In re Art & Architecture Books of the 21st Century
| Decision Date | 26 November 2014 |
| Docket Number | No. 2:13–BK–14135–RK.,2:13–BK–14135–RK. |
| Citation | 522 B.R. 249 |
| Parties | In re ART AND ARCHITECTURE BOOKS OF THE 21st CENTURY, Debtor. |
| Court | U.S. Bankruptcy Court — Central District of California |
Kurt Ramlo, Levene, Neale, Bender, Yoo & Brill L.L.P, Ron Bender, Beth Ann R. Young, Krikor J. Meshefejian, Thomas M. Geher, Joseph A. Eisenberg, Los Angeles, CA, for Debtor.
United States Trustee (LA), Alvin Mar, Los Angeles, CA, for Trustee.
The contested matter of the motion of AERC Desmond's Tower, LLC (“Landlord”) to: (1) compel immediate payment by Art and Architecture Books of the 21st Century (“Debtor”) of outstanding obligations to Landlord under the Master Lease pursuant to 11 U.S.C. § 365(d)(3) ; (2) modify adequate protection order based on debtor's contempt of court and other developments subsequent to its entry, came on for hearing before the undersigned United States Bankruptcy Judge on February 19, April 2, May 7 and 14, October 14 and November 18, 2014. The motion is opposed by Debtor and the Official Committee of Unsecured Creditors (“Committee”) in this case. Appearances were made as noted on the record.
The court has jurisdiction over the instant motion under 28 U.S.C. § 1334. The motion is a core proceeding under 28 U.S.C. §§ 157(a) and (b)(2)(A) and (M). Venue is proper in this judicial district pursuant to 28 U.S.C. § 1409(a). As discussed herein, the court determines that Landlord is entitled to immediate payment of outstanding obligations arising postpetition as required under 11 U.S.C. § 365(d)(3) and under the terms of the Master Lease and that the motion should be granted.1
In the case at bar, the District Court on Landlord's appeal of this court's ruling on Debtor's motion to assume the Lease held that the Lease was terminated before the commencement of the bankruptcy case when Debtor filed its voluntary petition for relief under Chapter 11 of the Bankruptcy Code, 11 U.S.C., and remanded to this court to determine whether Debtor would be entitled to relief from forfeiture under applicable state law, and thus could nevertheless assume the Lease pursuant to 11 U.S.C. § 365. Exhibit 18 to Request for Judicial Notice in Support of Motion to: (1) Compel Immediate Payment by Debtor of Outstanding Obligations to Landlord Pursuant to 11 U.S.C. § 365(d)(3) ; (2) Modify Adequate Protection Order Based on Debtor's Contempt of Court and Other Developments Subsequent to its Entry, ECF 443. Landlord filed the instant motion to compel immediate payment of outstanding obligations under the Lease pursuant to 11 U.S.C. § 365(d)(3) for the time period pending assumption or rejection of the lease, i.e., the period between the petition date and the date when the this court on remand ruled on Debtor's request for relief from forfeiture. Subsequently, this court has now denied relief from forfeiture in its memorandum decision on Debtor's request for relief from forfeiture in furtherance of its motion to assume the master lease, and there is no longer an unexpired lease. As discussed herein, this court should still rule on the instant motion pursuant to 11 U.S.C. § 365(d)(3) in the context of it being brought before the court's determination on relief from forfeiture, i.e. during the period pending assumption or rejection of the lease. Accordingly, as discussed herein, the pre-petition termination of the Lease does not preclude application of 11 U.S.C. § 365(d)(3), and the court may still rule on Landlord's motion for immediate payment.
A bankruptcy trustee, or a debtor-in-possession exercising the rights, powers and duties of a trustee under 11 U.S.C. § 1107, may assume or assign certain contracts or leases, but their ability to assume leases is limited by 11 U.S.C. § 365(c)(3), which states that “[t]he trustee may not assume or assign any executory contract or unexpired lease of the debtor, whether or not such contract or lease prohibits or restricts assignment of rights or delegation of duties, if ... such lease is of nonresidential real property and has been terminated under applicable nonbankruptcy law prior to the order for relief.” 11 U.S.C. § 365(d)(3). In construing 11 U.S.C. § 365(c)(3), the Ninth Circuit in In re Windmill Farms, Inc., 841 F.2d 1467 (9th Cir.1988) has stated:
Assumability of a lease by a trustee in bankruptcy, in the context of a lease termination claim, involves a two-part test. The first part of the test is to determine whether the lease terminated before the petition in bankruptcy was filed. We have already discussed this. The second part of the test requires the court to “determine whether the termination could have been reversed under a state anti-forfeiture provision or other applicable state law. ”
841 F.2d at 1472 (citation omitted) (italics in original).
The determination of the two-part test of Windmill Farms has been completed in this case. The District Court has determined the first part by holding that the lease terminated pre-petition. This court has now determined the second part by holding that the termination could not have been reversed under state law as Debtor had waived its rights to seek relief from forfeiture of the lease.
