In re Midway Airlines Corp.
| Decision Date | 02 May 2005 |
| Docket Number | No. 04-1502.,04-1502. |
| Citation | 406 F.3d 229 |
| Parties | In Re: MIDWAY AIRLINES CORPORATION; In Re: Midway Air-lines Parts, LLC, Debtors. CIT Communications Finance Corporation, Appellant, v. Midway Airlines Corporation; Midway Airlines Parts, LLC, Appellees, Joseph N. Callaway, Trustee-Appellee. |
| Court | U.S. Court of Appeals — Fourth Circuit |
ARGUED: Gregory Parker Chocklett, Raleigh, North Carolina, for Appellant. Alan Dale McInnes, Kilpatrick Stockton, L.L.P., Raleigh, North Carolina, for Appellees. ON BRIEF: Gerald A. Jeutter, Jr., Kilpatrick Stockton, L.L.P., Raleigh, North Carolina, for Appellees.
Before NIEMEYER and MICHAEL, Circuit Judges, and Norman K. MOON, United States District Judge for the Western District of Virginia, sitting by designation.
Reversed in part, affirmed in part, and remanded by published opinion. Judge MICHAEL wrote the opinion, in which Judge NIEMEYER and Judge MOON joined.
In this bankruptcy case, filed under chapter 11 and later converted to chapter 7, a lessor of personal property asserted an administrative expense claim under § 365(d)(10) of the Bankruptcy Code for all payments due under the lease for the thirteen-month period beginning sixty-one days after the order for relief and ending when the debtor rejected the lease. The lessor also sought immediate payment of the administrative expense. The bankruptcy and district courts determined that the lessor was entitled to only a fraction of the amount due under the lease and denied the request for immediate payment. We conclude that § 365(d)(10) entitles the lessor to an administrative expense for all lease payments due in the thirteen-month period. Immediate payment is not required, however.
Under a lease agreement entered into in February 1999, Midway Airlines Corporation (Midway) leased telephone equipment (or a telephone system) from CIT Communications Finance Corporation (CIT). The lease was to run for sixty months beginning on June 17, 1999. The monthly payment was $11,891.50, representing $11,218.39 in rent and $673.11 in reimbursement for state and county taxes. The lease provided for payment of late fees, interest on late payments, and reasonable attorney's fees and costs for collection efforts. On August 13, 2001, in the Eastern District of North Carolina, Midway filed a voluntary chapter 11 petition, which "constitute [d] an order for relief under [that] chapter." 11 U.S.C. § 301. Midway's bankruptcy petition had been filed for more than a year when, on October 10, 2002, CIT filed a motion to compel Midway to assume or reject the unexpired telephone equipment lease. On November 25, 2002, a consent order was entered allowing rejection of the lease. On December 20, 2002, CIT filed a motion for the allowance of administrative expenses for past due post-petition lease payments. CIT asserted that it was entitled to (1) an administrative expense of $11,891.50 under § 503(b)(1)(A) of the Code for Midway's actual and necessary use of the telephone equipment during the first sixty days after the order for relief was entered and (2) an administrative expense of $199,426.35 under § 365(d)(10) for all rent, taxes, late fees, interest, and attorney's fees due under the lease for the thirteen months beginning sixty-one days after the order for relief was entered (October 13, 2001) and ending on the date the lease was rejected (November 25, 2002).
The bankruptcy court declined to rule immediately on CIT's § 503(b)(1)(A) claim, stating that an evidentiary hearing would be needed to consider "both use and actual benefit to the bankruptcy estate." J.A. 106. The court did rule definitively on the § 365(d)(10) claim. First, the court concluded that the equities of the case justified a reduced § 365(d)(10) allowance because (1) the telephone equipment was of little use to Midway, and (2) CIT knew that Midway was making only limited use of the equipment, "yet CIT made no effort to seek adequate protection for the equipment until more than a year after the order for relief." J.A. 106. As a result, the bankruptcy court allowed CIT a § 365(d)(10) administrative expense for four months of rent and taxes beginning sixty-one days after the order for relief. For the remaining nine months, the court allowed CIT an administrative expense only to the extent that Midway actually used and benefitted from the equipment. Second, the bankruptcy court refused to allow CIT any interest, late fees, or attorney's fees. Third, the bankruptcy court determined that CIT was not entitled to immediate payment because the court had deferred payment of other (allowed) administrative expenses.
