Court Opinion

ID: 4402104
Source: CourtListenerOpinion
Date Created: 2019-05-30 20:00:34.021284+00
Date Added: 2024-06-11T14:52:27.453733
License: Public Domain

By order of the Bankruptcy Appellate Panel, the precedential effect
                        of this decision is limited to the case and parties pursuant to
                    6th Cir. BAP LBR 8024-1(b). See also 6th Cir. BAP LBR 8014-1(c).

                                         File Name: 19b0004n.06

                      BANKRUPTCY APPELLATE PANEL
                                     OF THE SIXTH CIRCUIT

 IN RE: ANTHONY W. ROBERSON; JOI N. ROBERSON,                 ┐
                                         Debtors.             │
                                                               >        No. 17-8041
                                                              │
                                                              ┘

                        Appeal from the United States Bankruptcy Court
                         for the Northern District of Ohio at Cleveland.
                             No. 16-11784—Arthur I. Harris, Judge.

                                 Decided and Filed: May 30, 2019

    Before: BUCHANAN, DALES and HUMPHREY, Bankruptcy Appellate Panel Judges.

                                        _________________

                                              COUNSEL

ON BRIEF: Stephen D. Hobt, Cleveland, Ohio, for Appellant. Charles J. Van Ness, Mayfield
Heights, Ohio, for Debtors.
                                        _________________

                                              OPINION
                                        _________________

       BETH A. BUCHANAN, Bankruptcy Appellate Panel Judge. GCB Properties III, Ltd.
appeals the bankruptcy court’s determination that any rent owed to GCB Properties III, Ltd. by
the debtors for their occupancy of the property during the bankruptcy case was deemed to be a
pre-petition debt and was discharged as part of the debtors’ chapter 7 bankruptcy case.
 No. 17-8041                              In re Roberson                                  Page 2

                                    I. ISSUES ON APPEAL

       The issues Appellant raises are:

       1. Whether the bankruptcy court erred in determining that, as a matter of law, Appellant,
          GCB Properties III, Ltd., holds no claim against the Appellees, Anthony and Joi
          Roberson, for their post-petition tenancy in the premises that was the subject of a pre-
          petition lease between the parties.
       2. Whether the bankruptcy court erred in determining that, as a matter of law, any and
          all claims arising in favor of the Appellant, GCB Properties III, Ltd., against the
          Appellees, Anthony and Joi Roberson, for the Appellees’ occupancy of the leased
          premises after the filing of the bankruptcy case under chapter 7 of the Bankruptcy
          Code were subject to the Appellees’ discharge in the bankruptcy case despite the fact
          such claims arose after the filing of the Appellees’ bankruptcy case.

                    II. JURISDICTION AND STANDARD OF REVIEW

       The Bankruptcy Appellate Panel of the Sixth Circuit (“BAP”) has jurisdiction to decide
this appeal. The United States District Court for the Northern District of Ohio has authorized
appeals to the BAP, and no party has timely elected to have this appeal heard by the district
court. 28 U.S.C. § 158(b)(6), (c)(1). A “final” order of a bankruptcy court may be appealed by
right under 28 U.S.C. § 158(a)(1). For purposes of appeal, an order is final if it “ends the
litigation on the merits and leaves nothing for the court to do but execute the judgment.”
Midland Asphalt Corp. v. United States, 489 U.S. 794, 797, 109 S. Ct. 1494, 1497 (1989)
(internal quotations and citations omitted). The order in the present case resolves the litigation
on the merits and leaves nothing for the bankruptcy court to do. The determination of the nature
of a claim arising from a debtor’s occupancy of property during a bankruptcy case is a question
of law and is reviewed de novo. See Giant Eagle, Inc. v. Phar-Mor, Inc., 528 F.3d 455, 461 (6th
Cir. 2008) (citing In re S. Air Transp., Inc., 511 F.3d 526, 530 (6th Cir. 2007)).

