In re Standard Furniture Co.
| Decision Date | 08 April 1980 |
| Docket Number | Bankruptcy No. 79-03109-M. |
| Citation | 3 BR 527 |
| Parties | In re STANDARD FURNITURE COMPANY, Debtor. |
| Court | U.S. Bankruptcy Court — Southern District of California |
Julius J. Pearl, San Diego, Cal., for himself as Trustee.
Richard F. Luther, Gray, Cary, Ames & Frye, San Diego, Cal., for Lee M. Norwood.
On January 25, 1980, Mr. Lee M. Norwood ("Norwood"), lessor to Standard Furniture Company ("Debtor"), filed his application for payment of administrative expenses pursuant to Section 503 of the United States Bankruptcy Code ("Code"). Norwood requests that he be immediately paid the sum of $9,898.33 in past due rent. He bases this claim on the terms of a lease under which the trustee herein, Mr. Julius J. Pearl, occupied the premises formerly used by the Debtor.
On February 11, 1980, the trustee filed his response to Norwood's claim for administrative expenses. It is the trustee's contention that Norwood is only entitled to administrative expenses in the amount of $2,398.33.
This matter came on for hearing before this Court on February 15, 1980. Having considered the written and oral arguments presented by both parties, the Court has decided that the trustee's position is the correct one. This opinion is filed to explain that decision.
On April 8, 1979, Norwood entered into a ten year lease of the premises in question with Mr. and Mrs. James Ogilvie. The rent agreed upon was $5,000.00 per month plus 10% interest per annum on all amounts not paid within five days of the date due. Mr. and Mrs. Ogilvie additionally deposited with Norwood, the sum of $5,000.00 as security for full performance of the terms of the lease. The lease was subsequently assigned by Mr. and Mrs. Ogilvie to the Debtor.
On November 14, 1979, the Debtor filed its Chapter 7 petition. The trustee then entered into possession of the leased premises. In early December of 1979, the trustee orally informed Norwood's attorney that the Debtor intended to vacate the premises on or before January 1, 1980. Thereafter, an auction was held, and the Debtor's inventory and equipment were sold.
On December 28, 1979, an agent of the trustee, Mr. Maxwell Kaufman, delivered the Debtor's keys to the premises to Norwood's real estate agent. Kaufman informed the agent that the Debtor would no longer conduct any business in the leased building and that all utility services had been discontinued.
On December 31, 1979, Norwood filed a priority claim for rent due covering the period from November 14, 1979, to December 27, 1979 in the amount of $7,166.67. This claim was subsequently amended to allege that the trustee was liable to Norwood for rent accrued during the period of November 14, 1979, to January 12, 1980. The amended claim is in the amount of $9,898.33.
Early in January of 1980, Norwood's attorney informally requested the trustee to make a motion under Section 365 of the Code to either assume or reject the Debtor's lease. The trustee declined to do so. He based his refusal on his prior oral notification of the Debtor's intent to vacate the premises as of January 1, 1980.
Norwood contends that under Section 503 of the Code he is entitled to priority administrative expenses for rent which accrued during the period of November 14, 1979, to January 12, 1980. He grounds his claim on the following argument: Section 365, he suggests, imposes a mandatory duty on the trustee to accept or reject the Debtor's lease. Norwood acknowledges, though, that in a Chapter 7 liquidation the debtor's lease is automatically rejected sixty days from the date the petition is filed. 11 U.S.C. § 365(d)(1). Nonetheless, Norwood argues that he was left in doubt regarding the status of the lease because of the trustee's failure to formally reject it. Norwood additionally claims that the trustee had effective use and control of the premises during the sixty day period because of his failure to formally reject the lease. Based on these premises, Norwood concludes that he is entitled to rent for the entire sixty day period under Section 365(d)(1).
The trustee, on the other hand, is willing to pay Norwood rent only for the period he actually occupied the premises i.e., November 14, 1979, to December 28, 1979, and claims entitlement to an offset of $5,000.00. He further points out that Norwood had timely and unequivocal notice of the Debtor's intent to vacate the building as of January 1, 1980, and that a formal motion under Section 365 was unnecessary because of that notice.
