In re Giles Associates, Ltd., Bankruptcy No. 88-50040-A.
| Decision Date | 08 August 1988 |
| Docket Number | Bankruptcy No. 88-50040-A. |
| Citation | 92 BR 695 |
| Parties | In re GILES ASSOCIATES, LTD., Debtor. |
| Court | U.S. Bankruptcy Court — Western District of Texas |
Garvin Stryker, Law Offices of Garvin P. Stryker, San Antonio, Tex., for debtor.
David Gragg, Jeffers, Brook, Kreager and Gragg, San Antonio, Tex., for City of San Antonio.
William H. Lemons, Cox & Smith Inc., San Antonio, Tex., for Nat. Bank of Commerce.
Attorneys for the debtor, Garvin Stryker of the Law Offices of Garvin Stryker for the City of San Antonio, Mr. David Gragg, Jeffers, Brook, Kreager and Gragg, for the National Bank of Commerce, William Lemons of Cox and Smith.
The debtor, Giles Associates, Ltd., filed a voluntary petition under Chapter 11 of the Bankruptcy Code on January 4, 1988. Since that date, the debtor has operated its business as a debtor in possession. The debtor owns, operates or leases a commercial office building located on Alamo Plaza in San Antonio, Texas. In fact, the debtor owns one-half of a building immediately across the plaza from the Alamo1 and leases (or leased) one-half of that same building from the City of San Antonio.
The National Bank of Commerce has a first lien pursuant to a deed of trust on the one-half of the building owned by the debtor. The debtor also gave the bank a lien on its leasehold interest as additional collateral.2
Following the date of the petition in bankruptcy, the bank tendered several rental payments to the City which were duly accepted. Unfortunately, neither the debtor nor the bank took any action to assume the lease between the debtor and the City within the sixty day period set forth at § 365(d)(4).
Eventually, the City of San Antonio noticed that error and filed a motion seeking to have the lease deemed rejected. In an interesting response, premised primarily on a decision by Jay Gueck, formerly United States Bankruptcy Judge, District of Colorado, the bank alleged that § 365(d)(4) did not work a termination of the leasehold even if the lease was "deemed rejected" under that section. See In re Storage Technology Corp., 53 B.R. 471 (Bankr.D. Colo.1985). This Court rejects the reasoning of the Colorado opinion and other similar opinions cited by the bank and adopts the rationale set forth in cases such as In re Bernard, 69 B.R. 13 (Bankr.D. Hawaii 1986), which holds that automatic rejection of the lease under § 365(d)(4) terminates a lease as to all parties, including creditors.
The issues are really very simple and straightforward. Under § 365(d)(4), a lease of non-residential real property is deemed rejected sixty days after the date of a petition in bankruptcy (under Chapter 11 or any other chapter) unless the trustee or debtor-in-possession takes some action to preserve the lease, either by filing a motion to assume or by filing a motion to extend the time for assumption or rejection. See generally, In re Southwest Aircraft Services, Inc., 831 F.2d 848 (9th Cir. 1987). If no action is taken, the lease is deemed rejected, and the trustee or debtor in possession must surrender possession of the premises.
This bankruptcy provision is not affected by separate state law doctrines concerning the termination of leases. Because state law does not control this issue, the Court need not consider the strong presumption under state law that there can be no implied termination and forfeiture of a lease. See, e.g., Wendlandt v. Sommers Drug Stores Co., 551 S.W.2d 488 (Tex.Civ. App. — Austin 1977, writ ref'd. n.r.e.). If the state law were relevant the doctrine of Butner v. United States, 440 U.S. 48, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979) would, of course, require this Court to look to state law. However, here it is very clear that the federal policy concerning leases and inaction on the part the debtor-lessor clearly supersedes any state law considerations.
Likewise, the fact that the lease in this case required some notice of breach to be provided by the City to the debtor-lessee is also irrelevant. The lease has not been rejected due to any contractual breach by the lessee; the lease is deemed rejected as a matter of law as set forth in the Bankruptcy Code.
A similar analysis also defeats any claim that the City has somehow accepted an assumption or other treatment of this lease by accepting the rent payments from the lienholder, the National Bank of Commerce. First, lease assumption is something more than the acceptance of rental payments, as ably set forth in opinions such as In re Southwest Aircraft Services, Inc., 53 B.R. 805 (Bankr.C.D. Ca.1985), rev'd on other grds., 831 F.2d 848 (9th Cir. 1988). Further, assumption of a lease cannot occur without some pleading being filed with the Court. That is quite clear from § 365(b) and Bankruptcy Rule 6006. Finally, § 365(d)(3) makes mandatory the payment of all sums due under a lease from the debtor-lessee to a lessor, irrespective of whether or not assumption or rejection occurs. § 365(d)(3) operates independently of § 365(d)(4). The requirement of monthly payments is very clear and has nothing to do with the issue of assumption or rejection. See, e.g., In re Southwest Aircraft Services, Inc., 53 B.R. 805.
The security interest held by the bank, the existence of which was known to the City of San Antonio, cannot be said to impose any affirmative duties on the City of San Antonio concerning the rights of the National Bank of Commerce. To the best of this Court's knowledge, there exists no such duty on behalf of the City.
Finally, although the lease may provide options allowing the debtor or some third party lienholder to cure defaults under the lease, it is very clear from these facts that no default has occurred under the lease. The default is under a separate statutory mandate not linked in anyway whatsoever to the terms of the lease.
All of this leads back to In re Storage Technology Corp., 53 B.R. 471 (Bankr.D. Colo.1985), which must be addressed. Basically, Judge Gueck's opinion holds that rejection of a lease under § 365(d)(4) is merely a "breach" of the lease. See § 365(g). Since a breach does not terminate a lease — and, since § 365(d)(4) does not itself use the word "terminate" — Judge Gueck ruled that failure to act under § 365(d)(4) did "not have the conclusive effect of terminating the lease." Id. at 475.
This analysis would make some sense if the Bankruptcy Code at § 365(d)(4) and the legislative history of that section were not so very clear. First, the legislative history of the so-called "shopping center" amendments enacted as part of the 1984 Bankruptcy Amendments and Federal Judgeship Act ("BAFJA"):
130 Cong.Rec. S8894-95 (Daily Ed. June 29, 1984).
Further, the statute is clear. Failure to act results in first rejection and next in an absolute obligation to surrender the premises: "If the trustee does not assume or...
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