Ha-Lo Industries Inc v. CenterPoint Prop

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 02-4331
HA-LO INDUSTRIES, INC.,
Debtor-Appellant,
v.
CENTERPOINT PROPERTIES TRUST,
Appellee.
____________
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 02 CV 3967—Matthew F. Kennelly, Judge.
____________
ARGUED JUNE 4, 2003—DECIDED SEPTEMBER 3, 2003
____________
Before RIPPLE, DIANE P. WOOD, and WILLIAMS, Circuit
Judges.
WILLIAMS, Circuit Judge. HA-LO Industries, Inc. appeals
from a district court’s decision affirming a bankruptcy court
order directing HA-LO to pay its former landlord, Center-
Point Properties, Inc., the remainder of a full month’s rent
that was due under an office building lease which covered
a period of time beyond HA-LO’s rejection of the lease. The
lower courts determined that § 365(d)(3) of the Bankruptcy
Code requires a debtor in possession that has elected to re-
ject a nonresidential real property lease to pay the monthly
rent due under that lease as it becomes due, even though
this may result in the advance payment of rent that covers
2 No. 02-4331
a period of time after the debtor’s rejection of the lease
takes effect. The lower courts also held that the lease did
not provide an independent basis for proration of the rent.
Because we find that § 365(d)(3) requires full payment of
rent under these circumstances, and that HA-LO’s lease
does not provide for proration in this case, we affirm.
I. BACKGROUND
HA-LO and CenterPoint were parties to a lease by which
CenterPoint rented an office building to HA-LO for a term
of 15 years commencing on April 1, 2001. Under the terms
of the lease, HA-LO was obligated to pay monthly rent in
the amount of $660,342.17, due and payable in full on the
first day of each month. HA-LO moved into the leased
premises on April 1, 2001, and remained in possession of
the premises through the first few days of November 2001.
On July 30, 2001, HA-LO filed a voluntary petition for
reorganization under Chapter 11 of the Bankruptcy Code.
On August 21, 2001, pursuant to § 365(a) of the Bankruptcy
Code, HA-LO sought authority to reject the lease, at its op-
tion, effective upon 30 days written notice to CenterPoint.
While the bankruptcy court granted HA-LO that authority
on September 6, 2001, HA-LO did not immediately exercise
that authority and continued to occupy the premises under
the terms of the lease. On October 3, 2001, however, HA-LO
decided to exercise its option to reject the lease and pro-
vided written notice to CenterPoint that it would vacate the
premises and reject the lease effective November 2, 2001.
On November 1, 2001, HA-LO paid CenterPoint
$60,031.17, representing a prorated payment of rent for
the three days during November 2001 that HA-LO planned
to occupy the office building (HA-LO vacated the premises
by November 4). CenterPoint accepted HA-LO’s check but
demanded payment from HA-LO for the balance of the
November rent. HA-LO refused and CenterPoint filed an
No. 02-4331 3
administrative rent claim in the bankruptcy court and
sought an order to compel immediate payment of the bal-
ance of the November 2001 rent pursuant to § 365(d)(3) of
the Bankruptcy Code.1 The bankruptcy court granted Cen-
terPoint’s motion and ordered HA-LO to pay the balance of
the November 2001 rent, which amounted to $600,311. The
bankruptcy court concluded that, because § 365(d)(3) pro-
vides that the trustee or, as here, the debtor in possession
must satisfy all rent obligations under a lease “arising . . .
after the order for relief” as those obligations come due,
HA-LO was obligated under the lease to pay the full
November 2001 rent on November 1 because it rejected the
lease effective November 2 and vacated the premises by
November 4. The bankruptcy court also rejected HA-LO’s
claim that the terms of the lease provide for prorated rent
payment. HA-LO appealed to the district court, which
affirmed the bankruptcy court’s order.
1
Section 365(d)(3) of the Bankruptcy Code provides:
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, notwithstanding section 503(b)(1) of
this title. The court may extend, for cause, the time for
performance of any such obligation that arises within 60
days after the date of the order for relief, but the time for
performance shall not be extended beyond such 60-day
period. This subsection shall not be deemed to affect the
trustee’s obligations under the provisions of subsection
(b) or (f) of this section. Acceptance of any such perfor-
mance does not constitute waiver or relinquishment of
the lessor’s rights under such lease or under this title.
