In Re: M Ward v. ( 2001 )

Opinions of the United
2001 Decisions States Court of Appeals
for the Third Circuit
10-10-2001
In Re: M Ward v.
Precedential or Non-Precedential:
Docket 99-6140
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Filed October 10, 2001
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
NO. 99-6140
IN RE: MONTGOMERY WARD HOLDING CORP.
Debtor
CENTERPOINT PROPERTIES
Appellant
v.
MONTGOMERY WARD HOLDING CORP.
On Appeal From the United States District Court
For the District of Delaware
(D.C. Civil Action No. 98-cv-00338)
District Judge: Honorable Joseph J. Farnan, Jr.
Argued April 3, 2001
BEFORE: MANSMANN, STAPLETON and GREENBERG,
Circuit Judges
(Opinion Filed: October 10, 2001)
Richard A. Chesley
Michael J. Gray (Argued)
Jones, Day, Reavis & Pogue
77 West Wacker Drive
Chicago, IL 60601
Attorneys for Appellee
J. Mark Fisher (Argued)
William M. Aguiar
Schiff, Hardin & Waite
6600 Sears Tower
Chicago, IL 60606
and
Steven K. Kortanek
Klehr, Harrison, Harvey, Branzburg
& Ellers
919 North Market Street,
Suite 1000
Wilmington, DE 19801
Attorneys for Appellant
OPINION OF THE COURT
STAPLETON, Circuit Judge:
This appeal presents us with a narrow question of
statutory interpretation. Section 365 of Title 11 requires
that a bankruptcy trustee fulfill all the obligations that
arise under a non-residential lease subsequent to the entry
of the bankruptcy order and prior to the time that the lease
is rejected. Under the terms of the non-residential lease
entered by the debtor in this case, it was required to
reimburse the landlord for all tax expenses attributable to
the leased premises. The obligation to pay that
reimbursement did not mature under the terms of the lease
until after the order, although the landlord's liability for the
taxes accrued in large part prior to the order. We must
determine whether in these circumstances section 365
requires the bankruptcy trustee to make the entire
payment called for in the lease.
I.
On September 7, 1995, Montgomery Ward Holding
Corporation ("Montgomery Ward"), executed a lease on a
commercial property in Illinois owned by CenterPoint
Properties Trust ("CenterPoint"). Two of the provisions of
the lease require Montgomery Ward to reimburse
2
CenterPoint for real estate taxes assessed on the premises.
Section 6.1 of the lease states:
Upon receipt of an invoice from [CenterPoint],
[Montgomery Ward] further agrees to pay before any
fine, penalty, or interest or cost may be added thereto
for the nonpayment thereof, as Additional Rent for the
Premises, all Taxes . . . levied, assessed or imposed
upon the Premises or any part thereof accruing during
the Term of this Lease, notwithstanding that such
Taxes may not be due and payable until after the
expiration of the Term of this Lease. . . .
An additional term of the Lease found in Section 6.3,
provides for a "security deposit" mechanism which operates
as follows:
As security for [Montgomery Ward's] obligation to pay
for Taxes assessed for 1996 and 1997, unless the same
were otherwise paid by [Montgomery Ward] prior to the
expiration of the Term, [Montgomery Ward] agrees to
deposit with [CenterPoint], or such other entity as
[CenterPoint] may designate, no later than thirty (30)
days prior to the expiration of the Term an amount
equal to one hundred percent (100%) of the most
recent ascertainable Taxes. . . . [Montgomery Ward's]
payment of the deposit shall be credited against the
Taxes due. . . .
Thus, two separate lease provisions obligate Montgomery
Ward to reimburse CenterPoint for tax liabilities incurred
during the term of the lease.
On July 7, 1997, Montgomery Ward filed for bankruptcy
under Chapter 11. Montgomery Ward continued to make
use of the premises as a debtor-in-possession pursuant to
SS 1107 and 1108 of the Bankruptcy Code, but it neither
assumed nor rejected the lease prior to the lease's
expiration on September 1, 1997.
