In re By-Rite Distributing, Inc., Bankruptcy No. 84A-03050.

• Decision Date: 12 March 1985
• Docket Number: Bankruptcy No. 84A-03050.
• Citation: 47 BR 660
• Parties: In re BY-RITE DISTRIBUTING, INC., Debtor.
• Court: U.S. Bankruptcy Court — District of Utah

47 B.R. 660 (1985)

In re BY-RITE DISTRIBUTING, INC., Debtor.

Bankruptcy No. 84A-03050.

United States Bankruptcy Court, D. Utah, C.D.

March 12, 1985.

COPYRIGHT MATERIAL OMITTED

Gerald H. Suniville, Roe, Fowler & Moxley, Salt Lake City, Utah, for debtor.

MEMORANDUM OPINION

JOHN H. ALLEN, Bankruptcy Judge.

CASE SUMMARY

This matter is before the Court on the debtor's motion to assume certain leases of nonresidential real property. The Court must decide whether the 1984 amendments to Section 365 permit the debtor in possession to assume nonresidential real property leases if the motion to assume is filed within 60 days from the commencement of the Chapter 11 case, but the matter is heard outside the 60-day period. This Court concludes that the leases terminated by operation of law and are, therefore, nonassumable.

FACTUAL AND PROCEDURAL BACKGROUND

The debtor, By-Rite Distributing, Inc., filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code on November 8, 1984. The debtor is engaged in the business of operating and leasing convenience stores and service stations. On January 7, 1985, the sixtieth day after filing, the debtor filed a motion to assume five leases of nonresidential real property used in its business. With respect to each lease, the motion recited that "said lease is currently being used in the debtor's business and is a valuable asset of the debtor's estate and is necessary to an effective reorganization of said debtor." Each lease was in default, but "in the event the court approves the debtor's assumption," the debtor proposed to cure all defaults "at that time and continue to make all payments . . . as they became due."¹

On January 29, 1985, a hearing was held on the debtor's motion. The Court questioned whether the leases could be assumed since more than 60 days had elapsed since the date of filing the Chapter 11 petition. Following a brief colloquy, counsel asked leave to submit a memorandum dealing with the issue.² The Court has considered the arguments and legal authorities presented by counsel, and upon its own review of the statute, rules and case authorities renders the following decision.³

ANALYSIS

The 1984 Amendments to Section 365

Section 365 of the Bankruptcy Code, 11 U.S.C. § 365, was substantially rewritten by the Bankruptcy Amendments and Federal Judgeship Act of 1984, Pub.L. 98-353, 98 Stat. 333 (July 10, 1984). Subtitle C of Title III of the Amendments contained the changes to the Code's treatment of unexpired commercial leases, and special protection for lessors of real property in shopping centers. Prior to the 1984 amendments, the Code treated unexpired leases differently in Chapter 7 than in Chapters 9, 11, and 13.⁴ In Chapter 7, the trustee was allowed 60 days to make the decision whether to assume an unexpired lease. If the trustee did not assume or reject within the 60-day period, the lease was deemed rejected. However, the trustee could obtain additional time to assume or reject "for cause" within the 60-day period. In a reorganization proceeding under Chapter 9, 11, or 13, the debtor in possession or trustee could assume or reject an expired lease at any time prior to plan confirmation, but a creditor could request that the bankruptcy court fix a deadline for assumption or rejection. See N.L.R.B. v. Bildisco and Bildisco, ___ U.S. ___, 104 S.Ct. 1188, 1198, 79 L.Ed.2d 482 (1984). See also, In re Kelly Lyn Franchise Co., 26 B.R. 441 (Bkrtcy.M.D.Tenn.), aff'd, 33 B.R. 112 (M.D.Tenn.1983); In re National Sugar Refining Co., 27 B.R. 565, Bankr.L.Rep. (CCH) ¶ 69,157 (S.D.N.Y.1983); Dallas-Fort Worth Regional Airport Board v. Braniff Airways, Inc., 26 B.R. 628, 10 B.C.D. 244 (N.D.Texas 1982); In re GHR Energy Corp., 41 B.R. 668 (Bkrtcy.D.Mass. 1984); In re Anderson, 36 B.R. 120 (Bkrtcy.D.Haw.1983). The debtor was entitled to a reasonable time within which to assume or reject the lease. Theatre Holding Corp. v. Mauro, 681 F.2d 102, 105 (2d Cir.1982). This proposition seems to have its origin in equity receivership practice. See Clark, Foley & Shaw, "Adoption and Rejection of Contracts and Leases by Receivers," 46 Harv.L.Rev. 1111 (1933). What constituted a reasonable time was left to the court's discretion in light of the circumstances of each case. Theatre Holding Corp. v. Mauro, supra, 681 F.2d at 105; In re Anderson, supra, 36 B.R. at 125. During the period between filing the bankruptcy petition and assumption or rejection of the lease, the debtor was not required to pay rent, but the estate was liable for the reasonable value of the use and occupancy of the premises. In re Cochise College Park, Inc., 703 F.2d 1339, 1354 (9th Cir.1983). In re GHR Energy Corp., supra, 41 B.R. at 670; Matter of Fred Sanders Co., 22 B.R. 902, 905 (Bkrtcy.E.D.Mich.1982). See generally, 2 COLLIER ON BANKRUPTCY ¶ 365.032, at 365-24 to 365-26 (15th ed. 1984).

