In re Pudgie's Development of NY, Inc.
| Decision Date | 29 September 1999 |
| Docket Number | 96B-22027,No. 98-Civ.-7870 (WCC). Bankruptcy No. 96B-21969 to 96B-21976,96B-22105,96B-22163 to 96B-22181 (ASH).,96B-22035,98-Civ.-7870 (WCC). Bankruptcy No. 96B-21969 to 96B-21976 |
| Citation | 239 BR 688 |
| Parties | In re PUDGIE'S DEVELOPMENT OF NY, INC., et al., Debtors. Omni Partners, L.P., Appellant, v. Pudgie's Dev. of NY, Inc., Appellee. |
| Court | U.S. District Court — Southern District of New York |
Hamburger, Maxson & Yaffe, LLP, Melville, NY, Richard Hamburger, Bruce H. Kaplan, of counsel, for appellant.
Carolyn S. Schwartz, United States Trustee, New York City, Diana G. Adams, Asst. United States Trustee, of counsel, for the United States Trustee.
Rattet Hollander & Pasternak, LLP, Harrison, NY, Jonathan S. Pasternak, Jill A. Abrams, of counsel, for debtors/appellees.
This matter is before this Court on an appeal taken by Creditor Omni Partners, L.P. ("Omni" or "Appellant") from the order of the Bankruptcy Court, entered August 11, 1998, denying its demand pursuant to 11 U.S.C. § 365(d)(3) for distribution from the bankruptcy estate of Pudgie's Famous Chicken, Ltd. and affiliated corporate entities ("Debtors").
Between September 18 and October 10, 1996, Debtors filed various petitions under Chapter 11 of the Bankruptcy Code. The Chapter 11 cases were consolidated on October 15, 1996.
Debtor Pudgie's Famous Chicken, Ltd., as lessee, and Omni, as lessor, were parties to a pre-petition lease ("Lease") for office space utilized by Debtors as their corporate headquarters (the "Premises") from the entry of the orders for relief beginning on September 18, 1996 (the "Filing Date")1 through May 28, 1998. On the Filing Date, Debtors were indebted to Omni in the amount of $7,859.66 which represented pre-petition unpaid rent and other charges. The Debtors failed to make any post-petition rent payments. The post-petition unpaid rent totaled $156,676.27 when the Lease was deemed rejected on May 4, 1998.
Pursuant to 11 U.S.C. § 365(d)(4), a lease for nonresidential real property is deemed rejected sixty days after entry of the order for relief unless the trustee assumes the lease or the Court enters an order extending the sixty day period.2 On October 22, 1996, Debtors applied to extend its time to assume or reject the Lease. By Order signed January 8, 1997, the Bankruptcy Court granted Debtors' request and extended Debtors' time to assume or reject the Lease through and including confirmation of a plan of reorganization.
During this post-petition, pre-rejection period, Omni claims that Debtors made affirmative representations that they would soon pay the accrued lease obligations in full.
By Notice of Motion dated February 28, 1998, Omni sought to compel Debtors to assume or reject the Lease and pay all post-petition rent due, or to allow Omni to commence eviction proceedings. In response, the Bankruptcy Court on April 7, 1998 directed Debtors to pay $28,000, representing two months rent, to Omni on or before May 4, 1998.
Debtors failed to pay the $28,000 or any post-petition rent. As a result of this default, the Lease was deemed rejected on May 4, 1998, pursuant to the Bankruptcy Court's April 7, 1998 Order. On May 13, 1998, pursuant to Omni's Order to Show Cause for Contempt, the Bankruptcy Court found that the Debtors were in contempt.
On May 28, 1998, the Court approved the sale of all of Debtors' assets to Pudgie's Acquisition Corp. ("PAC") for $425,000. Also at the May 28, 1998 hearing, in lieu of signing Omni's Order for Civil Contempt, the Court brokered an agreement under which the Debtors would vacate the office space and PAC would pay Omni use and occupancy until it vacated.
By Decision Resolving Claims to Proceeds of Sale entered July 30, 1998 and Order dated August 7, 1998 and entered August 11, 1998, the Court distributed the sale proceeds. First, the Court awarded the United States Trustee approximately $45,000 in fees pursuant to 28 U.S.C. § 1930(a)(6).
Next, secured creditor Herbert Turk was awarded $50,000. Turk had a lien on all property of the Debtors with priority over all creditors, subject to a $375,000 carve-out which included the superpriority claim of Sysco Food Services Corporation of Connecticut ("Sysco"), unpaid United States Trustee Fees, debtor-in-possession financing and professional fees. Turk was awarded the difference between the $425,000 sale proceeds and the $375,000 carveout, or $50,000.
Next, the Court awarded $41,019.90 to DiCarlo Distributors, Inc. ("DiCarlo"), whose financing replaced the Sysco financing and was secured by a superpriority lien in all of the Debtors' assets, subordinate to the Trustee's fees.
