Hertz Gateway Center, L.P. v. KDA Group, Inc. (In re KDA Group, Inc.)
Hertz Gateway Center, L.P. v. KDA Group, Inc. (In re KDA Group, Inc.)
Opinion of the Court
MEMORANDUM OPINION
Which came first: the lease rejection or the rental obligation? The Court welcomes this opportunity to resolve a bankruptcy permutation of the chicken-and-the-egg conundrum that has vexed curious minds throughout history. Hertz Gateway Center, L.P. seeks allowance of a chapter 11 administrative-expense claim for unpaid rent and other charges which came due under a lease for office space on August 1, 2016.
I.
KDA was an advertising agency that converted print media ads into digital marketing.
KDA shuttered the business and filed a voluntary petition for relief under chapter
On June 21, 2017, Hertz filed a motion for the allowance and payment of the lease obligations which accrued in June, July, and August of 2016 as administrative-expense claims.
The Court has jurisdiction in this matter under 28 U.S.C. §§ 1334 and 157(b)(2)(B). Venue is proper in this district pursuant to 28 U.S.C. § 1408.
II.
Postpetition lease obligations may be allowed as an administrative claim under either 11 U.S.C. § 503(b)(1) or 11 U.S.C. § 365(d)(3).
Hertz is entitled to an allowed administrative claim for the June and July rent because these obligations clear both § 365(d)(3) hurdles. As obligations which came due on June 1 and July 1, the June and July rent certainly arose after the petition date and before the lease was rejected.
The August rent must be analyzed differently because it came due on the same date the lease was rejected,
Hertz claims the holding in Appliance Store supports its contention that rent which accrues on the rejection date is nonetheless allowable as administrative expense. The Court is not convinced. While Appliance Store suggests that a landlord is entitled to collect administrative rent through the date of the lease rejection,
Courts in this Circuit have considered timing questions in the context of § 365, though none have squarely addressed the present issue.
In the absence of specific authority on this matter, the Court turns to the widely accepted interpretation of § 365(d)(3), which describes the time at which a debtor’s lease obligations may cease. While the “general rule [is the] party seeking relief in any court must bear the risk that the court may not reach a decision as quickly as the party expected or desired,”
Even if the rejection order did not take precedence, the Court had discretion to authorize the rejection of a lease retroactively under certain exceptional circumstances,
The Court was not asked to balance the equities in this case, however, KDA did not seek rejection of the lease retroactive to any particular date. As the master of its own filings, KDA controlled the date the rejection motion was filed and, by extension, the date the Court ultimately heard it. Accordingly, the issue before the Court is not whether equitable relief is appropriate, but rather whether the lease rejection supersedes the contemporaneous lease obligations as a matter of law. After considering the language of § 365(d)(3), which requires the debtor to perform under an unexpired lease “until such lease is assumed or rejected,” the Court finds that rent obligations which accrue on the rejection date cannot be allowed as an administrative expense under § 365(d)(3). The Court concludes that rather than prejudicing Hertz, this holding simply denies it a windfall it was never intended to receive.
III.
For the reasons set forth above, the entry of an order approving the rejection of an unexpired lease of nonresidential real property terminates the debtor’s duty under § 365(d)(3) to satisfy postpetition lease obligations as they come due, including those obligations which arise on the rejection date. Hertz’s Motion for Allowance and Payment of Administrative Claim for Post Petition Rent is GRANTED IN PART with respect to the June and July rental obligations and DENIED IN PART with respect to the August rental obligations.
A separate Order will issue.
. See Movant's Motion for Allowance and Payment of Administrative Claim for Post Petition Rent, Dkt. No. 178.
. Dkt. No. 48.
. Dkt. No. 46.
. Dkt. No, 178 at ¶¶ 1-2, 12. The installment pool included expenses for such things as "operating, managing, administering, equipping, securing, protecting, repairing, replac
. Dkt. No. 34 at HI 3.
. Dkt. No. 48.
. Dkt. No. 178 at II 12(a). Hertz has not requested an administrative claim for any "stub rent” that may be owed from the May 12, 2016 petition date through May 31, 2016.
.Dkt. No. 187 at ¶ 13.
. Dkt. No. 186.
. Dkt. No. 193.
. In re Goody's Family Clothing Inc., 610 F.3d 812, 816 (3d Cir. 2010) ("Put simply, § 365(d)(3) does not supplant or preempt § 503(b)(1).”).
. Appliance Store, 148 B.R. at 234.
. 11 U.S.C. § 365(d)(3) provides, in pertinent part: “The trustee shall timely perform all the obligations of the debtor, except those specified in section 365(b)(2), arising from and after the order for relief under any unexpired lease of nonresidential real property, until such lease is assumed or rejected.”
. In re Montgomery Ward Holding Corp., 268 F.3d 205, 207 (3d Cir. 2001).
. 11 U.S.C. § 365(d)(3).
. Although the Third Circuit has not decided the issue of when a debtor's rejection becomes effective, this Court has adopted the view that court approval is a condition precedent to an effective lease rejection. See, e.g., In re National Record Mart, Inc., 272 B.R. 131, 133 (Bankr. W.D. Pa. 2002); In re Four Star Pizza, Inc., 135 B.R. 498, 501 (Bankr. W.D. Pa. 1992) ("The majority view appears to be better reasoned.”).
