In re US Fax, Inc., Civ. A. No. 90-1707.

• Decision Date: 25 April 1990
• Docket Number: Civ. A. No. 90-1707.
• Citation: 114 BR 70
• Parties: In re U.S. FAX, INC.
• Court: U.S. District Court — Eastern District of Pennsylvania

114 B.R. 70 (1990)

In re U.S. FAX, INC.

Civ. A. No. 90-1707.

United States District Court, E.D. Pennsylvania.

April 25, 1990.

Gary A. Rosen, Hangley, Connolly, Epstein Chicco, Foxman & Ewing, Philadelphia, Pa., for appellant.

Michael A. Cibik, Philadelphia, Pa., for appellee.

James J. O'Connell, Asst. U.S. Trustee.

MEMORANDUM

GILES, District Judge.

A. Factual and Procedural Background

This is an appeal from a final order of the bankruptcy court entered on February 15, 1990. This court has jurisdiction to hear such appeals pursuant to 28 U.S.C. § 158(a) and Bankruptcy Rule 8001(a).

On July 1, 1989, U.S. Fax, Inc. and lessor, Robert Morris Building Associates (Morris), entered into a commercial lease agreement whereby Morris rented office space at the monthly rate of $8,509.63. Although U.S. Fax continues in possession, it has made no lease payments since September of 1989.

On December 7, 1989, U.S. Fax filed a petition for bankruptcy under Chapter 11. On January 16, 1990, Morris moved that the lease be "deemed rejected" and that U.S. Fax (Debtor) be required to surrender possession of the premises immediately. The motion was based on 11 U.S.C. § 365(d)(4), which provides, in relevant part:

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, within such 60-day period, fixes, then such lease is deemed rejected, and the trustee shall immediately surrender such nonresidential real property to the lessor.

In the alternative, Morris requested administrative rent for the period the Debtor remained in possession. Morris relied on 11 U.S.C. § 365(d)(3), which provides, in relevant part:

The trustee shall timely perform all the obligations of the debtor, . . . arising from and after the order of relief under any unexpired lease of nonresidential real property, until such lease is assumed or rejected.

On February 14, 1990, the bankruptcy court held a hearing on the motion. At the hearing, the Debtor stated that it did not object to the lease being deemed rejected, but that it disagreed that surrender was required. The following day, the bankruptcy court granted the motion to the extent of deeming the lease rejected. However, it declined to order that the Debtor surrender possession. It also declined to order that the Debtor pay administrative rent. The court relied on its earlier decision in In re Adams, 65 B.R. 646 (Bankr.E.D.Pa.1986), ruling that, to obtain possession of the premises, Morris would first have to move for relief from the automatic stay and then pursue its remedies in state court. The court stated that:

Neither rejection of the lease, nor the failure of the Debtor to make payments, however, justify denial of the Debtor\'s state-law rights . . . A motion seeking relief from the automatic stay and thereafter proceedings in accordance with applicable state law must precede a directive that the Debtor vacate the premises.

Morris appeals the order of the bankruptcy court, arguing that the court misinterpreted 11 U.S.C. § 365. Because the appeal concerns a question of law, this court's review is plenary. J.P. Fyfe, Inc. of Florida v. Bradco Supply Corp., 891 F.2d 66 (3d Cir.1989). For the reasons which follow, the bankruptcy court's order is reversed.

B. Discussion

1. The Debtor's Brief

The debtor has submitted a letter to the court which purports to be a reply brief. This "brief" is untimely and was never filed of record. Accordingly, I will not consider it.¹

2. The Requirements of 11 U.S.C. § 365(d)(4)

As discussed above, 11 U.S.C. § 365(d)(4) requires that when a lease for nonresidential property is "deemed rejected, . . . the trustee shall immediately surrender such nonresidential property to the lessor." The bankruptcy court ruled that the Debtor's lease with Morris was "deemed rejected," but declined to order surrender. The court relied on its earlier decision in In re Adams, 65 B.R. 646 (Bankr.E.D.Pa.1986). There, the bankruptcy judge had opined that the surrender requirement of 11 U.S.C. § 365(d)(4) was in conflict with the automatic stay provisions of the bankruptcy code. Id. at 648-9. See 11 U.S.C. § 362(a)(3). The automatic stay protects the debtor's property from actions by creditors. Id.

However, no such conflict was found by the bankruptcy court in In re Damianopoulos, 93 B.R. 3 (Bankr.N.D.N.Y.1988), where it was held that the automatic stay provisions do not preclude ordering surrender under section 365(d)(4). That court reasoned that when a nonresidential lease is "deemed rejected," the debtor's leasehold is "no longer property of the estate." Id. at 6.² I find this reasoning persuasive.

