In re Southwest Aircraft Services, Inc.
| Decision Date | 10 October 1985 |
| Docket Number | No. LA 85-05197 BR.,LA 85-05197 BR. |
| Citation | 53 BR 805 |
| Parties | In re SOUTHWEST AIRCRAFT SERVICES, INC., a corporation, Debtor. |
| Court | U.S. Bankruptcy Court — Central District of California |
Timothy B. Taylor, Brian L. Holman, Sheppard, Mullin, Richter & Hampton, Los Angeles, Cal., for Atlantic.
Richard Kohn, Hagen & Hagen, Encino, Cal., Richard K. Diamond, Special Counsel, Danning, Gill, Gould, Joseph & Diamond, Los Angeles, Cal., Jerome D. Fireman, Special Counsel, Los Angeles, Cal., for debtor.
Thomas A. Freiberg, Jr., Linda L. Northrup, Dreisen, Kassoy & Freiberg, Los Angeles, Cal., Richard F. Broude, Cynthia Futter, Sidley & Austin, Los Angeles, Cal., Roger P. Freeman, Office of the City Atty. of Long Beach, Long Beach, Cal., for City of Long Beach.
Michael J. Farrell, U.S. Trustee, Los Angeles, Cal.
The issue before the Court is whether 11 U.S.C. § 365(d)(4) permits this Court to extend the time for a debtor in possession to assume or reject an unexpired lease of nonresidential real property where the motion to extend is filed within 60 days from the commencement of the Chapter 11 case, but the motion is heard beyond the 60 day period.
The Court concludes that pursuant to 11 U.S.C. § 365(d)(4) the lease was deemed rejected by operation of law 61 days after the case was filed, i.e. June 18, 1985, and since the lease has been terminated, the Court may not extend the time to assume or reject the lease.
On June 1, 1971, the City of Long Beach and Bob's Aircraft and Industrial Cleaning Co., Inc. entered into a lease for a parcel of nonresidential real property located at the Long Beach airport. On January 31, 1976, Bob's assigned the lease to Southwest Aircraft Services, Inc.. Under the terms of the lease as assigned to Southwest, Southwest was required, inter alia, to pay the City a minimum rent of $150.00 per month or a percentage of the monthly gross receipts received by Southwest, whichever was greater. In addition, the City paid for and constructed an aircraft washrack on the premises. Under the lease, Southwest was required to make monthly payments to the City to pay for the washrack. Southwest paid the amounts due under the lease through February, 1985, but did not make the March, 1985 payment.
On April 18, 1985, Southwest filed this Chapter 11 case and has continued its business of refurbishing airplanes as debtor in possession pursuant to 11 U.S.C. § 1107. On June 14, 1985, 57 days after the petition was filed, Southwest filed its "Motion to Extend Time to Assume or Reject Executory Contracts and Unexpired Leases" in which it sought to extend the time in which it had to assume or reject the lease pursuant to 11 U.S.C. § 365(d)(4). The City opposed the motion on the basis that pursuant to the express terms of § 365(d)(4) the extension had to have been granted within 60 days of the filing of the case, i.e. June 17; and since it was not, the lease was deemed rejected. The City also argued that Southwest did not comply with § 365(d)(3) because it failed to make the monthly post-petition payments and to cure these post-petition defaults within 60 days after the filing of the case.
The motion was heard before this Court on July 17, 1985, 90 days after this case was filed. This Court orally ruled that because the time to assume or reject had not been extended within the 60 day period pursuant to § 365(d)(4) and the lease had not been assumed within the same period, the lease was deemed rejected. At the hearing, Southwest tendered a $2,900.00 cashier's check to the City to cure all the default under the lease. The City refused the offer since it was outside the 60 day period under § 365(d)(3).
On August 5, 1985, Southwest filed a Motion for Reconsideration and for the first time argued that somehow any rejection of the lease by Southwest as debtor in possession did not terminate the lease, but rather the lease was merely abandoned to Southwest the debtor, and therefore revested in Southwest the debtor. Southwest also argued for the first time that the rejection of the lease constituted a forfeiture which could not be accomplished without compliance with California law. Southwest also requested that it remain in possession for at least 90 days in order to remove a large amount of equipment from the premises.