                                           III. FACTS

       Anthony and Joi Roberson (together the “Robersons”) entered into a lease with GCB
Properties III, Ltd. (“GCB”) related to property in Cleveland, Ohio sometime in December 2014.
The monthly rent owed was $897. In December 2015, the parties renewed the lease through
 No. 17-8041                              In re Roberson                                   Page 3

January 2017. On February 10, 2016, the Robersons received a “Notice to Leave Premises” due
to non-payment of rent.

       The Robersons filed a voluntary chapter 7 bankruptcy petition on April 1, 2016. They
listed a disputed unsecured claim for “Cleveland Real Estate Pros,” which is a dba for GCB, in
the amount of $4,103 for “rent” on their Schedule E/F. The Robersons also listed the apartment
lease on their Schedule G. They indicated in their Statement of Intention that they did not intend
to assume the lease and the chapter 7 trustee took no action to assume the lease.

       The chapter 7 trustee filed a “no asset” report with the bankruptcy court on June 28,
2016. The bankruptcy court entered the Robersons’ discharge on July 13, 2016.

       Following the Robersons’ filing of the bankruptcy petition, GCB continued its efforts to
evict the Robersons and to collect unpaid rent. Between April 5, 2016 and June 25, 2016, GCB
delivered to the Robersons two additional Notices to Leave Premises and sent two emails
threatening eviction and requesting payment. In addition, an attorney sent a letter on behalf of
GCB attempting to collect payment.

       On June 28, 2016, the Robersons filed a motion for sanctions against GCB based on
allegations that it had made collection efforts and had threatened to evict them in violation of the
automatic stay. While the motion for sanctions was pending, GCB filed an action to evict the
Robersons, but this action was voluntarily dismissed without prejudice by GCB due to
procedural issues on August 22, 2016. The Robersons eventually moved out of the property on
September 30, 2016 having paid no rent from the petition date through the date they left the
premises.

       On October 11, 2016, the bankruptcy court conducted an evidentiary hearing on the
Robersons’ motion for sanctions. In its opinion and order entered on November 10, 2016, the
bankruptcy court held that GCB’s actions constituted a “willful violation of the automatic stay”
 No. 17-8041                                  In re Roberson                                        Page 4

under § 362,1 and awarded actual damages of $1,680 to the Robersons under § 362(k). GCB did
not appeal the bankruptcy court’s November 10, 2016 decision and order.

          The Robersons’ bankruptcy counsel contacted GCB’s counsel on January 3, 2017 to
inquire about payment of the $1,680 damages award and was advised in writing that GCB
credited the award against the Robersons’ post-petition rental obligation.

          The Robersons thereafter filed a motion to show cause why GCB should not be found in
contempt and sanctioned for failure to pay the $1,680 attorney fee award. The bankruptcy court
rendered an oral decision, and entered an order denying the Robersons’ motion without prejudice
on August 8, 2017.        The bankruptcy court declined to find GCB in contempt because its
November 10, 2016 order did not clearly prohibit setoff as a means of satisfying the previous
ruling.

          On August 23, 2017, the Robersons filed a motion to amend the bankruptcy court’s
November 10, 2016 order to clarify that no right of setoff exists. GCB objected. The bankruptcy
court heard oral argument on October 2, 2017 and took the matter under advisement.

          On December 6, 2017, the bankruptcy court issued its Memorandum of Opinion. In re
Roberson, No. 16-11784, 2017 WL 6060598 (Bankr. N.D. Ohio Dec. 6, 2017). The bankruptcy
court granted the Robersons’ motion and amended the court’s November 10, 2016 order “to
clarify that the creditor’s purported claim for post-petition rent was discharged, leaving the
creditor with no claim to set off.” Roberson, 2017 WL 6060598 at *2. GCB timely filed an
appeal of this ruling.