The Court also awarded $257,175.10 to Jeffrey Zisselman, who had provided post-petition financing to the Debtors secured by a senior lien. Zisselman's lien was included in the Turk "carve-out" but subordinate to Sysco's (now DiCarlo's) lien.
Finally, the Court awarded $31,193.43 to Debtors' Counsel, the Rattet firm, pursuant to 11 U.S.C. § 506(c), which provides that necessary costs of disposing of property of the estate may be charged to the secured parties. The Court, after finding that the Rattet firm's services were "reasonable, necessary costs and expenses of the disposing of the estate property," charged the Rattet award against the awards of the Trustee, DiCarlo and Zisselman. Accordingly, the entire proceeds from the sale of Debtors' assets were paid out to the Trustee, Turk, DiCarlo, Zisselman, and the Rattet firm.
Omni also filed an administrative claim against the sale proceeds, asserting a superpriority claim under 11 U.S.C. § 365(d)(3). The Court held that Omni was not entitled to superpriority and denied its claim against the sale proceeds. On appeal, Omni also asserted the right to payment of accrued unpaid rent as an operational expense charged to the secured creditors under § 506(c).
This Court has jurisdiction to hear this appeal pursuant to 28 U.S.C. § 158. On appeal, a bankruptcy court's conclusions of law are reviewed de novo. FED. R.BANKR. 8013; Federal Deposit Ins. Corp. v. Hirsch (In re Colonial Realty Co.), 980 F.2d 125, 130 (2d Cir.1992); Peters v. Hennenhoeffer (In re Peters), 133 B.R. 291, 294 (S.D.N.Y.1991), aff'd, 964 F.2d 166 (2d Cir.1992) (per curiam). However, Federal Rule of Bankruptcy 8013 provides that, "Findings of fact shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the bankruptcy court to judge the credibility of witnesses." See also Gulf States Exploration Co. v. Manville Forest Products Corp. (In re Manville Forest Prods. Corp.), 896 F.2d 1384, 1388 (2d Cir.1990); Shugrue v. Air Line Pilots Ass'n Int'l (In re Ionosphere Clubs, Inc.), 922 F.2d 984, 988 (2d Cir.1990); BT/SAP Pool C Associates v. Coltex Loop Central Three Partners, 203 B.R. 527 (S.D.N.Y.1996), aff'd sub nom, In re Coltex Loop Central Three Partners, 138 F.3d 39 (2d Cir.1998).
Section 365(d)(3) of the Bankruptcy Code was enacted in 1984 as part of the Bankruptcy Amendments and Federal Judgeship Act. It states in relevant part:
The trustee shall timely perform all the obligations of the debtor, except those specified in 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 legislative history indicates that the purpose of the amendment was to relieve the burden placed on nonresidential real property lessors (or "landlords") during the period between a tenant's bankruptcy petition and assumption or rejection of a lease. See 130 Cong.Rec. S8894-95 (daily ed. June 29, 1994) (remarks of Senator Hatch). Prior to these amendments, the Bankruptcy Code did not require a trustee to perform its obligation under a nonresidential lease, but the landlord was forced to provide services to the debtor-tenant. Congress specifically chose to protect real property lessors because: Id.
Despite the seemingly clear purpose and language of § 365(d)(3), the application of the statute has been the source of great division among bankruptcy courts. See, e.g., Joshua Fruchter, To Bind or Not To Bind—Bankruptcy Code § 365(d)(3): Statutory Minefield, 68 Am.Bankr.L.J. 437, 439 (1994) (). In order to decide whether Omni is entitled to distribution from the proceeds of the sale of Debtors' assets this Court must consider: (A) whether a landlord must show the actual value of the use and occupancy to the bankruptcy estate; (B) the timing of payment to the landlord; and (C) the landlord's remedy for the failure of the trustee or debtor to pay the lease obligations during the post-petition, pre-rejection period.
Prior to the amendment of § 365(d)(3), debtors were obligated to pay rent as an administrative expense of the bankruptcy estate, but only to the extent to which the lease payments were "actual, necessary costs and expenses" under § 503(b)(1). 11 U.S.C. § 503(b)(1).3 The majority of courts agree that § 365(d)(3) now gives landlords a right to payment in the full amount of rent and other charges under the lease without showing that the amount is reasonable or of benefit to the estate. See In re Pacific-Atlantic Trading Co., 27 F.3d 401, 404 (9th Cir.1994); In re Microvideo Learning Systems, Inc., 232 B.R. 602, 607 (Bankr.S.D.N.Y.1999); In re Wingspread Corp., 116 B.R. 915, 925 (Bankr.S.D.N.Y.1990); but see Great Western Savings Bank v. Orvco Inc. (In re Orvco, Inc.), 95 B.R. 724, 728 (9th Cir. BAP 1989) (...
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