The 1984 Amendments reallocated the burden of fixing a reasonable time within which to assume or reject unexpired leases. Section 365(d) now provides:

(1) In a case under chapter 7 of this title, if the trustee does not assume or reject an executory contract or unexpired lease of residential real property or of personal property of the debtor within 60 days after the order for relief, or within such additional time as the court, for cause, within such 60-day period, fixes, then such contract or lease is deemed rejected.

(2) In a case under chapter 9, 11, or 13 of this title, the trustee may assume or reject an executory contract or unexpired lease of residential property or of personal property of the debtor at any time before the confirmation of a plan but the court, on the request of any party to such contract or lease, may order the trustee to determine within a specified period of time whether to assume or reject such contract or lease.

(3) 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. The court may extend, for cause, the time for performance of any such obligation that arises within 60 days after the date of the order for relief, but the time for performance shall not be extended beyond such 60-day period. This subsection shall not be deemed to affect the trustee\'s obligations under the provisions of subsection (b) or (f) of this section. Acceptance of any such performance does not constitute waiver or relinquishment of the lessor\'s rights under such lease or under this title.

(4) Notwithstanding paragraphs (1) and (2), in a case under any chapter of this title, if the trustee does not assume or reject an unexpired lease of non-residential 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.

The legislative history indicates the Congressional intent behind the modifications to Section 365(d):

Subtitle C of title III, with the exception of a few minor changes, is identical to S. 549 which was overwhelming approved by the committee and which unanimously passed the Senate in 1982 and 1983.

This subtitle contains three major substantive provisions which are intended to remedy serious problems caused shopping centers and their solvent tenants by the administration of the bankruptcy code.

The first problem which this bill would remedy is the long-term vacancy or partial operation of space by a bankrupt tenant. Although in a chapter 7 case the bankruptcy code presently requires that the trustee decide whether to assume or reject an unexpired lease within 60 days after the bankruptcy petition is filed, there is no deadline for this decision in a chapter 11 case. Because of the unprecedented number of bankruptcy cases and the consequent delays in the bankruptcy courts, tenant space has been vacated for extended periods of time before the bankruptcy court forced the trustee to decide whether to assume or reject the lease. During this time, the other tenants of the shopping center are hurt because of the reduced customer traffic in the shopping center. Tenants and landlords in other nonresidential structures have encountered similar problems.

The bill would lessen the problems caused by extended vacancies and partial operation of tenant space by requiring that the trustee decide whether to assume or reject the nonresidential real property lease within 60 days after the order for relief in a case under any chapter. This time period could be extended by the court for cause, such as in exceptional cases involving large numbers of leases. One of the minor changes in this subtitle was to limit it to nonresidential real property leases. If the lease is not assumed or rejected within this 60-day period, or any additional period granted by the court, the lease is deemed rejected and the trustee must immediately surrender the property to the lessor.

A second and related problem is that during the time the debtor has vacated space but has not yet decided whether to assume or reject the lease, the trustee has stopped making payments due under the lease. These payments include rent due the landlord and common area charges which are paid by all the tenants according to the amount of space they lease. In this situation, the landlord is forced to provide current services—the use of its property, utilities, security, and other services—without current payment. No other creditor is put in this position. In addition, the other tenants often must increase their common area charge payments to compensate for the trustee\'s failure to make the required payments for the debtor.

The bill would lessen these

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