On July 11, 1997, CenterPoint sent three invoices to
Montgomery Ward. The first invoice was for a first
installment of 1996 taxes (payable in 1997) in the amount
of $320,404.40. The second invoice was for an estimated
second installment of 1996 taxes in the amount of
3
$320,569.70. The third invoice was issued pursuant to
Section 6.3 of the lease and covered the 1997 taxes. This
was in the amount of $426,729.87.
Montgomery Ward did not remit payment for either of the
first two invoices, but remitted $96,584.95 as payment for
the third invoice. This amount represented the prorated
portion of taxes attributable to the period subsequent to
Montgomery Ward's petition for bankruptcy relief.
Montgomery Ward took the position that all taxes
attributable to a pre-petition period constituted unsecured
claims.1
On September 15, 1997, CenterPoint filed a motion
pursuant to 11 U.S.C. S 365(d)(3) in the Bankruptcy Court
for the District of Delaware seeking payment in full of
Montgomery Ward's tax reimbursement obligations
pursuant to the lease. Section 365(d)(3) reads, in relevant
part:
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. The court may extend, for
cause, the time for performance of any such obligation
that arises within 60 days after the date of the order
for relief, but the time for performance shall not be
extended beyond such 60-day period.
CenterPoint argued that all the invoices were payable
immediately as "obligations of [Montgomery Ward] . . .
arising from . . . the lease" after the order for relief.2
_________________________________________________________________
1. As the Seventh Circuit noted in In re Handy Andy Home Improvement
Centers, 144 F.3d 1125, 1126 (7th Cir. 1998), recorded decisions often
refer to "pre-petition" and "post-petition" periods rather than a "pre-
order" and "post-order" periods. The latter terms are technically correct.
2. While section 6.3 did not explicitly contemplate an invoice to trigger
payment, it did contemplate that the payment obligation would arise at
a fixed date no later than thirty days prior to the expiration of the
lease.
In the absence of an invoice from CenterPoint, the obligation to make
payment would have arisen within the post-order, pre-rejection period.
4
Montgomery Ward argued that the statute was ambiguous
and that the jurisprudence of the Third Circuit required
that it should pay only the taxes attributable to the period
after the order.
The Bankruptcy Court decided in favor of Montgomery
Ward. CenterPoint appealed this decision to the District
Court for the District of Delaware, which affirmed the
decision of the Bankruptcy Court. CenterPoint again
appeals.
The Bankruptcy Court had subject matter jurisdiction
pursuant to 28 U.S.C. S 157 because CenterPoint's claim
arose in the Chapter 11 bankruptcy case filed by
Montgomery Ward. The District Court had appellate
jurisdiction over the Bankruptcy Court's final judgment,
order, and decree pursuant to 28 U.S.C. SS 158(a) and
1334(a). This Court has appellate jurisdiction to review the
final order of the District Court pursuant to 28 U.S.C.
SS 158(d) and 1291. We exercise plenary review over the
legal question of the proper interpretation of a statute. In re
McDonald, 205 F.3d 606, 609 (3d Cir. 2000).
II.
Section 365(d)(3) mandates that "the trustee shall timely
perform all the obligations of the debtor . . . arising from
and after the order for relief under any unexpired lease
. . . , until such lease is assumed or rejected,
notwithstanding section 503(b)(1) of this title." 11 U.S.C.
S 365(d)(3). There is, of course, a syntactical ambiguity in
this text. It is not clear, as a purely formal matter, whether
the preposition "from" should be read to modify the most
proximate noun, "order," or the more remote,"lease."
Nevertheless, we will interpret the preposition, as do both
parties here, as modifying "lease," and the requirement as
relating to obligations "arising from[,] and after the order of
relief under[,] any unexpired lease." To require a trustee to
perform all obligations "arising from . . . the order of relief "
would make little sense and would be entirely inconsistent
with the legislative history.
The issue for resolution then is what Congress meant
when it referred to "obligations of the debtor arising under
5
a lease after the order of relief." In the factual context of
this case, does it require payment by the trustee of all
amounts that first become due and enforceable after the
order under the terms of the lease? Or does it require the
proration of such amounts based upon whether the
landlord's obligation to pay the taxes accrued before or
after the order?
