In re Child World, Inc.
| Decision Date | 29 November 1993 |
| Docket Number | Bankruptcy No. 92 B 20887 (HS). No. 93 Civ. 4806 (GLG). |
| Citation | 161 BR 571 |
| Parties | In re CHILD WORLD, INC., Debtor. CHILD WORLD, INC., Appellant, v. The CAMPBELL/MASSACHUSETTS TRUST, Appellee. |
| Court | U.S. District Court — Southern District of New York |
Weil, Gotshal & Manges (Pamela B. Corrie, of counsel), New York City, for debtor-appellant.
Foley, Hoag & Eliot (Andrew Z. Schwartz, of counsel), Boston, MA, for appellee.
This matter is before this court on an appeal taken by Child World, Inc. ("Child World"), the Chapter 11 debtor, from an order of the bankruptcy court (the "Order") dated March 16, 1993 requiring Child World to pay timely to the Campbell/Massachusetts Trust (the "Trust"), the landlord under a lease with Child World, certain tax-related obligations under said lease. In addition, Child World is appealing an order of the bankruptcy court dated May 21, 1993 denying its motion to reconsider the Order and to amend the findings of fact issued by the bankruptcy court in its decision (the "Decision"), 150 B.R. 328 (Bankr.S.D.N.Y.1993), accompanying the Order.
Eleven U.S.C. § 365(d)(3) creates a special priority among creditors for landlords by requiring debtor-tenants to pay timely their obligations under leases of nonresidential real property during the period after the debtor-tenants have filed their bankruptcy petition, and before they have either rejected or assumed their leases.1 The issue in this appeal is whether § 365(d)(3) requires debtor-tenants to pay timely all lease obligations billed during the postpetition, prerejection period, regardless of whether the items billed relate in part to the prepetition period, or whether the courts should prorate debtor-tenants' lease obligations to cover only the postpetition, prerejection period. The Trust contends that the plain meaning of § 365(d)(3) compels the former result, while Child World argues that proration is required to ensure that landlords do not receive more than Congress intended, to the detriment of other creditors.
The essential facts relevant to this appeal are not in dispute. On May 6, 1992, Child World filed its voluntary petition for relief under Chapter 11 of the Bankruptcy Code and was authorized to operate its business and manage its properties as a debtor in possession pursuant to 11 U.S.C. §§ 1107(a) and 1108. Child World anticipates the complete liquidation of its business and therefore has either sold or rejected its unexpired business leases.
The lease in question in this appeal (the "Lease") was entered into on February 27, 1989 between Cmane-Hyannis Retail Limited Partnership ("Hyannis") and Child World, and involves approximately 36,416 square feet of retail space at the Hyannis Festival Shopping Center in Hyannis, Massachusetts. Subsequently, Hyannis assigned its lessor's interest in the Lease to the Trust.
Child World's rent under the Lease consisted of a monthly base charge, a percentage of gross profits, and Child World's proportionate share of the net amount of all real estate taxes and assessments levied and assessed against the shopping center. The Lease directs Child World to pay its share of the taxes within fifteen days after the Landlord submits proof of payment of taxes, a bill for Child World's share and a statement describing how Child World's share was calculated.
On June 15, 1992, more than five weeks after the petition date, the Trust submitted to Child World its proof of payment of the real estate taxes assessed for the second half of fiscal year 1992, namely, the period from January to June of 1992, and enclosed a bill for Child World's share, which amounted to $47,451.46. This was in accordance with the customary practices of Child World and the Trust.
Child World did not consider itself legally bound to timely reimburse the Trust for real estate taxes which arose during the prepetition period. Accordingly, Child World only reimbursed the Trust for its share of the real estate taxes arising during the postpetition, prerejection period.
On September 4, 1992, an order was entered granting Child World's motion to reject the Lease, thus bringing to an end the period to which § 365(d)(3) applies.
