Koenig Sporting v. Morse Road ( 2000 )

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
ELECTRONIC CITATION: 2000 FED App. 0056P (6th Cir.)
File Name: 00a0056p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
_________________
;

In Re: KOENIG SPORTING
Debtor. 
GOODS, INC.,

________________________ 
No. 99-3347

>
KOENIG SPORTING GOODS, 

Appellant, 
INC.,



v.


Appellee. 
MORSE ROAD COMPANY,
1
On Appeal from the Bankruptcy Appellate
Panel of the Sixth Circuit.
No. 97-15635—David F. Snow, Bankruptcy Judge.
Argued: January 25, 2000
Decided and Filed: February 15, 2000
Before: GUY, RYAN, and BOGGS, Circuit Judges.
1
2 In re Koenig Sporting Goods, Inc. No. 99-3347 No. 99-3347 In re Koenig Sporting Goods, Inc. 7
_________________ period. That is a sensible adjustment of this particular debtor-
creditor relationship.”)
COUNSEL
The debtor’s reliance on our decision in Vause is
ARGUED: Jeffrey C. Toole, BUCKLEY, KING & BLUSO unavailing.4 There, we considered the meaning of the term
CO., Cleveland, Ohio, for Appellant. Ellen Maglicic Kramer, “due” in 11 U.S.C. § 502(b)(6) to determine whether
KOHRMAN, JACKSON & KRANTZ, Cleveland, Ohio, for Congress intended to give lessors damages for unpaid rent
Appellee. ON BRIEF: Jeffrey C. Toole, Harry W. “owing” under the lease or “payable” under the lease. In
Greenfield, BUCKLEY, KING & BLUSO CO., Cleveland, Vause, the debtor farmers were obligated to pay the lessor
Ohio, for Appellant. Ellen Maglicic Kramer, Jonathon M. $36,000 on5 December 1 of each year for the prior year’s
Yarger, KOHRMAN, JACKSON & KRANTZ, Cleveland, occupancy. On November 27, 1985, four days before the
Ohio, for Appellee. rent for 1985 became due, the debtors filed for bankruptcy
and sought permission to reject the lease. The farmers argued
_________________ that because the previous year’s rent was not due until
December 1, they were not obligated to pay any portion of the
OPINION rent. We found the term “due” to be ambiguous in that
_________________ context, and concluded that such a result, under the unique
facts of that case, would be inequitable and ruled in favor of
RALPH B. GUY, JR., Circuit Judge. Koenig Sporting the lessor.
Goods, Inc. (debtor) appeals from the judgment of the
Bankruptcy Appellate Panel (BAP) affirming the bankruptcy No such facts or inequities are present in this case. While
court’s decision to grant Morse Road Company’s request for the debtor characterizes Morse’s receipt of a full month’s rent
a full month’s rent. On appeal, the debtor claims that the for December 1997 as a “windfall,” we disagree. Rather,
bankruptcy court and the BAP erred in ruling that 11 U.S.C. Morse would receive that to which it is entitled under
§ 365(d)(3) requires a debtor in bankruptcy to pay rent for an § 365(d)(3) and the debtor is obligated to pay under the lease.
entire month when the debtor has rejected the lease of
nonresidential real property and vacated the premises on the AFFIRMED.
second day of the month. After a review of the record and
arguments presented on appeal, we affirm.
I. 4
Morse relies on Vause as well. Both sides argue that the following
The facts are not disputed. In November 1993, Morse, as sentence from Vause strengthens their argument: “Section 502(b)(6) is
not difficult to apply when a lease does not make rent payable in arrears.”
landlord, and the debtor, as tenant, entered into a ten-year Vause, 886 F.2d at 798-99. Our dicta as to the application of § 502(b)(6)
lease under which the debtor was obligated to pay Morse in a different context than was present in Vause is not controlling.
$8,500 on the first of each month for that month’s rent.1 The Further, the parties’ conflicting interpretations of the case undermine their
debtor operated a sporting goods store on the property. On respective reliance upon it.
5
“[A] farm lease is unique in that the lessee is permitted to occupy
1 and make use of the land but not pay for such use until the end of
The $8,500 monthly rent payment included $500 in charges for occupancy.” Vause, 886 F.2d at 796. In contrast, the debtor here was
common area maintenance. permitted to occupy Morse’s property if it paid in advance for that right.