The Motion for Reconsideration was heard by this Court on August 27, 1985. At the hearing, Southwest argued for the first time that the Court could not order Southwest to surrender possession of the premises to the City of Long Beach because Bob's (assignor of the lease to Southwest) was a necessary party due to an alleged reversionary interest in the lease. Although this Court was highly skeptical of this last minute claim, the hearing was continued to September 9, 1985 to allow Southwest time to substantiate its claim.
At the September 9, 1985 hearing this Court concluded that all of Southwest's arguments were totally without merit and orally ruled that Southwest would be required pursuant to § 365(d)(4) to turn over immediate possession of the premises to the City, and that Southwest would have until November 5, 1985 to remove its property from the premises.
The City argues that Southwest is barred from assuming the lease because Southwest has defaulted on its post-petition lease obligations. The facts are undisputed that Southwest did not make its post-petition monthly lease payments to the City during the 60 day period commencing with the filing of this Chapter 11 case and therefore was in violation of the express terms of 11 U.S.C. § 365(d)(3), which provides in pertinent part:
(Emphasis added)
Unfortunately, § 365(d)(3) is silent regarding the consequences for non-compliance with its requirements. Nevertheless, if the time for performance, i.e. the payment of the monthly lease obligation, may not be extended by the Court beyond the 60 day period, a strong argument may be made for the proposition that a failure to make the lease payments results in a default which may not be cured by the trustee, or in this case by the debtor in possession. Since § 365(b)(1) requires the prompt cure of all defaults in order to assume a lease, it may be argued that the lease is non-assumable and therefore should be deemed rejected due to the failure to comply with § 365(d)(3).
The answer to the § 365(d)(3) problem is less certain than the clear mandate of § 365(d)(4) which deems a lease to be rejected for failure to comply with its terms. Because the outcome of this motion is dictated by § 365(d)(4) the Court will leave the determination of the consequences of a failure to comply with § 365(d)(3) to another day.
§ 365(d)(4)
Section 365(d)(4) was added by the 1984 Amendments to the Bankruptcy Code, and provides as follows:
"Notwithstanding paragraphs (1) and (2), in a case under any chapter of this title, if the trustee does not assume or reject an unexpired lease of nonresidential real property under which the debtor is the lessee within 60 days after the date of the order for relief, or within such additional time as the Court, for cause, fixes, then such lease is deemed rejected, and the trustee shall immediately surrender such nonresidential real property to the lessor."
This subsection was intended to resolve uncertainty about leases between the parties to the lease. In re By-Rite Distributing, Inc., 47 B.R. 660, 669 (D.Utah 1985).
There are two important aspects of § 365(d)(4). First, the trustee (or the debtor in possession pursuant to 11 U.S.C. § 1107) must accept or reject the lease within 60 days. Second, if the trustee or the debtor in possession wants more time in which to decide whether to accept or reject, the extension must be obtained within the original 60 day period. If the trustee or debtor in possession does not follow one of these two courses of action, then the lease is deemed rejected.
In the instant case, the 60 day time period ended on June 17, 1985. The debtor in possession filed the motion to extend before that date, but did not have the motion heard until July 17, 1985 — one month after the expiration of the time period. This is insufficient under the requirements of § 365(d)(4). The language of the section is very clear. An extension of the time period must be made within the original 60 days. Merely filing a motion is not the equivalent of actually being granted an extension. In re By-Rite Distributing, Inc., 47 B.R. 660, 699 (D.Utah 1985). Additionally, there is no language in § 365(d)(4) that provides for tolling of the time period upon filing of the motion, or that allows the order to relate back to the filing of the motion. Thus, the trustee or debtor in possession must obtain a hearing and a decision within 60 days. Otherwise, the lease is deemed rejected. Id. at 669-70.
This conclusion is bolstered by the cases construing § 365(d)(1), which involves executory contracts and certain types of leases in Chapter 7 proceedings, and contains virtually the same automatic rejection language as § 365(d)(4). Hence, the interpretation of § 365(d)(1) is indicative of how § 365(d)(4) should be construed.
§ 365(d)(1) provides:
"In a case under chapter 7 of this title, if the trustee does not assume or reject an executory contract or unexpired lease of residential real...
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