11 U.S.C. § 365(d)(3). The rights and obligations of the trustee
apply with equal force to a debtor in possession such as HA-LO.
11 U.S.C. § 1107(a).
4 No. 02-4331
On appeal, HA-LO challenges the conclusion that
§ 365(d)(3) requires it to pay CenterPoint the full November
2001 rent and argues that our decision in In Re Handy
Andy Home Improvement Centers, Inc., 144 F.3d 1125 (7th
Cir. 1998), supports its payment of prorated rent for only
those days in November 2001 that it actually occupied the
premises. Alternatively, HA-LO argues that the terms of
the lease, independent of § 365(d)(3), provide that it need
only pay prorated rent for November 2001. We address
these issues in turn.
II. ANALYSIS
This case requires the interpretation of both a statute,
§ 365(d)(3) of the Bankruptcy Code, and a contract, the
building lease between HA-LO and CenterPoint, which are
questions of law that we review de novo. Shelby County
State Bank v. Van Diest Supply Co., 303 F.3d 832, 835 (7th
Cir. 2002).
A. Section 365(d)(3) of the Bankruptcy Code
When interpreting the meaning of a statute, we focus first
on the language of the statute. Precision Indus., Inc. v.
Qualitech Steel SBQ, LLC, 327 F.3d 537, 543-44 (7th Cir.
2003) (citing Hughes Aircraft Co. v. Jacobson, 525 U.S. 432,
438 (1999)). “[C]ourts must presume that a legislature says
in a statute what it means and means in a statute what it
says there. When the words of a statute are unambiguous,
then, this first canon is also the last: ‘judicial inquiry is
complete.’ ” Conn. Nat’l Bank v. Germain, 503 U.S. 249,
253-54 (1992) (quoting Rubin v. United States, 449 U.S.
424, 430 (1981)) (internal citations omitted).
HA-LO’s obligation to pay its rent to CenterPoint is gov-
erned by § 365(d)(3) of the Bankruptcy Code and the terms
of the parties’ lease. Section 365(d)(3) provides that obliga-
No. 02-4331 5
tions under an unexpired lease that arise after an order for
relief is entered permitting the bankruptcy case to proceed
(commonly referred to as arising “postpetition”),2 and prior
to rejection of the lease (“prerejection”), are to be timely
fulfilled under the terms of the lease:
The [debtor in possession; see 11 U.S.C. § 1107(a)]
shall timely perform all [of its] obligations . . .
arising from and after the order for relief under any
unexpired lease of nonresidential real property, un-
til such lease is assumed or rejected. . . .
11 U.S.C. § 365(d)(3). HA-LO’s petition for bankruptcy is
dated July 30, 2001.3 Therefore, under the prescriptions of
§ 365(d)(3), HA-LO is required to timely perform all lease
obligations that arise after July 30, 2001, until the lease is
rejected.
The lease between HA-LO and CenterPoint provides that
rent for any given month is due and payable “in advance,
in twelve (12) equal monthly installments . . . on the first
(1st) day of each month.” Under the terms of the lease,
then, HA-LO’s obligation for the November 2001 rent arose
on November 1. At that time, however, HA-LO had not yet
effected its rejection of the lease; it had informed Center-
Point on October 3 that it would reject the lease as of No-
vember 2. Under the terms of the lease, and in accordance
2
It is a technical misnomer to refer to something as “prepetition”
or “postpetition,” as the date on which the order for relief is
granted is the true dividing line. See In re Handy Andy Home
Improvement Ctrs., Inc., 144 F.3d 1125, 1126 (7th Cir. 1998). Usu-
ally, but not always, the date on which the petition is filed and the
date on which the order for relief is granted are the same. See id.3
It is unclear from the record when the order for relief was
granted in this case, but we will presume it was granted on July
30, 2001, as the parties do not contend otherwise and it makes no
substantive difference to our analysis.
6 No. 02-4331
with § 365(d)(3), HA-LO was therefore obligated to pay the
entire November 2001 rent on November 1.
HA-LO argues that our decision in In re Handy Andy
Home Improvement Centers, Inc., 144 F.3d 1125 (7th Cir.
