170 B.R. 69 (Bkrtcy.S.D.N.Y. 1994), 92 B 40477 , In re R.H. Macy & Co., Inc.

Docket NºBankruptcy No. 92 B 40477 (BRL).
Citation170 B.R. 69
Party NameIn re R.H. MACY & CO., INC. et al., Debtors.
Case DateJuly 07, 1994
CourtUnited States Bankruptcy Courts, Second Circuit

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170 B.R. 69 (Bkrtcy.S.D.N.Y. 1994)

In re R.H. MACY & CO., INC. et al., Debtors.

Bankruptcy No. 92 B 40477 (BRL).

United States Bankruptcy Court, S.D. New York.

July 7, 1994

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Weil, Gotshal & Manges by Richard Krasnow, Beth Rosen, New York City, for debtors.

Winston & Strawn by Cory Friedman, New York City, for Grossmont Shopping Center Co.

Otterbourg, Steindler, Houston & Rosen, P.C. by Debra Sudock, New York City, for Official Committee of Unsecured Creditors.

Memorandum Decision on Debtor's Motion to Dismiss Lessor's Motion for Payment of Administrative Expenses



Grossmont Shopping Center Company, ("Grossmont"), alleges that Bullock's Properties Corporation, a subsidiary of R.H. Macy & Co., Inc., ("Debtor"), breached a lease for nonresidential real property (the "Lease") located at the Grossmont Shopping Center in La Mesa, California (the "La Mesa Store"). Grossmont asserts that approximately $970,000 in damages arose as a consequence of the Debtor's failure to operate the La Mesa Store under the trade name "Bullock's" from April 19 through December 17, 1993, during which period the Debtor conducted a court-approved store closing sale and engaged in an unsuccessful effort to sell its leasehold interest. Grossmont contends that such damages must be timely paid under § 365(d)(3) of the Bankruptcy Code, 11 U.S.C. §§ 101-1330 (1988), (the "Code"), or, in the alternative, qualify as administrative expenses pursuant to § 503(b) of the Code. 1

The Debtor has responded by moving to dismiss Grossmont's motion under Federal Rules of Bankruptcy Procedure 9014 and 7012 on the ground that Grossmont's motion fails to state a claim upon which relief can be granted. It is well settled that Grossmont's motion will not be dismissed, " 'unless it appears beyond doubt that the [movant] can prove no set of facts in support of his claim which would entitle him to relief.' " Cohen v. Koenig, 25 F.3d 1168, 1171-72 (2d Cir.1994) (citing Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957)). For the purpose of this motion, Grossmont's well plead factual allegations are accepted as true. Allen v. WestPoint-Pepperell, Inc., 945 F.2d 40, 44 (2d Cir.1991) (citations omitted).

Section 6-A of the Lease provides that the Debtor must continuously operate, subject to certain exceptions, a store under the trade name "Bullock's" during the first 15 years of the Lease (the "Covenant to Stay Open" or "Covenant"). Grossmont asserts that the Debtor paid a relatively low rent because it operated an anchor store which drew customers to the shopping center. In January 1992, four years after assuming the Lease and ten years after the Lease was originally executed by Grossmont and the Debtor's predecessor-in-interest, the Debtor filed its Chapter 11 petition.

In March 1992, the Debtor's time to assume or reject certain leases for nonresidential real property, including the Lease for the La Mesa Store, was extended until the confirmation

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of a plan or plans of reorganization. In March 1993, the Debtor sought authorization to conduct a store closing sale at the La Mesa Store in connection with its decision to cease operations and maximize the value of estate assets at this location. Grossmont objected. The Court approved the store closing sale, and addressing Grossmont's concern that its shopping center would be burdened by an anchor store which had "gone dark," directed that the Lease be deemed rejected on November 1, 1993 unless there was a prior assumption and assignment of such Lease. Grossmont alleges that the Debtor ceased operating the La Mesa Store under the name "Bullock's" on April 19, 1993, and conducted the store closing sale under the trade name "Grand Finale" until July 6, 1993.