We believe that to state these questions is to answer
them. The clear and express intent of S 365(d)(3) is to
require the trustee to perform the lease in accordance with
its terms. To be consistent with this intent, any
interpretation must look to the terms of the lease to
determine both the nature of the "obligation" and when it
"arises." If one accepts this premise, it is difficult to find a
textual basis for a proration approach. On the other hand,
an approach which calls for the trustee to perform
obligations as they become due under the terms of the
lease fits comfortably with the statutory text.
The term "obligation" is not defined in the Code, and it is
thus apparently used in its commonly understood sense.
Black's Law Dictionary defines it as "[t]hat which a person
is bound to do or forebear; any duty imposed by law,
promise, contract, relations of society, courtesy, kindness,
etc." Black's Law Dictionary 968-69 (5th ed. 1979). In the
context of a lease contract, it seems to us that the most
straightforward understanding of an obligation is something
that one is legally required to perform under the terms of
the lease and that such an obligation arises when one
becomes legally obligated to perform.
While Montgomery Ward insists that the statutory text is
ambiguous, it has not advanced a plausible reading that
seems to us consistent with that text. Several courts that
have adopted a proration approach have suggested that
such an approach can be reconciled with the text by
interpreting "obligation" in light of the statutorily
defined term "claim." See, e.g., Child World, Inc. v.
Campbell/Massachusetts Trust (In re Child World, Inc.), 161
B.R. 571, 574 (S.D.N.Y. 1993). The tenant has an
"obligation" when the landlord has a "claim." The Code, of
course, defines "claim" as including an "unmatured right to
6
payment."3 Thus, it is suggested, an "obligation" can arise
before the tenant is obliged to perform. There are several
difficulties with this suggestion. First, of course, Congress
chose "obligation" and not "claim." See In re R.H. Macy &
Co., 152 B.R. 869, 873 n.3 (S.D.N.Y. 1993) (suggesting that
this makes S 365(d)(3) "somewhat out of synch" with the
rest of the code). Second, this reading would render
S 365(d)(3) superfluous. Unmatured rights to payment
under a lease exist from the date the lease is executed, and
no right to payment would ever arise under an unexpired
lease after the order for relief. Finally, understanding
"obligation" to be the corollary of "claim" does not produce
the result for which those making the suggestion contend.
Including unmatured rights to payment provides no
analytical foundation for prorating the obligation to
reimburse the landlord for taxes based on the date of the
order and whether the landlord's obligation to pay those
taxes accrued before or after the order was entered, an
obligation that clearly does not arise under the lease.
Indeed, any reading that provided an analytical foundation
for such proration would be inconsistent with what would
appear to be the fundamental tenet of the text -- that it is
the terms of the lease that determine the obligation and
when it arose.
Finding a straightforward interpretation that produces a
rational result and no other reasonable interpretation
consistent with the text, we are constrained to hold that
S 365(d)(3) is not ambiguous. We thus have no justification
for consulting legislative history. Nevertheless, we believe
the limited legislative history of S 365(d)(3) is consistent
with our reading of the text. The situation existing prior to
the adoption of S 365(d)(3) has been accurately described in
the literature as follows:
Prior to 1984, landlords who leased premises to a
[debtor-in-possession ("DIP")] sought payment of rent
and other postpetition charges as administrative
_________________________________________________________________
3. "Claim" is defined as a "right to payment, whether or not such right
is reduced to judgment, liquidated, unliquidated, fixed, contingent,
matured, unmatured, disputed, undisputed, legal, equitable, secured, or
unsecured." 11 U.S.C. S 101(5)(A).