With respect to Norwood's contentions, Section 503 provides in pertinent part that:
The trustee does not challenge the established proposition that rent incurred by a trustee or debtor during their occupancy of leased premises is allowable as an administrative expense. See e.g., In re Chase Commissary Corporation, 11 F.Supp. 288, 289 (S.N.Y.1935) (reorganization case). Nor does he question that the Code adopts this position by allowing as an expense of administration the "costs and expenses of preserving the estate. . . ." 11 U.S.C. § 503(b)(1)(A). See 3 Collier on Bankruptcy, ¶ 503.04 (15th ed.). The dispute here centers around the amount of the expenses to be allowed.
Where an unexpired lease is eventually adopted by the trustee, the estate becomes liable to the lessor for rent reserved in the lease accruing from the date of filing the petition until the date of assumption. See In re Chase Commissary Corporation, supra, 11 F.Supp. at 289. See also 2 Collier on Bankruptcy, ¶ 365.032 at p. 365-25 (15th ed.). It is well settled, however, that where a lease is ultimately rejected, or for the period pending either rejection or assumption, the amount of allowable expense for administrative rent is measured by the period of actual occupation and use of the premises. See Philadelphia Co. v. Dipple, 312 U.S. 168, 174, 61 S.Ct. 538, 541, 85 L.Ed. 651 (1940) (reorganization case); Matter of Chase Commissary Corporation, supra, 11 F.Supp. at 289; In re CRS Architectural Metals Corp., 1 B.R. 729, 732 (E.N.Y.1979). This amount is ordinarily, but not necessarily, determined by an allocation of the rent reserved in the lease on a pro-rata basis. See In re Frederick's Meats, Inc., 483 F.2d 951, 952 (9th Cir. 1973); In re Buttonwood Securities, Inc., 349 F.Supp. 273, 278 (S.Cal. 1972) (Neilson, J.). See also 2 Collier on Bankruptcy, ¶ 365.032 at p. 365-24 (15th ed.). This proposition is reaffirmed in Section 503 by use of terms "actual" and "necessary" in reference to those expenses allowed as a cost of preserving the estate. 11 U.S.C. § 503(b)(1)(A). See generally 3 Collier on Bankruptcy, ¶ 503.041a at p. 503-15 (15th ed.). Here, the trustee is satisfied that the contractual rental is a reasonable figure from which the value of his use and occupancy can be calculated.
Norwood, though, contends that he is entitled to rent covering the sixty day period preceding the automatic rejection of the Debtor's lease under Section 365(d)(1). This section 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 the debtor within 60 days after the order for relief, or within such additional time as the court, for cause, within such 60-day period, fixes, then such contract or lease is deemed rejected.
Norwood's contention is without merit. To begin with, Section 365 is not mandatory in character as Norwood suggests. It provides only that the trustee may assume or reject an unexpired lease. See 11 U.S.C. § 365(a). It does not place upon the trustee a mandatory duty to do so. He is merely given the discretionary power to assume or reject, subject to court approval.
A lessor in a case brought under Chapters 9, 11 or 13 of the Code may request the court to order the trustee to assume or reject a lease within a specified time period. As Section 365(d)(2) provides:
In a case under chapter 9, 11, or 13 of this title, the trustee may assume or reject an executory contract or unexpired lease of the debtor at any time before the confirmation of a plan, but the court, on request of any party to such contract or lease, may order the trustee to determine within a specified period of time whether to assume or reject such contract or lease.
11 U.S.C. § 365(d)(2). The decision to assume or reject a lease in a Chapter 7 setting, however, is solely the trustee's for a sixty day period. See 11 U.S.C. § 365(d)(1).
Secondly, Norwood's claim that he was left in "doubt" regarding his status vis-a-vis the lease is not well taken. By implication, Section 365(d)(1) operates to remove doubts entertained by a lessor concerning the status of his lease with the estate. This is so because in a non-Chapter 7 case a lessor may resolve his doubts about his lease by requesting the court to order the trustee to assume or reject it within a certain period of time. See 11 U.S.C. § 365(d)(2). That Congress did not include a similar provision for use by Chapter 7 lessors indicates that the automatic rejection provision of Section 365(d)(1) was itself intended to resolve such uncertainty. See generally H.R.Rep. No. 95-595, 95th Cong., 1st Sess. 348 (1977), U.S.Code Cong. & Admin.News 1978, pp. 5787, 5963.
This factor, coupled with the timely and unequivocal notice given Norwood by the trustee regarding the Debtor's intent to vacate the premises, refutes Norwood's claim that he was confused about the eventual disposition of...
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