College Columns May 2022 - Page 29

The Splits coninuted from page 28
The alternative interpretation of this statutory language creating the circuit split on this issue was explained by the Third Circuit in In re Montgomery Ward Holding Corp ., 268 F . 3d 205 ( 3rd Circ . 2001 ), yet another case dealing with taxes on leased premises that had accrued prior to the bankruptcy filing but were due under the lease after the filing . Rejecting the suggestion that “ obligation ” should be defined or interpreted as a “ claim ” under the Bankruptcy Code , the Third Circuit pointed out that Congress chose to use “ obligation ” rather than “ claim ,” that an “ obligation ” can arise before “ the tenant is obligated to perform ,” and that a reinterpreting of “ obligation ” as “ claim ” “ would render section 365 ( d )( 3 ) superfluous .” Id . at 209 . Rather , the Third Circuit determined that “ the most straightforward understanding of an obligation is something that one is legally required to perform under the terms of the lease and that such an obligation arises when one becomes legally obligated to perform ,” making it “ the terms of the lease that determine the obligation and when it arose .” Id . 209 – 10 . Acknowledging that proration was a pre-Code practice , the court explained : “ It seems clear to us , however , that Congress enacted § 365 ( d ) ( 3 ) for the purpose of altering a pre-Code practice that had created a problem for landlords of non-residential property .” Id . at 211 . As such , the debtor ’ s obligation under the lease to reimburse the lessor for tax payments that arose after the bankruptcy filing must be paid as a post-order obligation under Section 365 ( d )( 3 ). Likewise , the Sixth Circuit , in In re Koenig Sporting Goods , Inc ., 203 F . 3d 986 ( 6th Cir . 2000 ), found the debtor liable for rent for the entire month under section 365 ( d )( 3 ) when the debtor rejected the lease after the first date of the month the advance rental payment was due . Noting that the “ purpose of § 365 ( d ) is to ‘ prevent parties in contractual or lease relationships with the debtor from being left in doubt concerning their status vis-avis the estate ,’” and recognizing that the debtor was in control of the timing of the rejection , the court did not find the result inequitable . Id . at 989 . This became known at the “ Performance Date Rule .”
The Eighth Circuit also adopted the Performance Date Rule in In re Burival , 406 B . R . 548 ( B . A . P . 8th Cir . 2009 ). This case involved a crop lease payment required twice a year where one of the payments was due two days after the orders for relief were entered . The payment “ was attributable to the growing season which ended prepetition ,” id . at 550 , but applying the Performance Date Rule , the Eighth Circuit found that “ the Landlord was entitled to payment of the entire post-petition rent payment under 11 U . S . C . § 365 ( d )( 3 ) as an administrative expense claim .” Id . at 550 . Describing the Performance Date Test as a “ bright-line test ,” the court took the position that “ if a rent payment is due during the post-petition , pre-rejection period , it must be paid pursuant to Section 365 ( d )( 3 ).” Id . at 552 . The Eighth Circuit found that language of Section 365 ( d )( 3 ) “ clear ” and stated that “[ w ] here the language of a statute is clear , our job is to enforce the language according to its terms .” Id . at 553 . Addressing the confusing interaction of Section 503 ( b )( 1 ) with Section 365 ( d )( 3 ), the court found that Section 365 ( d )( 3 ) granted administrative expense status for covered claims without the need to prove benefit to the bankruptcy estate . continued online
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