In re Pyxsys Corp., No. 02-40375-HJB.

• Decision Date: 03 January 2003
• Docket Number: No. 02-40375-HJB.
• Parties: In re PYXSYS CORPORATION, Debtor.
• Court: United States Bankruptcy Courts. First Circuit. U.S. Bankruptcy Court — District of Massachusetts

Page 309

288 B.R. 309

In re PYXSYS CORPORATION, Debtor.

No. 02-40375-HJB.

United States Bankruptcy Court, D. Massachusetts.

January 3, 2003.

David M. Nickless, Fitchburg, MA, Chapter 7 Trustee.

David R. Suny, Woburn, MA, for Cummings Properties, LLC.

HENRY J. BOROFF, Bankruptcy Judge.

MEMORANDUM OF DECISION

Before the Court is a "Motion by Cummings Properties, LLC Directing The Trustee To Pay Postpetition Rent And Administrative Use And Occupancy Charges" (the "Motion"). Cummings Properties, LLC ("CPL") was the lessor of 142-Q North Road, Sudbury, Massachusetts (the "Property") under a non-residential lease, dated January 11, 2001 (the "Lease") to Pyxsys Corporation, the Chapter 7 debtor in this case (the "Debtor"). CPL moves the Court, pursuant to 11 U.S.C. §§ 365(d)(3).¹ and 503(b)(1)², to direct David M. Nickless, the Chapter 7 Trustee (the "Trustee") to render immediate payment to CPL on account of its postpetition claims. Those claims total $26,673.15 and represent rent due from the date relief entered on February 5, 2002 through the 60 day period until the lease was deemed automatically rejected on April 6, 2002, together with use and occupancy charges ending the date the premises were vacated on May 6, 2002.

I. FACTS AND TRAVEL OF THE CASE

At case commencement, the Debtor was in the business of developing high performance, intelligent computer network storage solutions. On January 18, 2002, an involuntary Chapter 7 Petition was filed against the Debtor in this Court. On February 5, 2002, an Order For Relief entered, and, on the following day, the Trustee was appointed.

Under the Lease, monthly rent for calendar year 2002 was set at $8,891.05, due in advance on the first day of each month. In this case, the Trustee did not make any postpetition rental payments nor did he formally assume or reject the Lease. Consequently, pursuant to 11 U.S.C. § 365(d)(4), the Lease was deemed automatically rejected on April 6, 2002. Notwithstanding rejection of the Lease, certain assets remained stored at the Property until they were sold by the Trustee for approximately $65,000.00. The Property was then fully vacated on May 6, 2002.

CPL filed the instant Motion on May 13, 2002. The Motion requests allowance and prompt payment of the total claim amount of $26,673.15, consisting of $17,782.10 in postpetition, pre-rejection rent (the "Rent Claim") and $8,891.05 in use and occupancy charges for storing estate assets during the post-rejection period, ending when the Property was vacated (the "Use Claim"). The Trustee filed a Limited Objection, countering that, pursuant to 11 U.S.C. §§ 507(a) and 503(b)(1), CPL is not entitled to immediate payment on its claims. The Trustee contends that payment should be withheld until a final determination of estate solvency is made and that disbursement should then follow pro rata for like claims. Further, the Trustee states that, under 11 U.S.C. § 502(b)(6), the claims should be reduced by $16,500.00, which represents the amount of the pre-petition security deposit held by CPL under the Lease. By supplemental memorandum, the Trustee advised that the estate had accumulated approximately $75,000.00 in proceeds through asset liquidation and had incurred administrative expenses of approximately $30,000.00, exclusive of CPL's claims.

After hearing, the matter was taken under advisement. Further briefs were filed by each party.

II. POSITIONS OF THE PARTIES

CPL contends that this Court should order the Trustee to pay the claims immediately. In support of its argument, CPL points to § 365(d)(3), which requires a trustee to timely perform all obligations under a lease until assumed or rejected. CPL asserts that the Trustee has failed to timely perform the Lease obligations by not paying the Rent Claim. CPL asserts further that the Court should order the Trustee to immediately pay the Use Claim as well. In support, CPL argues that, by permitting estate assets to be stored at the Property until liquidation by the Trustee, CPL suffered a loss preserving the estate, compensable under § 503(b)(1)(A). CPL contends that payment on its postpetition claims should not be conditioned upon future estate solvency nor subject to subsequent disgorgement in the event of estate insolvency.

The Trustee maintains that, pursuant to the priority scheme established under 11 U.S.C. § 507(a)(1), the Rent and Use Claims are not subject to immediate payment, but rather, payment should await final administration of the estate or a determination that the Trustee has sufficient funds to pay all administrative creditors in full. The Trustee argues that recent case law has withdrawn from the stance that § 365(d)(3) mandates superpriority status for rents to commercial landlords unpaid during the postpetition, pre-rejection period. Further, the Trustee contends that the Court should not allow CPL's post-rejection Use Claim under § 503(b)(1)(A) because the claim does not qualify as an actual and necessary expense of preserving the estate. In support, the Trustee maintains that under the Bankruptcy Code (the "Code") priorities are strictly construed in order to adhere to the distribution scheme established under 11 U.S.C. §§ 726 and 507. On that basis, the Trustee urges the Court to refrain from invoking its equitable powers under 11 U.S.C. § 105(a) to grant payment of either of the claims at this time. In the alternative, the Trustee argues that any claims now paid be subject to recapture in case of administrative insolvency. Finally, the Trustee argues that any postpetition claims of CPL should be offset by the amount of the pre-petition security deposit held by CPL and that any claim allowable under § 502(b)(6) should be reduced by the amount of the Rent and Use Claims.