. Dkt. No. 178 at ¶ 10. Hertz admits that KDA “had unrestricted access to the suite and continued to occupy the premises .,. through the date of the rejection of [Hertz’s] lease on August 1, 2016.”
. Goody's Family Clothing, 610 F.3d at 818 ("Proving this is the lessor’s burden.”).
. Appliance Store, 148 B.R. at 232.
. Id. at 233.
. Id. at 229-30. The landlord’s administrative claim consisted of amounts owed for the months of June, July, and August of 1992. Although the lease was rejected on September 1, 1992, there is nothing in the case to suggest landlord sought to recoup any rent for September of 1992.
. See, e.g., In re Garden Ridge Corp., 323 B.R. 136, 153 (Bkr. D. Del. 2005) (holding that a- rental obligation maturing the first of the month that fell on Sunday the first was still a prepetition obligation where the debtor petitioned for chapter 11 relief on Monday the second, even though the debtor’s time to fulfill the obligation was extended to Monday the second under state law). The implication of this holding is that the petition would have superseded the obligation if they had occurred the same day.
. Matter of Barrister of Del., Ltd., 49 B.R. 446, 447 (Bkr. D. Del. 1985).
. Id. at 446-47 (“The parties agree[d] that the lease was rejected on March 1.”).
. Id. at 446.
. Matter of Federated Dept. Stores, Inc., 131 B.R. 808, 815 (S.D. Ohio 1991).
. In re Fed.-Mogul Glob. Inc., 222 Fed.Appx. 196, 199 (3d Cir. Mar. 15, 2007) (citing Montgomery Ward, 268 F.3d at 209).
. See, e.g., HA-LO Indus., Inc. v. Center-Point Props. Tr., 342 F.3d 794, 798 (7th Cir. 2003) ("Section 365(d)(3) provides that obligations under an unexpired lease that arise after an order for relief is entered ... and prior to rejection of the lease .,. are to be timely fulfilled under the terms of the lease."); In re McCrory Corp., 210 B.R. 934, 936 (S.D.N.Y. 1997) (“§ 365(d)(3) requires debtor-tenants to provide landlords of nonresidential property full and timely payment for services due under an unexpired lease during the post-petition, prerejection period."); In re BH S&B Holdings LLC, 401 B.R. 96, 102 (Bankr. S.D.N.Y. 2009); In re NETtel Corp., 289 B.R. 486, 492 (Bankr. D.C. 2002) ("Section 365(d)(3) ought to be viewed as dealing with the obligations arising under the lease for the estate's right to use the property in the period after the petition and prior to rejection.”); In re Papercraft Corp., 127 B.R. 346, 351 (Bankr. W.D. Pa. 1991).
. See In re At Home Corp., 392 F.3d 1064, 1072 (9th Cir. 2004); In re Thinking Machines Corp., 67 F.3d 1021, 1028 (1st Cir. 1995); In re Fleming Cos., Inc., 304 B.R. 85, 96 (Bankr. D. Del. 2003) ("Rejection has been allowed nunc pro tunc to the date the Motion is filed or the premises is surrendered, whichever is later, only in certain circumstances.”) (citing In re CCI Wireless, LLC, 279 B.R. 590, 595 (Bankr. D. Colo. 2002) (“[Wjhen principles of equity so dictate, [a court] may approve a rejection of' a nonresidential lease pursuant to [§ ] 365(a) retroactive to the motion filing date.")).
. In re Chi-Chi's, Inc., 305 B.R. 396, 399 (Bankr. D. Del. 2004).
. See Fed.-Mogul Glob., 222 Fed.Appx. at 201 (declining to “make a bright line rule” about whether nunc pro tunc relief is permissible in the context of lease modifications under 11 U.S.C. § 365(d)(5)).
. See, e.g., In re Phila. Newspapers, LLC, 424 B.R. 178, 184 (Bankr. E.D. Pa. 2010) (“[T]he decision to grant retroactive rejection of a lease or contract is dictated by equitable considerations.”); Chi-Chi's, 305 B.R. at 399 ("Moreover, the court's power to grant retroactive relief is derived from the bankruptcy court’s equitable powers so long as it promotes the purposes of § 365(a). Thus, only after balancing the equities in a particular case, should the court approve a retroactive rejection of nonresidential lease.”) (internal citation omitted); see also Order Authorizing (i) Rejection of Certain Unexpired Leases of Real Property Effective Nunc pro Tunc to the Petition Date, (ii) Rejection of Certain Unexpired Leases of Real Property Nunc pro Tunc to May 31, 2017, and (Hi) Abandonment of any Burdensome Property Located at Locations Covered by Such Unexpired Leases, In re rue21 Inc., No. 17-22045, Dkt. No. 531 at ¶2 (Bankr. W.D. Pa. June 13, 2017).
Reference
- Full Case Name
- IN RE: KDA GROUP, INC., Debtor. Hertz Gateway Center, L.P., Movant v. KDA Group, Inc.
- Cited By
- 1 case
- Status
- Published