                                            IV. ANALYSIS

          Section 365 of the Bankruptcy Code addresses the treatment of executory contracts and
unexpired leases in bankruptcy cases. A trustee may assume or reject an unexpired lease of the
debtor. 11 U.S.C. § 365(a). In a chapter 7 case, if the lease is an unexpired lease of residential

        1Unless otherwise indicated, all chapter and section references are to the Bankruptcy Code, 11 U.S.C.
§§ 101–1532.
 No. 17-8041                                    In re Roberson                                         Page 5

real property, the trustee must decide whether to assume or reject the lease within 60 days 2 of the
petition date or the lease will be deemed rejected. 11 U.S.C. § 365(d)(1).

        At no time has GCB disputed that the Robersons’ lease qualified as an “unexpired lease
of residential real property” on the petition date. Rather, all parties proceeded on the basis that
the lease was an unexpired lease under § 365. They further agree that the lease was deemed
rejected on May 31, 2016, 60 days after the petition filing date, pursuant to § 365(d)(1). The
parties disagree, however, on what effect the deemed rejection of the lease had on GCB’s claim
based on the Robersons’ post-rejection occupancy of the leased premises.

        The bankruptcy court held that, upon the deemed rejection of the lease by the trustee, any
debt owed to GCB under the lease, including post-petition rent, was to be treated as a discharged
pre-petition debt. The bankruptcy court relied on the express language of §§ 365(g)(1) and
727(b), as well as the Sixth Circuit’s interpretation of these Bankruptcy Code provisions in
Miller v. Chateau Cmtys, Inc. (In re Miller), 282 F.3d 874 (6th Cir. 2002).

        Rejection of an unexpired lease constitutes a breach of the lease that occurred
immediately prior to the petition date. 11 U.S.C. § 365(g)(1). “[A] debtor’s rejection of an
executory contract3 in bankruptcy has the same effect as a breach outside bankruptcy.” Mission
Prod. Holdings, Inc. v. Tempnology, LLC, No. 17–1657, 587 U.S. ___, ___ S. Ct. ___, 2019 WL
2166392, at *9 (U.S. May 20, 2019).

        In addition, § 502(g)(1) states that: “[a] claim arising from the rejection, under [§ 365]
. . . shall be allowed under subsection (a), (b), or (c) of this section or disallowed under
subsection (d) or (e) of this section, the same as if such claim had arisen before the date of the
filing of the petition.” 11 U.S.C. § 502(g)(1). Among other debts, § 727(b) provides for the
discharge of “any liability on a claim that is determined under [§ 502] as if such claim had arisen
before the commencement of the case[.]” 11 U.S.C. § 727(b). In Miller, the Sixth Circuit
concluded that the plain language of § 727(b) provides for the discharge of both pre-petition and

        2Within   this 60-day period, the court can extend the deadline to assume or reject for cause. 11 U.S.C.
§ 365(d)(1).
        3Although Mission deals specifically with an executory contract, the effect of rejection is the same for
unexpired leases. See 11 U.S.C. § 365(g)(1).
 No. 17-8041                                   In re Roberson                                         Page 6

post-petition liabilities resulting from a breach of a lease due to its deemed rejection under § 365.
Miller, 282 F.3d at 877. Accordingly, the bankruptcy court concluded that GCB became an
unsecured creditor with a pre-petition claim for damages, including any damages for post-
petition rent, upon rejection of the lease.

        GCB does not seem to quibble with the bankruptcy court’s conclusion that rent owed
under the lease for the Robersons’ post-petition but pre-rejection occupancy of the leased
premises was discharged in the Robersons’ bankruptcy.4 GCB, however, takes exception to the
bankruptcy court’s conclusion that GCB’s claim for the Robersons’ post-rejection occupancy of
the leased premises was also discharged. GCB argues that the bankruptcy court read Miller too
broadly when it concluded that post-petition obligations under the lease are always pre-petition
claims arising from the deemed rejection of a residential lease under § 365. In support of its
position, GCB points out the following passage from Miller:

        The bankruptcy court correctly determined and, the district court agreed, that
        plaintiff did not incur any new post-petition liability for the lease after she
        rejected it. She did not use and occupy the lot subsequent to the rejection of the
        lease with defendant that occurred on September 12, 1999. In fact, plaintiff
        vacated the premises prior to filing for her petition for relief with the bankruptcy
        court on July 14, 1999 and indicated an intention to abandon the mobile home.