7
expenses. Several factors, however, made collecting
postpetition lease obligations under S 503 an
unsatisfactory arrangement. First, a landlord had to
comply with the formal and time-consuming procedure
of an application, notice, and hearing. Second, a
landlord could, upon proper proof, only recover the
reasonable value of the DIP's actual use and occupancy
of the premises. The "reasonable value-actual use"
standard meant that (i) if a DIP physically occupied
only a portion of the premises, it would, in turn, only
be liable for the pro rata rent corresponding to the
percentage of space actually occupied, and (ii) the
court could limit a landlord's recovery to a fair market
rate where the contract rate in the lease appeared
clearly unreasonable. Finally, since bankruptcy courts
exercise discretion with respect to the timing of the
payment of administrative expenses, the court could
delay payment of the amount awarded to the landlord
until confirmation of a plan. The resulting loss of
income imposed a heavy economic burden on landlords
who were forced to provide ongoing services and space
to the estate without receiving timely payment to
satisfy their own cash obligations.
See Joshua Fruchter, To Bind or Not to Bind -- Bankruptcy
Code S 365(d)(3): Statutory Minefield, 68 Am. Bankr. L.J.
437, 437 (1994) (emphasis in original; footnotes omitted)
[herinafter "To Bind or Not to Bind"].
In 1984, Congress adopted S 365(d)(3) as a part of the
Bankruptcy Amendments and Federal Judgship Act of
1984. Virtually all courts have agreed that it was intended
to alleviate the above described burdens of landlords by
requiring timely compliance with the terms of the lease. As
Senator Orrin Hatch, a conferee on the originating act, put
it:
This subtitle contains three major substantive
provisions which are intended to remedy serious
problems caused shopping centers and their solvent
tenants by the administration of the bankruptcy code.
. . . 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
8
trustee has stopped making payments under the lease.
In this situation, the landlord is forced to provide current
services -- the use of its property, utilities, security, and
other services -- without current payment. 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, and
other charges on time pending the trustee's assumption
or rejection of the lease.
H.R. Rep. No. 882, 95th Cong., 2d Sess., reprinted in 1984
U.S.C.C.A.N. 576 (emphasis added). Senator Hatch's
statements seem to us to confirm that Congress intended
that the debtor in possession perform "all the obligations
. . . at the time required in the lease." See In re Krystal Co.,
194 B.R. 161, 164 (E.D. Tenn. 1996) (finding legislative
history supports "time required in the lease" theory).4
We are not alone in holding that an obligation arises
under a lease for the purposes of S 365(d)(3) when the
legally enforceable duty to perform arises under that lease.
See e.g., In re Koenig Sporting Goods, Inc., 203 F.3d 986
(6th Cir. 2000) (where rent for the coming month was due
under the lease on the first of the month and the tenant
rejected the lease on the second, "S 365(d)(3) is
unambiguous as to the debtor's rent obligation and
requires payment of the full month's rent;" proration would
be inconsistent with the statute); In re R.H. Macy, 152 B.R.
at 873 ("As [the landlord] correctly notes,[the debtor] is not
directly liable for the reassessed taxes, but only
_________________________________________________________________
4. In re Child World, 161 B.R. 571, 575-77 (S.D.N.Y. 1993), and a line of
similar cases focus on Senator Hatch's "current payment" for "current
services" language and conclude that S 365(d)(3) was targeted at the
specific inequity of requiring the landlord to provide current services
without compensation. Senator Hatch's description of the solution
chosen by Congress is not so limited, however.
9
contractually obligated to pay such amounts to [the
landlord.] Accordingly, the reassessed taxes represent an
obligation of [the debtor] under the Lease that arose after
the order for relief which must be timely performed in
accordance with section 365(d)(3)."); In re Duckwall-Alco
Stores, 150 B.R. 965, 976 n.23 (D. Kan. 1993) (stating that
"[t]he language of S 365(d)(3) is clear in imposing the duty
to comply with all lease obligations arising after the order
for relief. . . . The lease did not provide for payment of taxes
to the landlord as they accrued."). See also Joshua
Fruchter, To Bind or Not to Bind -- Bankruptcy Code
S 365(d)(3): Statutory Minefield, 68 Am. Bankr. L.J. 437,
473 (1994).
