MEMORANDUM OF DECISION
EUGENE R. WEDOFF, Bankruptcy Judge.
These administratively consolidated cases have come before the court on the motion of a creditor, Travelers Insurance Company, to compel one of the debtors, Telesphere Communications, Inc. (“TCI”), to pay $22,952.49 in postpetition rent. The motion raises the question of the interpretation of Section 365(d)(3) of the Bankruptcy Code (Title 11 U.S.C., the “Code”), which provides for timely performance of certain lease obligations of the debtor until the lease is assumed or rejected.
Travelers argues that this section accords lessors a right to immediate lease payments. In response, the debtor argues (1) that Travelers’ claim for postpetition rent is an administrative claim, pursuant to Section 503(b)(1) of the Code, which must be paid pro rata with all other administrative claims, pursuant to the priority scheme of Section 507(a)(1),
and (2) that if an estate may have insufficient funds to pay all administrative claims, no claims should be paid until the extent of available funds is determined. The court has considered the arguments of the parties presented at the hearing on this matter, as well as the briefs submitted by counsel. For the reasons discussed below, Travelers’ motion to compel payment is granted.
Jurisdiction
This court has jurisdiction over the pending motion pursuant to 28 U.S.C. § 1334(a) and (b), 28 U.S.C. § 157(a) and (b)(1), and Rule 2.33 of the General Rules of the United States District Court for the Northern District of Illinois. This matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (B), and (0).
Factual Background
Before these cases were instituted, TCI leased commercial space in Philadelphia from Travelers. The lease was in effect in August 1991 when certain creditors filed an involuntary petition against TCI under Chapter 7 of the Bankruptcy Code. Shortly thereafter, on September 11, 1991, TCI converted the case by filing a petition for relief under Chapter 11. Simultaneous with TCI’s conversion, its two subsidiaries — Telesphere Network, Inc., a/k/a TNI, and Telesphere Limited, Inc., f/k/a National Telephone Services, Inc. and American Operator Services, Inc. — also filed Chapter 11 petitions. Pursuant to Section 301 of the Code, an order for relief was entered in the three cases effective September 11. This court later consolidated the cases for
administrative purposes, and the three debtors are jointly known as “Telesphere.”
On November 1, 1991, Ronald Haan Ventures, Inc. (“Haan Ventures”) and Tele-sphere entered into an agreement to purchase substantially all of Telesphere’s assets, following a sale in open court. The sale effectively transformed the Telesphere cases from reorganizations into liquidations under Chapter 11. The purchase contract allowed Haan Ventures up to ninety days to direct Telesphere to seek to assume unexpired leases and assign them to Haan Ventures, or to seek to reject them. The court later granted a motion by Telesphere (1) to extend the time in which to assume or reject a number of leases, including Travelers’, until February 4, 1992; and (2) to require, pursuant to the purchase contract, that Haan Ventures pay all administrative rents from November 1 until the court approved assumption or rejection of the leases. In the case of its lease with Travelers, TCI continued to use the premises until February 4, 1992, when the court approved rejection of the lease. Travelers has been paid all rent due from November 1, 1991, through February 4, 1992, leaving only a claim for rent from September 11 to October 31, 1991.
Telesphere, currently implementing its liquidation, resists immediate payment of this rent, either in whole or in part, on the ground that the estates may be unable to pay all administrative claimants. This claim of administrative insolvency appears to arise from genuine concerns. These are very large cases — the number of unsecured creditors exceeds 24,000 — and hundreds of administrative claims have already been submitted for payment, including other claims for payment of postpetition rent under Section 365(d). Many of the professionals have yet to file their fee applications. Furthermore, the principal secured creditors in the case have claimed blanket liens on all assets of the estates, subject to certain “carve outs” for professional fees and expenses. It may well be, then, that administrative claims allowed under Section 503(b) and accorded the first priority of payment under Section 507(a)(1) will not be paid in full.
