College Columns May 2022 - Page 28

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to the pre-petition period , the Seventh Circuit noted that this situation “ is thus no different from its debts to trade creditors for supplies that it bought [ prepetition ] but never paid for .” Id . Recognizing that section 365 ( d )( 3 ) relieved the landlord from having to meet the “ actual , necessary ” requirement of Section 503 ( b )( 1 ) to enable the landlord “ to collect the rent fixed in the lease ,” the Seventh Circuit found that Congress did not intend to go beyond this narrow exception “ and thus [ gave ] no indication that it meant to give landlords favored treatment for any class of prepetition debts .” Id . at 1128 . In so deciding , the Seventh Circuit essentially defined “ obligations ” to be paid under Section 365 ( d )( 3 ) as akin to “ claims ” under the Bankruptcy Code , with only postpetition claims entitled to priority payment under this section . This decision marked the beginning of the “ Proration Rule ,” which looks at whether the amounts due under the lease are in fact post-petition debts entitled to priority .
However , lest Handy Andy makes the Proration Rule look too easy , the Seventh Circuit had to backtrack a bit on this rule in HA- LO Industries , Inc . V . CenterPoint Properties Trust , 342 F . 3d 794 ( 7th Cir . 2003 ). The question in HA-LO Industries was whether the rent due on the first day of the month for the entire month had to be paid when the lease was rejected in the bankruptcy case on the second day of the month . In distinguishing its own earlier decision , the Seventh Circuit referred to the tax claims in Handy Andy as prepetition claims which were “ sunk costs ” while the post-petition rent claim arose entirely post-petition and was “ a charge for the consumption of a resource during the administration of the case ,” making the entire amount payable under Section 365 ( d )( 3 ). Id . at 799 ( quoting In re Comdisco , Inc ., 272 B . R . 671 , 674 – 75 ( Bankr . N . D . Ill . 2002 )).
In a case involving the payment of rents , which also included taxes , the Tenth Circuit B . A . P . likewise followed the Seventh Circuit ’ s Proration Rule as “ better-reasoned ” and “ more consistent with the legislative purpose underlying § 365 ( d )( 3 )’ s enactment ” in El Paso Props . Corp . v . Gonzales ( In re Furr ’ s Supermarkets , Inc .), 283 B . R . 60 , 68 ( B . A . P . 10th Cir . 2002 ). The court reasoned that if claims accrued prepetition were to be paid as administrative claims , Congress “ would have enacted conforming amendments to sections 503 and 507 along with the amendment to § 365 ( d ).” Id . at 69 . Rather , the court held that “ lease obligations ‘ arise ’ under § 365 ( d )( 3 ) as the obligations accrue , not simply when they are billed , and that the debtor or trustee is required to pay only those lease obligations that accrue after the Conversion Date and prior to the date of rejection or assumption .” Id . at 70 .
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