We reach the conclusion that S 365(d)(3) is unambiguous
with some reluctance given that one sister court of appeals
and a number of other courts have reached the opposite
conclusion and have opted for a proration approach. See,
e.g., In re Handy Andy, 144 F.3d 1125 (7th Cir. 1998); In
re Child World, 161 B.R. 571 (S.D.N.Y. 1993), reversing 150
B.R. 328 (Bankr. S.D.N.Y. 1993). Nevertheless, we find
ourselves unpersuaded by the contentions that have led
them to their conclusion. We acknowledge that there are
aspects to a proration approach that Congress might have
found desirable. It is not our role, however, to make
arguably better laws than those fashioned by Congress. See
Touche Ross & Co. v. Redington, 442 U.S. 560, 578 (1979).
We also acknowledge that proration was the pre-Code
practice and that we had been admonished not to"read the
Bankruptcy Code to erode past bankruptcy practice absent
a clear indication that Congress intended such a
departure." Pennsylvania Dept. Pub. Welfare v. Davenport,
495 U.S. 552, 563 (1990). It seems clear to us, however,
that Congress enacted S 365(d)(3) for the purpose of altering
a pre-Code practice that had created a problem for
landlords of non-residential property and that our task is to
determine the nature of the change based on the text
chosen. Finally, we acknowledge that the result we reach
may in some cases leave room for strategic behavior on the
part of landlords and tenants. Here, we tender only two
observations. Tax reimbursement obligations are only a
small constellation in the universe of obligations coming
within the scope of S 365(d)(3), and there is no basis in the
10
text for distinguishing them from rent and numerous other
obligations of tenants. Moreover, strategic behavior even in
the area of tax reimbursement can be constrained by
forethought and careful drafting.
Contrary to the suggestion of Montgomery Ward, we do
not find our decision in In re Columbia Gas Transmission
Corp., 37 F.3d 982 (3d Cir. 1994), to be helpful in resolving
the issue before us. As Montgomery Ward stresses, we
there observed that a tax liability is generally"incurred on
the date it accrues, not on the date of the assessment or
date on which it is payable." Id. at 985. Columbia Gas did
not involve a lease, however, and, accordingly, did not call
upon us to interpret S 365(d)(3).
III.
Montgomery Ward's lease obligation to reimburse
CenterPoint for tax payments arose post-order and prior to
rejection. Under S 365(d)(3), Montgomery Ward's obligation
must be fulfilled not in part, but in full.
The judgment of the District Court will be reversed and
this case will be remanded for proceedings consistent with
this opinion.
11
MANSMANN, Circuit Judge, dissenting:
I.
This appeal requires us to determine when a leasehold
obligation "arises" for purposes of S 365(d)(3) of the
Bankruptcy Code. The majority holds, in effect, that an
obligation that accrues over time does not arise as it
accrues, but instead arises at whatever time the parties
specify in their lease. Because I believe that the majority's
holding gives an unwarranted preference to landlords for
recovery of "pre-petition" debts, I respectfully dissent.
II.
Section 365(d)(3) provides, in pertinent part, that:
The trustee shall timely perform all 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 assumed or rejected,
notwithstanding section 503(b)(1) of this title.
11 U.S.C. S 365(d)(1). The plain import of this provision is
that the trustee must fulfill all obligations under the lease
which "arise" from the date of the order until the date of
assumption or rejection.1
In the present case, the lease called for reimbursement of
taxes when invoiced by the landlord. Shortly after the
_________________________________________________________________
1. I do not perceive a "syntactical ambiguity" in the statute. Unlike the
majority, I read the phrase "from and after" as a redundant pair, much
like the common phrases "over and above" or"cease and desist". Hence,
I believe that "from" is used in the sense of"commencing with", and
modifies the order rather than the lease: The statute deals with
obligations under the lease, arising "from and after" the date of the
order. Although the majority's alteration of the syntax through insertion
of commas may resolve the majority's perceived difficulty with the usage
of "from", it creates a new usage problem by designating the order for
relief (or perhaps the relief itself) to be "under" the lease. In any
event,
it appears that these disagreements over the parsing of the statutory text
are of merely academic concern, as I believe that the majority agrees that
the trustee need not perform obligations that arise before the date of the
order.
