Court Opinion

ID: 9651597
Source: CourtListenerOpinion
Date Created: 2023-08-23 16:28:30.98012+00
Date Added: 2024-06-11T18:12:36.580042
License: Public Domain

RHODES, J.,
dissenting.
A majority of courts have recognized that the meaning of § 365(d)(3) is anything but plain and that the performance date approach 1 can lead to outrageous conse*395quences. Instead of confronting these problems, the Panel follows the lead of the bankruptcy court and simply leaves them “for another day.” In merely announcing a result for this case, the Panel opinion thus neither announces nor adopts any rule of decision. Moreover, the Panel’s suggestion that in certain circumstances there may be “ambiguities of interpretation” contradicts its conclusion that the statute’s “plain meaning” compels the performance date approach. Only the proration approach, adopted in a majority of cases, applies § 365(d)(3) in a manner that is consistent not only with the language of § 365(d)(3), but also with the Bankruptcy Code as a whole, common sense, the legislative history, and Sixth Circuit precedent. Accordingly, the bankruptcy court’s order should be reversed.
In the present case, although only two days passed in the calendar month when the Debtor rejected the lease and vacated the premises, the Panel’s judgment requires the Debtor to pay the entire month’s rent of $8,500. Approximately $7,950 of that monthly rent was for the twenty-eight days after the rejection and after the Debtor returned possession of the premises to the landlord. The issue is whether § 365(d)(3) requires the bankruptcy court to award that windfall.
I.
“The objective of statutory construction is to ‘ascertain the intent of Congress.’ ” Vause v. Capital Poly Bag, Inc. (In re Vause), 886 F.2d 794, 798 (6th Cir.1989) (citing Philbrook v. Glodgett, 421 U.S. 707, 713, 95 S.Ct. 1893, 1898, 44 L.Ed.2d 525 (1975)). “The starting point in determining legislative intent is the language of the statute itself.” Id. (citing Blum v. Stenson, 465 U.S. 886, 896, 104 S.Ct. 1541, 1547, 79 L.Ed.2d 891 (1984); Watt v. Alaska, 451 U.S. 259, 265, 101 S.Ct. 1673, 1677, 68 L.Ed.2d 80 (1981)).
Section 365(d)(3) provides:
The trustee shall timely perform all the obligations of the debtor, except those specified in section 365(b)(2), arising from and after the order for relief under any unexpired lease of nonresidential real property, until such lease is assumed or rejected, notwithstanding section 503(b)(1) of this title.
11 U.S.C. § 365(d)(3).
The question of statutory interpretation in this case is to define the “obligations of the debtor ... arising from and after the order for relief under any unexpired lease of nonresidential real property, until such lease is ... rejected.” § 365(d)(3). The bankruptcy court joined the majority of cases in noting, “Both a performance date and an allocation interpretation of section 365(d)(3) are consistent with the statutory language.” In re Koenig Sporting Goods, Inc., 221 B.R. 737, 740 (Bankr.N.D.Ohio 1998). McCrory Corp., quoted by the Panel, stated that this phrase in § 365(d)(3) is “far from clear,” and that “the language § 365(d)(3) simply does not answer the question at hand.” Newman v. McCrory Corp. (In re McCrory Corp.), 210 B.R. 934, 939 (S.D.N.Y.1997). See also In re All for A Dollar, 174 B.R. 358, 361 (Bankr.D.Mass.1994) (“Congress did not explicitly address whether obligations owed under a lease, albeit at the contract rate, should be allocated.”); In re Krystal Co., 194 B.R. 161, 164 (Bankr.E.D.Tenn.1996) (In adopting the performance date approach, the court conceded “there are doubtless cases that can be imagined in which the court’s reading of the statute in question might produce dubious results[.]”).
Accordingly, in determining the intent of § 365(d)(3), it is necessary and appropriate to examine other considerations, including the structure and purposes of the Bankruptcy Code as a whole, common sense, pre-enactment law, the legislative history, and related Sixth Circuit precedent. Examination of each of these considerations fully demonstrates the merit of the proration approach.