1998), is controlling and compels proration of rent so that
HA-LO is liable only for those few days of November 2001
during which its occupancy of the premises actually fell
postpetition and prerejection. We disagree. Handy Andy
addressed a situation in which non-rent expenses (real
estate taxes), for which Handy Andy was liable under the
terms of the lease, had in part accrued prepetition while
Handy Andy occupied the premises, but were not billed to
Handy Andy until after the start of the postpetition period
and prior to Handy Andy’s rejection of the lease. Id. at
1126. We held in Handy Andy that the portion of taxes that
accrued during Handy Andy’s prepetition occupancy there-
fore had arisen prepetition, and thus were akin to “sunk
costs” that are not chargeable to Handy Andy even though
billed postpetition. “In economic terms, the prioritization of
postpetition debt enables the debtor (or trustee) to ignore
sunk costs—treat bygones as bygones—and continue oper-
ating as long as the debtor’s business is yielding an eco-
nomic profit.” Id. at 1127; see generally Charles W. Adams,
An Economic Justification for Corporate Reorganizations, 20
HOFSTRA L. REV. 117 (1991); but see CenterPoint Props. v.
Montgomery Ward Holding Corp. (In re Montgomery Ward),
268 F.3d 205, 209 (3d Cir. 2001) (“The clear and express
intent of § 365(d)(3) is to require the trustee to perform the
lease in accordance with its terms. . . . It is difficult to find
a textual basis for a proration approach.”).
Unlike the portion of real estate taxes that accrued and
therefore arose prepetition in Handy Andy, HA-LO chal-
lenges paying in full a rent obligation that arose entirely
postpetition and prerejection, but which covers in part a
period of time that extends beyond rejection of the lease.
Postpetition rent covering a period of time that extends into
No. 02-4331 7
the postrejection period is “not a sunk cost that relates to a
time before the bankruptcy case, but a charge for the
consumption of a resource during the administration of the
case . . . , and costs of administration must be paid.” In re
Comdisco, Inc., 272 B.R. 671, 674-75 (Bankr. N.D. Ill. 2002)
(citing 11 U.S.C. § 1129(a)(9)(A)). Handy Andy therefore
does not constrain our analysis.
Moreover, Handy Andy recognizes the purpose behind
§ 365(d)(3)’s enactment and does nothing to diminish the
statutory protection afforded landlords for purely postpeti-
tion and prerejection obligations to pay rent. As we ac-
knowledged in Handy Andy, landlords, unlike other cred-
itors, are “forced to deal with [their] bankrupt tenant[s] on
whatever terms the bankruptcy court impose[s]” because
landlords cannot evict their tenant. 144 F.3d at 1128 (citing
Robinson v. Chicago Hous. Auth., 54 F.3d 316, 317-18 (7th
Cir. 1995) (automatic stay prevents landlord from evicting
tenant)). We noted that Congress passed § 365(d)(3) to
relieve landlords of the uncertainty of collecting rent fixed
in the lease “in full, promptly, and without legal expense”
during the awkward postpetition prerejection period. Id. We
therefore find Handy Andy supports our conclusion that §
365(d)(3) requires HA-LO to pay its November 2001 rent in
full on November 1, the postpetition and prerejection day on
which such payment was due to CenterPoint under the
terms of the lease.
The Sixth Circuit addressed this exact question in Koenig
Sporting Goods, Inc. v. Morse Road Co. (In re Koenig Sport-
ing Goods, Inc.), 203 F.3d 986 (6th Cir. 2000), and similarly
held that rent must be paid on the day it is due even if it
will cover a period of time after the lease is rejected. See id.
at 989. In doing so, the court noted that “[t]he purpose of
§ 365(d) is to prevent parties in contractual or lease rela-
tionships with the debtor from being left in doubt concern-
ing their status vis-a-vis the estate.” Id. (citations and
quotation marks omitted). “The legislative history also sug-
8 No. 02-4331
gests that the purpose was ‘to relieve the burden placed on
nonresidential real property lessors (or ‘landlords’) during
the period between a tenant’s bankruptcy petition and as-
sumption or rejection of a lease.’ ” Id. (citing Omni Partners,
L.P. v. Pudgie’s Dev. of NY, Inc. (In re Pudgie’s Dev. of NY,
Inc.), 239 B.R. 688, 692 (S.D.N.Y. 1999) (citing 130 Cong.
Rec. S8894-95 (daily ed. June 29, 1994) (statement of Sen.
Hatch))).