The bankruptcy court, in its Decision accompanying the order requiring Child World to pay timely its share of the real estate taxes, determined that Child World's obligation under the Lease to reimburse the Trust for taxes was an integral component of its obligation to pay rent under the Lease. Furthermore, the court determined that under the Lease Child World's reimbursement was due and owing by June 30, 1992, fifteen days after the Trust submitted its bill to Child World. Thus, the court found that Child World's obligation to reimburse arose after the petition date of May 6, 1992 and before the rejection date of September 4, 1992. Since the court interpreted § 365(d)(3) as providing that the billing date in the lease determines when an obligation arises, the court held that Child World was required to reimburse the Trust for the full amount of the real estate taxes arising from the period from January to June of 1992, regardless of the fact that most of this period fell prepetition.
The bankruptcy court's legal conclusions are reviewed de novo by the district court. In re Ionosphere Clubs, Inc., 922 F.2d 984, 988 (2d Cir.1990), cert. denied, ___ U.S. ___, 112 S.Ct. 50, 116 L.Ed.2d 28 (1991).
In conducting our review, we begin, of course, with the language of the controlling statute.2 11 U.S.C. § 365(d)(3) provides in relevant part:
The trustee 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) of this title which allows for first priority administrative expenses, including the actual, necessary costs of preserving the estate, as well as taxes incurred by the estate.
Unexpired leases must be assumed or rejected within sixty days of the order for relief, at which time they are automatically deemed rejected, unless the court grants additional time. 11 U.S.C. 365(d)(4).
The parties have focussed their disagreement on the interpretation of the word "obligations." The Trust argues that since the Lease does not require Child World to make any tax-related payments to the Trust until the Trust sends a bill,3 Child World had no obligation under § 365(d)(3) to reimburse the Trust until the Trust sent the bill.4 Since in the instant case the Trust sent the bill during the postpetition, prerejection period, the argument goes, the bill is a postpetition obligation which must be timely paid, even though much of the taxes for which reimbursement was sought arose prepetition.
Child World maintains that their obligation to reimburse the Trust for real estate taxes arose when the taxes accrued against the Trust, which was largely prepetition. In their view, they had an unmatured, prepetition obligation to reimburse the Trust for prepetition real estate taxes. Child World argues that the Bankruptcy Code recognizes such unmatured obligations, citing the Code's definition of a "claim," (which, they assert, is the corollary to an "obligation") as a "right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured. . . ." 11 U.S.C. § 101(5)(A) (emphasis added). Black's Law Dictionary states that obligation is "a generic word . . . having many, wide, and varied meanings, according to the context in which it is used." 6th ed. 1993. We conclude that § 365(d)(3) is ambiguous as to when a debtor-tenant's obligation under a lease to reimburse the landlord for real estate taxes arises. Consequently, we must examine the legislative history to discern Congress' intent. Blum v. Stenson, 465 U.S. 886, 896, 104 S.Ct. 1541, 1547, 79 L.Ed.2d 891 (1984).
The legislative history provides compelling evidence that Congress did not intend § 365(d)(3) to include debtor-tenants' rental obligations arising prepetition, but billed postpetition. To better understand § 365(d)(3), it is useful to consider the state of the law prior to its enactment.
Prior to the enactment of § 365(d)(3) as part of the 1984 amendments to the Bankruptcy Code, debtor-tenants' lease obligations in the postpetition, prerejection period were handled under the general statute for administrative expenses, 11 U.S.C. § 503. This provision allows the bankruptcy court, after a request, notice, and hearing, to declare certain payments "administrative expenses." Administrative expenses include "the actual, necessary costs and expenses of preserving the estate" as well as certain taxes incurred by the estate. 11 U.S.C. § 503(b)(1). Administrative expenses are given priority over all other unsecured claims. 11 U.S.C. § 507.
Trustees of Amalgamated Insurance Fund v. McFarlin's, Inc., 789 F.2d 98, 101 (2d Cir. 1986) (citations omitted). The same court also stated that "because the presumption in bankruptcy cases is that the debtor's limited resources will be equally distributed among his creditors, statutory priorities are narrowly construed." Id. at 100; accord Joint Industry Board v. United States, 391 U.S. 224, 228, 88 S.Ct. 1491, 1494, 20 L.Ed.2d 546 (1968); In re Mammoth Mart, Inc., 536 F.2d 950,...
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