DocketNumber： 95-1575
Filed Date： 10/17/1995
Status： Precedential
Modified Date： 9/21/2015
November 17, 1995 UNITED STATES COURT OF APPEALS UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT FOR THE FIRST CIRCUIT
_________________________
No. 95-1575
IN RE: THINKING MACHINES CORPORATION,
Debtor.
_________________________
THINKING MACHINES CORPORATION,
Appellee,
v.
MELLON FINANCIAL SERVICES CORPORATION #1,
Appellant.
_________________________
ERRATA SHEET ERRATA SHEET
The opinion of this court issued on October 17, 1995, is
corrected as follows:
On page 2, line 13; page 6, line 24; page 7, line 2; page 13,
line 10; page 15, line 19; page 17, line 22 change "
365(c)(3)" to " 365(d)(3)"
On page 7, line 11 change " 365(c)(4)" to " 365(d)(4)"
UNITED STATES COURT OF APPEALS UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT FOR THE FIRST CIRCUIT
_________________________
No. 95-1575
IN RE: THINKING MACHINES CORPORATION,
Debtor.
_________________________
THINKING MACHINES CORPORATION,
Appellee,
v.
MELLON FINANCIAL SERVICES CORPORATION #1,
Appellant.
_________________________
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. William G. Young, U.S. District Judge] ___________________
_________________________
Before
Selya and Stahl, Circuit Judges, ______________
and Gorton,* District Judge. ______________
_________________________
Kevin J. Simard, with whom Charles R. Bennett, Jr. and _________________ _________________________
Riemer & Braunstein were on brief, for appellant. ___________________
Charles R. Dougherty, with whom Jonathan C. Lipson and Hill _____________________ __________________ ____
& Barlow were on brief, for appellee. ________
_________________________
October 17, 1995
_________________________
______________
*Of the District of Massachusetts, sitting by designation.
SELYA, Circuit Judge. This appeal compels us to SELYA, Circuit Judge. ______________
address a nagging question of bankruptcy law on which no court of
appeals has yet spoken and on which lower federal courts are
divided. The problem relates to the operation of section 365(a)
of the Bankruptcy Code, 11 U.S.C. 365(a) (1994), a statute that
permits a Chapter 11 trustee, subject to certain conditions, to
assume or reject any unexpired lease or executory contract in
existence on the date the insolvency proceeding commences.
Because the trustee's actions require court approval, and because
the Code treats nonresidential leases differently than other
leases or executory contracts, requiring the estate to continue
paying rent at the contract rate until rejection takes effect, 11
U.S.C. 365(d)(3), a question arises: Is court approval a
condition precedent or subsequent to the effective rejection of a
nonresidential lease pursuant to section 365(a)? This question
is of considerably more than academic interest. Time is money in
the waiting game that Chapter 11 often entails, and substantial
sums can ride on how quickly the trustee can jettison a high-
priced lease. In this case, for example, the determination of
which date controls carries with it a swing of approximately
$200,000.
The courts below disagreed on how the question should
be answered. The bankruptcy court ruled that the debtor's
rejection of its lease took effect only on court approval. See ___
In re Thinking Machines Corp., 178 B.R. 31 (Bankr. D. Mass. ________________________________
1994). The district court reversed, holding that the rejection
3
was effective on the date that the debtor gave appropriate notice
of its decision to reject.1 See In re Thinking Machines Corp., ___ _____________________________
182 B.R. 365 (D. Mass. 1995). Concluding, as we do, that the
statute is most propitiously read to make court approval a
condition precedent to an effective rejection of a nonresidential
lease, we now reverse.
I. BACKGROUND I. BACKGROUND
The material facts are undisputed. In 1990, Thinking
Machines Corporation ("TMC" or "the debtor") leased a building in
Cambridge, Massachusetts, from Mellon Financial Services
Corporation #1 ("Mellon"). Apparently, the environs were not
sufficiently conducive to fertile thought, for, on August 17,
1994, TMC filed a voluntary petition seeking relief under Chapter
11 of the Code, 11 U.S.C. 1101-1145. TMC proceeded to operate
the business as a debtor in possession. It continued to occupy
the demised premises, using only a fraction of the space. On
September 13, 1994, TMC filed a motion asking the bankruptcy
court to approve its decision to reject the lease. The court
granted the motion on October 4.
