In re Bon Ton Restaurant and Pastry Shop, Inc.
| Decision Date | 12 September 1985 |
| Docket Number | Bankruptcy No. 85 B 1755. |
| Parties | In re BON TON RESTAURANT AND PASTRY SHOP, INC., Debtor. |
| Court | United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Northern District of Illinois |
Robert R. Benjamin & Associates, Ltd., Chicago, Ill., for debtor.
Cory Lipoff, Nachman, Munitz & Sweig, Ltd., Joel Greenblatt, Foss, Schuman, Drake & Barnard, Chicago, Ill., for movant/landlord.
This matter was heard upon the motion of the debtor in possession, Bon Ton Restaurant and Pastry Shop, Inc. ("Bon Ton" or "debtor"), for authority to assume an unexpired lease of nonresidential real property under section 365(a) of the Bankruptcy Code. In opposition, the successor-lessor, Bernard A. Heerey ("Heerey" or "lessor") contends that a number of defaults exist under the lease which must be cured as a condition to assumption as provided by section 365(b)(1) of the Code. Presently before the court is the lessor's alternative contention that Bon Ton is obligated to surrender the subject premises because the lease has been terminated by operation of law pursuant to 11 U.S.C. § 365(d)(4). For the reasons set forth below, the court concludes that the lease herein has not been deemed rejected under the provisions of section 365(d)(4).
On February 8, 1985, Bon Ton filed its voluntary petition for relief under Chapter 11 of the Bankruptcy Code, and has continued to operate its business and manage its property as a debtor in possession. The lease in question was executed on April 6, 1981 for rental of the premises at 1151-53 North State Street, Chicago, Illinois, including storage space in the basement. The entire building in which Bon Ton operates its restaurant and pastry shop consists of four commercial units and twenty-four rental units. Heerey is the successor-lessor of the premises, the lease term for which expires April 30, 1988.
On March 29, 1985, and within 60 days of the commencement of this case, Bon Ton filed its motion under section 365(a)1 to assume the unexpired lease, and a hearing thereon was held April 4, 1985. On that date, Heerey requested time to respond to Bon Ton's motion and was given until May 15, 1985. Bon Ton then requested that its motion to assume be heard within the next sixty days, or before June 8, 1985. The court thereafter directed the parties to comply with a pretrial order by June 5th, set a status hearing for June 6th, and set the hearing on assumption for June 7, 1985.
At the conclusion of the June 7th hearing, the court determined that certain threshold legal questions2 surrounding the assumption of the lease should be decided on briefs, thereby avoiding the necessity for an evidentiary hearing since the only remaining issues, would likely involve the net amount due the lessor at the time of assumption and the debtor's ability to perform. Both sides agreed upon a briefing schedule3 proposed by the court.
Rather than filing a responsive brief, the lessor on July 2, 1985 filed a motion to compel Bon Ton to vacate and surrender the premises, contending that on April 4, 1985, Bon Ton had requested and obtained a sixty-day extension of time within which to assume the unexpired lease but no order to that effect was entered by the court before June 8, 1985. Therefore, according to the lessor, the lease was deemed rejected pursuant to section 365(d)(4) of the Code. Bon Ton replies that on April 4, 1985, the court extended the time for assumption without setting a final date by which the lease must be assumed. It is Bon Ton's contention that the time within which the lease must be assumed had not yet expired and in fact could not expire until this court set a final date for Bon Ton to assume the lease.
Section 365(d)(4) of the Bankruptcy Code governs the time within which a lease of nonresidential real property must be assumed and provides in relevant part:
. . . In a case under any chapter of this title, if the trustee does not assume or reject an unexpired lease of nonresidential real property under which the debtor is the lessee within 60 days after the date of the order for relief, or within such additional time as the court, for cause, within such 60-day period, fixes, then such lease is deemed rejected, and the trustee shall immediately surrender such nonresidential real property to the lessor.
