In re By-Rite Distributing, Inc.
| Decision Date | 26 November 1985 |
| Docket Number | No. NC-85-0055J.,Bankruptcy No. 84A-03050,NC-85-0055J. |
| Citation | 55 BR 740 |
| Parties | In re BY-RITE DISTRIBUTING, INC., a Utah corporation, Debtor. BY-RITE DISTRIBUTING, INC., a Utah corporation, Appellant, v. Wayne and Leva BRIERLEY, Panos Deuel Investments, Tom and John Kershisnik, and Ogden City Corporation, Appellees. |
| Court | U.S. District Court — District of Utah |
Vernon L. Hopkinson, Salt Lake City, Utah, for appellant.
Bryce D. Panzer, Salt Lake City, Utah, for appellee.
On November 6, 1985, the court heard oral arguments on this appeal from the bankruptcy court's order denying the appellant's motion to assume certain real property leases. Vernon L. Hopkinson appeared for the appellant, By-Rite Distributing, Inc., and Bryce D. Panzer appeared for the appellee Panos Deuel Investments. At that time the court reversed the bankruptcy court's order but reserved the right to set forth its reasons in this memorandum opinion because of the importance of the issue involved.
This case presents a rather pedestrian question of statutory interpretation but one with potentially serious consequences, not only for bankruptcy debtors and their creditors, but also for already crowded court calendars.
The debtor-appellant, By-Rite Distributing, Inc., operated and leased convenience stores and service stations. In August 1976 it leased two lots of real property in Wyoming, one for $700 a month and the other for $750 a month.1 The appellees in this action are the lessors under those leases. By-Rite improved the property by building service stations on the lots, which were appraised in 1983 at more than $200,000 each. It then subleased each lot for $2,150 a month. By-Rite's leases with the appellees were due to expire in 1986, but By-Rite had the option to extend the leases for two additional ten-year terms. Under the terms of the leases, the improvements reverted to the lessors if the leases were rejected.
On November 8, 1984, By-Rite filed a voluntary petition for reorganization under chapter 11 of the Bankruptcy Code (hereinafter the Code), 11 U.S.C.A. §§ 1101-1174 (1979 & Supp.1985).2 Sixty days later, on January 7, 1985, it filed a motion, as debtor in possession, to assume the unexpired leases pursuant to section 365 of the Code. That section provides that "the trustee in bankruptcy, subject to the court's approval, may assume or reject any executory contract or unexpired lease of the debtor." 11 U.S.C.A. § 365(a) (Supp.1985).3
By-Rite's motion to assume the leases was duly noticed, and no objections were filed. The motion came on for hearing before the Honorable John H. Allen on January 29, 1985, more than sixty days after By-Rite filed its petition for reorganization. None of the lessors appeared. The bankruptcy court, sua sponte, dismissed the plaintiff's motion to assume the leases on the grounds that it was barred by the time limitations of section 365 of the Code. In re By-Rite Distrib., Inc., 47 B.R. 660 (Bankr.D. Utah 1985). The court construed that section to mean that a debtor in possession must obtain court approval of his decision to assume a nonresidential real property lease within sixty days of filing his petition for relief under chapter 11, unless the court extends the time for cause. By-Rite claims that the bankruptcy court erred in its construction of that section. This court agrees and therefore reverses the bankruptcy court's order of dismissal.
The "date of the order for relief" is the date on which the debtor files his petition for relief, see 11 U.S.C.A. § 301, in this case, November 8, 1984. It is undisputed that By-Rite filed its motion to assume the leases "within 60 days after the date of the order for relief," namely, on the sixtieth day. It is equally clear that the bankruptcy court did not fix any "additional time" for assumption of the leases. The question, then, is whether the trustee's filing of a motion to assume within the sixty-day period satisfies the time requirements of section 365(d)(4) or whether court approval of the trustee's motion to assume must also occur within the sixty days. The bankruptcy court concluded that merely filing a motion to assume within the sixty-day period was insufficient. Because By-Rite's motion was not heard until after the sixty days had elapsed, the bankruptcy court held that By-Rite was deemed to have rejected the leases. It felt constrained to reach that result by both the language and legislative history of section 365.