Three weeks later, Mellon moved for immediate
possession of the premises and payment of $345,915.89
____________________
1This date is sometimes called, in bankruptcy parlance, the
"motion filing date." The label refers to the requirement that
the trustee or debtor in possession must signify an election to
accept or reject a particular lease by the filing of a motion to
that effect in the bankruptcy court. See Fed. R. Bankr. P. 6006, ___
9014. Mindful of the pithy advice that St. Ambrose is reputed to
have offered St. Augustine ("When you are at Rome live in the
Roman style."), see Jeremy Taylor, Ductor Dubitantium, I, I, 5 ___ __________________
(1660), we shall employ this terminology.
4
(representing administrative rent accrued at the contract rate
through the date on which the bankruptcy court had approved the
debtor's rejection of the lease, plus associated expenses). TMC
parried this thrust by touting the motion filing date as the
effective date of its rejection (and, therefore, the outer
boundary of its liability under the lease). It also tendered to
Mellon $143,326.45 (the amount due under the lease through the
motion filing date).
The bankruptcy judge resolved the dispute in Mellon's
favor, ruling that the rejection did not take effect until the
court had approved it, and that, accordingly, the debtor owed
Mellon $210,150.26 (the difference between the total amount due
under the lease through October 4 and the partial payment
previously made by the debtor) plus interest and common area
maintenance charges.2 See Thinking Machines, 178 B.R. at 34. ___ __________________
When TMC appealed, the district court took a different slant. It
held that the rejection occurred on September 13, 1994 (the
motion filing date), and that, therefore, no further payments
were due. See Thinking Machines, 182 B.R. at 369. This appeal ___ _________________
ensued.
II. STANDARD OF REVIEW II. STANDARD OF REVIEW
We afford plenary review to determinations of law made
by a district court sitting in appellate review of a bankruptcy
____________________
2We note an $80 discrepancy between the bankruptcy court's
judgment and the total claimed arrearage. This appears to be
traceable to the court papers. We do not pursue the point,
confident that any necessary adjustment can be made on remand.
5
court order, ceding no special deference to the district court.
See, e.g., In re Winthrop Old Farm Nurseries, Inc., 50 F.3d 72, ___ ____ ________________________________________
73 (1st Cir. 1995); In re G.S.F. Corp., 938 F.2d 1467, 1474 (1st ___________________
Cir. 1991); In re Navigation Technology Corp. 880 F.2d 1491, 1493 _________________________________
(1st Cir. 1989). This standard is fully applicable here, as it
is in all cases in which we are asked to decipher the meaning of
a statute. See, e.g., In re Jarvis, 53 F.3d 416, 419 (1st Cir. ___ ____ ____________
1995); United States v. Holmquist, 36 F.3d 154, 158 (1st Cir. _____________ _________
1994), cert. denied, 115 S. Ct. 1797 (1995); United States v. _____ ______ _____________
Gifford, 17 F.3d 462, 472 (1st Cir. 1994). _______
III. ANALYSIS III. ANALYSIS
We organize our analysis in three segments, dealing
with the statutory framework, the time when the rejection of a
nonresidential lease becomes effective under that framework, and
the implications of our exercise in statutory construction on the
calculus of relief.
A. The Statutory Framework. A. The Statutory Framework. _______________________
Section 365(a) states, with exceptions not relevant
here, that "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. 365(a).3 This proviso furnishes the
trustee with a multipurpose elixir for use in nursing a business
____________________
3For ease in reference, we discuss the issue in terms of
trustees. We recognize, however, that under Chapter 11 a debtor
in possession has essentially the same rights, powers, and duties
as a trustee, see 11 U.S.C. 1107(a), 1108, including the right ___
under 365(a) to assume or reject a nonresidential lease. Thus,
our comments and conclusions, context permitting, are equally
applicable to debtors in possession.
