In re Thinking Machines Corp., Civ. A. No. 95-10394-WGY.
| Decision Date | 17 May 1995 |
| Docket Number | Civ. A. No. 95-10394-WGY. |
| Parties | In re THINKING MACHINES CORPORATION, Debtor-in-possession. |
| Court | U.S. District Court — District of Massachusetts |
Charles R. Dougherty, Hill & Barlow, Boston, MA, for Thinking Machines Corp.
Charles R. Bennett, Jr., Riemer & Braunstein, Boston, MA, for Mellon Financial Corp.
This appeal of a decision and judgment of the Bankruptcy Court involves a single narrow issue hotly contested and frequently litigated—with contradictory results—across the country. The question is whether, under the Bankruptcy Code (the "Code"), the rejection of a commercial lease by the bankruptcy trustee or the debtor-in-possession is effective at once upon an unequivocal act of rejection by the trustee or debtor-in-possession or later upon court approval of the rejection. As a debtor must continue to honor its obligations under the lease until rejection occurs, the effective date of rejection has great practical importance where, as here, the fair market value of the rental property is far below the lease rate. The debtor, Thinking Machines Corp. ("Thinking Machines"), asserts that the plain language of the Code and general bankruptcy policy require that rejection be effective upon its expression thereof and the filing of its motion for court approval; its lessor, Mellon Financial Corporation # 1 ("Mellon" or "the lessor"), insists that those same factors compel the conclusion that rejection occurs upon—and dates from—Bankruptcy Court approval of the motion. The Bankruptcy Court held for the lessor, and Thinking Machines appealed.
In April of 1990, Thinking Machines entered into a long-term lease with Mellon for space in a Cambridge office building. As time passed, Thinking Machines' financial situation deteriorated, and the company filed a voluntary bankruptcy petition under Chapter 11 on August 17, 1994, continuing to operate as a debtor-in-possession. At the time of filing, Thinking Machines was leasing more space from Mellon than it needed, and the rental value of the property had dropped appreciably. As was its right as a debtor-in-possession, Thinking Machines sought to rid itself of an undesirable asset, its leasehold, and to that end filed with the Bankruptcy Court on September 13, 1994 a motion for approval of its rejection of the unexpired lease ("the motion"). The Bankruptcy Court granted the motion on October 4, 1994.
Mellon then filed a motion to compel, demanding that Thinking Machines pay, as an administrative expense, the lease-rate of rent and certain real estate taxes through October 4, 1994, the date of approval, in the amount of $345,915.89. Thinking Machines contended that the lease was rejected on the day it filed the motion, September 13, 1994, and argued that it only owed rent up until that date. In late October, Thinking Machines paid Mellon's administrative rent claim through September 13 in the amount of $143,326.45. On December 21, 1994, the Bankruptcy Court issued its decision in favor of Mellon (the "Decision"), holding that Thinking Machines did not effectively reject the lease until it obtained approval from the court and that Mellon was thus entitled to collect rent up until October 4, 1994. See In re Thinking Machines Corp., 178 B.R. 31 (Bankr.D.Mass.1994). At Mellon's request, the Bankruptcy Court entered judgment in its favor on January 23, 1995, in the amount of the balance due, $210,150.26, plus interest (the "Judgment"). Thinking Machines now appeals the Decision and Judgment pursuant to 28 U.S.C.A. § 158(a) (West 1993).
The issue presented in this case is bereft of factual dispute and is purely a question of law which the Court reviews de novo. Rome v. Braunstein, 19 F.3d 54, 58 (1st Cir.1994).
The key Code provision at issue states that, with exceptions not here relevant, "the trustee, subject to the court's approval, may assume or reject any executory contract or unexpired lease of the debtor." 11 U.S.C.A. § 365(a) (West 1993). A debtor-in-possession may exercise all the powers of a trustee under section 365. See id. § 1107(a). Section 365 states further:
The trustee shall timely perform all the obligations of the debtor . . . arising from and after the order for relief under any unexpired lease of nonresidential real property, until such lease is assumed or rejected. . . . If the trustee does not assume or reject an unexpired lease of non-residential real property under which the debtor is the lessee within 60 days after the date of the order for relief . . . then such lease is deemed rejected . . .