II.
“‘Statutes should be interpreted to avoid untenable distinctions and unreasonable results whenever possible.’ ” Vause, 886 F.2d *396at 803 (quoting American Tobacco Co. v. Patterson, 456 U.S. 63, 71, 102 S.Ct. 1534, 1538, 71 L.Ed.2d 748 (1982)). “[C]ommon sense and evident statutory purpose must prevail.” Wisconsin Higher Educ. Aids Bd. v. Hogan (In re Hogan), 707 F.2d 209, 211 (5th Cir.1983) (citing United States v. Brown, 333 U.S. 18, 26, 68 S.Ct. 376, 380, 92 L.Ed. 442 (1948); United States v. Babcock, 530 F.2d 1051, 1053 (D.C.Cir.1976)). See also New York State Higher Educ. Serv. Corp. v. Adamo (In re Adamo), 619 F.2d 216, 222 (2d Cir.), cert. denied, sub nom. Williams v. New York State Higher Educ. Serv. Corp., 449 U.S. 843, 101 S.Ct. 125, 66 L.Ed.2d 52 (1980); Santa Ana Best Plaza, Ltd. v. Best Prods. Co.(In re Best Prods. Co.), 206 B.R. 404, 407 n. 2 (Bankr.E.D.Va.1997) (“Indeed, ‘even within the fluctuating walls of the “plain meaning” fortress, a court should not resolve questions of statutory interpretation so that a particular Bankruptcy Code section conflicts and disturbs the overall purpose and function of the Code.’ ”) (quoting In re R.H. Macy & Co., 170 B.R. 69, 73 (Bankr.S.D.N.Y.1994)).
In the present context, the structure and purposes of the Bankruptcy Code as a whole, as well as simple common sense, suggest that the statute should not be interpreted to require the payment of a windfall. “Because the presumption in bankruptcy cases is that the debtor’s limited resources will be equally distributed among his creditors, statutory priorities are narrowly construed.” Trustees of the Amalgamated Ins. Fund, v. McFarlin’s, Inc., 789 F.2d 98, 100 (2nd Cir.1986) (citations omitted).
A landlord can receive a windfall in two ways under the billing date approach. First, a windfall can result from a debtor’s postpetition, prerejection payment to a landlord for prepetition services that would otherwise be an unsecured claim. See Best Prods., 206 B.R. 404 (The landlord billed the debtor for six months of taxes as additional rent, including approximately three months of prepetition taxes.); Child World, Inc. v. Campbell/Massachusetts Trust (In re Child World, Inc.), 161 B.R. 571, 575 (S.D.N.Y.1993) (A six month tax bill became due during the postpe-tition, prerejection period, which included taxes for four months prepetition.). This windfall gives the landlord a preference that potentially prejudices both the debtor in its effort to reorganize and other unsecured creditors who may receive a reduced dividend.
Second, a windfall can result from a debt- or’s advance payment of rent during the postpetition, prerejection period, if the lease is rejected. Under this scenario, the debtor pays for services the landlord will not be obligated to provide. See McCrory Corp., 210 B.R. 934 (A full year’s taxes fell due during the postpetition, prerejection period, covering a substantial postrejection period as well.); In re All for A Dollar, Inc., 174 B.R. 358 (Bankr.D.Mass.1994) (A six month tax bill became due during the postpetition, pre-rejection period, including taxes for three months after rejection.). Under these circumstances, a landlord can enter into a new lease for the property and charge the new tenant for the same services for which the debtor had already paid. Indeed, “a lessor has a duty to mitigate its damages.” Unsecured Creditors’ Committee of Highland Superstores, Inc. v. Strobeck Real Estate, Inc. (In re Highland Superstores, Inc.), 154 F.3d 573, 577 (6th Cir.1998). Regardless, the windfall payment again unfairly prejudices the debtor and other unsecured creditors.