CIT appealed the bankruptcy court's order on the § 365(d)(10) claim to the district court on July 11, 2003. On October 30, 2003, Midway's chapter 11 case was converted to chapter 7. See 11 U.S.C. § 1112. Later, on March 24, 2004, the district court affirmed the bankruptcy court's order with respect to the § 365(d)(10) claim. CIT appeals, asking us to review only conclusions of law reached by the bankruptcy and district courts. We review these conclusions de novo. See Tavenner v. Smoot, 257 F.3d 401, 405 (4th Cir.2001).
CIT asserts on appeal that § 365(d)(10) entitles it to the full amount due under the telephone equipment lease for the thirteen-month period beginning sixty-one days after the order for relief was entered. We agree for the following reasons.
When a debtor is a lessee on the date of bankruptcy, the lease does not automatically become an obligation of the estate. Rather, the trustee (or debtor in possession) has the option to assume or reject the lease. See 11 U.S.C. § 365(a); 2 William L. Norton, Jr., Norton Bankruptcy Law & Practice 2d § 42:17 (2004). Section 362(a)'s automatic stay prevents the lessor from recovering the property or terminating the lease while the trustee is deciding whether to assume or reject it. See 11 U.S.C. § 362(a); 2 Norton, supra, § 39:17. Moreover, during this period the trustee can force the lessor to continue performing under the lease. 2 Norton, supra, § 42:17. In the event the trustee ultimately decides to assume the lease, and the lease is in default, the trustee is required to cure the default or provide adequate assurance that a prompt cure will be forthcoming. See 11 U.S.C. § 365(b)(1)(A).
If the trustee decides to reject the lease, however, the Code does not have a provision that requires the outright cure of any default. Thus, if the lease is rejected, an issue arises as to the nature of the lessor's remedy for recovering lease payments for the post-petition period during which the trustee was deciding to reject the lease and during which the estate possessed, and perhaps used, the property. Prior to 1994 the lessor's remedy was to file a claim for an administrative expense under § 503(b)(1)(A), which allows a lessor to recover "the actual, necessary costs and expenses of preserving the estate." Under § 503(b)(1)(A), however, a lessor is compensated only for the estate's actual and necessary use of the property; in other words, there is no automatic entitlement to all payments due under the lease. See Ford Motor Credit Co. v. Dobbins, 35 F.3d 860, 866 (4th Cir.1994) () (internal quotation marks, citation, and emphases omitted); see also In re Mr. Gatti's, Inc., 164 B.R. 929, 932 (Bankr.W.D.Tex.1994) ().
In 1994 Congress made it easier for lessors of personal property to recover post-petition lease payments by adding § 365(d)(10) to the Code. Section 365(d)(10) provides that:
The trustee shall timely perform all of the obligations of the debtor, except those specified in § 365(b)(2), first arising from or after 60 days after the order for relief in a case under Chapter 11 of this title under an unexpired lease of personal property ... until such lease is assumed or rejected notwithstanding § 503(b)(1) of this title, unless the court, after notice and a hearing and based on the equities of the case, orders otherwise with respect to the obligations or timely performance thereof.
11 U.S.C. § 365(d)(10). Section 365(d)(10) is modeled on a very similar provision of the Code, § 365(d)(3), which requires that a trustee timely perform all obligations under a lease of nonresidential real property after an order for relief is entered. Notably, "[b]oth sections impose a duty of timely performance on debtor[s] ... and both expressly specify that this duty exists `notwithstanding section 503(b)(1)' of the Code." In re E. Agri-Sys., Inc., 258 B.R. 352, 354 (Bankr.E.D.N.C.2000). As a result, in construing § 365(d)(10), courts often look to decisions construing § 365(d)(3).1 See id.
While it is clear that § 365(d)(10) and § 365(d)(3) impose on a trustee the duty to perform all lease obligations in a timely manner, these sections do not specify a lessor's remedy should the trustee fail to perform. Two lines of cases elaborate on the remedy available to a lessor. The first line of cases (the majority interpretation) holds that the lessor is entitled to an administrative expense for the missed payments under the lease. See Towers v. Chickering & Gregory, 27 F.3d 401, 404 (9th Cir.1994); In re E. Agri-Sys., 258 B.R. at 354-55. Under this interpretation a lessor is entitled to recover the total amount of payments due under the lease, including rent, taxes, interest, late fees, and attorney's fees. See In re Muma Servs. Inc., 279 B.R. 478, 488-89 (Bankr.D.Del.2002) (...
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