Id. ¶¶ 365(d)(3), (4). The date of the "order for relief" is the date upon which the debtor files a petition for relief. See id. § 301.
Section 365(a) has been a frequent subject of litigation, primarily in Bankruptcy Courts, over the past few years. Several courts have deemed its language plain, but disagree markedly over what result is compelled by the supposedly "plain language."1 In this case, the Bankruptcy Court found neither Thinking Machines' nor Mellon's view clearly expressed in the statute. In re Thinking Machines, 178 B.R. 31, 33 (Bankr. D.Mass.1994). Rather, the Bankruptcy Court held that the "better reasoned argument" was that two acts, one by the debtor-in-possession and the other by the court, are necessary, "together constituting rejection, with the court order, the last to occur, controlling the effective date." Id. The court supported its holding by reference to a particular policy consideration: the need for factual certainty as to the date of rejection so that a lessor would not be caught in the unenviable position of being unable to collect rent or to relet the premises until court approval was obtained. The court was concerned that the possibility that such approval might not be forthcoming would prevent the lessor from gaining possession of the property and taking steps to locate a new tenant. Id. at 33-34.
While this Court agrees that the language of the statute is not "plain" in the sense of admitting of but one reasonable interpretation, it must respectfully disagree with the Bankruptcy Court's holding that the better reading of section 365(a) delays the effective date of rejection until court approval. The statute does in fact contemplate a two-step procedure, but those steps are "assumption" or "rejection" (by the debtor-in-possession) and "approval" (by the Bankruptcy Court), and not "motion for approval" and "rejection" or "assumption." See In re Casual Male Corp., 120 B.R. 256, 260 (Bankr.D.Mass.1990) (Queenan, J.); In re By-Rite Distrib., Inc., 55 B.R. 740, 742 (D.Utah 1985). The Congress did not say "with the approval of," or similar language indicating a joint enterprise culminating in rejection or assumption; examples abound of such restrictions. See, e.g., U.S. CONST. art. 2, § 2, cl. 2 ().
In the analogous context of lease assumption, Judge Queenan of the Bankruptcy Court in this district stated:
We can be confident, however, that court approval is not the equivalent of the debtor\'s action to "assume". . . . Assumption is obviously action separate from the court order. The words "subject to" and "approval" connote action which precedes the court order; otherwise, words of prior authorization would have been used.
Casual Male, 120 B.R. at 260. The same reasoning applies with equal force to lease rejections. See also In re Joseph C. Spiess Co., 145 B.R. 597, 600 (Bankr.N.D.Ill.1992) ().
The statute thus grants the trustee or a debtor-in-possession the power to reject or assume an unexpired lease and at the same time provides a mandatory mechanism through which the Bankruptcy Court may scrutinize the propriety of such action. See Spiess, 145 B.R. at 601 (); In re 1 Potato 2, Inc., 58 B.R. 752, 755 (Bankr.D.Minn.1986) (). In a sense, the rejection or assumption is valid but voidable as of the date upon which the debtor-in-possession or trustee unequivocally demonstrates an intent to reject or assume. Here, both parties agree that Thinking Machines indicated such intent by the filing of the motion.
The filing of such a motion, however, is not the sine qua non of a valid rejection or assumption:
The trustee assumes or rejects the lease within the meaning of section 365(d)(4) when he makes up his mind to do so and communicates his decision in an appropriate manner, such as by filing a motion to assume. The assumption may become effective only after the court approves it. It is, in effect, subject to defeasance by the court. But the trustee\'s act of assuming the lease is complete for the purposes of section 365(d)(4) before the trustee ever obtains court approval.
By-Rite, 55 B.R. at 742-43 (emphasis supplied) (footnote omitted); Casual Male, 120 B.R. at 261 (quoting By-Rite); see also In re Re-Trac Corp., 59 B.R. 251, 254-55 (Bankr.D.Minn.1986) (); 1 Potato 2, 58 B.R. at 754-55 (); In re Bon Ton Restaurant and Pastry Shop, 52 B.R. 850, 854 (Bankr.N.D.Ill.1985) (). The Court...
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