Legal Conclusions
This case presents a narrow legal issue; whether Section 365(d)(3), by mandating the trustee’s “timely performance” of the debtor’s post-petition lease obligations, gives the lessor a right to payment from the estate independent of the rights of administrative claimants under Section 503(b), regardless of administrative solvency. A majority of the decisions construing Section 365(d)(3) in the context of potential administrative insolvency support Tele-sphere’s resistance to payment. They hold that rental payments made pursuant to Section 365(d)(3) are payments of administrative expenses, and, since Congress did not expressly provide for any superpriority, these rental payments should be made only to the extent that other administrative claims are paid.
However, at least two
courts have concluded that although rent payable under Section 365(d)(3) is an administrative expense, the statute requires payment without consideration of the estate’s ability to pay other administrative claims.
The majority interpretation of Section 365(d)(3) has two difficulties. First, it produces a strained reading of the statutory language. That language provides that a trustee (and pursuant to Section 1107(a), a debtor in possession) “shall timely perform all the obligations of the debtor ... arising from and after the order for relief under any unexpired lease of nonresidential property, until such lease is assumed or rejected, notwithstanding section 503(b)(1) of this title.” Since a principal obligation of the lessee is payment of rent, this language plainly directs a debtor in possession to make rental payments when they are due.
By engrafting an exception to this language — “unless it appears that there may be insufficient funds to pay all administrative claimants” — the majority interpretation dilutes this plain meaning.
The Supreme Court has, in several recent decisions, directed that the plain language of the Bankruptcy Code should not be departed from without substantial justification.
United States v. Ron Pair Enterprises, Inc.,
489 U.S. 235, 242, 109 S.Ct.
Free access — add to your briefcase to read the full text and ask questions with AI
MEMORANDUM OF DECISION
EUGENE R. WEDOFF, Bankruptcy Judge.
These administratively consolidated cases have come before the court on the motion of a creditor, Travelers Insurance Company, to compel one of the debtors, Telesphere Communications, Inc. (“TCI”), to pay $22,952.49 in postpetition rent. The motion raises the question of the interpretation of Section 365(d)(3) of the Bankruptcy Code (Title 11 U.S.C., the “Code”), which provides for timely performance of certain lease obligations of the debtor until the lease is assumed or rejected.
Travelers argues that this section accords lessors a right to immediate lease payments. In response, the debtor argues (1) that Travelers’ claim for postpetition rent is an administrative claim, pursuant to Section 503(b)(1) of the Code, which must be paid pro rata with all other administrative claims, pursuant to the priority scheme of Section 507(a)(1),
and (2) that if an estate may have insufficient funds to pay all administrative claims, no claims should be paid until the extent of available funds is determined. The court has considered the arguments of the parties presented at the hearing on this matter, as well as the briefs submitted by counsel. For the reasons discussed below, Travelers’ motion to compel payment is granted.
Jurisdiction
This court has jurisdiction over the pending motion pursuant to 28 U.S.C. § 1334(a) and (b), 28 U.S.C. § 157(a) and (b)(1), and Rule 2.33 of the General Rules of the United States District Court for the Northern District of Illinois. This matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (B), and (0).
Factual Background
Before these cases were instituted, TCI leased commercial space in Philadelphia from Travelers. The lease was in effect in August 1991 when certain creditors filed an involuntary petition against TCI under Chapter 7 of the Bankruptcy Code. Shortly thereafter, on September 11, 1991, TCI converted the case by filing a petition for relief under Chapter 11. Simultaneous with TCI’s conversion, its two subsidiaries — Telesphere Network, Inc., a/k/a TNI, and Telesphere Limited, Inc., f/k/a National Telephone Services, Inc. and American Operator Services, Inc. — also filed Chapter 11 petitions. Pursuant to Section 301 of the Code, an order for relief was entered in the three cases effective September 11. This court later consolidated the cases for
administrative purposes, and the three debtors are jointly known as “Telesphere.”