Miller, 282 F.3d at 878. GCB suggests that the Sixth Circuit in Miller left open the possibility for
a post-rejection claim for damages based on a debtor’s continued use and occupancy of the
leased premises.

        Indeed, GCB notes that two bankruptcy courts have held that a landlord possessed a
claim for a debtor’s post-rejection occupancy of leased premises that was not discharged in
bankruptcy. In re Werbinski, 271 B.R. 514 (Bankr. E.D. Mich. 2001) (concluding that rejection
of a lease effects an abandonment of the lease back to the debtor so that a landlord may pursue
rent or eviction for post-rejection occupancy unhindered by the discharge); Johnson v. Manatee
Bay Apartments Corp. (In re Johnson), 460 B.R. 328 (Bankr. S.D. Fla. 2011) (determining that

        4In   its brief, GCB at times frames the issue of damages in the context of the Robersons’ post-petition
occupancy of a leased premises. At other times, GCB discusses damages for the Robersons’ post-rejection
occupancy of a leased premises. The Panel presumes GCB means the latter given that the case law on which GCB
relies speaks to a debtor’s post-rejection occupancy of a leased premises.
 No. 17-8041                                    In re Roberson                                           Page 7

the landlord and tenant’s continued performance of obligations under the lease post-rejection
waived the rejection damages and continued the lease in force so that any future breach would
not arise from rejection but from a subsequent default subject to enforcement under applicable
state law).5 Starting with § 727(b)’s reference to § 502 and building on the Werbinski and
Johnson decisions, GCB notes that § 502(g)(1) provides that only “claims arising from the
rejection” of an unexpired lease under § 365 are deemed to have arisen before the petition filing
date and are therefore discharged. GCB maintains that its claim for post-rejection damages did
not arise from the rejection of the lease but, instead, was an independent claim for damages
under applicable state law. GCB bases its claim for damages on the premise that the Robersons
became “holdover tenants” under Ohio law upon the deemed rejection of the lease in their
bankruptcy case, making the Robersons liable for the reasonable value of the use and occupancy
of the premises or damages for trespass from that point onward.

        Under Ohio law, a tenant becomes a holdover tenant or tenant in sufferance, when the
tenant continues in possession of the leased premises after termination of the lease. Bliss Props.
v. Hughes-Peters, 1996 WL 339976, at *2 (Ohio Ct. App. June 20, 1996) (“Generally, a tenant’s
continued possession after termination of a lease renders the tenant a holdover tenant.”); Steiner
v. Minkowski, 596 N.E.2d 492, 497 (Ohio Ct. App. 1991) (“Appellants were duly notified that
the tenancy would terminate as of April 29, 1989. After that date, the [Appellants] became
holdover tenants or tenants by sufferance.”); Craig Wrecking Co. v. S.G. Loewendick & Sons,
Inc., 526 N.E.2d 321, 324 (Ohio Ct. App. 1987) (“In Ohio, a tenant who holds over after the term
of his lease expires is a tenant at sufferance.”).

        In reaching its conclusion that the Robersons were holdover tenants, GCB argues that the
deemed rejection of the lease in bankruptcy terminated the lease. See Appellant’s Br. at 11,
ECF No. 11 (“Upon the rejection of a lease obligation under the provisions of 11 U.S.C.
§ 365(d)(1), the lease ceases to exist as a legal obligation between the debtor and the landlord.”).