The Sixth Circuit acknowledged (but nevertheless re-
jected) the practical realities of the argument for proration:
[Koenig] argues that policy considerations, equity,
and “common sense” compel adoption of the prora-
tion method in this context. We disagree. [Koenig]
alone was in the position to control Morse’s entitle-
ment to payment of rent for December. If [Koenig]
had rejected the lease effective November 30, 1997,
rather than December 2, it would not have been
obligated to pay rent for December under 11 U.S.C.
§ 365(d)(3). Instead, an election was made to reject
the lease effective December 2, one day after
[Koenig’s] monthly rent obligation would arise. In
this case, involving a month-to-month, payment-
in-advance lease, where the debtor had complete
control over the obligation, we believe that equity
as well as the statute favors full payment to Morse.
Id. (citations omitted). The same principle applies to HA-
LO, as it alone controlled CenterPoint’s entitlement to
payment of rent for November 2001. If HA-LO had rejected
the lease effective October 31, rather than November 2, it
would not have been obligated to pay rent for November
under 11 U.S.C. § 365(d)(3). Instead, it elected to reject the
lease one day after its monthly rent obligation to Center-
Point would arise. Under these circumstances, we agree
with the Sixth Circuit that equity as well as the statute fa-
vors full payment.
No. 02-4331 9
B. Proration Under the Lease
HA-LO argues that even if § 365(d)(3) does not allow for
proration, we should read the lease itself to require prora-
tion in the event of bankruptcy. HA-LO admits, however,
that the lease does not address whether proration applies
to a partial month’s rent in a situation where, as here, the
debtor in bankruptcy proceedings rejects the lease post-
petition. Instead, HA-LO argues that because the lease
provides for proration in certain anticipated circumstances
where occupancy may be for less than a full month—in the
first month (§ V.1),4 in the last month when the landlord
terminates the lease (§ XX.1), when the premises are de-
stroyed or left uninhabitable (§ X.1), or when the premises
are condemned (§ XIII.1)—we should read the lease to sug-
gest that the parties would take a position favoring prora-
tion in situations they could not and did not anticipate,
such as the one we have here.5 HA-LO makes this argu
4
Section V.1 of the lease provides: “The Annual Base Rent shall
be paid in advance, in twelve (12) equal monthly installments,
commencing on the Commencement Date (prorated for any partial
month) and continuing on the first (1st) day of each month there-
after for the balance of the term of the lease. . . .” The bankruptcy
and district courts rejected an argument by HA-LO that the par-
enthetical “(prorated for any partial month)” makes clear that the
tenant’s obligation is to pay prorated rent for any partial month
during the period that the lease is in force, and not just the month
in which the lease commences. Curiously, HA-LO does not chal-
lenge the lower courts’ holdings on this issue. HA-LO’s failure to
raise this issue on appeal, however, necessarily constitutes waiver
of any claim of error with respect to the lower courts’ decisions on
that issue. Kauthar SDN BHD v. Sternberg, 149 F.3d 659, 668
(7th Cir. 1998); Williams v. Leach, 938 F.2d 769, 772 (7th Cir.
1991).
5
In support of its argument HA-LO cites only to Connecticut Gen-
(continued...)
10 No. 02-4331
ment even though the lease contains a merger clause which
states that the lease is the entire agreement between the
parties and “fully and completely expresses their agree-
ments.” See Bock v. Computer Assocs. Int’l, Inc., 257 F.3d
700, 707 (7th Cir. 2001) (“Written contracts are presump-
tively complete in and of themselves; when merger clauses
are present, this presumption is even stronger.”). Under
these circumstances, we must decline HA-LO’s invitation to
read the lease more broadly than the parties themselves
provided.
III. CONCLUSION
For the foregoing reasons, the judgment is AFFIRMED.
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
5
(...continued)
eral Life Insurance Co. v. Sun Life Assurance Co. of Canada, 210
F.3d 771, 774-76 (7th Cir. 2000), in which we permitted consoli-
dated arbitration of a dispute involving ten parties to a contract
even though the contract did not appear to address the issue. In
Sun Life, however, we were resolving an ambiguity in an arbitra-
tion clause regarding the submission of the dispute to a panel of
three arbitrators when “each party” is to select “one arbitrator” for
the panel, and the parties were asserting that separate arbitra-
tions were therefore required. By contrast, there is no ambiguity
in HA-LO’s lease about whether proration is appropriate when a
debtor in bankruptcy rejects the lease postpetition; the lease does
not address the issue at all. Therefore, Sun Life is not applicable.
USCA-02-C-0072—9-3-03