In re Koenig Sporting Goods, Inc.

• Decision Date: 11 June 1998
• Docket Number: Bankruptcy No. 97-15635.
• Parties: In re KOENIG SPORTING GOODS, INC., Debtor.
• Court: United States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Northern District of Ohio

221 B.R. 737 (1998)

In re KOENIG SPORTING GOODS, INC., Debtor.

Bankruptcy No. 97-15635.

United States Bankruptcy Court, N.D. Ohio.

June 11, 1998.

Ellen Maglicic Kramer, Kohrman Jackson & Krantz, P.L.L., Cleveland, OH, for Morse Road Co.

Harry W. Greenfield, Nancy Heller, Buckley King & Bluso, Cleveland, OH, for Debtor.

MEMORANDUM OF OPINION

DAVID F. SNOW, Bankruptcy Judge.

The Debtor, which operated sporting goods stores in leased space in shopping centers, experienced financial troubles during the mid 1990's. It decided with the support of a committee of its suppliers to sell its business and assign its profitable leases and to reject the leases it could not assign. After filing this chapter 11 case in August 1997, the Debtor obtained from the Court an order under section 365 of the Bankruptcy Code authorizing it to reject any lease effective seven days after notice to the landlord. Pursuant to that order the Debtor on November 25, 1997 notified Morse Road Company ("Morse Road"), the lessor of the Debtor's store in Columbus, Ohio, that it intended to reject its lease with Morse Road. The parties agree that that notice effectively rejected the lease December 2, 1997.

On December 1, 1997, the Debtor was obligated under the lease to pay Morse Road approximately $8,500, $8,000 in rent and $500 in common area charges, for the month of December. However, Debtor did not make that payment because it would have compensated Morse Road for 29 days in December that the Debtor did not occupy the leased premises. Debtor contends that Morse Road is entitled to only two days rent of about $550 for December. Morse Road does not question the Debtor's right to reject the lease or that Debtor had vacated the premises by December 2 but asserts that it is entitled to the full $8,500 December payment under the express terms of section 365(d)(3) of the Bankruptcy Code. Morse Road also attempted to buttress its statutory argument by complaining that the short seven-day rejection period afforded it inadequate time to relet the premises and that it is therefore entitled to the full month's rent, presumably as an administrative expense. There appears little merit to this complaint however. Morse Road was well aware of Debtor's plans and did not object to Debtor's motion fixing the seven-day rejection period. There was no evidence that Morse Road could have found another tenant for the premises had it received the rejection notice two days earlier. Nevertheless, it appears that Morse Road is entitled under section 365(d)(3) to payment of the full December payment rather than only two days' rental as the Debtor asserts.

Analysis

There is a conflict in the cases as to whether section 365(d)(3) compels a debtor to pay all rent and other charges which become due under a lease during the postpetition prerejection period or whether, instead, it requires the debtor to pay only the rent and charges allocable to that period. Compare Santa Ana Best Plaza, Ltd. v. Best Prods. Co. (In re Best Prods. Co.), 206 B.R. 404, 406 (Bankr. E.D.Va.1997), with In re Krystal Co., 194 B.R. 161, 163 (Bankr.E.D.Tenn.1996). Section 365(d)(3) provides:

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.

By and large the courts have framed the issue as whether section 365(d)(3) by its terms clearly compels the debtor to pay in full obligations becoming due postpetition but prerejection, even though allocable to another time period, or whether its terms are sufficiently malleable to permit the court to construe them to require payment only of rent and other charges allocable to the postpetition prerejection period. See id.

There is no question but that as a matter of ordinary language usage section 365(d)(3) appears to apply to obligations becoming due during the postpetition prerejection period. Based largely on this perception a minority of the courts that have considered the question has invoked the "plain meaning rule" to preclude further analysis of Congressional intent. This has resulted in courts ordering large payments to landlords relating to taxes attributable to prepetition or postrejection periods that would not have qualified for administrative expenses priority. See In re R.H. Macy & Co., 152 B.R. 869 (Bankr. S.D.N.Y.1993), aff'd sub nom. Bullock's Inc. v. Lakewood Mall Shopping Ctr. (In re R.H. Macy & Co.), 1994 WL 482948 (S.D.N.Y. 1994); Inland's Monthly Income Fund, L.P. v. Duckwall-ALCO Stores, Inc. (In re Duckwall-ALCO Stores, Inc.), 150 B.R. 965 (D.Kan.1993).

The fact that a payment date interpretation flows naturally from the language of section 365(d)(3) is not, however, decisive under the plain meaning rule. The meaning of statutory language cannot be determined solely from the dictionary. Ordinary usage, however "plain," must be filtered through statutory definitions and usages of the same terms in other sections of the statute, as well as judicial interpretations that may have put a gloss on dictionary definitions. This is particularly true in a statute as detailed and complex as the Bankruptcy Code whose terms have frequently been interpreted by the Supreme Court and lesser courts.

The fact that more than half of the courts that have considered this question have concluded that the language of section 365(d)(3) is ambiguous strongly suggests that linguistic analysis alone cannot resolve the question. The proponents of ambiguity focus on the phrase "obligations . . . arising" in the first sentence of section 365(d)(3). That phrase could refer either to the facts and circumstances giving rise to the obligation, even though payment or performance is deferred, or to the date specified for payment or performance.

Neither this phrase nor the word "arise" is defined in the Code. However, the participle "arising," when used in the Code, often refers to the events giving rise to a claim or obligation. See, e.g., 11 U.S.C. §§ 507(a)(4)(A), (a)(6), (a)(8)(F), (b), and (c); 510(b); 522(f)(2)(C); 523(a)(11); 524(g)(2)(B)(ii)(I); 922(a)(2). Where a payment or performance date is intended, Congress usually made this clear by choosing language other than "arising". See 11 U.S.C. § 1110(a)(1)(A) ("obligations of the debtor that become due on or after the date of the order"); 1168(a)(1)(A). It appears, therefore, that Congress knew how to dispel any uncertainty as to whether a provision of the Code was intended to refer to the time the events giving rise to the obligation occurred or to the date on which the obligation was to be performed and appears to provide textual justification for the Court to examine the legislative history of section 365(d)(3) for guidance as to whether Congress intended the word "arising" in section 365(d)(3) to cover lease obligations becoming due during the postpetition prerejection period or only obligations allocable to that period.

Unfortunately, however, that history, which consists of remarks by Senator Orrin Hatch in connection with the enactment of section 365(d)(3) in 1984, provides little help in choosing between a payment date or an allocation interpretation of section 365(d)(3). Those remarks are in relevant part as follows:

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.

This bill would lessen these problems by requiring the trustee to perform all the obligations of the debtor under a lease of nonresidential real property at the time required in the lease. This timely performance requirement will insure that debtor-tenants pay their rent, common area, and other charges on time pending the trustee\'s assumption or rejection of the

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