11 U.S.C. § 365(d)(4) (West 1984). Section 365(d)(4) was added to the Code by the Bankruptcy Amendments and Federal Judgeship Act of 1984, thereby changing the Code's treatment of unexpired commercial real estate leases. Prior to the Amendments, the trustee in a Chapter 11 case could assume an unexpired lease of nonresidential real property at any time before confirmation of a plan if not assumed within sixty days after the order for relief. Such leases are now deemed rejected under section 365(d)(4) if not assumed within sixty days after the order for relief unless the court, for cause, grants additional time during that sixty-day period. The amount of additional time to be given, if any, has been left to the discretion of the court and the Code does not limit the court in granting a substantial extension of time so long as it is granted within the initial sixty-day period. 2 Collier on Bankruptcy ¶ 365.031 (15th ed. 1985).
Section 365(d)(4) is to be read in conjunction with section 365(a) and section 365(b)(1) with regard to the act of assumption. Section 365(a) provides the authority to assume an unexpired lease. However, this right to assume is not unfettered. Where there has been a default under the lease, section 365(b)(1) conditions the trustee's power of assumption on first curing the default, compensating the other party for damages resulting therefrom, and providing adequate assurance of future performance under the lease. Section 365(a) further requires that the assumption have court approval in the form of an express order. E.g., Matter of Whitcomb & Kelly Mortg. Co., Inc., 715 F.2d 375, 380 (7th Cir.1983).
Court approval is generally granted as a matter of course if there are no monetary defaults, Matter of Goldblatt Bros., Inc., 766 F.2d 1136 (7th Cir.1985), if assumption of the unexpired lease or executory contract appears to be in the best interests of the estate, In re Lionel Corp., 29 B.R. 694, 696 (Bankr.S.D.N.Y.1983), and if the debtor is able to perform under the lease. In re Coast Trading Co., Inc., 26 B.R. 737, 741 (Bankr.D.Ore.1982). Once the lease is assumed, the lessor is getting the benefit of his bargain and thereafter generally has no standing to object to assumption by the trustee.
The lessor relies on In re By-Rite Distributing, Inc., 47 B.R. 660 (Bankr.Utah 1985), which views assumption of an unexpired lease of nonresidential real property as contemplated by section 365(d)(4) to consist of three elements:
(1) a conscious and deliberate decision on the part of the debtor in possession or trustee to assume, whether that decision is manifested by words, conduct, or a paper filed with the court; (2) the ability, as determined by the Court after notice and a hearing, to satisfy the cure, compensate, and adequate assurance requirements of Section 365(b)(1)(A), (B), and (C); and (3) a manifestation of judicial approval by the bankruptcy court.
Id. at 669. The court in that case, confronted with a debtor in possession's motion to assume nonresidential real property leases filed on the sixtieth day after the order for relief, held that court approval of assumption may not fall outside the sixty day period provided by the Code. In addition, unless a motion for an extension of time to assume or reject is heard and granted within the initial sixty-day period, automatic rejection of the unexpired lease will occur.
Heerey claims that the decision in By-Rite and its interpretation of section 365(d)(4) support his argument that the lease herein has been rejected by operation of law. Heerey states that prior to the April 4th hearing, Bon Ton and Heerey had reached an oral agreement that Bon Ton would ask for a sixty-day extension of time to assume the lease. However, because court approval was not granted before this alleged sixty-day extension expired, and because Bon Ton could have taken the necessary steps to assume the lease within that time, the lessor argues it can now invoke section 365(d)(4) to deem the lease rejected.
In the context of section 365(d)(1),4 there is no requirement that court approval occur within the sixty-day limitation imposed so long as the trustee has "acted" within that time period. See In re Price Chopper Supermarkets, Inc., 19 B.R. 462 (Bankr.S.D.Ca.1982); In re Avery Arnold Constr. Inc., 11 B.R. 34 (Bankr.S.D.Fla. 1981). The policy behind section 365 is to prevent parties in contractual or lease relationships with the debtor from being left in doubt concerning their status vis-a-vis the estate. H.R.Rep. No. 95-595, 95th Cong., 2nd Sess. 348, (1977) reprinted in U.S. Code Cong. & Admin.News 5963, 6304 (1978); S.Rep. No. 95-989, 95th Cong., 2nd Sess. 59 (1978) reprinted in U.S.Code Cong. & Admin.News 5787, 5845 (1978).
The legislative history to section 365(d)(4) in particular indicates that the trustee must elect to assume within the sixty-day period:
130 Cong.Rec. S8894-95 (remarks of Senator Hatch) reprinted in U.S.Code Cong. & Admin.News 599 (1984) (emphasis added). However, no time constraints...
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