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In response to pressure from the "shopping
center lobby," Congress enacted §365 to "remedy serious
problems of shopping centers and their solvent tenants by the administration of
the Bankruptcy Code." See In
re Berger's Babes 'n Bears Inc.,
149 B.R. 715, 717 (Bankr. M.D. Fla. 1993) (citing 130 Cong. Rec. S8, 894-95 (daily ed. June 29, 1984)
(remarks of Sen. Hatch)). Among other remedies enacted was §365(d)(4),
which provides:
[I]f the
[debtor-in-possession] does not assume or reject an unexpired lease of
nonresidential real property under which the debtor is the lessee within 60
days after the date of the order for relief, or within such additional time as
the court, for cause, within such 60-day period, fixes, then such lease is
deemed rejected, and the [debtor-in-possession] shall immediately surrender
such nonresidential real property to the lessor.
Section
365(d)(4)'s language demonstrates that Congress sought to assist lessors
of non-residential real property by requiring debtors to assume or reject such
leases in a relatively short time frame, unless extended by the court.
Due
to varying judicial interpretation, however, there is a split in authority on
the meaning of "as the court, for cause, within such 60-day period,
fixes." Indeed, while certain courts have found §365(d)(4) clear and
unambiguous, others have found it ambiguous as to whether an order extending
the assumption/rejection deadline must be obtained prior to expiration of
§365(d)(4)'s 60-day period, or whether a court may effectively issue
such an order after it expires.
As
stated below, many cases addressing this issue were decided prior to a series
of Supreme Court cases that address the method for interpreting the Bankruptcy
Code. See In re Horwitz, 167 B.R. 237,
239 (Bankr. W.D. Okla. 1994). As such, practitioners must now
consider whether the authority they previously relied on will lead them astray.
Southwest Aircraft and Its Progeny
In the seminal case for its view, the Ninth Circuit held
that a court may grant an extension of the assumption/rejection deadline after
expiration of §365(d)(4)'s 60-day period. See In
re Southwest Aircraft Services Inc., 831 F.2d
848 (9th Cir. 1986). In examining §365(d)(4)'s
language, the Ninth Circuit concluded that "[i]t is not entirely clear
whether the second term—'within such 60-day
period'—modifies the term that precedes it or the term that follows
it. If...the 60-day term modifies 'for cause,' then while the cause
must arise within 60 days...there is no express limit on when the bankruptcy
court must hear and decide the motion." Southwest
Aircraft, 831 F.2d at 850. The
Ninth Circuit based its conclusions partly on the legislative history of
§365(d)(4). While noting that the legislative history did not expressly
address any requirement that a debtor must file a motion to extend within 60
days, the Ninth Circuit held that such a requirement may be fairly implied;
however, "a rule that forfeits rights because a court fails to act would
be quite extraordinary." See Id. at 851; see, also, In
re Travel 2000 Inc., 264 B.R. 451, 454 (Bankr.
W.D. Mich. 2001) (where the court held that requiring a court to
both consider and rule on the assumption/rejection issue within the same 60
days effectively truncates the debtor's statutorily allotted time).
The Ninth Circuit then concluded that
"Congress would not adopt any such rule without clearly indicating in the
legislative history its intention to do so and explaining its reasons." Id.;
see, also, In
re Wedtech Corp., 72 B.R. 464, 469-71 (Bankr.
S.D.N.Y. 1987) (where the court commented on the imposition
upon courts if it were necessary to obtain an order prior to expiration); see,
also, Berger's
Babes, 149 B.R. at 717 (where
the court held that the imposition of §365(d)(4)'s 60-day period was
designed to apply to the trustee or debtor-in-possession (DIP), not the court).
Contrary to Southwest Aircraft, other courts have held that the mandate of
§365(d)(4) is unequivocal in that it demands either assumption, rejection
or a fixing of additional time within that 60-day time frame. See In
re Coastal Industries Inc., 58 B.R. 48, 49
(Bankr. D. N.J. 1986). In Coastal, the court examined and adopted Southwest Aircraft's underlying bankruptcy court opinion, which
held that granting an extension of the assumption/rejection deadline after the
expiration of §365(d)(4)'s 60-day period would defeat rather than
carry out §365(d)(4)'s objectives. In
re Southwest Aircraft Services, 53 B.R. 805,
809 (Bankr. C.D. Ca. 1985); rev'd.,
831 F.2d 838 (9th Cir. 1986).
In fact, the Coastal court agreed that:
Although the automatic
rejection of §365(d)(4) is a harsh rule, it is clearly what Congress
intended. The language of the statute is unequivocal. Additionally, the
legislative history indicates that the purpose of §365(d)(4) is to force
the trustee or debtor-in-possession to make a quick decision, thereby
eliminating the problem of extended vacancies. Statement of Sen. Hatch, 98th Cong.2d Sess., 1984 U.S. Code Cong. &
Admin. News 598-99. To disregard the clear language and legislative history of
§365(d)(4) and allow a decision beyond the 60-day period would nullify the
principal objective of Congress, and would be beyond the court's equity
powers.
