UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF ALASKA

The chapter 7 trustee seeks to establish that the effective date for rejection of the leases at the airport facilities in Chicago and Denver is the date the motion was filed, November 13, 1995 (Docket Entry 1335), pursuant to 11 USC § 365(a) and FRBP 6006, as opposed to the date the order was entered permitting the rejections on about November 22, 1995 (Docket Entry 1375).

Identifying the date is important in calculating when contractual payments are no longer due for these nonresidential leases under 11 USC § 365(d)(3) which requires the timely performance (including payment at the contracted rental rate) pending assumption or rejection.

I have determined that, in the absence of equitable considerations making the later date unfair, the court will adopt the date that an order has been entered as the date through which contracted payments must be made, as opposed to the earlier date when a motion to reject has been filed under 11 USC § 365(a). In this, I follow the only circuit case to date on this point, In re Thinking Machines Corp., 67 F3d 1021 (1st Cir 1995). I am only deciding the narrow issue of which of two dates is more appropriate for cutting off contractual rent payments. I am not deciding at this time what is appropriate if the trustee has held over or still retains the premises even after the rejection is approved by a court order.

Although a relatively short time accrued between the date the motion was filed and the entry of an order allowing the rejections, the amount of accrued rent is not insignificant. In the case of the lease facilities at Denver International Airport, the City and County of Denver indicated that the daily rental rate, excluding a 25% joint fee feature,       4 ABR 233  was $6,573 per day, or about $65,000±. Probably a lesser amount is involved in the City of Chicago lease.

MarkAir closed its flight operations on October 24, 1995, when The Boeing Company indicated it was repossessing several of debtor's remaining Boeing 737 aircraft. On about October 27, 1995, the debtor and the Unsecured Creditors' Committee learned that a potential suitor to purchase the Denver hub operations as a going concern had backed out. The case was converted to chapter 7 on November 8, 1995.

The trustee argues that the game was over in early November, 1995, and the airport lessors could have repossessed its space at that time. The trustee contends that certainly by the date the motion was filed to reject the airport facility leases in Denver, Chicago, and other locations, there was no viable airline left. Thus, the trustee argues that the leases were no longer "necessary" and the estate should not have to carry the rental burden until the court signed the order allowing rejection.

The City of Denver indicates that neither the trustee nor MarkAir immediately vacated the premises as of the date of the motion, November 13, 1995, but, to this date has counters and equipment located at various places in the airport. The situation in Chicago appears to be the same.

The trustee cites In re Dant & Russell, 853 F2d 700, 706 (9th Cir 1988) for the proposition that the Ninth Circuit, more than others, is strict in allowance of administrative expense, restricting them in a broad sense to only those necessary for the operation of the business. 11 USC § 503(b)(1)(A).

Notwithstanding this decision, the Ninth Circuit has read the Congressional intent regarding 11 USC §365(d)(3) to require full, timely payments of the contractual rent payments for nonresidential real estate pending rejection or assumption, even if this prefers landlords over other types of creditors. In re Pacific-Atlantic Trading Co., 27 F3d 401 (9th Cir 1994). From this, I presume that the Ninth Circuit would adopt the later date (the date of the order of rejection of a nonresidential real property lease) as opposed to the earlier date (the date the motion to reject was filed) if it determined this was what Congress intended by § 365(a).

There is a split of authority as to when the obligation of a trustee       4 ABR 234  or debtor-in-possession to make full rental payments under 11 USC § 365(d)(3) ceases.

Some courts indicate this should occur on the date the motion is filed. The argument is that, if a court at a subsequent hearing determines that the lease should not be rejected pursuant to a motion under § 365(a), the rejection can be unwound. This is the "condition subsequent" argument, i.e. that the lease is rejected upon the motion, subject to the possibility that the court might not approve the rejection. See, e.g., In re Joseph C. Speiss Co., 145 BR 597, 601 (Bankr ND Ill 1992).

A majority of courts, and the only circuit court to have ruled on the issue, have decided that the date the rejection becomes effective for the purpose of terminating the contractual payments should generally be the date that the court signed the order. In re Thinking Machines Corp. and In re 1 Potato 2, Inc., 182 BR 540 (Bankr D MN 1995). In other words, the order is a "condition precedent" to rejection.

The circuit case deciding the issue, In re Thinking Machines Corp., indicated that requiring the rejection be conditioned upon the court's order was the natural reading of the statute. It gave four reasons for its holding: (1) a dominant theme in the Bankruptcy Code is to require judicial oversight in a chapter 11 situation; (2) from a historical perspective, the 1978 Act affected a change under prior practice in which no motion was required, indicating an intent to make the court involved in the decision process; (3) treating the order as a condition subsequent would make the process too unstructured; and, (4) making an order "valid, but voidable" would make matters unduly complex in many situations by requiring parties to unwind transactions.

I will adopt the Thinking Machines approach, since it seems to accord with the natural reading of 11 USC § 365(a) and the orderly functioning of bankruptcy process. In an appropriate case, Thinking Machines would allow a bankruptcy court to exercise its equitable powers in an appropriate situation (but, the court declined to identify what circumstances would justify the use of such powers).

A possible situation for invoking the equitable doctrine to choose the earlier date would be when the debtor had actually, without court order, vacated the leased premises and the landlord resumed possession       4 ABR 235  and enjoyment of the premises at the time the motion was filed. Another situation where equitable intervention might be appropriate is when the delay is caused by the landlord, and the trustee or debtor-in-possession is trying diligently to give the property back to the landlord but was delayed by the creditor.

No grounds for an equitable modification of the general rule that the leases should be considered to be rejected as of the date of the order are apparent in the case of the Denver or Chicago leases. Therefore, the date of the rejection of the two leases which are addressed in the pending motion shall be the date of the order, and not the date of the motion.

There are 10 other airport leases which were rejected by the trustee (Atlanta, Dallas/Ft. Worth, Kansas City, Clark County, NY and NJ Port Authority, Minneapolis/St. Paul, Phoenix, San Diego, and Seattle). With respect to these leases and other nonresidential real property leases, the court will follow the general rule outlined in this memorandum, subject to any equitable considerations brought to the court's attention as grounds to modify the general rule. These can be addressed when the trustee is prepared to make a distribution. Barring unusual circumstances, however, the November 23, 1995, order date will be the date when contractual payments are, at the earliest, cut off. 11 USC §§ 365(a),(d)(3).

DATED: December 20, 1995

HERBERT A. ROSS
U.S. Bankruptcy Judge