6
back to good health. On one hand, the trustee may prescribe the
elixir as a tranquilizer to ease the fears of squeamish suppliers
and customers so that they will continue doing business with a
bankrupt corporation. On the other hand, the trustee may
prescribe it as an emetic to purge the bankruptcy estate of
obligations that promise to hinder a reorganization.
Having originally given Chapter 11 trustees broad
latitude in dispensing the elixir, Congress subsequently diluted
the potion. Since section 365(a), as initially enacted,
contained no temporal boundaries within which a trustee had to
assume or reject an unexpired lease, and did not require debtors
to pay rent at the contract rate while the trustee equivocated,
commercial landlords felt themselves unfairly disadvantaged
because, unlike other creditors, they were forced to continue
extending credit to the debtor during the pendency of the
reorganization proceeding. See 130 Cong. Rec. 20084, 20088 ___
(daily ed. June 29, 1984), reprinted in 1984 U.S.C.C.A.N. 590, _________ __
598-99 (statement of Sen. Hatch). Whether or not love of money
is the root of all evil, it is at the least a powerful motivator.
Spurred by financial self-interest, the landlords lobbied
successfully for passage of the so-called Shopping Center
Amendments (the "S/C Amendments") as part of the Bankruptcy
Amendments and Federal Judgeship Act of 1984, Pub. L. No. 98-353,
98 Stat. 333.
The S/C Amendments alter the equation in two
significant respects. First, they direct the trustee, in a
7
timely fashion, to "perform all the obligations of the debtor . .
. under any unexpired lease of nonresidential real property,
until such lease is assumed or rejected." 11 U.S.C. 365(d)(3).
This provision requires the trustee, inter alia, to pay rent _____ ____
under the lease at the contract rate unless and until he rejects
it, and gives the landlord what amounts to a preference in the
form of an administrative claim for such avails. Thus, section
365(d)(3) is a marked departure from the tenet, reflected
throughout the Code, that post-petition administrative expenses
should be allowed only for "actual, necessary costs and expenses
of preserving the [bankruptcy] estate." 11 U.S.C.
503(b)(1)(A). Second, if the trustee fails to take a position in
regard to the lease within sixty days from the date of the order
for relief under Chapter 11 (or within such longer period as the
court, on application, may fix), the lease is deemed rejected at
that juncture. See 11 U.S.C. 365(d)(4). This provision gives ___
the bankruptcy estate a measure of protection against indecision
or inadvertence on the trustee's part.
These modifications ameliorate, but do not entirely
solve, several of the problems related to tenant bankruptcies
that historically have plagued commercial landlords. One
surviving problem concerns the rampant uncertainty as to whether
a rejection will be deemed effective on the date of the trustee's
decision or only when the court thereafter endorses the decision.
It is to this question that we now turn.
B. When Is A Rejection Effective? B. When Is A Rejection Effective? _____________________________
8
The best hope for capturing congressional intent is by
focusing on the language purposefully deployed by the
legislature. Thus, a statute ordinarily will be construed
according to its plain meaning. See Estate of Cowart v. Nicklos ___ ________________ _______
Drilling Co., 112 S. Ct. 2589, 2594 (1992); In re Jarvis, 53 F.3d ____________ ____________
at 419; Pritzker v. Yari, 42 F.3d 53, 67-68 (1st Cir. 1994), ________ ____
cert. denied, 115 S. Ct. 1959 (1995). But, when Congress' words _____ ______
admit of more than one reasonable interpretation, "plain meaning"
becomes an impossible dream, and an inquiring court must look to
the policies, principles and purposes underlying the statute in
order to construe it. See Pritzker, 42 F.3d at 67; see also ___ ________ ___ ____
Sullivan v. CIA, 992 F.2d 1249, 1252 (1st Cir. 1993) (explaining ________ ___
that courts may "look behind statutory language" when the
legislature "blows an uncertain trumpet"). Congress, after all,
does not legislate in a vacuum.
