Doing the Splits
Clarity or Confusion - Navigating the Circuit Splits on the 1984 Amendment Addressing Unexpired Nonresidential Leases Under Section 365 ( d )( 3 )
Annette W . Jarvis , Greenberg Traurig , LLP Secretary , American College of Bankruptcy
Section 365 ( d )( 3 ) was added to the Bankruptcy Code in 1984 as part of the Bankruptcy Amendments and Federal Judgeship Act . As explained in the legislative history by Senator Hatch , this provision was added to ensure that landlords , who are in the unique position of being required to continue to perform after a bankruptcy filing due to the inability to evict the debtor tenant because of the automatic stay , receive current payment of rent in accordance with the governing lease without having to prove benefit to the estate under Section 503 ( b )( 1 ). In relevant part , Section 365 ( d )( 3 ) states :
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 .
Meant to be a clarifying provision to require reciprocal performance from debtors in recognition of the inequitable position in which lessors are placed as a result of a bankruptcy filing , this clarification has opened the door to disagreement and circuit splits on the meaning of Section 365 ( d )( 3 ) and its interaction with Section 503 ( b )( 1 ).
The first question under Section 365 ( d )( 3 ) on which the circuits disagree is interpreting what is meant by “ obligations . . . arising from and after the order for relief under any unexpired lease of nonresidential real property . . . .” As discussed below , some Circuits apply a “ Proration Rule ,” which looks at when the obligations accrued , and other Circuits apply a “ Performance Date Rule ,” which considers when the obligations are due under the lease ( regardless of when they accrued ). Both sides of this split quote the legislative history to support policy arguments for their interpretation of the statutory language , and while coming to different results , both sides ironically argue the plain language of the statute . The Seventh Circuit was the first to weigh in on this piece of statutory interpretation in the case of In re Handy Andy Home Improvement Centers , Inc ., 144 F . 3d 1125 ( 7th Cir . 1998 ). Facing a tax obligation due under the lease after the order for relief was entered , notwithstanding the taxes all related to a pre-petition period , Judge Posner analyzed the statutory language and intent , determining that the taxes were , in fact , pre-petition claims not entitled to timely payment under Section 365 ( d )( 3 ). The Seventh Circuit applied an economic analysis : “ In economic terms , the prioritizing of post-petition debt enables the debtor ( or trustee ) to ignore sunk costs — treat bygones as bygones — and continue operating as long as the debtor ’ s business is yielding a net economic benefit .” Id . at 1127 . Since the taxes related
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