Opinion ID: 196348
Heading Depth: 2
Heading Rank: 3

Heading: Relief Under Section 365(a).

Text: C. Relief Under Section 365(a). Although we have decided the precise issue presented on appeal, we think it behooves us to make clear that nothing in our holding today precludes a bankruptcy court, in an appropriate section 365(a) case, from approving a trustee's rejection of a nonresidential lease retroactive to the motion filing date. We explain briefly. Bankruptcy courts are courts of equity, see Pepper v. Litton, 308 U.S. 295, 304-05 (1939), and, particularly in the Chapter 11 context, they may sometimes abandon mechanical 17 solutions in favor of the pliant reins of fairness. See, e.g., Winthrop Old Farm Nurseries, 50 F.3d at 75 (explaining that a bankruptcy court, applying principles of equity, may in its discretion choose between valuation methods). In the section 365 context, this means that bankruptcy courts may enter retroactive orders of approval, and should do so when the balance of equities preponderates in favor of such remediation. See In re Jamesway Corp., 179 B.R. 33, 39 (S.D.N.Y. 1995) (holding that a bankruptcy court can order rejection retroactive to an earlier date to avoid penalizing the debtor for an unnecessary delay caused by the creditor); see also In re Garfinckels, Inc., 118 B.R. 154, 154 (Bankr. D.D.C. 1990) (suggesting that, in the absence of unfair prejudice, a bankruptcy court may enter an order nunc pro tunc setting the motion filing date as the effective date of approval); see generally 11 U.S.C. 105(a) (authorizing bankruptcy courts to issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of Title 11). Of course, the equitable powers of bankruptcy courts are not unlimited. They can only be brought to bear in the service of the Bankruptcy Code. See Norwest Bank, Worthington, v. Ahlers, 485 U.S. 197, 206 (1988). Thus, a bankruptcy court's exercise of its residual equitable powers must be connected to, and advance the purposes of, specific provisions in the Code. See, e.g., In re Hoffman Bros. Packing Co., 173 B.R. 177, 185-86 (Bankr. 9th Cir. 1994) (invalidating nunc pro tunc order that 18 contradicted an express Code provision). There is little question, however, that a retroactive order may be appropriate as long as it promotes the purposes of section 365(a).7 Consequently, we rule that a bankruptcy court, when principles of equity so dictate, may approve a rejection of a nonresidential lease pursuant to section 365(a) retroactive to the motion filing date.8 The fact that the bankruptcy court has the power to approve the trustee's rejection of an unexpired nonresidential lease retroactive to the motion filing date has a salutary side effect; it should act as a stimulus to all parties to cooperate in getting the trustee's motion to reject heard and determined at the earliest practicable date. Moreover, the possibility of retroactivity helps to explain the seeming rift in the case law. Witness, for example, In re Joseph C. Spiess Co., 145 B.R. 597 (Bankr. N.D. Ill. 1992), the leading case cited by the district court in support of its valid, but voidable rationale. A close reading of Spiess indicates that the court may have reached its ultimate conclusion that the rejection took effect on the 7Retroactive approval orders do not contradict 365(c)(3). While that provision commands the trustee to pay rent at the contract rate until a nonresidential lease is rejected, it does not stipulate that a rejection cannot be made to apply retroactively. See Jamesway, 179 B.R. at 37. 8We note, in this connection, that because such retroactive orders are within the bankruptcy court's sound discretion, appeals from a bankruptcy court's disposition of a request for retroactive relief will be reviewed only for abuse of discretion. See, e.g., Jarvis, 53 F.3d at 420; Grella v. Salem Five Cent Sav. Bank, 42 F.3d 26, 30 (1st Cir. 1994); In re Gonic Realty Trust, 909 F.2d 624, 626 (1st Cir. 1990). 19 motion filing date as opposed to the court approval date on the basis of equitable, rather than statutory, principles. The court's actual holding is illuminating. After determining that the trustee's rejection of a lease should be retroactive to the date that trustee takes affirmative steps to reject said lease such as serving notice on motion to reject, the court held that a court-approved rejection of an unexpired nonresidential lease could apply retroactively to the date the trustee notices the motion requesting same. Spiess, 145 B.R. at 606. Thus, Spiess can fairly be read as an instance of a bankruptcy court recognizing that retroactive approval orders are within its equitable powers under section 365(a), and acting on that realization. Reading Spiess in this manner bridges the apparent conflict in the case law. Doctrinal incoherence vanishes, and a single black-letter rule emerges: rejection under section 365(a) does not take effect until judicial approval is secured, but the approving court has the equitable power, in suitable cases, to order a rejection to operate retroactively.9