The windfall consequences of the performance date approach are not limited to scenarios that unfairly favor the landlord. This approach can also be prejudicial to the landlord. Suppose that under the parties’ lease, a year’s rent was due the day before the bankruptcy case was filed and was not paid. There would be no performance date during the postpetition, prerejeetion time period and thus no immediate payment to the landlord under § 365(d)(3). See McCrory Corp., 210 B.R. at 939. The prejudice resulting to the landlord in these circumstances is clear.
Indeed, both the Panel and the bankruptcy court recognize that the performance date approach is too inflexible to deal with such circumstances fairly and justly. The Panel states, “Left for another day is the question whether ambiguities of interpretation arise under § 365(d)(3) when a nonresidential lease requires substantial payments in ar*397rears or imposes obligations that are fundamentally inconsistent with other provisions of the Bankruptcy Code.” (Panel Op. at 394.) The bankruptcy court stated, “[T]he lack of precision and clarity in the language of section 365(d)(3) may indicate that Congress intended the courts to exercise some discretion where an inflexible approach to section 365(d)(3) would severely distort fundamental bankruptcy principles.” Koenig Sporting Goods, 221 B.R. at 741. The Panel’s adoption of the performance date approach in the face of this recognized inflexibility is puzzling.
The Sixth Circuit has echoed the Supreme Court in stating, “ ‘The canon of strict construction is not an inexorable command to override common sense and evident statutory purpose.’” Vause, 886 F.2d at 800 n. 9 (quoting United States v. Brown, 333 U.S. at 25, 68 S.Ct. 376.) In this case, common sense dictates the wisdom of applying an approach that in each case accommodates the interests of all concerned in a fair and balanced way. The proration approach accomplishes that result, and because it is fully consistent with the language of § 365(d)(3), it ought to be applied.
III.
The United States Supreme Court has held that it “ ‘would not read the Bankruptcy Code to erode past bankruptcy practice absent a clear indication that Congress intended such a departure.’” Cohen v. De La Cruz, 523 U.S. 213, -, 118 S.Ct. 1212, 1218, 140 L.Ed.2d 341, 348 (1998) (quoting Pennsylvania Dept. of Public Welfare v. Davenport, 495 U.S. 552, 563, 110 S.Ct. 2126, 2133, 109 L.Ed.2d 588 (1990)). See also Midlantic Nat’l Bank v. New Jersey Dep’t of Envtl. Protection, 474 U.S. 494, 501, 106 S.Ct. 755, 759, 88 L.Ed.2d 859 (1986) (“The normal rule of statutory construction is that if Congress intends for legislation to change the interpretation of a judicially created concept, it makes that intent specific. The court has followed this rule with particular care in construing the scope of bankruptcy codifications.”).
Before § 365(d)(3) was enacted in 1984, courts uniformly applied the proration approach under § 503(b)(1) to “allow as an administrative expense the full amount of the rent, as long as it was not clearly unreasonable, prorated over the postpetition, prere-jection period.” Child World, 161 B.R. at 574 (citations omitted). Since 1984, “[t]he majority of courts [construing § 365(d)(3)] have adhered to the long-standing, pre-1984 practice of prorating payment of a debtor’s obligations under a lease, regardless of the billing date.” McCrory Corp., 210 B.R. at 937 (collecting cases). As Child World, concluded, “Nothing in the legislative history indicates that Congress intended § 365(d)(3) to overturn the long-standing practice under 503(b)(1) of prorating debtor-tenant’s rent to cover only the postpetition, prerejection period, regardless of billing date.” Child World, 161 B.R. at 575-76. See also McCrory Corp., 210 B.R. at 937; Best Prods., 206 B.R. at 406-407.
IV.