In In re Adams, contrary to substantial authority, the bankruptcy court stated that "it is inconceivable that Congress would intend to place in the Bankruptcy Code a provision which would allow creditors to short-circuit established state law landlord-tenant procedures." 65 B.R. at 649. A number of courts have concluded that Congress did so intend. See, e.g., In re Damianopoulos, 93 B.R. 3 (Bankr.E.D.N.Y. 1988); In re Giles Associates, Ltd., 92 B.R. 695 (Bankr.W.D.Tex.1988); In re O.P. Held, Inc., 77 B.R. 388 (Bankr.N.D.N.Y. 1987); In re Fosko Markets, Inc., 74 B.R. 384 (Bankr.S.D.N.Y.1987); In re Hurst Lincoln-Mercury, Inc., 70 B.R. 815 (Bankr.S.D. Ohio 1987); In re Bernard, 69 B.R. 13 (Bankr.D. Hawaii 1986); In re Southwest Aircraft Services, Inc., 53 B.R. 805 (Bankr.C.D.Cal.1985), aff'd, 66 B.R. 121 (Bankr. 9th Cir.1986), rev'd on other grounds, 831 F.2d 848 (9th Cir.1987).

Indeed, neither the language of section 365(d)(4) nor the legislative history suggests that Congress meant for creditors to pursue state-law remedies. This subsection was added to the Bankruptcy Code as part of the Amendments of 1984. A sponsor explained the Amendments as "measures that correct problems for owners of shopping centers and their tenants, and other owners of real estate, whose leases are tied up in reorganization proceedings under chapter 11 of the Bankruptcy Code." Statement by Senator Robert J. Dole, on House Conference Report No. 98-882, June 29, 1984, reprinted in 1984 U.S.Code Cong. & Ad. News 576, 586, 587. The Amendments were further explained as follows:

The first problem which this bill would remedy is the long-term vacancy or partial operation of space by a bankrupt tenant. Although in a chapter 7 case the bankruptcy code presently requires that the trustee decide whether to assume or reject an unexpired lease with 60 days after the bankruptcy petition is filed, there is no deadline for this decision in a chapter 11 case. Because of the unprecedented number of bankruptcy cases and the consequent delays in the bankruptcy courts, tenant space has been vacated for extended periods of time before the bankruptcy court forced the trustee to decide whether to assume or reject the lease. During this time, the other tenants of the shopping center are hurt because of the reduced customer traffic in the shopping center. Tenants and landlords in other nonresidential structures have encountered similar problems.

The bill would lessen the problems caused by extended vacancies and partial operation of tenant space by requiring that the trustee decide whether to assume or reject nonresidential real property lease within 60 days after the order for relief in a case under any chapter. This time period could be extended by the court for cause, such as in exceptional cases involving large numbers of leases. . . . If the lease is not assumed or rejected within this 60-days period, or any additional period granted by the court, the lease is deemed rejected and the trustee must immediately surrender the property to the lessor.

Statement by Senator Orrin G. Hatch, on House Conference Report No. 98-882, June 29, 1984, reprinted in 1984 U.S.Code Cong. & Ad. News 590, 598-99.³

Under the Supremacy Clause,

Where Congress has chosen to exercise its authority, contrary provisions of state law must accordingly give way. It is equally well-settled, however, that state laws are suspended only to the extent of actual conflict with the bankruptcy system provided by Congress, so that in the absence of any conflict between the state and bankruptcy laws, the law of the state where the property is situated governs questions of property rights.

Johnson v. First National Bank of Montivedo, Minn., 719 F.2d 270, 273 (8th Cir. 1983), cert. denied, 465 U.S. 1012, 104 S.Ct. 1015, 79 L.Ed.2d 245 (1984).

Requiring creditors to pursue state-law remedies would frustrate the language and purpose of section 365(d)(4) in several ways. The statute requires, when a lease is deemed rejected, that surrender be "immediate." Requiring the creditor to initiate state-court proceedings would defeat the statutory mandate. Cf. In re Fosko Markets, Inc., 74 B.R. 384, 391-92 (Bankr.S.D.N.Y.1987) (denying stay pending appeal because statute requires immediate surrender). Also, the statute requires, by use of the word "shall," surrender of the premises when the lease is "deemed rejected" regardless of whether the debtor has breached the lease agreement. Presumably, a state's laws would require eviction only if the lease agreement were found to have been breached. Consequently, "if debtor is current with its rent, . . ., the lessor could not succeed in an eviction. The net result then would be that the last clause of § 365(d)(4) would be rendered meaningless." In re Hurst Lincoln-Mercury, Inc., 70 B.R. 815, 817 (Bankr.S.D. Ohio 1987).

In summary, the language and legislative history of section 365(d)(4) demonstrate that Congress did not intend for creditors to pursue state-law remedies and that requiring creditors to pursue such remedies would frustrate the statute's purpose. Accordingly, that portion of the bankruptcy court's...