Einstein/Noah Bagel Corp. v. Smith (In re BCE West, L.P.)
Docket: BAP No. AZ-01-1017-RPRy; Bankruptcy Nos. 98-12547-ECF-CGC to 98-12570-ECF-CGC
Court: United States Bankruptcy Appellate Panel for the Ninth Circuit; July 16, 2001; Us Bankruptcy; United States Bankruptcy Court
An appellant, Einstein/Noah Bagel Corporation (ENBC), filed an administrative claim against Boston Chicken, Inc., a chapter 11 debtor in possession, based on an alleged postpetition breach of a sublease. The claim was grounded in sections 365(d)(3) and 503(b) of the Bankruptcy Code. Following the confirmation of Boston Chicken's plan, the plan trustee objected to ENBC's claim and sought summary judgment. The bankruptcy court ruled in favor of the trustee, determining that section 365(d)(3) only pertains to debtor-lessees and not debtor-lessors, leading to this appeal.
The background involves a relationship between ENBC and Boston Chicken, where Boston Chicken, which owns half of ENBC's shares, had entered into various agreements with ENBC in 1996, including a five-year sublease for 38,000 square feet of office space. The sublease was later amended to reduce the space to 27,000 square feet, including a requirement for Boston Chicken to try to secure a non-disturbance agreement from Prudential Insurance Company, the master lessor, to protect ENBC's rights. However, Boston Chicken failed to obtain this agreement, prompting ENBC to take measures to ensure its survival amid fears of eviction.
In March 2000, Boston Chicken sought to reject the ENBC sublease, which ENBC did not oppose, leading to the bankruptcy court's order of rejection. Subsequently, Boston Chicken's plan was approved, involving the sale of assets to a McDonald's subsidiary and the appointment of Gerald K. Smith as plan trustee. ENBC submitted a request for payment of administrative expenses totaling $1,883,000, which included claims related to Boston Chicken's failure to fulfill contractual obligations and a significant claim of $1.5 million for the breach concerning the non-disturbance agreement.
ENBC claimed Boston Chicken failed to use its best efforts in securing an agreement with Prudential, resulting in uncertainty about ENBC’s office occupancy and a $1.5 million relocation cost. Boston Chicken objected to ENBC’s three claims in one pleading. For the accounting services agreement, Boston Chicken asserted that ENBC could only claim damages for willful misconduct or gross negligence, which were not alleged. Regarding the computer services agreement, Boston Chicken contended the agreement was terminated in February 2000 and ENBC had released any claims upon termination. For the sublease non-disturbance agreement, Boston Chicken argued that its court-approved rejection of the sublease rendered ENBC’s claims prepetition and unsecured under 11 U.S.C. § 365(g) and § 502(g). ENBC countered that its claim was not about the rejection of the sublease but rather Boston Chicken’s failure to fulfill a postpetition obligation to seek a non-disturbance agreement, citing 11 U.S.C. § 365(d)(3) as supporting its position. The trustee sought summary judgment on the objections to ENBC's claims, which ENBC opposed, reiterating its arguments related to § 365(d)(3). The bankruptcy court denied summary judgment on the accounting services claim but granted it on the computer services claim. The court deferred ruling on the sublease claim for further review of relevant case law. After ENBC submitted a responsive brief, the court ruled that § 365(d)(3) only applied to debtor-lessees, thus granting summary judgment to the trustee on the sublease claim. ENBC appealed, but the order was not final, leading to a remand for a final decision, which concluded that ENBC's claim based on the sublease did not have administrative priority under 11 U.S.C. § 503(b), § 365(d)(3), or any other Bankruptcy Code provision. ENBC’s appeal then proceeded under Rule 8002(a). The legal issue at hand is whether the bankruptcy court properly determined ENBC's sublease claim lacked administrative priority, which will be reviewed under a de novo standard.
ENBC asserts that its claim related to the sublease should receive administrative priority under sections 365(d)(3) and 503(b). However, the court disagrees, concluding that section 365(d)(3) applies only when the debtor is a lessee, not a lessor like Boston Chicken, which is the debtor-in-possession (DIP). Section 365(d)(3) mandates that a trustee must fulfill obligations arising from unexpired nonresidential property leases after the order for relief, except for specified exceptions. The court emphasized that the section's intent is to protect lessors, as highlighted in legislative history, particularly by Senator Orrin Hatch, who explained that landlords should not be forced to provide services without payment during bankruptcy proceedings. The court noted that the language of 365(d)(3) suggests its protections are limited to lessors, supported by the phrase indicating acceptance of performance does not waive lessor rights. ENBC contests this interpretation, arguing that the plain language of 365(d)(3) does not restrict its application to lessees and that the court's reliance on legislative history was misplaced, asserting that the text should have sufficed for the court's decision.
ENBC relies on the Supreme Court decision in *United States v. Ron Pair Enters., Inc.* to argue that Section 365(d)(3) of the Bankruptcy Code applies not only to debtors who are lessees but also to lessors. They reference legislative history and earlier, unenacted versions of the statute that suggested the trustee should perform obligations of a "tenant" rather than just the "debtor." However, the court asserts that the explicit language of 365(d)(3) limits its application to situations where the debtor is a lessee, protecting the rights of lessors rather than lessees. The legislative intent was to address issues faced by debtor-tenants who fail to make payments, ensuring that landlords continue to receive payment for services provided during lease assumption or rejection.
Additionally, regarding administrative priority under section 503(b), the bankruptcy court indicated that ENBC did not originally claim this priority, which would limit the court's ability to consider the argument on appeal. Nonetheless, ENBC did raise a 503(b) argument in a post-hearing brief, asserting that a nondebtor party to a contract with a debtor is entitled to administrative priority for any postpetition benefit provided before the contract is assumed or rejected. ENBC contended that it had provided a postpetition benefit to the Boston Chicken estate by consistently paying rent, despite the lack of performance from the debtor in terms of fulfilling lease obligations.
ENBC's claims regarding its sublease with Boston Chicken were evaluated under sections 365(d)(3) and 503(b) of the Bankruptcy Code. The court found that a non-debtor party to an executory contract is entitled to an administrative claim for any postpetition benefit conferred on the estate before the assumption or rejection of that contract. However, ENBC's claim for relocation costs was denied. The court reasoned that these costs did not confer a benefit to the estate, as they were incurred due to Boston Chicken's failure to secure a non-disturbance agreement with the Master Landlord, Prudential Insurance Company. Consequently, ENBC's need to relocate was driven by uncertainty about its right to occupy its previous space, resulting in approximately $1.5 million in moving expenses. The court concluded that ENBC’s claims under both provisions lacked merit and affirmed the bankruptcy court's decision to deny administrative priority to ENBC's claim. All references pertain to the Bankruptcy Code and related rules, with ENBC's chapter 11 petition filed shortly thereafter.
