Affirming a decision by Bankruptcy Judge David S. Jones of New York, District Judge Katherine Polk Failla explained how to write a lease or an executory contract so debt for work performed before bankruptcy will be paid in full as a cost of administration.
The debtor was an airline. Before bankruptcy, the airline engaged a broker to arrange aircraft leases. To avoid paying the broker in full on execution of the leases, the documents were written so the airline would pay the broker’s fees in installments every month over the term of the leases.
The leases characterized the brokerage fee installments as “additional rent” to be paid over the term of the leases. The fee installments were owing to the aircraft lessors but earmarked for the brokers.
The leases recited that the broker’s services were all performed before the leases were signed and that the airline’s obligation to pay the brokerage fees in installments was “unconditional.”
The airline-debtor did not reject the leases on filing a chapter 11 petition. Sixty days after filing, the debtor began paying the lessors for the aircraft but did not pay the broker’s fees. Within two years after filing, the debtor rejected all of the leases that the broker had arranged.
The broker filed proofs of claim and a motion to compel payment of the fees beginning 60 days after filing until the leases were rejected. The debtor opposed, saying that the obligation to pay brokerage fees was an unsecured claim that arose before filing.
Bankruptcy Judge Jones agreed with the broker and directed the debtor to pay about $4.3 million to the broker, representing fee installments coming due after 60 days following filing until the leases were rejected. The debtor appealed.
The outcome turned on Section 365(d)(5), which provides:
The trustee shall timely perform all of the obligations of the debtor . . . first arising from or after 60 days after the order for relief in a case under chapter 11 of this title under an unexpired lease of personal property . . . , until such lease is assumed or rejected . . . unless the court, after notice and a hearing and based on the equities of the case, orders otherwise with respect to the obligations or timely performance thereof.
In her December 29 opinion ruling on the appeal, District Judge Failla succinctly described the subsection to mean that the debtor “must perform all of the debtor’s obligations under any unexpired lease of personal property arising after the expiration of the sixty-day grace period until that lease is assumed or rejected — unless the court orders otherwise.” Even more tersely, she said that “an obligation may be entitled to such priority if it ‘aris[es]’ after the bankruptcy filing.”
Judge Failla said that the courts are split on whether the subsection is ambiguous. She cited the Third, Sixth and Eighth Circuits for observing no ambiguity. She found them “more persuasive.”
Judge Failla interpreted the leases as “dictat[ing] that [the debtor’s] obligation to make the disputed payments arose when each such payment came due.” In support of the conclusion, she pointed to the word “unconditional” to mean that the payments were due when lease payments were to be made and that the “payment obligations did not arise at the time the Lease Agreements were signed.” [Emphasis in original.]
In addition, the parties referred to the payments as additional rent that they “explicitly likened . . . to traditional rent payments,” Judge Failla said.
Having found that the statute was not ambiguous, Judge Failla saw no need to address the debtor’s arguments based on policy and legislative history. Perhaps supposing there could be an appeal, she nonetheless examined the arguments but concluded that “policy and legislative history fail to overcome the clear text of Section 365(d)(5).”
Judge Failla affirmed the decision by Bankruptcy Judge Jones, holding that “the statute and the Lease Agreements — by their terms — bring the [brokerage fee installments] within the ambit of Section 365(d)(5).”
Affirming a decision by Bankruptcy Judge David S. Jones of New York, District Judge Katherine Polk Failla explained how to write a lease or an executory contract so debt for work performed before bankruptcy will be paid in full as a cost of administration.
The debtor was an airline. Before bankruptcy, the airline engaged a broker to arrange aircraft leases. To avoid paying the broker in full on execution of the leases, the documents were written so the airline would pay the broker’s fees in installments every month over the term of the leases.
The leases characterized the brokerage fee installments as “additional rent” to be paid over the term of the leases. The fee installments were owing to the aircraft lessors but earmarked for the brokers.