Interestingly, courts on both sides of the issue rely on the same remarks of Senator Hatch in support of their respective conclusions:
A second and related problem is that during the time the debtor has vacated space but has not yet decided whether to assume or reject the lease, the trustee has stopped making payments due under the lease. These payments include rent due the landlord and common area charges which are paid by all the tenants according to the amount of space they lease. In this situation, the landlord is forced to provide current services-the use of its property, utilities, security, and other sendees without current payments. No other creditor is put in this position. In addition, the other tenants often must increase their common area charge payments to compensate for the trustee’s failure to make the required payments for the debtor.
The bill would lessen these problems by requiring the trustee to perform all the obligations of the debtor under a lease of nonresidential real property at the time required in the lease. This timely performance requirement will insure that debtor-tenants pay their rent, common area *398charges, and other charges on time pending the trustee’s assumption or rejection of the lease.
130 Cong. Reo. S8887, S8994-95 (daily ed. June 29, 1984) (remarks of Senator Hatch).
While Senator Hatch’s remarks are far from conclusive, they do provide insight into the Congressional intent. One of the problems addressed by the statute arises when a debtor vacates a premises and stops paying rent but does not formally reject the lease. Congress noted that the landlord cannot lease the premises until after rejection of the lease and cannot pursue the debtor for payment for the postpetition rent. Thus, one purpose of § 365(d)(3) was to require continued payment of rent until the lease is formally rejected. The majority of courts have concluded that the limited available legislative history suggests that Congress only intended to protect the landlord’s right to payment for services that the landlord is obligated to provide during the postpetition, prerejection period. For example, the McCrory court interpreted Senator Hatch’s remarks to indicate “that Congress sought only to ensure that landlords received ‘current payment’ for ‘current services’ provided.” Continuing the longstanding use of the proration approach carries out that Congressional intent.
V.
As the majority opinion notes, the Sixth Circuit has not yet adopted either the pro-ration approach or the performance date approach. The Panel concludes that the Sixth Circuit’s decision in Vause, 886 F.2d 794, supports the performance date approach. However, both the rationale and the results of that ease strongly suggest otherwise.
In Vause, the debtor was a farmer and his lease required annual rent payments in arrears. A payment became due four days after the debtor filed bankruptcy. The landlord filed a prepetition claim for that rent (as well as for one year’s postpetition rent.) The debtor objected to the claim, arguing that § 502(b)(6)(B) limits a landlord’s claim to the amount “due under the lease” and that the rent was not “due” until after the petition was filed. The bankruptcy court sustained the objection, holding that under the plain meaning of § 502(b)(6)(B), the rent was not “due” until after the petition was filed. The district court affirmed on the same grounds.
The Sixth Circuit reversed. Initially, the court concluded that the term “due” has a double meaning. It might mean either “presently matured and enforceable” or “the mere state of indebtment.” Id. at 799-800. The court then looked to the legislative history of § 502(b)(6)(B) and determined that “Congress intended to compensate landlords for their actual damages while placing a limit on large future, speculative damages which would displace other creditors’ claims.” Id. at 801-802. At the conclusion of its summary of the legislative history, the court observed, “The lower courts’ interpretation of the section in a way which eliminates past damages based on the fortuity of the filing date does not comport with the balance Congress has attempted to strike between the affected parties.” Id. at 803.
Finally, the court examined the equities involved, stating, “[E]quitable considerations require interpreting ‘due’ in the sense of ‘owing’ in order to prevent the debtors, who had the use of [the lessor’s] land for 361 days, from receiving a windfall based on the fortuity of the filing date. The lower courts themselves acknowledged the inequities.” Id. After reviewing the consequences of the bankruptcy court’s holding in a number of possible scenarios, the Sixth Circuit concluded, “The potential for untenable distinctions and unreasonable results is readily apparent in this case.” Id. The court further stated that the bankruptcy court’s “reading of the statute ignores a fundamental tenet of the Bankruptcy Code requiring equal treatment of similarly situated creditors.” Id. (citing Sumy v. Schlossberg, 777 F.2d 921, 932 (4th Cir.1985); In re Brints Cotton Mktg., Inc., 737 F.2d 1338, 1342 (5th Cir.1984)).
