Daily Development for Monday, May 6, 2002

By: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
prandolph@cctr.umkc.edu

BANKRUPTCY; LEASES; PRE-REJECTION ADMINISTRATIVE CLAIM; HANDY ANDY RULE REJECTED:

The landlord was entitled to an administrative claim for the entire amount of property taxes -- including those which accrued pre-petition --

where under the terms of the lease the debtor=s obligation to make payment to the landlord for such taxes came due on a date after the commencement of the case and before the lease was rejected.

Centerpoint Properties v. Montgomery ward Holding Corp. (In re Montgomery Ward Holding Corp.) 268 F.3d 205 (3rd Cir. 2001).

Montgomery Ward continued to occupy the premises in question as a debtor in possession subsequent to its filing for bankruptcy. The time for rejection or affirmance was extended by the court, and the lease ran out prior to the trustee's ever reaching a decision as to whether to affirm or reject. Under these circumstances, the estate was liable for the lease expenses during its post petition occupancy under 365(d)(3).

Section 365(d)(3) of the Bankruptcy Code was enacted to require timely compliance with the terms of a lease until it is rejected (or assumed and/or assigned) by debtor. The court held that the obligation to make the property tax reimbursement payment to the landlord arose when the legally enforceable duty to pay arose under the lease, and there is no ambiguity in the statute that should permit a court to permit a partial or pro-rated payment. AWe reach the conclusion that '365(d)(3) is unambiguous with some reluctance, given that one sister court of appeals and a number of other courts have reached the opposite conclusion and have opted for a proration approach. See, e.g., In re Handy Andy, 144 F.3d 1125 (7th Cir. 1998)...@

The dissent would have followed the Handy Andy Rule (pro-ration) as opposed to the Abilling date rule,@ on the basis that section 365(d)(3) does not say how to interpret when the obligation arose. It argued for a common-sense view that would allow for property taxes accruing pre-

petition to retain their status as unsecured claims along with all other pre-

petition claims in the case.

Reporter's Comment: I believe the dissent is correct in saying that opinions preferring the pro-ration approach over the billing date approach are in the majority. This decision creates a split of authority among the Courts of Appeals concerning priority of back taxes that are billed post-petition, as it is squarely in conflict with the Seventh Circuit's well-reasoned decision in Handy Andy. Chicago practitioners Jonathan Friedland and Steve Kotarba explain that the billing date approach helps the tenant in some cases, as where a large payment obligation happens to "arise" under the terms of the lease a few days after rejection, in A3rd Circuit ruling may (further) influence venue selection, 38 Bankruptcy Court Decisions," Weekly News & Comment 1 (No. 16, November 27,

2001).

The Reporter for this case is Jim Stillman of the California Bar.

BANKRUPTCY; LEASES; AFFIRMANCE OR REJECTION:

Automatic rejection of lease following failure to affirm during sixty day evaluation period relates back to date of petition, and effectively terminates lease as of that point, leaving landlord with a prepetition claim for damages, if any, which will be discharged in the bankruptcy. Even where tenant's property (mobile home) remains on the premises, the lease will not be deemed to be continued during the bankruptcy period.

Miller v. Chateau Communities, Inc. 2002 FED App. 0085P (6th Cir.

3/11/02)

This was a Chapter Seven bankruptcy. Debtor had resided in a mobile home prior to the bankruptcy, and the mobile home was located in a mobile home park, where tenant rented space on a month to month basis.

Tenant abandoned the mobile home, which was subject to a mortgage for greater than its value. She did not reside in the home post petition. The mortgagee on the home obtained relief from the stay and carried out a foreclosure.

During the period between the petition and the completion of the foreclosure, however, landlord argued that the continued presence of tenant's mobile home on its property constituted a renewal of the month to month tenancy, and it sought rent damages for that period.

As the caption above indicates, the court held that when tenant's trustee in bankruptcy failed to affirm the lease during the sixty day period following the filing of the petition, the lease was deemed rejected. This was, in effect a pre-petition breach of the lease, leaving the landlord only with damages as an unsecured creditor:

'Pursuant to § 365(g)(1), the rejection is treated as a breach of the lease that took place immediately prior to the filing of the bankruptcy petition. . . . . As explained in Collier on Bankruptcy:

'The purpose of section 365(g) is to make clear that, under the doctrine of relation back, the other party to a contract that has not been assumed is simply a general unsecured creditor. The effect of the breach is to permit the creditor to seek allowance of its claim under § 502.

This is affirmed by the definition of the term "creditor" in section 101 which provides that the term includes any entity that has a claim of the type specified in section

502(g). Thus, the effect of a rejection is that a breach is deemed to exist which in the ordinary case will give rise to a claim for damages.' (Citations Omitted)

Comment: The court does not address the question as to whether the mortgagee on the mobile home might have owed some rent for the storage of its security prior to foreclosure. It also doesn't address the question of whether there would have been an administrative claim for rent for the benefit conferred on the estate while the mobile home remained on the landlord's property post petition. Since the debtor had abandoned the mobile home to the creditor and did not live in it, there was no argument for benefit conferred.

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