Section 365 does not expressly require the bankruptcy court to rule within the sixty-day period on the trustee's decision to assume a lease. It only says that the trustee must "assume or reject" an unexpired lease within sixty days of the commencement of the case. 11 U.S.C.A. § 365(d)(4). The bankruptcy court reasoned, however, that court approval is an essential element of assumption under section 365(a) and therefore must also occur within the sixty-day time limit of section 365(d)(4).4
Section 365 contemplates two distinct actions, one by the trustee (or debtor in possession) and one by the court. The trustee assumes or rejects, and the court approves. The Code does not specify how the trustee is to assume or reject a lease, but the trustee's action is different from the court's. Such is the import of section 365(a), which says that "the trustee, subject to the court's approval, may assume or reject any . . . unexpired lease of the debtor."
The court concludes that the trustee assumes or rejects the lease within the meaning of section 365(d)(4) when he makes up his mind to do so and communicates his decision in an appropriate manner, such as by filing a motion to assume.5 The assumption may become effective only after the court approves it. It is, in effect, subject to defeasance by the court. But the trustee's act of assuming the lease is complete for purposes of section 365(d)(4) before the trustee ever obtains court approval. Cf. Cranmer v. Fidelity & Casualty Co., 18 So.2d 220, 222 (La.Ct.App. 1944) (). And according to the statute, it is only the trustee's action that must occur within sixty days. Accord In re Bon Ton Restaurant & Pastry Shop, Inc., 52 B.R. 850 (Bankr.N.D.Ill.1985). The express language of the statute imposes no such deadline for the court's action.
Nevertheless, the bankruptcy court concluded from the statutory framework and the legislative history that Congress intended the entire process, including court approval, to occur within sixty days of the commencement of the case. It reasoned that Congress intended by the 1984 amendments to provide landlords of insolvent commercial tenants with maximum protection, and requiring court approval within the sixty-day period best effected that intent.
Declaring legislative intent is always a precarious undertaking at best. More often than not, Congress's "intent" is "a riddle wrapped in a mystery inside an enigma," to borrow Churchill's phrase. But to the extent this court can determine Congress's intent in enacting section 365(d)(4), it concludes that Congress never intended to place any time limit on judicial approval of the trustee's decision to assume an unexpired lease.
Under the Code as it existed before the 1984 amendments, a chapter 11 debtor in possession had until confirmation of the reorganization plan to elect to assume or reject an unexpired lease. 11 U.S.C. § 365(d)(2) (1982) (amended 1984).6 The debtor was not required to pay rent for the period between filing his petition and assuming (or rejecting) the lease, but the estate was liable for the reasonable value of the use and occupancy of the premises during that time. See, e.g., Philadelphia Co. v. Dipple, 312 U.S. 168, 174, 61 S.Ct. 538, 541, 85 L.Ed. 651 (1941); Palmer v. Palmer, 104 F.2d 161, 163 (2d Cir.), cert. denied, 308 U.S. 590, 60 S.Ct. 120, 84 L.Ed. 494 (1939). However, the lessor's claim for this amount was treated as an administrative claim, see, e.g., Hall v. Perry (In re Cochise College Park, Inc.), 703 F.2d 1339, 1354-55 (9th Cir.1983), which meant that the lessor generally was not paid until later, when other administrative claims were satisfied.
In a chapter 7 case, on the other hand, "if the trustee did not assume or reject an . . . unexpired lease 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 . . . lease was deemed rejected." 11 U.S.C. § 365(d)(1) (amended 1984).
This disparate treatment of chapter 7 and chapter 11 cases led to inequitable results. A trustee in a chapter 7 case had to decide within sixty days after the bankruptcy petition was filed whether or not to assume the lease. Thus, within a reasonable time the landlord of a chapter 7 debtor knew whether or not he still had a tenant and could start collecting rent again. A chapter 11 trustee, on the other hand, could wait almost indefinitely — till confirmation of the plan — to decide to assume the lease; in the meantime, the landlord...
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