Accordingly, based on the ambiguity in the statutory language, the legislative history and the equities in the case and in related scenarios, the court rejected the view that the plain meaning of § 502(b)(6)(B) required sustaining the debtor’s objection to the landlord’s claim. Rather, the court ordered that the landlord’s claim be prorated.
*399The similarities to the present case are striking. Just as the term “due” in § 502(b)(6)(B) is ambiguous, so is the term “obligation” in § 365(d)(3). Indeed, as noted, the bankruptcy court, the district court and the Panel have so observed. Just as “the legislative history [of § 502(b)(6)(B) ] allows a reasonable interpretation in this ease which ‘strikes the balance between creditor protection and debtor relief that Congress intended, and is eminently reasonable, fair, and sensible[,]’ ” the legislative history of § 365(d)(3) allows for a similarly reasonable interpretation. Vause, 886 F.2d 794 (quoting In re Southwest Aircraft Servs., Inc., 831 F.2d 848, 853 (9th Cir.1987), cert. denied, sub nom. City of Long Beach v. Southwest Aircraft Servs., Inc., 487 U.S. 1206, 108 S.Ct. 2848, 101 L.Ed.2d 885 (1988)). Just as Vause examined equitable considerations in applying § 502(b)(6)(B) both to the specific facts of that case and also to related scenarios, it is necessary and appropriate to do so in applying § 365(d)(3) in this case, and not to leave them for another day. Finally, just as Vause determined that those equitable considerations in the application § 502(b)(6)(B) require proration of the landlord’s claim, the similar concerns about potential windfalls in the application of § 365(d)(3) require the application of the pro-ration approach.
The Panel mistakenly concludes that Vause supports the performance date approach based on the Sixth Circuit’s observation that if the lease requires payments in advance, then § 502(b)(6) is not difficult to apply. Id. at 798-99. The court’s point was that in that scenario, either of the two meanings of the term “due” leads to the same result for the landlord. The same observation simply cannot be made regarding the term “obligation” in § 365(d)(3) in the present case, as the Panel itself notes. The lease in the present case does require rent payments in advance, and it is precisely that fact that raises the equitable concerns about requiring a windfall payment to the landlord. In the present case that windfall is $7950, which could and should rather be made available to support the debtor’s reorganization.
VI.
The only court of appeals to address the issue has joined the majority in adopting the proration approach. In re Handy Andy Home Improvement Ctrs., Inc., 144 F.3d 1125 (7th Cir.1998). The issue in that case arose from a postpetition, prerejection bill for real estate taxes. The Seventh Circuit stated:
Statutory language like other language should be read in context. Textron Lycoming Reciprocating Engine Division v. United Auto., Aerospace & Agric. Implement Workers, 523 U.S. 653, 118 S.Ct. 1626, 1629, 140 L.Ed.2d 863 (1998); Sundstrand Corp. v. Comm’r, 17 F.3d 965, 967 (7th Cir.1994), [cert. denied, 513 U.S. 821, 115 S.Ct. 83, 130 L.Ed.2d 36 (1994) ]; Bell Atlantic Tel. Cos. v. FCC, 131 F.3d 1044, 1047 (D.C.Cir.1997). The context consists not merely of other sentences but also of the real-world situation to which the language pertains. Here that situation concerned a class of postpetition debts. That is all that Congress was legislating in reference to. When context is disregarded, silliness results. The rule for which [the lessee] contends would make the rights of creditors turn on the happenstance of the dating of tax bills and the strategic moves of landlords and tenants.
Handy Andy, 144 F.3d at 1128.
As Handy Andy suggests, the results of the performance date approach can turn upon random happenstance. Although the Seventh Circuit’s characterization of this as “silliness” may be exaggerated, the bankruptcy court’s order should nevertheless be reversed.

. The terms "performance date approach” and "proration approach" are used because they *395more accurately reflect the substance of each approach.