Handy Andy Home Improvement Centers, Inc., Matter of

• Decision Date: 24 June 1998
• Docket Number: No. 97-3781,97-3781
• Citation: 144 F.3d 1125
• Parties: 40 Collier Bankr.Cas.2d 295, 32 Bankr.Ct.Dec. 992, Bankr. L. Rep. P 77,722 In the Matter of HANDY ANDY HOME IMPROVEMENT CENTERS, INC., Debtor-Appellee. Appeal of NATIONAL TERMINALS CORPORATION.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1125

144 F.3d 1125

40 Collier Bankr.Cas.2d 295, 32 Bankr.Ct.Dec. 992,

Bankr. L. Rep. P 77,722

In the Matter of HANDY ANDY HOME IMPROVEMENT CENTERS, INC.,

Debtor-Appellee.

Appeal of NATIONAL TERMINALS CORPORATION.

No. 97-3781.

United States Court of Appeals, Seventh Circuit.

Argued May 21, 1998.

Decided June 24, 1998.

Michael Weininger (argued), Rusty A. Payton, Katz, Randall & Weinberg, Chicago, IL, for Appellant.

John J. Voorhees, Jr. (argued), Lawrence K. Snider, Mayer, Brown & Platt, Chicago, IL, Michael P. Richman, Mayer, Brown & Platt, New York City, for Debtor-Appellee.

Before POSNER, Chief Judge, and COFFEY and EVANS, Circuit Judges.

POSNER, Chief Judge.

We are asked to decide an important question of bankruptcy law that, surprisingly, has never elicited an appellate opinion, even though it has been the subject of a large number of decisions by bankruptcy and district judges--decisions that are on both sides of the question. Compare, e.g., In re McCrory Corp., 210 B.R. 934 (S.D.N.Y.1997); In re Child World, Inc., 161 B.R. 571 (S.D.N.Y.1993), and In re Victory Markets, Inc., 196 B.R. 6 (Bankr.N.D.N.Y.1996), with, e.g., In re F & M Distributors, Inc., 197 B.R. 829 (Bankr.E.D.Mich.1995), and In re Krystal Co., 194 B.R. 161 (Bankr.E.D.Tenn.1996). Often, after a tenant declares bankruptcy but before he (as debtor in possession) or the trustee in bankruptcy assumes or rejects the lease (as he is entitled to do), the landlord receives a bill for taxes that the lease requires the tenant to reimburse him for. The question is whether the tenant's debt to the landlord for the taxes is entirely a postpetition debt or must be prorated between the prepetition and postpetition period of the tenant's occupancy. The bankruptcy judge, 196 B.R. 87 (Bankr.N.D.Ill.1996), and the district judge ruled that it had to be prorated. The landlord, claiming that the date by which the tenant must pay the bill determines whether the debt is prepetition or postpetition, argues that the entire amount is a postpetition debt. We are being a little imprecise in speaking of "prepetition" and "postpetition" debt; the dividing line is, as we shall see, not the date on which the petition is filed but the date on which the order for relief is entered. Often these are the same date, but not always (and not here).

Handy Andy leased commercial property in Cook County, Illinois from a predecessor of National Terminals Corporation. The lease went into effect on October 1, 1986, and was to expire ten years later. The lease required the lessee to pay all real estate taxes on the property during its term and provided that if the lease ended during rather than at the end of a tax period, the taxes would be prorated between the parties, so that the lessee would be responsible only for those taxes that had accrued before termination. The taxes were of course billed to National, as the owner of the property, rather than to Handy Andy. The lease provided that National would either transmit the bill to Handy Andy, which would then pay the taxes directly to the collector, or pay the taxes itself and bill Handy Andy for reimbursement, which would be due with the next rental payment due National under the lease. National followed the second course, except that it sometimes gave Handy Andy a little longer time within which to reimburse it.

Cook County bills the taxpayer after the period for which the taxes have been assessed. And so the bill for real estate taxes on the leased property for the second installment of 1994 taxes wasn't sent to National until September of the following year. The next month, Handy Andy's creditors filed a bankruptcy petition against Handy Andy under Chapter 11. Two weeks later, National paid the tax bill that it had received from Cook County and invoiced Handy Andy for the amount. Shortly afterward, on November 1, 1995, an order authorizing the bankruptcy case to proceed (an "order for relief," 11 U.S.C. § 303(h)) was entered. The following February, with Handy Andy still in bankruptcy, National received the bill for the first installment of 1995 taxes, paid it, and invoiced Handy Andy. Handy Andy rejected the lease in April.

Section 365(d)(3) of the Bankruptcy Code provides that the trustee or (as in this case) debtor in possession, 11 U.S.C. § 1107(a); In re Thinking Machines Corp., 67 F.3d 1021, 1024 n. 3 (1st Cir.1995), "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)"; the latter section allows as expenses of administering the debtor's estate "the actual, necessary costs and expenses of preserving the estate." National insists that Handy Andy's obligation to reimburse it for the second installment of the 1994 taxes and the first installment of the 1995 taxes did not arise until the first rental due date after National invoiced Handy Andy, and therefore that Handy Andy is obligated by section 365(d)(3) to pay the taxes. Even if the premise is correct, the conclusion may not follow for the 1994 installment. Remember that the entitlement created by section 365(d)(3) clicks in only when the order for relief is entered. That wasn't until November 1, and under the lease that was the deadline for Handy Andy to reimburse National for the 1994 installment, because it was the date on which the next rental payment was due; so under no interpretation of "obligation" did the obligation arise after the order for relief. Cf. Swiss Bank Corp. v. Dresser Industries, Inc., 141 F.3d 689, 691-92 (7th Cir.1998). But Handy Andy makes nothing of this point, so we won't either. Likewise neither party tries to attach significance to the statutory phrase "arising from" the order for relief as distinct from arising after it. We can't figure out what the "from" adds to the "after."

The quarrel between the parties is over whether Handy Andy's "obligation" under the lease could arise before Handy Andy was contractually obligated to reimburse National for the taxes that the latter had paid. National says no, and this "billing date" approach is a possible reading of section 365(d)(3), but it is neither inevitable nor sensible. It is true that Handy Andy's obligation to National to pay (or reimburse National 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 Handy Andy'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, Handy Andy would have had a definite obligation to reimburse National for the 1994 real estate taxes when those taxes were billed to National. The obligation thus arose, in a perfectly good sense, before the bankruptcy. The obligation to reimburse National for the first installment of the 1995 taxes likewise arose before the bankruptcy.

This interpretation is more sensible than National's because it tracks the purpose of giving postpetition creditors a high priority in the distribution of the debtor's estate. The purpose is to enable the debtor to keep going for as long as its current revenues cover its current costs, so that it does not collapse prematurely because of the weight of its existing debt. See In re Jartran, Inc., 732 F.2d 584, 586-88 (7th Cir.1984); Trustees of Amalgamated Ins. Fund v. McFarlin's, Inc., 789 F.2d 98, 101 (2d Cir.1986). In economic terms, the prioritizing of postpetition debt enables the debtor (or trustee) to ignore sunk costs--treat bygones as bygones--and continue...