III. DISCUSSION

A. Non-residential postpetition, pre-rejection rents under § 365(d)(3).

Section 365(d)(3) of the Code provides the framework for how estate representatives shall handle unexpired, non-residential leases. This section was added to the Bankruptcy Code by 1984 amendment. Bankruptcy Amendments and Federal Judgment Act of 1984, Pub.L. No. 98-353, 98 Stat. 333 (1984) (the "BAFJA Amendments"). Prior to the BAFJA Amendments, estate representatives were not required to make rental payments during the postpetition, pre-rejection period. In re New Almacs, Inc., 196 B.R. 244, 247 (Bankr.N.D.N.Y.1996). In effect, a commercial landlord was forced to lease property rent free to the bankruptcy estate postpetition while awaiting a decision from the estate representative on lease assumption or rejection. In re J.T. Rapps, Inc., 225 B.R. 257, 260 (Bankr.D.Mass.1998); In re Leisure Time Sports, Inc., 189 B.R. 511, 513 (Bankr.S.D.Cal.1995). These "administrative rent" claims were then subject to adjustment, in abrogation of the lease terms, to reflect the reasonable value of the estate's use and occupancy, and, if paid at all, were eventually paid with other administrative claimants on a pro rata basis. New Almacs, 196 B.R. at 247.

The legislative history of the BAFJA Amendments suggests that Congress adopted § 365(d)(3) as an attempt to alleviate the unique financial strains the Code placed upon the commercial lessor.³ However, notwithstanding the command of § 365(d)(3) that the estate representative make timely payments due under a lease not yet assumed or rejected, the Code provides no specific consequences for non-payment. In re Microvideo Learning Systems, Inc., 232 B.R. 602, 605 (Bankr.S.D.N.Y.1999); In re J.T. Rapps, Inc., 225 B.R. 257, 260 (Bankr.D.Mass.1998); In re Rich's Dep't Stores, Inc., 209 B.R. 810, 815 (Bankr.D.Mass.1997); In re Amber's Stores, Inc., 193 B.R. 819, 822 (Bankr.N.D.Tex.1996); In re Virginia Packaging Supply Co., 122 B.R. 491, 494 (Bankr.E.D.Va.1990). In essence, it has been observed that § 365(d)(3) provides a right but no remedy. In re Brennick, 178 B.R. 305, 308 (Bankr.D.Mass.1995). It is, perhaps, this absence of an enforcement provision in the face of estate representative default that has led courts to such divergent conclusions about the array of rights and obligations under § 365(d)(3).

Before discussing the decisions regarding the payment of postpetition, pre-rejection rents, it should be noted that there is at least general agreement on three changes to the treatment of these claims wrought by § 365(d)(3). First, there is little dispute that the clause "notwithstanding section 503(b)(1) of this title" eliminates the requirement for an order expressly authorizing payment of an administrative rent claim. 11 U.S.C. § 365(d)(3); see In re Brennick, 178 B.R. at 307. Second, many courts have held that same clause to eliminate the "benefits test" of 503(b)(1)⁴ and view § 365(d)(3) as having no threshold requirement that administrative rent claims reflect an objective benefit to the estate. Towers v. Chickering & Gregory (In re Pacific-Atlantic Trading Co.), 27 F.3d 401, 404 (9th Cir.1994); In re Microvideo Learning Systems, Inc., 232 B.R. 602, 605 (Bankr.S.D.N.Y.1999); Pudgie's Development of NY, Inc., 239 B.R. 688, 692 (S.D.N.Y.1999); but see Great Western Savings Bank v. Orvco Inc. (In re Orvco, Inc.), 95 B.R. 724, 728 (9th Cir. BAP 1989)(holding that certain factors under the § 503(b)(1) benefits test serve as a threshold requirement for courts assessing § 365(d)(3) claims) rev'd in part, sub nom. In re Pacific-Atlantic Trading Co., 27 F.3d 401 (9th Cir.1994). Third, most courts have agreed that the clause has the further and corollary effect of allowing landlords to assert claims under § 365(d)(3) valued according to the lease terms and not according to a reasonable value based upon benefit to the estate. Towers v. Chickering & Gregory (In re Pacific-Atlantic Trading Co.), 27 F.3d 401, 404 (9th Cir.1994); In re Microvideo Learning Systems, Inc., 232 B.R. 602, 605 (Bankr.S.D.N.Y.1999); Pudgie's Development of NY, Inc., 239 B.R. 688, 692 (S.D.N.Y.1999); In re New Almacs, Inc., 196 B.R. 244, 247 (Bankr.N.D.N.Y...