In re Peaberry's Ltd.
| Decision Date | 12 February 1997 |
| Docket Number | BAP No. RI 96-035. |
| Parties | In re PEABERRY'S LTD. The KRIKOR DULGARIAN TRUST, Creditor-Appellant, v. UNIFIED MANAGEMENT CORP. OF RHODE ISLAND, INC., Creditor-Appellee, Matthew J. McGowan, Esq., Chapter 7 Trustee, Trustee-Appellee. |
| Court | U.S. Bankruptcy Appellate Panel, First Circuit |
Andrew S. Richardson, Boyajian, Harrington & Richardson, Providence, RI, for Krikor Dulgarian Trust.
Joseph Avanzato, Adler Pollock & Sheehan Inc., Providence, RI, for Unified Management Corp. of Rhode Island, Inc.
Matthew J. McGowan, Salter, McGowan & Swartz, Providence, RI, for Matthew J. McGowan, Chapter 7 Trustee.
Before GOODMAN, HAINES and CARLO, Bankruptcy Judges.
Krikor Dulgarian Trust, former landlord of chapter 11 debtor Peaberry's, Ltd., appeals the bankruptcy court's denial of its motion seeking full payment of pre-assumption rent arrearages from proceeds of the sale of Peaberry's assets. Krikor Dulgarian's motion was opposed below by another of Peaberry's chapter 11 administrative creditors, Unified Management Corporation of Rhode Island, Inc., the appellee here.
The bankruptcy court held that, given Peaberry's administrative insolvency, to grant Krikor Dulgarian's motion would be to recognize a "superpriority" claim for lease arrearages, that the Bankruptcy Code does not authorize such treatment and, therefore, that it could not grant the motion. In re Peaberry's, Ltd., 198 B.R. 644 (Bankr.D.R.I.1996).
We hold that Krikor Dulgarian's entitlement to full payment of pre-assumption rent arrearages follows under the terms of the bankruptcy court's earlier-entered order authorizing Peaberry's assumption of the Krikor Dulgarian lease, that the assumption order was validly entered pursuant to § 365(b)(1) of the Code and, therefore, that Krikor Dulgarian's motion should have been granted.1 Accordingly, we reverse.
The order denying Krikor Dulgarian's motion for payment is a final order from which appeal to the Bankruptcy Appellate Panel lies under 28 U.S.C. § 158(c)(1). See In re Saco Local Dev. Corp., 711 F.2d 441, 445-46 (1st Cir.1983) ().
Drawn from the bankruptcy court's unchallenged findings, In re Peaberry's, Ltd., 198 B.R. at 645, the pertinent facts are as follow. Peaberry's, which operated restaurants at several Rhode Island locations, including one on real estate owned by Krikor Dulgarian, voluntarily filed for chapter 11 relief on July 26, 1994. At filing it owed Krikor Dulgarian $27,037.00 in unpaid rent. Peaberry's soon concluded that it would sell its assets as a going concern. Anticipating such a sale, it moved to assume the Krikor Dulgarian lease and on October 12, 1994, after notice and without objection, the court granted the motion. See R.I.Local Bankr.R. 10(d); Fed.R.Bankr.P. 6006, 9014. As set forth in the motion, and as authorized by the bankruptcy judge, assumption terms included the requirement that "as adequate assurance of future performance, the debtor shall pay all rental arrearages in full . . . from the proceeds of the sale of the debtor's assets." As of the assumption date, those arrearages (which by then included substantial post-petition rent) had climbed to $62,460.00.
The bankruptcy court approved a going concern sale of Peaberry's assets on January 19, 1995. The transaction included assignment of the Krikor Dulgarian lease to the purchaser. The sale, which realized $100,804.00 for the estate, closed without disbursements to Krikor Dulgarian in respect to its rent claims. On February 1, 1995, Unified, which had no pre-petition claims against Peaberry's, filed its $16,128.02 administrative claim for personnel and services it provided the debtor's post-petition operations. On February 17, 1995, Peaberry's voluntarily converted its case to chapter 7.
With its lease arrearages remaining unpaid, Krikor Dulgarian moved to compel their payment, asserting that the assumption order required it. Although Peaberry's chapter 7 trustee agreed, Unified objected. With it plain that Peaberry's estate held insufficient assets to pay all chapter 11 administrative claimants, the bankruptcy judge denied the motion. This appeal ensued.