Here, the protagonists assure us that the statutory
language is plain, and that we need not go beyond it. The debtor
says that under section 365(a) the rejection of a nonresidential
lease "plainly" becomes effective on the motion filing date (when
notice of rejection is given), subject to defeasance in the event
a judge later vetoes the trustee's decision. The landlord says
that under section 365(a) the rejection of a nonresidential lease
"plainly" cannot become effective until the court approval date
(when the bankruptcy court places its imprimatur on the
decision). The authorities are divided as to which
interpretation of the statutory language is appropriate. Some
9
courts (albeit a minority) believe that section 365(a) should be
read, as TMC successfully argued in the district court, to align
judicial approval as a condition subsequent to the trustee's
independently effective rejection of a nonresidential lease.
See, e.g., In re Joseph C. Spiess Co., 145 B.R. 597, 604 (Bankr. ___ ____ __________________________
N.D. Ill. 1992); In re 1 Potato 2, Inc., 58 B.R. 752, 755-56 ________________________
(Bankr. D. Minn. 1986). Other courts (more numerous, overall)
believe, as Mellon successfully argued in the bankruptcy court,
that section 365(a) should be read to require judicial approval
as a condition precedent to an effective rejection of a
nonresidential lease. See, e.g., In re Paul Harris Stores, Inc., ___ ____ ______________________________
148 B.R. 307, 309 (S.D. Ind. 1992); In re Federated Dept. Stores, _____________________________
Inc., 131 B.R. 808, 815-816 (S.D. Ohio 1991); In re Swiss Hot Dog ____ ___________________
Co., 72 B.R. 569, 571 (D. Colo. 1987); In re 1 Potato 2, Inc., ___ _______________________
182 B.R. 540, 542 (Bankr. D. Minn. 1995); In re Revco Dept. ___________________
Stores, Inc., 109 B.R 264, 267 (Bankr. N.D. Ohio 1989). No court ____________
of appeals has ventured to answer the question.4
In our judgment, this collision of viewpoints
underscores the obvious: although the text of section 365(a)
plainly indicates that a trustee's rejection of a nonresidential
____________________
4Contrary to Mellon's characterization, In re Arizona _______________
Appetito's Stores, Inc., 893 F.2d 216 (9th Cir. 1989), is not on _______________________
point. There, the Ninth Circuit merely observed that "rejection
of an unexpired lease can be accomplished only by an order of the
bankruptcy court." Id. at 219-20 (dictum). The statement is ___
correct as far as it goes but it does not go far enough. The
issue here is not whether court approval is required under
section 365(a) clearly, it is but whether a purported
rejection becomes legally effective before court approval is ______
secured.
10
lease is conditional upon court approval, the text is unclear as
to whether that approval constitutes a condition precedent or
subsequent to an effective rejection. Consequently, section
365(a) is ambiguous in this respect. See United States v. ___ ______________
Gibbens, 25 F.3d 28, 34 (1st Cir. 1994) ("A statute is ambiguous _______
if it can be read in more than one way.").
While the competing interpretations proposed by the
parties are both reasonable renditions of the statute's language,
we believe that section 365(a) is most faithfully read as making
court approval a condition precedent to the effectiveness of a
trustee's rejection of a nonresidential lease. Therefore, the
date of court approval, not the motion filing date, controls. We
are guided to this conclusion by several signposts.
First and foremost, we think that the structure of the
Bankruptcy Code and the nature of judicial oversight in the
Chapter 11 milieu combine to make it highly likely that Congress
intended judicial authorization to be a condition precedent to
rejection. Bankruptcy is inherently a judicial process. From
the moment that a debtor's petition is filed in the bankruptcy
court, the debtor's property is in custodia legis. See 1 William ________ _____ ___
C. Norton, Jr., Norton Bankruptcy Law and Practice 2d 3:2 ________________________________________
(1994). From that point forward, the bankruptcy court is charged
with overseeing the trustee's management in order to ensure that
the interests of the bankruptcy estate are served. See 4 Norton, ___
supra, 77:4. _____
Judicial oversight of the reorganization process takes
11
two forms. Many routine decisions are made by the trustee
without any specific clearance from the bankruptcy court, and are
reviewed (if at all) only in the course of an examination of the
trustee's overall stewardship (say, when a plan of reorganization
is proposed or when an application for fees is filed). Other
decisions are not effective unless they are specifically
sanctioned by the court. In those instances, judicial approval
is almost invariably a condition precedent to the trustee's
action.5 Arranging matters in this sequence facilitates
judicial oversight, minimizes false starts, and enhances the
efficiency of the process. We can think of no convincing reason
why Congress would abruptly depart from this tried-and-true
formula. More importantly, we are confident that if Congress
wished to inaugurate so radical a change, it would have taken
pains to mark the trail brightly.