This apparently presents an unusual situation, as both parties now appear to seek the opposite of their previous litigating positions in the case. Debtor had argued in its Lease Assumption Motion that it was entitled to relief from forfeiture, and thus, that the lease was assumable, and now argues that the lease should be deemed expired before the petition date and never assumable afterwards from the date of pre-petition termination for purposes of 11 U.S.C. § 365(d)(3). Landlord, which in the Lease Assumption Motion had argued that Debtor waived its right to relief from forfeiture, and thus that the lease was not assumable, now argues that the lease is to be deemed rejected as of the date this court entered an order determining that Debtor had waived its right to relief from forfeiture, thus implicitly arguing that the lease was capable of assumption or rejection for purposes of 11 U.S.C. § 365(d)(3). This apparent turnabout in litigating positions is probably explainable by the effect of the text in 11 U.S.C. § 365(d)(3), which 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.” 11 U.S.C. § 365(d)(3). Essentially this means that during the applicable option period for assuming or rejecting a lease, the trustee of the bankruptcy estate (or a debtor-in-possession) must timely perform all of a nonresidential tenant's post-filing obligations as they become due. 11 U.S.C. § 365(d)(3) ; see also, 11 U.S.C. § 1107 (); In re Cukierman, 265 F.3d 846, 849 (9th Cir.2001).
Debtor disagrees with this construction of 11 U.S.C. § 365(d)(3), citing to In re Orvco, Inc., 95 B.R. 724, 726–727 (9th Cir. BAP 1989), and characterizing its holding as “once [the] lease is rejected, § 365(d)(3) no longer applies to pre-rejection period.” Debtor's Second Supplemental Brief in Response to Court's Order for Further Hearing, ECF 689 at 4:20. It is unclear where in the Orvco opinion this proposition is supported, but to the extent that it was the holding in Orvco, it was contradicted and overruled at least implicitly by the Ninth Circuit in In re Cukierman, 265 F.3d at 851, which held that 11 U.S.C. § 365(d)(3) requires a trustee or debtor-in-possession to perform all obligations under an unexpired lease of nonresidential real property “pending the assumption or rejection of the lease.”
Furthermore, as held in Cukierman, any obligation of a trustee or debtor-in-possession under a non-residential lease of real property, whether or not related to debtor's use of the property, enjoys the administrative status and right to prompt performance conferred by 11 U.S.C. § 365(d)(3), pending the assumption or rejection of a lease. In re Cukierman, 265 F.3d at 850. Also, as held by the Ninth Circuit in Cukierman and other cases, 11 U.S.C. § 365(d)(3) requires the payment of rent in the amount required by the lease (not some other “fair value” amount based on the estate's actual use and occupancy of the premises), plus all other obligations of the tenant debtor under the lease (e.g., common area maintenance charges). 11 U.S.C. § 363(d)(3) ; In re Cukierman, 265 F.3d at 850–851 ; In re LPM Corp., 300 F.3d 1134, 1137 (9th Cir.2002) ; In re Pacific–Atlantic Trading Co., 27 F.3d 401, 404–405 (9th Cir.1994). This means in this case that if 11 U.S.C. § 365(d)(3) applies, Landlord could seek, as it does, administrative priority treatment of: (1) holdover rent as provided for in the lease; (2) late charges provided for in Section 5.3 of the Master Lease; (3) attorneys' fees under Section 16.2 in the lease; (4) replacement parking costs; and (5) subtenant rents.
In opposing the motion, Debtor, joined by the Committee, seeks to avoid the application of 11 U.S.C. § 365(d)(3) in this case, and argues that the lease should be deemed expired as of the petition date. According to Debtor, if the lease is deemed expired as of the petition date, 11 U.S.C. § 365(d)(3) will no longer be in effect, as that section only...
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