ELEVENTH CIRCUIT CONSIDERS A DEBTOR'S OBLIGATIONS BEFORE AND AFTER REJECTION OF A COMMERCIAL LEASE

1. Background. The Debtor's Chapter 11 petition was filed on June 19, 2001, at which time the Debtor was a party to a lease with Trizechan 1065 Avenue of the Americas ("Lessor") for commercial space. The Debtor filed a motion authorizing rejection of the lease on July 31, 2001. The Bankruptcy Court issued an oral Order on August 22, 2001, and a formal Order on August 29, 2001, giving court approval for rejection of the lease. The Debtor vacated the premises on September 26, 2001. The Debtor paid rent prorated through August 22, 2001. The Lessor contended that it was owed the full rent for the month of August, real estate taxes billed on August 1, 2001, a fuel adjustment charge billed on September 1, 2001, and the full amount of the September rent. The Debtor contended that it did not owe rent, taxes or any other expenses past the date the Bankruptcy Court approved the rejection. The Debtor further argued that if the Lessor was entitled to payment for anything beyond the date of the rejection, the amount owed should be based on the use to which the property was put after the lease rejection.

2. Bankruptcy Court Rules for the Debtor. The Bankruptcy Court ruled in favor of the Debtor and did not allow the expenses the Lessor sought. The Bankruptcy Court noted that the use to which the property was put after the lease rejection was important in determining the amount, if any, owed the Lessor for the period between the lease rejection and the Debtor's vacating of the property. The Bankruptcy Court determined that the Debtor's continued use of the premises was for the sole purpose of winding up its affairs and it did not receive any benefit from maintaining the premises.

3. District Court Reversal. The District Court reversed, holding that the plain language of §365 required the payment of all obligations of the Debtor, including rent, real estate taxes and any other charges or expenses provided for in the lease.

4. The Eleventh Circuit Opinion. On appeal, the Eleventh Circuit affirmed in part and reversed in part, in an unpublished, per curiam opinion. The Eleventh Circuit agreed with the District Court that under 11 U.S.C. §365 the Debtor was obligated for all expenses prior to rejection of the lease, including the ordinary monthly rent payments that were due on the first day of the month. Since the Debtor's obligation to pay the August rent preceded the rejection of the lease, it was required to pay the entire amount of the August rent. However, the Eleventh Circuit disagreed with the District Court's application of §365 to post rejection obligations, such as the holdover rent. The Eleventh Circuit held that obligations due the Lessor after rejection of the lease until the property was vacated had to be determined under §503(b)(1)(A), which addresses allowance of administrative expenses. Because the Debtor had continued to occupy the premises for a 25-day period in September, the Eleventh Circuit found that the Lessor was entitled to an administrative rent claim for that time period and remanded the case to the District Court for a calculation of the amount due.

Trizechan 1065 Avenue of the Americas, L.L.C. v. Thomaston Mills, Inc., (In re Thomaston Mills, Inc.), 273 B.R. 284 (M.D.Ga. 2002) rev'd in part, aff'd in part, remanded No. 02-11045 (11th Cir. July 11, 2002).

For more information, please contact a representative from our Bankruptcy and Leasing Groups listed below at 404.873.8500:

Byron P. Alterman
Walter H. Bush, Jr.
Neil C. Gordon
Jerome L. Kaplan
Seth S. Katz
J. Hayden Kepner, Jr.
Darryl S. Laddin
Abe J. Schear
Philip G. Skinner
James P. Smith
Ronald C. Thomason
Frank N. White

This bulletin was prepared by the law firm of Arnall Golden Gregory LLP. It presents information on legal matters of general interest in summary form. This document should not be construed as legal advice or opinion on specific matters.

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