A second reason for reading section 365(a) to require
judicial approval as a condition precedent to rejection of a
nonresidential lease is rooted in history. Congress enacted
section 365(a) as part of the Bankruptcy Code of 1978, making
court approval of such rejections obligatory for the first time.
____________________
5We note several examples. Before using, selling, or
leasing property of the estate outside the ordinary course of
business, the trustee must seek court approval. See 11 U.S.C. ___
363(b)(1). Unless each entity that has an interest in cash
collateral consents, the trustee may not use cash collateral
unless the bankruptcy court first grants authorization. See 11 ___
U.S.C. 363(2)(A), (B). If the trustee seeks extraordinary
post-petition financing, he must first obtain court approval.
See 11 U.S.C. 364(b). And the trustee may not abandon property ___
of the estate, even if burdensome, without obtaining court
approval. See 11 U.S.C. 554(a). ___
12
The predecessor to section 365(a), section 70(b) of the
Bankruptcy Act of 1898, 11 U.S.C. 110(b) (repealed 1978), and
the applicable bankruptcy rule governing actions taken pursuant
to section 70(b), Fed. R. Bankr. P. 607 (repealed 1978), did not
explicitly require judicial approval of a trustee's rejection of
a lease, and many courts held that the trustee, acting alone,
could make a rejection stick. See, e.g., Villas & Sommer, Inc. ___ ____ ______________________
v. Mahony (In re Steelship Corp.), 576 F.2d 128, 132 (8th Cir. _______________________________
1978). The conclusion is irresistible that Congress, by changing
the protocol in 1978, intended to involve bankruptcy courts more
actively in the decisional process. We believe that this policy
of increased involvement is better served by viewing judicial
approval as a condition precedent to the effectiveness of a
rejection instead of as a condition subsequent.
In a related vein, we note that several courts have
found support for requiring court approval as a condition
precedent to rejection in two extant rules of bankruptcy
procedure, namely, Fed. R. Bankr. P. 6006 and 9014. See, e.g., ___ ____
Revco, 109 B.R. at 268. Read together, these rules require a _____
trustee who desires to reject a lease to file a formal motion to
that effect. This, too, constitutes an innovation for,
previously, the rules did not provide a formal procedure for
rejecting leases. We think this is another sign that Congress
intended courts to become more involved in the decisional
process, and, thus, reinforces our vision of court approval as a
condition precedent to a valid rejection of a nonresidential
13
lease.
The third reason for our view is that reading the
statute in the manner favored by the district court tends to
reduce a bankruptcy court's order of approval to a bagatelle. So
interpreted, the provision would trivialize judicial oversight of
the rejection process. Court orders are customarily important
events in the life of a judicial proceeding; they are the primary
means through which courts speak, see, e.g., Advance Financial ___ ____ _________________
Corp. v. Isla Rica Sales, Inc., 747 F.2d 21, 26 (1st Cir. 1984), _____ _____________________
and they should carry commensurate weight. We see no reason for
allowing a trustee to substitute his voice for that of the court.
The trustee may sing all he wants, but it is the court that must
call the tune. Cf. W.A. Mozart, Le Nozze di Figaro, Act 1, sc.2 ___ __________________
(1786) (Figaro's Aria).