6 In re Koenig Sporting Goods, Inc. No. 99-3347 No. 99-3347 In re Koenig Sporting Goods, Inc. 3
left in doubt concerning their status vis-a-vis the estate.’” August 18, 1997, the debtor voluntarily filed for bankruptcy
Tully Constr. Co. v. Cannonsburg Envtl. Assocs., (In re under Chapter 11 and later obtained leave from the
Cannonsburg Envtl. Assocs.), 72 F.3d 1260, 1266 (6th Cir. bankruptcy court to conduct going-out-of-business (GOB)
1996) (quoting H.R. REP. No. 95-595, at 348 (1978), sales at its remaining retail stores. The debtor subsequently
reprinted in 1978 U.S.C.C.A.N. 5963, 6304). The legislative moved for an extension of time within which it could assume,
history also suggests that the purpose was “to relieve the assume and assign, or reject unexpired leases of
burden placed on nonresidential real property lessors (or nonresidential real property. The debtor sought the right to
‘landlords’) during the period between a tenant’s bankruptcy reject the leases, upon seven-days’ notice, covering the
petition and assumption or rejection of a lease.” Omni properties where the GOB sales were to be held. Morse
Partners, L.P. v. Pudgie’s Dev. of NY, Inc. (In re Pudgie’s received the debtor’s motion, but did not object. The
Dev. of NY, Inc.), 239 B.R. 688, 692 (S.D.N.Y. 1999) (citing bankruptcy court granted the motion on November 6, 1997.
130 CONG. REC. S8894-95 (daily ed. June 29, 1994)
(statement of Sen. Hatch)). On November 25, 1997, the debtor notified Morse that it
was rejecting the lease effective December 2, 1997, which
Under the terms of the lease the debtor was obligated to pay was the date that the debtor vacated the property. On January
Morse $8,500 in advance on the first of each month for that 29, 1998, Morse filed a request with the bankruptcy court
month’s rent. The specific obligation to pay rent for seeking payment of the rent for the full month of December.
December 1997 arose on December 1, which was during the The debtor objected to paying rent for the entire month and
postpetition, prerejection period. Under these circumstances, argued that Morse was entitled to receive only $516.13,
§ 365(d)(3) is unambiguous as to the debtor’s rent obligation representing the pro rata value of rent for December 1 and 2.
and requires payment of the full month’s rent. The bankruptcy court disagreed and granted Morse’s request.
See In re Koenig Sporting Goods, Inc., 221 B.R. 737 (Bankr.
The debtor argues that policy considerations, equity, and N.D. Ohio 1998). Following the debtor’s appeal, this circuit’s
“common sense” compel adoption of the proration method in BAP affirmed, with one judge dissenting. See Koenig
this context. We disagree. The debtor alone was in the Sporting Goods, Inc. v. Morse Road Co. (In re Koenig
position to control Morse’s entitlement to payment of rent for Sporting Goods, Inc.), 229 B.R. 388 (B.A.P. 6th Cir. 1999).
December. If the debtor had rejected the lease effective The debtor’s appeal to this court followed.
November 30, 1997, rather than December 2, it would not
have been obligated to pay rent for December under 11 U.S.C. II.
§ 365(d)(3). Instead, an election was made to reject the lease
effective December 2, one day after the debtor’s monthly rent The debtor claims that the bankruptcy court and the BAP
obligation would arise. In this case, involving a month-to- erred in ruling that Morse was entitled to a full month’s rent
month, payment-in-advance lease, where the debtor had under 11 U.S.C. § 365(d)(3). Based upon the statute’s
complete control over the obligation, we believe that equity language, legislative history, common sense, and equity, the
as well as the statute favors full payment to Morse. See debtor argues that it was only required to pay for the two days
Krystal, 194 B.R. at 164 (emphasizing that “Congress that it actually occupied the premises at the beginning of
intended § 365(d)(3) to shift the burden of indecision to the December.
debtor: the debtor must now continue to perform all the
obligations of its lease or make up its mind to reject it before “Whether an appeal comes to our court by way of a district
some onerous payment comes due during the prerejection court or the BAP, our review is of the bankruptcy court’s