See Coastal, 58 B.R. at 50 (citing Southwest
Aircraft, 53 B.R. at 809). Based on the
reasoning of the bankruptcy court in Southwest Aircraft, Coastal held that "[it] would truly be gazing with a
jaundiced eye were it to perceive some ambiguity with §365(d)(4)." See
Coastal, 58 B.R. at 50; see, also, DeBartolo
Properties Management Inc. v. Devan, 194 B.R.
46 (D. Md. 1996) (where the court held that the statutory
language [of §365(d)(4)] is clear and unambiguous).
Similarly,
though not directly on point, the Third Circuit has rejected the reasoning of
the Ninth Circuit's Southwest Aircraft opinion. See Legacy
Ltd. v. Channel Home Centers Inc. (In re Channel Home Centers Inc.), 989 F.2d 682, 686-87 (3d Cir. 1993).
In Channel Home, which was pending and
decided contemporaneously with the Supreme Court's interpretation cases,
the Third Circuit considered whether the language of §365(d)(4) prohibited
a second extension of time to assume or reject a lease of non-residential real
property, which it ultimately concluded in the negative.
In
its examination, the Third Circuit stated that "[t]o use the words
'cause...within such 60-day period' to mean 'a cause that
exists or arises within the 60-day period' is unnatural, unclear and
unnecessary. If §365(d)(4) were meant to convey this meaning, we are
confident that different terms would have been employed." Id. As such, the Ninth Circuit's interpretation
would not serve the evident purpose of §365(d)(4)—to prevent
trustees from taking too much time in deciding whether to assume unexpired
non-residential real property leases. Id. at 687.
Thus,
between the Ninth and Third Circuits, §365(d)(4) is a matter of
interpretation, whether one considers Congress to have intended a harsh result
or a harsher result. Both considered the legislative history, as well as the
express language of §365(d)(4), yet they came to different conclusions.
Post-Supreme Court Instruction for Interpretation of the Bankruptcy Code
While many courts adopted and/or agreed with
the Ninth Circuit in Southwest Aircraft,
most were decided prior to a series of Supreme Court cases addressing the
methodology for interpretation of the Bankruptcy
Code. See In re Horwitz, 167 B.R. 237, 239 (Bankr. W.D. Okla. 1994)
(citing Midlantic
National Bank v. New Jersey Department of Environmental Protection, 474 U.S. 494), 106 S.Ct. 755, 88 L.Ed.2d 859 (1986);
Kelly
v. Robinson, 479 U.S. 36, 107 S.Ct. 353, 93
L.Ed.2d 216 (1986); U.S.
v. Ron Pair Enterprises Inc., 489 U.S. 235, 109
S.Ct. 1026, 103 L.Ed.2d 290 (1989); Toibb
v. Radloff, 501 U.S. 157, 111 S.Ct. 2197, 115
L.Ed.2d 145 (1991); Union
Bank v. Wolas, 502 U.S. 151, 112 S.Ct. 527, 116
L.Ed.2d 514 (1991); Dewsnup
v. Timm, 502 U.S. 410, 112 S.Ct. 773, 116
L.Ed.2d 903 (1992); Taylor
v. Freeland & Kronz, 503 U.S. 638, 112
S.Ct. 1644, 118 L.Ed.2d 280 (1992); Barnhill
v. Johnson, 503 U.S. 393, 112 S.Ct. 1386, 118
L.Ed.2d 39 (1992); Patterson
v. Shumate, 504 U.S. 753, 112 S.Ct. 2242, 119
L.Ed.2d 519 (1992); Pioneer
Investment Services v. Brunswick Associate Limited Partnership, 507 U.S. 380, 113 S.Ct. 1489, 123 L.Ed.2d 74 (1993);
Nobelman
v. American Savings Bank, 508 U.S. 324, 113
S.Ct. 2106, 124 L.Ed.2d 228 (1993); and Rake
v. Wade, 508 U.S. 464, 113 S.Ct. 2187, 124
L.Ed.2d 424 (1993)). Of particular note is Taylor
v. Freeland & Kronz, 503 U.S. 638, 112
S.Ct. 1644, 118 L.Ed.2d 280 (1992).