Along the same lines, we think that the district
court's "valid, but voidable" construct, see Thinking Machines, ___ _________________
182 B.R. at 368, is largely bereft of meaning. In the rejection
scenario, the sole reason for seeking court approval is to cut
off the debtor's post-petition liability, imposed by section
365(d)(3), under the unexpired nonresidential lease. If the
bankruptcy court disapproves the trustee's motion for rejection,
then the "rejection" never had any meaningful legal existence in
the first place the trustee will remain liable for rent at the
contract rate from the inception of the insolvency proceeding.
As judicial approval will always be the last step in the
rejection pavane, it follows that the trustee's repudiation of a
14
lease can never be valid in any meaningful sense until the court
has acted.
A final reason for our view stems from a concern that
treating a rejection as "valid, but voidable" from the motion
filing date forward would further ensnarl the tangles inherent in
the complexities of modern commerce. If "valid, but voidable"
were the rule, the parties could act on the trustee's notice, and
their actions would have to be undone if the court later
disagreed. Traditionally, attempts to unwind bankruptcy
transactions after the fact have proven nettlesome, see, e.g., In ___ ____ __
re Stadium Mgmt. Corp., 895 F.2d 845, 849 (1st Cir. 1990); In re _______________________ _____
Texaco, 92 B.R. 38, 50 (S.D.N.Y. 1988), and we will not lightly ______
assume that Congress intended to invite these myriad
complications.
This round trip back to the future serves to highlight
the importance of factual certainty in the rejection process. In
adopting a requirement of court approval, Congress overruled
precedent that allowed trustees to show by informal conduct that
they had either assumed or rejected leases (or other executory
contracts, for that matter). Thus, the requirement seems to have
been designed at least in part to remedy the problems attendant
upon informal or equivocal rejections particularly the lack of
clear notice to landlords as to when they could safely redeem and
relet their property. See Gregory G. Hesse, A Return to ___ _____________
Confusion and Uncertainty as to the Effective Date of Rejection _________________________________________________________________
of Commercial Leases in Bankruptcy, 9 Bankr. Dev. J. 521, 531 ___________________________________
15
(1993) (discussing legislative history). Treating a trustee's
rejection of a nonresidential lease as "valid, but voidable" tugs
in the opposite direction, promoting uncertainty rather than
dispelling it.6
In an effort to resist the force of these four reasons,
TMC counters with two principal points. First, it notes that the
language used in section 365(a) is atypical. Congress
traditionally employs the vocabulary of prior authorization when
inserting a requirement of court approval in the Code. For
example, the statutes cited in note 5, supra, all say that "the _____
court, after notice and a hearing," may authorize particular
actions. TMC visualizes the somewhat different wording of
section 365(a) as betokening a different mechanism. But it is
risky to read too much into Congress' use of an alternative
formulation, especially when the new language is opaque. We are
unwilling, without more, to construe the mere absence of an
explicit reference to securing court approval in advance as an
intentional departure from the pattern of prior court approval
woven throughout the fabric of the Bankruptcy Code.
____________________
6We do not think that it is any real answer to insinuate
that "valid, but voidable" is workable because a bankruptcy court
will usually support a trustee's desire to scrap an unexpired
nonresidential lease. The magnitude of the harm that a landlord
might suffer if the bankruptcy court subsequently disapproved a
particular rejection after the landlord diligently relet the
rejected premises, or incurred substantial expenses to
rehabilitate or advertise them, brings into focus the potential
unfairness inherent in adopting the motion filing date as the
effective date of a rejection. We have no reason to think that
Congress intended to add an element of Russian roulette to the
already tumultuous effects of the reorganization process on
commercial landlords.
16
Next, TMC complains that using the date of court
approval as the termination date of a nonresidential lease
burdens the scarce resources of bankruptcy estates. In this
respect, section 365(a), in conjunction with section 365(d)(3),
departs from one of the general themes of Chapter 11 in that it
hinders the trustee's efforts to rid the bankruptcy estate of
unnecessary baggage. But general themes are, by definition,
general; they are not necessarily controlling in all specific
instances. Since the S/C Amendments purposefully discounted this
general theme in relation to the specific circumstances presented
by nonresidential leases, TMC's policy argument is best directed
to the legislative, not the judicial, branch.