The bankruptcy court based its disallowance of Krikor Dulgarian's motion seeking full payment of Peaberry's rental arrearages exclusively on legal grounds. In re Peaberry's, Ltd., 198 B.R. at 645-46. The appellant's challenge to the order raises legal issues only. We review de novo the bankruptcy court's legal conclusions. Concrete Equip. Co. v. Fox (In re Vigil Bros. Constr., Inc.), 193 B.R. 513, 516 (9th Cir. BAP 1996); Citibank (South Dakota) N.A. v. Lee (In re Lee), 186 B.R. 695, 697 (9th Cir. BAP 1995).
When Krikor Dulgarian insisted that the terms of the assumption order be honored and Unified objected, the bankruptcy judge acknowledged the assumption order's existence and terms, but proceeded to analyze Krikor Dulgarian's claim as though its rights vis-a-vis the estate and other creditors had not already been determined. He first analyzed the sharply divergent lines of authority treating the relative priorities of landlords' claims for post-petition rent and the claims of other administrative creditors under § 365 and § 503. In re Peaberry's, Ltd., 198 B.R. at 645-46. Compare, e.g., In re Brennick, 178 B.R. 305, 308 (Bankr.D.Mass.1995) (); In re Telesphere Communications, Inc., 148 B.R. 525, 531-32 (Bankr. N.D.Ill.1992) (same); with In re Almac's, Inc., 167 B.R. 4, 7-8 (Bankr.D.R.I.1994) (); In re Granada, Inc., 88 B.R. 369, 375 (Bankr.D.Utah 1988). See generally, Joshua Fruchter, To Bind or Not to Bind — Bankruptcy Code § 365(d)(3): Statutory Minefield, 68 Am.Bankr.L.J. 437 (1994). He then concluded that Krikor Dulgarian was demanding a priority of payment above and beyond that which § 503 authorized and, therefore, that its demand had to be rejected. In re Peaberry's, Ltd., 198 B.R. at 646.
Krikor Dulgarian's essential point on appeal is simple: It asserts that the bankruptcy court's order authorizing Peaberry's to assume its lease effectively and finally foreclosed any future dispute regarding its entitlement to be paid pre-assumption arrearages from the fund that flowed from the asset sale. Unified advances two points in support of the bankruptcy court's order denying Krikor Dulgarian full payment. It urges, first, that the assumption order did not provide Krikor Dulgarian first claim on the sales proceeds and, second, that it could not do so under pertinent bankruptcy principles.
To resolve this appeal we need not reconcile or choose among divergent authorities addressing the relative priorities of landlords' pre- and post-petition rent claims and other administrative claims. We conclude only that, given the propriety of the assumption order and the absence of any timely challenge to its substance or regularity,2 the bankruptcy court was duty bound to enforce it according to its terms. Creditors who were in the case at the time the assumption order entered were duly apprised of its substance and had the opportunity to be heard; those, like Unified, who arrived on the scene later were able to inform themselves of its terms and to arrange their affairs accordingly.3
We observe that, under § 365(b)(1), Krikor Dulgarian was entitled to insist that, as a condition of Peaberry's lease assumption, it be provided with a "cure" or "adequate assurance" that Peaberry's would "promptly cure" pre-assumption defaults. § 365(b)(1)(A). Of course, it could have settled for less, but a straightforward reading of the assumption order belies the contention that it did. The order plainly states that as "adequate assurance" of its lease performance Peaberry's would pay "all rental arrearages in full" from the proceeds of its asset sale.4
In the face of the assumption order's clarity, and its consistency with § 365(b)(1)(A)'s terms, we simply cannot accept Unified's contention that the order left Krikor Dulgarian at risk that the estate's potential future insolvency would dilute its right to full payment of Peaberry's back rent. Indeed, it was against such an eventuality that the lease assumption order was premised on the condition that unpaid pre-assumption rent be paid in full from the asset sale proceeds.
Unified portrays such an arrangement as "unfair" because it (and other post-petition creditors) was situated similarly to Krikor Dulgarian. As Unified sees it, each party that dealt with the debtor-in-possession, including Krikor Dulgarian, chanced administrative insolvency (and pro rata payment of administrative claims). But, unlike other post-petition creditors, Krikor Dulgarian had no choice but to deal with the debtor until its lease was assumed or rejected. § 365(a). See Frito-Lay, Inc. v. LTV Steel Co. (In re Chateaugay Corp.), 10 F.3d 944, 954-55 (2nd Cir.1993) (); In re Almac's, Inc., 167 B.R. at 7 (); cf. Thinking Machs. Corp. v. Mellon Fin. Serv. Corp. # 1 (In re Thinking Machs. Corp.), 67 F.3d 1021, 1024 (1st Cir.1995) (...
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