In re Bce West, L.P.

• Decision Date: 14 February 2003
• Docket Number: No. 01-16724.,01-16724.
• Citation: 319 F.3d 1166
• Parties: In re BCE WEST, L.P., et al, Debtor, Einstein/Noah Bagel Corp., Appellant, v. Gerald K. Smith, Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

319 F.3d 1166 In re BCE WEST, L.P., et al, Debtor,

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Einstein/Noah Bagel Corp., Appellant,
v.
Gerald K. Smith, Appellee. No. 01-16724. United States Court of Appeals, Ninth Circuit. Argued and Submitted December 3, 2002. Filed February 14, 2003.

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Amar S. Bhachu, Skadden, Arps, Slate, Meagher & Flom, Chicago, IL, for the appellant.

J. Henk Taylor, Lewis & Roca LLP, Phoenix, AZ, for the appellee.

Appeal from the Ninth Circuit Bankruptcy Appellate Panel; Perris, Russell and Ryan, Bankruptcy Judges, Presiding. BAP No. AZ-01-01017-RPRy.

Before: BERZON, TALLMAN, Circuit Judges, and MILLER,^* District Judge.

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OPINION

TALLMAN, Circuit Judge:

This is an appeal from the Bankruptcy Court and the Bankruptcy Appellate Panel ("BAP") involving the interpretation of the administrative priority given to an obligation under a sublease of commercial property. Appellant, Einstein/Noah Bagel Corporation ("ENBC") argues that it is entitled to administrative priority for its claims against trustee Gerald K. Smith under 11 U.S.C. §§ 365(d)(3) and 503(b)(1)(A). We hold that ENBC is not entitled to priority because section 365(d)(3) is not applicable to debtors who are lessors. We also hold that ENBC is not entitled to priority under section 503(b)(1)(A) because its administrative claim did not arise from a post-petition transaction and conferred no benefit on Boston Chicken Inc.'s ("Boston Chicken") estate.

I

ENBC is a stock retailer of bagels and associated foods, and Appellee Boston Chicken is a purveyor of home-style meals. Boston Chicken owned half of ENBC's outstanding shares. In 1996, the two companies entered into various agreements relating to the operations of ENBC. One of these agreements was a five-year lease under which ENBC subleased from Boston Chicken space in the office building where Boston Chicken maintained its headquarters. Boston Chicken, in turn, was leasing the entire building from the Prudential Insurance Company ("Prudential").

Boston Chicken and ENBC amended the sublease agreement in May 1998. The amended sublease included a provision requiring Boston Chicken to use its best efforts to obtain a non-disturbance agreement from Prudential. Such an agreement would prohibit Prudential from disturbing ENBC's rights under the sublease in the event that Boston Chicken defaulted on the master lease with Prudential. ENBC sought to ensure that its tenancy would be undisturbed because it contemplated a significant expenditure to improve its corporate computer operations at the subleased location.

In October 1998, Boston Chicken, along with its affiliates, filed a Chapter 11 Petition. According to ENBC, during the time leading up to the filing of Boston Chicken's bankruptcy petition, Boston Chicken had been unable to consistently perform its contractual obligations to ENBC. Boston Chicken had also failed to obtain the desired non-disturbance agreement from Prudential. As a result, ENBC asserts that it took steps to ensure its own survival in the event that Boston Chicken abandoned its contractual obligations. To avoid the perceived risk of disruption of its operations, ENBC relocated its headquarters at the end of 1999. ENBC claims that the moving expenses, coupled with accounting costs, amounted to approximately $1.5 million.

In March 2000, Boston Chicken moved for an order authorizing rejection of the ENBC sublease pursuant to 11 U.S.C. § 365. Without opposition by ENBC, the bankruptcy court approved the request the following month. Boston Chicken was deemed to have rejected the ENBC sublease upon the filing of the motion under the terms of the bankruptcy court's order.

In May 2000, Boston Chicken's third amended plan for the bankruptcy estate was approved. The plan provided for the sale of most of Boston Chicken's assets to a subsidiary of the McDonald's Corporation. The plan also provided for the appointment of a plan trustee, Gerald K. Smith, whose duties included the collection, administration, and distribution of Boston Chicken's sale proceeds as well as any retained assets.

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Before Boston Chicken's plan was approved, ENBC filed a "Request for Payment of Administrative Expense." ENBC asked for payment of three separate claims, the largest of which was the claim for $1.5 million that alleged Boston Chicken had not used its best efforts to obtain the nondisturbance agreement from Prudential. ENBC asserts that Boston Chicken's breach caused it uncertainty regarding the continued occupation of its offices, thereby forcing ENBC to incur relocation costs.

The bankruptcy court granted summary judgment on the trustee's objection to ENBC's claims arising from the sublease. The only issue addressed in the bankruptcy court's order was whether section 365(d)(3) applied to debtor lessors. The bankruptcy court determined that the plain language of section 365(d)(3) was ambiguous, but that the statute's legislative history, as well as the overall purpose served by the Bankruptcy Code, favored an interpretation limiting the application of that section to debtor lessees. The bankruptcy court's final appealable order stated that ENBC was "not entitled to administrative priority under 11 U.S.C. §§ 503(b),¹ 365(d)(3) or any other provision of the Bankruptcy Code."

On appeal, the BAP likewise determined that ENBC's claim relating to the sublease was not entitled to administrative priority. The BAP upheld the bankruptcy court's construction of section 365(d)(3) as inapplicable to debtor lessors, and then went on to resolve ENBC's section 503(b)(1)(A) claim. The BAP determined that ENBC was not entitled to administrative priority under section 503(b)(1)(A) because ENBC had not conferred a substantial benefit on Boston Chicken's bankruptcy estate. ENBC appeals the BAP's order. We have jurisdiction pursuant to 28 U.S.C. § 158(d).

II

We examine the bankruptcy court's conclusions of law de novo and its factual findings for clear error. Carrillo v. Su (In re Su), 290 F.3d 1140, 1142 (9th Cir.2002). Mixed questions of law and fact are reviewed de novo. See id. Decisions of the BAP are reviewed de novo. Id. We also review de novo the bankruptcy court's interpretation of the Bankruptcy Code. Id.; see also Staffer v. Predovich (In re Staffer), 306 F.3d 967, 970-71 (9th Cir.2002).

Section 365(d)(3) of the Bankruptcy Code provides in pertinent 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 .... Acceptance of any such performance does not constitute waiver or relinquishment of the lessor's rights under such lease or under the title.

Whether section 365(d)(3) applies to debtor lessors is an issue of first impression in this circuit. ENBC argues that the plain text of section 365(d)(3) is clear: it applies to any lease to which the debtor is a party, not just to leases under which the debtor is the lessee. The trustee, on the other hand, argues that the last sentence of section 365(d)(3) indicates that it applies only when the debtor is a lessee.

Our analysis under the general rules of statutory construction begins with

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the language of the statute itself. United States v. Buckland, 289 F.3d 558, 564 (9th Cir.2002) (en banc). "[A]s long as the statutory scheme is coherent and consistent, there generally is no need for a court to inquire beyond the plain language of the statute." ...