We need go no further. For the reasons limned above,
we hold that a rejection of a nonresidential lease under section
365(a) becomes legally effective only after judicial approval has
been obtained.
C. Relief Under Section 365(a). C. Relief Under Section 365(a). ___________________________
Although we have decided the precise issue presented on
appeal, we think it behooves us to make clear that nothing in our
holding today precludes a bankruptcy court, in an appropriate
section 365(a) case, from approving a trustee's rejection of a
nonresidential lease retroactive to the motion filing date. We
explain briefly.
Bankruptcy courts are courts of equity, see Pepper v. ___ ______
Litton, 308 U.S. 295, 304-05 (1939), and, particularly in the ______
Chapter 11 context, they may sometimes abandon mechanical
17
solutions in favor of the pliant reins of fairness. See, e.g., ___ ____
Winthrop Old Farm Nurseries, 50 F.3d at 75 (explaining that a ____________________________
bankruptcy court, applying principles of equity, may in its
discretion choose between valuation methods). In the section 365
context, this means that bankruptcy courts may enter retroactive
orders of approval, and should do so when the balance of equities
preponderates in favor of such remediation. See In re Jamesway ___ _______________
Corp., 179 B.R. 33, 39 (S.D.N.Y. 1995) (holding that a bankruptcy _____
court can order rejection retroactive to an earlier date "to
avoid penalizing the debtor for an unnecessary delay caused by
the creditor"); see also In re Garfinckels, Inc., 118 B.R. 154, ___ ____ _______________________
154 (Bankr. D.D.C. 1990) (suggesting that, in the absence of
unfair prejudice, a bankruptcy court may enter an order nunc pro
tunc setting the motion filing date as the effective date of
approval); see generally 11 U.S.C. 105(a) (authorizing ___ _________
bankruptcy courts to "issue any order, process, or judgment that
is necessary or appropriate to carry out the provisions" of Title
11).
Of course, the equitable powers of bankruptcy courts
are not unlimited. They can only be brought to bear in the
service of the Bankruptcy Code. See Norwest Bank, Worthington, ___ _________________________
v. Ahlers, 485 U.S. 197, 206 (1988). Thus, a bankruptcy court's ______
exercise of its residual equitable powers must be connected to,
and advance the purposes of, specific provisions in the Code.
See, e.g., In re Hoffman Bros. Packing Co., 173 B.R. 177, 185-86 ___ ____ _______________________________
(Bankr. 9th Cir. 1994) (invalidating nunc pro tunc order that
18
contradicted an express Code provision). There is little
question, however, that a retroactive order may be appropriate as
long as it promotes the purposes of section 365(a).7
Consequently, we rule that a bankruptcy court, when principles of
equity so dictate, may approve a rejection of a nonresidential
lease pursuant to section 365(a) retroactive to the motion filing
date.8
The fact that the bankruptcy court has the power to
approve the trustee's rejection of an unexpired nonresidential
lease retroactive to the motion filing date has a salutary side
effect; it should act as a stimulus to all parties to cooperate
in getting the trustee's motion to reject heard and determined at
the earliest practicable date. Moreover, the possibility of
retroactivity helps to explain the seeming rift in the case law.
Witness, for example, In re Joseph C. Spiess Co., 145 B.R. 597 ____________________________
(Bankr. N.D. Ill. 1992), the leading case cited by the district
court in support of its "valid, but voidable" rationale. A close
reading of Spiess indicates that the court may have reached its ______
ultimate conclusion that the rejection took effect on the
____________________
7Retroactive approval orders do not contradict 365(c)(3).
While that provision commands the trustee to pay rent at the
contract rate until a nonresidential lease is rejected, it does
not stipulate that a rejection cannot be made to apply
retroactively. See Jamesway, 179 B.R. at 37. ___ ________
8We note, in this connection, that because such retroactive
orders are within the bankruptcy court's sound discretion,
appeals from a bankruptcy court's disposition of a request for
retroactive relief will be reviewed only for abuse of discretion.