In October 1993, the Debtor, asserting that a potential purchaser of the Lease required additional time to conduct its due diligence review, sought to extend its time to assume or reject the Lease to March 31, 1994. Grossmont opposed this motion. The Court denied the Debtor's request and set a December 16, 1993 deadline for the assumption or rejection of the Lease. The Debtor's marketing efforts to sell the Lease were unsuccessful, and the Lease, by Order dated December 17, 1993, was deemed rejected on December 15, 1993.

There is no dispute that at all times pending the December 1993 rejection of the Lease the Debtor paid all rent due under the Lease. Grossmont alleges that the Debtor ceased operating the La Mesa Store on April 19, thereby breaching the Covenant to Stay Open and requiring timely payment of damages under § 365(d)(3) of the Code. Grossmont argues in the alternative that such damages qualify as an administrative expense pursuant to § 503(b)(1)(A). While the Debtor disputes that it breached the lease and that approximately $970,000 in damages resulted from this breach, it moves to dismiss Grossmont's motion on the grounds that any damages awarded would not be timely paid under § 365(d)(3) and do not qualify as an expense of administering the Debtor's estate. It is assumed for the purpose of the § 365(d)(3) discussion that the Covenant is enforceable. In ruling on the § 503(b) request for relief it is necessary to review whether the Covenant to Stay Open is enforceable against the Debtor.

II. SECTION 365(d)(3)

Section 365(d)(3) of the Bankruptcy Code provides, in pertinent part, that "[t]he trustee shall timely perform all the obligations of the debtor, except those specified in section 365(b)(2), arising from ... any unexpired lease of nonresidential real property, until such lease is assumed or rejected, notwithstanding section 503(b)(1) of this title." As it appears that damages for a breach of a covenant which qualify as a contractual obligation under § 365(d)(3) must be timely paid, In re Atlantic Container Corp. 133 B.R. 980, 991 (Bankr.N.D.Ill.1991), Grossmont argues that the Covenant to Stay Open qualifies as an obligation under § 365(d)(3). 2

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Yet the issue is not simply whether the Covenant to Stay Open is an obligation under the Lease, nor whether it is an obligation which is theoretically susceptible to mandatory timely performance. See 11 U.S.C. § 365(d)(3) ("[t]he trustee shall timely perform all the obligations of the debtor") (emphasis added). The Court must determine whether the Covenant to Stay Open is an obligation which must be timely performed in concert with the Debtor's obligation to maximize estate assets for the benefit of all parties in interest. Cf. BFP v. RTC, 511 U.S. 531, ---- - ----, 114 S.Ct. 1757, 1769-70, 128 L.Ed.2d 556 (1994) (meaning of § 548(a)(2)(A)'s "reasonably equivalent value" determined in light of mortgage foreclosure proceeding's effect on real property's value). For even within the fluctuating walls of the "plain meaning" fortress, see 680 Fifth Ave. Assocs. v. Mutual Benefit Life Ins. Co. (In re 680 Fifth Ave. Assocs.), 156 B.R. 726, 734 n. 12 (Bankr.S.D.N.Y.1993) (noting "that the Supreme Court has redefined its support of the plain meaning rule in recent cases involving bankruptcy issues") (citation omitted), aff'd, 169 B.R. 22 (S.D.N.Y.1993); Walter A. Effross, Grammarians at the Gate: The Rehnquist Court's Evolving "Plain Meaning" Approach to Bankruptcy Jurisprudence, 23 Seton Hall L.Rev. 1636 (1993) (setting forth "internal ambiguities of the 'plain meaning' approach"), 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. See Crandon v. United States, 494 U.S. 152, 158, 110 S.Ct. 997, 1001, 108 L.Ed.2d 132 (1990) ("In determining the meaning of the statute, we look not only to the particular statutory language, but to the design of the statute as a whole and to its object and policy.") (citations omitted); cf. Rake v. Wade, 508 U.S. 464, ----, 113 S.Ct. 2187, 2192, 124 L.Ed.2d 424 (1993) (construing §§ 506(b) & 1322(b)(5) together, and stating that "[w]e generally avoid construing one provision in a statute so as to suspend or supersede another provision.") While "[t]he starting point in any case involving construction of a statute...

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