In Taylor,
the Supreme Court interpreted the language of Federal
Rule of Bankruptcy Procedure 4003, which limits the time for a
trustee to object to a debtor's claim of exemptions to 30 days from conclusion
of the meeting of creditors unless, within such period, further time is granted
by the court. In its analysis, the Supreme Court held that the rule must be
read according to its plain meaning, even if that results in debtors exempting
property in which they have no lawful claim. See Taylor, 503 U.S. at 643-44, 112 S.Ct. at 1648.
Deadlines may lead to unwelcome results, but they prompt parties to act and
they produce finality. Taylor, 503 U.S. at 643-44, 112 S.Ct. at 1648.
Based on Taylor and the application of the Supreme Court's methodology for
interpreting the Bankruptcy Code, the court in In
re Horowitz, 167 B.R. 237 (Bankr. W.D. Okla.
1994), concluded that "when a provision has a plain
meaning, judges are to apply it and not otherwise explicate the Code." Horwitz, 167 B.R. at 238-39. Since §364(d)(4)
has a plain meaning, if an order is not entered within the 60 days, then no
extension may be granted and, as an absolute rule, the court is not authorized
to employ any discretion or to apply any equitable principles. Id. at 241-42. Thus, considering the
similarity of Rule 4003 and §365(d)(4)'s language and the Supreme
Court's holding in Taylor, a
bankruptcy court may not extend the assumption/ rejection deadline after the
expiration of §365(d)(4)'s 60-day period. Id. at 241.
While Taylor was not directly on point, Horwitz found it and its sister cases instructive as to
§365(d)(4)'s interpretation. Further guidance is derived from cases
addressing different aspects of §365(d)(4), such as whether a debtor may
enlarge the assumption/rejection deadline after it expires pursuant to Federal
Rule of Bankruptcy Procedure 9006(b)'s "excusable
neglect" standard. See In
re Federated Food Courts Inc., 222 B.R. 396,
398 (Bankr. N.D. Ga. 1998).
In Federated Food Courts, the court reasoned that Rule 9006(b) refers to
deadlines set by "these rules or by a notice given there under or by
order of the court. It does not refer to enlarging time periods prescribed by
statute." See Id. at 398. Thus, regardless of the
doctrine of "excusable neglect," the failure to comply with
§365(d)(4)'s deadline can be fatal. Id.
Similarly, in In
re Damach, 235 B.R. 727 (Bankr. D. Conn. 1999),
the court held that "the automatic termination of leases under
§365(d)(4) is a substantive, rather than a procedural, matter, and that it
may not therefore be modified or extended by either the Federal Rules of
Bankruptcy Procedure or the Federal Rules of Civil Procedure. The statutes
authorizing the Supreme Court to adopt such rules specifically prohibit the
rules from abridging, enlarging or modifying any substantive rights." See
Damach, 235 B.R. at 731 (citing 28 U.S.C. §§2075 and 2072); cf. Berger's
Babes, 249 B.R. at 718 (where
the court stated that notwithstanding the fact that a motion to assume was
filed one day after the expiration of 60 days, it was timely filed).
Though not expressly stated by either court,
these holdings provide that §365(d) (4)'s deadline is more akin to a
statute of limitations than a time period set forth in a procedural rule. And
while neither address the failure to comply with §365(d)(4)'s
deadline after such deadline has been extended by order of the court, it seems
illogical to allow the use of Rule 9006(b) when an extended deadline is missed,
when it cannot be used for the original deadline.
Regardless, both Federated Foods and Damach build upon Horowitz and Taylor in guiding subsequent analysis of the timing of
obtaining an extension of §365(d)(4)'s assumption/rejection
deadline, and the court's ability to grant such relief after the expiration
thereof.
Conclusion
Based on subsequent Supreme Court and other
case law, Horwitz appears to correctly
conclude that Southwest Aircraft
and its progeny are outdated. While those cases may have once held the majority
view, a change of precedent has occurred due to the Supreme Court's
numerous statutory interpretation cases.
In fact, such cases go farther than just Southwest
Aircraft and §365(d)(4), as local
rules that provide automatic bridge orders for any motion filed are arguably
inapplicable to certain time periods. Indeed, if a statute provides for a time
period, it is an absolute substantive right, not a procedural rule. As such, it
appears inappropriate to automatically extend such time periods by the mere
filing of a motion. After all, a statute of limitations cannot be extended
involuntarily, so how could a motion to extend result in an automatic bridge
order that extends it?
Nonetheless, since the issue of
§365(d)(4) is arguably an open issue, the wise practitioner should
consider a motion to extend the assumption/rejection period of §365(d)(4)
a "first week" pleading so notice and a hearing may occur, and an
order may be issued prior to the 60th day of the case.
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