12
tenant filed for bankruptcy protection in July, 1997, the
landlord issued invoices for taxes attributable to all of 1996
and 1997, up to the September 1, 1997 expiration date of
the lease. The majority today holds that, because the billing
took place within the eight-week administrative period
between entry of an order for relief and expiration of the
lease (before assumption or rejection thereof), the entire
twenty months' worth of tax obligations "arose" during that
eight-week period. In so holding, the majority elevates the
accident or artifice of the billing date above the economic
reality of the accrual, and thereby inappropriately burdens
the administration of the bankrupt estate and unfairly
favors landlords over similarly situated pre-petition
creditors.
The majority's holding is predicated on its view that the
"fundamental tenet" of S 365(d)(3) is that "it is the terms of
the lease that determine the obligation and when it arose".
Supra at 7. While I agree that the terms of the lease
determine the obligation, the statute says nothing about
how to determine when the obligation arises. Nothing in the
text is inconsistent with the common-sense view that when
an obligation arises may be fixed by its intrinsic nature
and/or by the extrinsic circumstances of its accrual. An
obligation attributable to a particular time may well be said
to "arise" at that time, and an obligation that accrues over
time may be said to "arise" as it accrues, without doing
violence to the statutory language.
I believe that the true "fundamental tenet" ofS 365(d)(3)
is that landlords, like other post-petition creditors, should
receive full and timely payment for post-petition services.
This is in keeping with the policy of the Bankruptcy Code
of giving priority to post-petition claims to enable the debtor
to keep operating for as long as its current revenues cover
current costs (so that the debtor's business is yielding a net
economic benefit). See In re Handy Andy Home
Improvement Centers, Inc., 144 F.3d 1125, 1127 (7th Cir.
1998). Moreover, S 365(d)(3) should be read in light of the
overarching policy of treating all creditors within a class
(such as unsecured pre-petition trade creditors) alike. Both
of these policies are disserved by requiring the debtor or
trustee to repay back taxes, a pre-petition "sunk cost", as
a condition of ongoing operations. See id. at 1128.
13
Our decision today creates a split of authority among the
Courts of Appeals concerning priority of back taxes that are
billed post-petition, as it is squarely in conflict with the
Seventh Circuit's well-reasoned decision in Handy Andy. As
Chief Judge Posner explained:
The quarrel between the parties is over whether
[tenant]'s "obligation" under the lease could arise
before [tenant] was contractually obligated to
reimburse [landlord] for the taxes that the latter had
paid. . . . [the] `billing date' approach is a possible
reading of section 365(d)(3), but it is neither inevitable
nor sensible. It is true that [tenant]'s obligation to
[landlord] to pay (or reimburse [landlord] for paying)
the real estate taxes did not crystallize until the rental
due date after the taxes were paid. But since death and
taxes are inevitable and [tenant]'s obligation under the
lease to pay the taxes was clear, that obligation could
realistically be said to have arisen piecemeal every day
of 1994 and to have become fixed irrevocably when, the
last day of the year having come and gone, the lease
was still in force. Had the lease been terminated for
one reason or another on January 1, 1995, [tenant]
would have had a definite obligation to reimburse
[landlord] for the 1994 real estate taxes when those
taxes were billed to [landlord]. The obligation thus
arose, in a perfectly good sense, before the bankruptcy.
The obligation to reimburse [landlord] for the first
installment of the 1995 taxes likewise arose before the
bankruptcy.
Handy Andy, 144 F.3d at 1127. I find this reasoning
persuasive, and I would follow it in this case.
The majority finds support for its position in a recent
decision by the Sixth Circuit that involved just one month
of advance rent rather than a year and a half of back taxes.