On November 1, 1991, Ronald Haan Ventures, Inc. (“Haan Ventures”) and Tele-sphere entered into an agreement to purchase substantially all of Telesphere’s assets, following a sale in open court. The sale effectively transformed the Telesphere cases from reorganizations into liquidations under Chapter 11. The purchase contract allowed Haan Ventures up to ninety days to direct Telesphere to seek to assume unexpired leases and assign them to Haan Ventures, or to seek to reject them. The court later granted a motion by Telesphere (1) to extend the time in which to assume or reject a number of leases, including Travelers’, until February 4, 1992; and (2) to require, pursuant to the purchase contract, that Haan Ventures pay all administrative rents from November 1 until the court approved assumption or rejection of the leases. In the case of its lease with Travelers, TCI continued to use the premises until February 4, 1992, when the court approved rejection of the lease. Travelers has been paid all rent due from November 1, 1991, through February 4, 1992, leaving only a claim for rent from September 11 to October 31, 1991.
Telesphere, currently implementing its liquidation, resists immediate payment of this rent, either in whole or in part, on the ground that the estates may be unable to pay all administrative claimants. This claim of administrative insolvency appears to arise from genuine concerns. These are very large cases — the number of unsecured creditors exceeds 24,000 — and hundreds of administrative claims have already been submitted for payment, including other claims for payment of postpetition rent under Section 365(d). Many of the professionals have yet to file their fee applications. Furthermore, the principal secured creditors in the case have claimed blanket liens on all assets of the estates, subject to certain “carve outs” for professional fees and expenses. It may well be, then, that administrative claims allowed under Section 503(b) and accorded the first priority of payment under Section 507(a)(1) will not be paid in full.
Legal Conclusions
This case presents a narrow legal issue; whether Section 365(d)(3), by mandating the trustee’s “timely performance” of the debtor’s post-petition lease obligations, gives the lessor a right to payment from the estate independent of the rights of administrative claimants under Section 503(b), regardless of administrative solvency. A majority of the decisions construing Section 365(d)(3) in the context of potential administrative insolvency support Tele-sphere’s resistance to payment. They hold that rental payments made pursuant to Section 365(d)(3) are payments of administrative expenses, and, since Congress did not expressly provide for any superpriority, these rental payments should be made only to the extent that other administrative claims are paid.
However, at least two
courts have concluded that although rent payable under Section 365(d)(3) is an administrative expense, the statute requires payment without consideration of the estate’s ability to pay other administrative claims.
The majority interpretation of Section 365(d)(3) has two difficulties. First, it produces a strained reading of the statutory language. That language provides that a trustee (and pursuant to Section 1107(a), a debtor in possession) “shall timely perform all the obligations of the debtor ... arising from and after the order for relief under any unexpired lease of nonresidential property, until such lease is assumed or rejected, notwithstanding section 503(b)(1) of this title.” Since a principal obligation of the lessee is payment of rent, this language plainly directs a debtor in possession to make rental payments when they are due.
By engrafting an exception to this language — “unless it appears that there may be insufficient funds to pay all administrative claimants” — the majority interpretation dilutes this plain meaning.
The Supreme Court has, in several recent decisions, directed that the plain language of the Bankruptcy Code should not be departed from without substantial justification.
United States v. Ron Pair Enterprises, Inc.,
489 U.S. 235, 242, 109 S.Ct. 1026, 1031, 103 L.Ed.2d 290 (1989) (“The plain meaning of legislation should be conclusive, except in the ‘rare cases [in which] the literal application of the statute will produce a result demonstrably at odds with the intentions of its drafters.’ [citation omitted]”);
Union Bank v. Wolas,
— U.S. -,-, 112 S.Ct. 527, 531, 116 L.Ed.2d 514 (1991) (“The fact that Congress may not have foreseen all of the consequences of a statutory enactment is not a sufficient reason for refusing to give effect to its plain meaning.”);
Patterson v. Shumate,
— U.S. -, -, 112 S.Ct. 2242, 2248, 119 L.Ed.2d 519 (1992) (when there is “clarity of the statutory text,” the party urging an interpretation contrary to the plain meaning of the statute bears an “exceptionally heavy” burden of persuasion).
The interpretation urged by the majority of courts addressing Section 365(d)(3) is not supported by any showing that Congress intended rental payments to be withheld in cases of potential administrative insolvency. To the contrary, the legislative history reflects congressional concern that lessors of nonresidential real property, in contrast to other creditors, had frequently been forced to extend credit to an estate during the time given for assumption or rejection of the lease.