See, e.g., Jarvis, 53 F.3d at 420; Grella v. Salem Five Cent Sav. ___ ____ ______ ______ ____________________
Bank, 42 F.3d 26, 30 (1st Cir. 1994); In re Gonic Realty Trust, ____ _________________________
909 F.2d 624, 626 (1st Cir. 1990).
19
motion filing date as opposed to the court approval date on the
basis of equitable, rather than statutory, principles. The
court's actual holding is illuminating. After determining "that
the trustee's rejection of a lease should be retroactive to the
date that trustee takes affirmative steps to reject said lease
such as serving notice on motion to reject," the court held that
a court-approved rejection of an unexpired nonresidential lease
could "apply retroactively to the date the trustee notices the
motion requesting same." Spiess, 145 B.R. at 606. Thus, Spiess ______ ______
can fairly be read as an instance of a bankruptcy court
recognizing that retroactive approval orders are within its
equitable powers under section 365(a), and acting on that
realization.
Reading Spiess in this manner bridges the apparent ______
conflict in the case law. Doctrinal incoherence vanishes, and a
single black-letter rule emerges: rejection under section 365(a)
does not take effect until judicial approval is secured, but the
approving court has the equitable power, in suitable cases, to
order a rejection to operate retroactively.9
IV. CONCLUSION IV. CONCLUSION
We reverse the decision of the district court, vacate
its order, and direct that it remand the matter to the bankruptcy
court (which, if it so elects, may in its discretion reconsider
____________________
9Because no two cases are exactly alike, we eschew any
attempt to spell out the range of circumstances that might
justify the use of a bankruptcy court's equitable powers in this
fashion. That exercise is best handled on a case-by-case basis.
20
its original order in light of this opinion).
The judgment of the district court is reversed, and the The judgment of the district court is reversed, and the _______________________________________________________
cause is remanded to the district court with instructions to cause is remanded to the district court with instructions to _________________________________________________________________
remit the case to the bankruptcy court. Costs in favor of remit the case to the bankruptcy court. Costs in favor of __________________________________________ ___________________
appellant. appellant. _________
21
United Food & Commercial Workers Union, Local 770 v. ... , 173 B.R. 177 ( 1994 )
Advance Financial Corporation v. Isla Rica Sales, Inc., ... , 747 F.2d 21 ( 1984 )
United States v. Holmquist , 36 F.3d 154 ( 1994 )
In Re Winthrop Old Farm Nurseries, Inc., Debtor. Winthrop ... , 50 F.3d 72 ( 1995 )
In Re GONIC REALTY TRUST, Debtor. Appeal of GONIC REALTY ... , 909 F.2d 624 ( 1990 )
In Re G.S.F. CORPORATION, Debtor, Chase Commercial ... , 938 F.2d 1467 ( 1991 )
United States v. Gibbens , 25 F.3d 28 ( 1994 )
Paul J. Grella, Trustee v. Salem Five Cent Savings Bank , 42 F.3d 26 ( 1994 )
United States v. Gifford , 17 F.3d 462 ( 1994 )
In Re Navigation Technology Corporation, Debtor. Victor W. ... , 880 F.2d 1491 ( 1989 )
Sherry Ann Sullivan v. Central Intelligence Agency , 992 F.2d 1249 ( 1993 )
Jay A. Pritzker v. Bob Yari , 42 F.3d 53 ( 1994 )
Jarvis v. Debtor Estate , 53 F.3d 416 ( 1995 )
in-re-stadium-management-corp-debtor-anheuser-busch-inc-v-stanley , 895 F.2d 845 ( 1990 )
In Re Joseph C. Spiess Co. , 145 B.R. 597 ( 1992 )
In the Matter of Steelship Corporation, Bankrupt. Vilas and ... , 576 F.2d 128 ( 1978 )
In Re Thinking MacHines Corp. , 178 B.R. 31 ( 1994 )
In Re Garfinckels, Inc. , 118 B.R. 154 ( 1990 )
Swiss Hot Dog Co. v. Vail Village Inn, Inc. (In Re Swiss ... , 72 B.R. 569 ( 1987 )
Paul Harris Stores v. Mabel L. Salter Realty Trust , 148 B.R. 307 ( 1992 )