        5The   Werbinski court’s determination that a landlord may possess a post-rejection claim against debtor-
tenants arising from a pre-petition lease that is not discharged stands in stark contrast to the bankruptcy court’s
determination below. See Roberson, 2017 WL 6060598 at *4–5 (rejecting the Werbinski conclusion that “rejection
effects an abandonment” and holding that a landlord does not retain a post-rejection claim against debtor–tenants
when they simply remain on the premises). This creates an apparent split within the Sixth Circuit. However, the
Panel does not reach the issue because GCB’s premise is without merit.
 No. 17-8041                                     In re Roberson                                            Page 8

GCB misapprehends the effect of rejection under bankruptcy law. The Supreme Court recently
looked at the plain language of § 365(g) and noted that its broad terms speak to any executory
contract, thus, holding that, “a rejection does not terminate [a] contract” and that “a debtor’s
rejection of an executory contract in bankruptcy has the same effect as a breach outside
bankruptcy.” Mission, 2019 WL 2166392, at *6,*9. This is in line with the case law in this
circuit. See Miller, 282 F.3d at 878 (“The rejection of the lease under § 365(d)(1) is not a
termination[.]”); Simmons Capital Advisors, Ltd. v. Bachinski (In re Bachinski), 393 B.R. 522,
544 (Bankr. S.D. Ohio 2008) (“[R]ejection does not ‘nullify,’ ‘rescind,’ or ‘vaporize’ the
contract or terminate the rights of the parties[.]”) (internal quotation marks and citation omitted).

         The Mission Court noted that when a debtor in possession or trustee chooses to reject,
and therefore breach, an executory contract, the counterparty also has a choice: “when a contract
is breached in the course of performance, the injured party may elect to continue the contract or
refuse to perform further[.]”          2019 WL 2166392, at *5 (quoting 13 R. Lord, Williston on
Contracts §39:32, pp. 701–702 (4th ed. 2013)).6 In other words, while bankruptcy law does not
terminate the contract, general contract law may give the counterparty the option to terminate or
continue to perform under the contract “while suing for whatever damages go with its choice.”
Id. at *6.7 However, the Mission majority held, and the concurrence emphasized, that in specific
cases, the counterparty’s option to terminate the contract, may be regulated by a special contract
term or state law. Id. at *6, *9 (Sotomayor, J. concurring). In this case, Ohio landlord tenant law
regulates the manner in which GCB may terminate the lease. See Ohio Rev. Code Chapters
1923, 5303, and 5321.

         Other than the deemed rejection of the lease, GCB offers no other event that caused or
resulted in the termination of the lease.8 In the absence of the lease having been terminated

         6One common instance when landlords choose to continue performance under the contract is when the
debtor is current on rent payments.
         7The  one “twist” § 365(g)(1) makes to the normal law of contracts is that the breach resulting from the
rejection is deemed to have occurred immediately before the date of the filing of the petition. Mission, 2019 WL
2166392, at *6.
         8While  GCB cites Bliss, Craig Wrecking Co., and Steiner, which all discuss a tenant’s obligations to the
landlord upon termination of a lease under Ohio law, GCB fails to explain the basis for the lease being terminated in
 No. 17-8041                                   In re Roberson                                          Page 9

under a special contract term or state law, there is no basis for the Panel to conclude that the
Robersons were holdover tenants under Ohio law.

        The Panel cannot overstate the narrow gauge of this opinion, which is premised solely
upon the conclusion that rejection of an unexpired lease under § 365(g) creates a breach of the
lease, not a termination. Because GCB relied exclusively on its contrary view, the Panel finds no
error in the bankruptcy court’s ruling.

                                            V. CONCLUSION

        GCB’s claim for recovery of post-rejection damages based on the Robersons’ continued
occupancy of the leased premises as holdover tenants fails. The deemed rejection of the lease
did not terminate it and, thus, did not result in the Robersons’ becoming holdover tenants under
state law. Accordingly, the Panel AFFIRMS the bankruptcy court’s determination that GCB
failed to establish a post-rejection claim against the Robersons that survives the bankruptcy
discharge.

this case other than its erroneous conclusion that the deemed rejection of the lease terminated the lease or the
obligations of the parties under the lease.