See In re Koenig Sporting Goods, Inc., 203 F.3d 986 (6th
Cir. 2000). Although I disagree with the statutory analysis
in Koenig Sporting Goods, it would seem that parceling a
continuing obligation into monthly increments is far less
subversive of statutory policies than aggregating a year or
more of accrued debt for priority purposes. In any event,
the Sixth Circuit itself apparently considers the difference
14
between a short advance payment and a long back payment
to be important. Compare Vause v. Capital Poly Bag, Inc.,
886 F.2d 794 (6th Cir. 1989) (rejecting argument that farm
rent payable at end of year accrued only on the payment
date) with Koening Sporting Goods, 203 F.3d at 990 nn.4&5
(distinguishing Vause as involving rent payments in arrears
rather than in advance).
Although some courts have applied the "billing date"
approach adopted by the majority today, most decisions
have rejected that approach in favor of proration. See, e.g.,
In re McCrory Corp., 210 B.R. 934, 940 (S.D.N.Y. 1997)
(observing that the billing date approach "would result in a
windfall either to the landlord or the debtor-tenant"); In re
Victory Markets, Inc., 196 B.R. 6 (Bankr. N.D.N.Y. 1996); In
re All For A Dollar, Inc., 174 B.R. 358 (Bankr. D. Mass.
1994); In re Child World, Inc., 161 B.R. 571 (S.D.N.Y. 1993)
(observing that allowing landlords to recover for pre-petition
services billed post-petition "would grant landlords a
windfall payment, to the detriment of other creditors"); In re
Ames Department Stores, 150 B.R. 107 (Bankr. S.D.N.Y.
1993). Cf. Daugherty v. Kenerco Leasing Co. (In re Swanton
Corp.), 584 B.R. 474 (S.D.N.Y. 1986) (rent prorated
although lease called for yearly rental payments). 2
The proration approach is in keeping with what had
been, prior to enactment of S 365(d)(3), the well-established
rule. See, e.g., Child World, 161 B.R. at 575-76 (referring to
"the long-standing practice under S 503(b)(1) of prorating
debtor-tenant's rent to cover only the postpetition,
prerejection period, regardless of billing date"). As the
majority acknowledges, we should not read legislation to
alter established bankruptcy practice "absent a clear
indication that Congress intended such a departure." Supra
at 10, quoting Pennsylvania Dept. Pub. Welfare v.
Davenport, 495 U.S. 552, 563 (1990). See also Cohen v. De
La Cruz, 523 U.S. 213 (1998) (same); Midlantic Nat'l Bank
v. New Jersey Dep't of Envtl. Protection, 474 U.S. 494, 501
_________________________________________________________________
2. See generally 2 Norton Bank. L. & Prac. 2d S 42:8 Nonresidental Real
Property Leases under Code S 365(D)(3) (2000 Supp.); Arnold M.
Quittner, Executory Contracts and Leases, 805 PLI/Comm 79, 249-53
(April 2000).
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(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 the intent specific.
The court has followed this rule with particular care in
construing the scope of bankruptcy codifications.").
Although, as the majority suggests, Congress clearly
intended to change prior practice when it enacted
S 365(d)(3), I can find no indication of a specific intent to
displace proration with the billing date approach. Rather, it
seems clear that the statute was aimed at providing
landlords with current pay for current services and
relieving them from the "actual and necessary" analysis
required under S 503(b)(1). Nothing in the text or legislative
history suggests that Congress wished to go beyond putting
landlords on the same footing with other trade creditors by
allowing them through the timing of their billing to
transform pre-petition claims into post-petition claims. See
Handy Andy, 144 F.3d at 1128; Child World at 575-76.
The majority seeks to marshal support for its
interpretation from the remarks of Senator Hatch in the
legislative history. However, the Senator's observation that
the trustee must perform "all the obligations . .. at the time
required in the lease" simply has no bearing on the
question before us. The quoted passage merely indicates
when an obligation must be performed: "at the time
required in the lease", which adds nothing to the statute's
requirement of "timely" performance. It simply does not
address how to determine when the obligation arises.
III.
Because neither the language of the statute nor the
legislative history forecloses the District Court's common-
sense interpretation - one that preserves prior practice and
better serves fundamental bankruptcy policies, I would
affirm the decision below. Accordingly, I dissent.
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
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