decision.” Corzin v. Fordu (In re Fordu), ___ F.3d ___, No.
4 In re Koenig Sporting Goods, Inc. No. 99-3347 No. 99-3347 In re Koenig Sporting Goods, Inc. 5
97-3936, 1999 WL 1222643, at *13 n.1 (6th Cir. Dec. 22, American Textile Mfrs. Inst., Inc. v. The Limited, Inc., 190
1999). We review de novo the legal conclusions of the F.3d 729, 738-39 (6th Cir. 1999).
bankruptcy court. See id. In granting Morse the right to a full
month’s rent, the bankruptcy court held that Section 365(d)(3) states in pertinent part:
section 365(d)(3) was, at the least, intended to assure the The trustee shall timely perform all the obligations of
landlord payment of ordinary monthly rent payments the debtor . . . arising from and after the order for relief
which become due during the postpetition prerejection under any unexpired lease of nonresidential real property,
period. Since Congress was no doubt well aware that until such lease is assumed or2rejected, notwithstanding
rent[] is usually paid monthly in advance, it is not really section 503(b)(1) of this title.
possible to reconcile section 365(d)(3) with according the
Debtor the option not to pay its monthly rent when due, The debtor argues that the language referring to the
even though payment would impinge to some extent “obligations of the debtor . . . arising from and after the order
upon normal bankruptcy principles and priorities. for relief” is ambiguous and requires us to resort to judicially
created rules of statutory construction. Both parties have
Statutory interpretation is a question of law also subject to de identified the split of authority within the district and
novo review. See Vause v. Capital Poly Bag, Inc. (In re bankruptcy courts as to the proper interpretation of this
Vause), 886 F.2d 794, 798 (6th Cir. 1989). provision. One line of cases generally supports the debtor’s
position that Morse is entitled to only a pro-rata share of
“The starting point in interpreting a statute is its December rent for those days the debtor actually occupied the
language[.]” Good Samaritan Hosp. v. Shalala, 508 U.S. property, see, e.g., Newman v. McCrory Corp. (In re McCrory
402, 409 (1993). “Our interpretation of legislative acts is Corp.), 210 B.R. 934 (S.D.N.Y. 1997) (proration approach),
limited, for ‘[i]f the statutory language is unambiguous, in the while the other line generally supports Morse’s entitlement to
absence of a clearly expressed legislative intent to the a full month’s rent, see, e.g., In re Krystal Co., 194 B.R. 1613
contrary, that language must ordinarily be regarded as (Bankr. E.D. Tenn. 1996) (performance date approach).
conclusive.’” Nixon v. Kent County, 76 F.3d 1381, 1386 (6th Neither the Sixth Circuit nor any other circuit has addressed
Cir. 1996) (quoting Reves v. Ernst & Young, 507 U.S. 170, this issue in the context presented here.
177 (1993)). When a statute is unambiguous, resort to
legislative history and policy considerations is improper. See The purpose of § 365(d) is to “‘prevent parties in
Forbes v. Lucas (In re Lucas), 924 F.2d 597, 600 (6th Cir. contractual or lease relationships with the debtor from being
1991). “Departure from the language of the legislature and
resort to judicially created rules of statutory construction is
appropriate only in the ‘rare cases [in which] the literal 2
application of a statute will produce a result demonstrably at A debtor’s obligations under § 365(d)(3) should not be analyzed by
odds with the intentions of its drafters . . . or when the reference to the principles governing administrative claims under
statutory language is ambiguous.’” Nixon, 76 F.3d at 1386 § 503(b)(1). See Towers v. Chickering & Gregory (In re Pacific-Atlantic
Trading Co.), 27 F.3d 401, 405 (9th Cir. 1994).
(quoting Kelley v. E.I. DuPont de Nemours & Co., 17 F.3d
836, 842 (6th Cir. 1994)). When a statute is ambiguous, we 3
Both McCrory and Krystal, which involve a debtor’s obligation to
look to its purpose and may consider the statute’s policy pay taxes pursuant to a lease, are cited simply to show the competing
implications in determining what Congress intended. See views on the more general issue of proration versus full payment in the
§ 365(d)(3) context.