Because such a lessor, unlike utilities,
trade creditors, or post-petition employees, cannot utilize the self-help remedy of terminating their relationship with the debtor if prompt payment is not assured, the lessor becomes, in effect, an “involuntary extender of unsecured credit.”
In re Dieckhaus Stationers of King of Prussia, Inc.,
73 B.R. 969, 973 n. 2 (Bankr.E.D.Pa.1987) (emphasis in original). Congress responded to this situation with Section 365(d)(3), adding it to the Bankruptcy Code by the Bankruptcy Amendments and Federal Judgeship Act of 1984, Pub.L. 98-353, 98 Stat. 333 (1984), to “lessen these problems by requiring the trustee to perform all the obligations of the debtor ... at the time required in the lease ... insuring] that debtor-tenants pay their rent ... on time_” 130 Cong.Rec. S8894-95 (daily ed. June 29, 1884) (statement of Sen. Hatch)
reprinted in
App. 4 Collier on Bankruptcy, at XX-70 — XX-71 (Lawrence P. King et al. eds., 15th ed. 1992).
Nothing in this history reflects any purpose to limit the circumstances under which rent should be paid during the period prior to assumption or rejection. Indeed, to withhold payment when the debtor may be administratively insolvent would actually reverse legislative intent, because it would require involuntary extensions of credit by lessors in the very circumstances where the debtors are least likely to honor their lease obligations.
The second difficulty with the majority decisions is their assumption that payments made under Section 365(d)(3) are payments of administrative expenses under Section 503(b)(1). This assumption is a linchpin of the decisions: they reason that if Section 365(d)(3) payments satisfy administrative expenses, then they must be paid pro rata with other Section 503(b) expenses — pursuant to the priority scheme of Section 507(a) — because Congress did not expressly provide for any superpriority.
Similarly, some of these decisions note that if one
administrative expense is paid before the others, as with interim fee awards under Section 331, the earlier paid claim is still entitled only to a pro rata share of the assets of the estate, and hence may be subject to disgorgement if funds are not available to pay all administrative claims in full.
However, this discussion of the need for pro rata payment is misplaced, because Section 365(d)(3) payments are not payments of administrative expenses pursuant to Section 503(b)(1).
Section 503(b)(1)(A) describes “administrative expenses” as including “the actual, necessary costs and expenses of preserving the estate.” The rental payments involved in the present case fit within this description. However, Section 503 does not set forth the exclusive procedure for paying such expenses. The Bankruptcy Code contains two distinct procedures for the payment of administrative expenses. One of these procedures — the one that involves Section 503(b)(1) — is supervised by the court, and requires application, notice and hearing.
The court supervised procedure requires pro rata payment of administrative claims, pursuant to Section 726(b), unless the claim involved is given an express superpriority.
The other procedure for payment of administrative expenses does not involve Section 503(b)(1) or any court supervision. Section 1108 of the Code authorizes the trustee (and hence the debtor in possession under Section 1107) to operate the business of a Chapter 11 debtor unless otherwise ordered by the court. Section 363(c)(1) allows a trustee or debtor in possession, authorized to operate the debtor’s business, to “use property of the estate in the ordinary course of business without notice or a hearing.” Thus, a trustee or debtor in possession may expend unencumbered cash (property of the estate), in the ordinary course of the debtor’s business, to pay providers of goods and services to the estate. This alternative to court supervised payment of administrative expenses may be referred to as “operational payment.”
See United States ex. rel. Harrison v. Estate of Deutscher (In re H & S Transportation Co.),
115 B.R. 592, 600 (M.D.Tenn.1990) (distinguishing professional activities involved in the administration of the estate from activities involved in its operation).
In contrast to payments made pursuant to the court supervised procedure, there is no requirement that operational payments be made pro rata with other administrative expenses; operational payments are final. This point was made emphatically in
In re Vernon Sand & Gravel, Inc.,
109 B.R. 255, 257 (Bankr.N.D.Ohio 1989):
If delays for court approval would deal a staggering blow to debtors-in-possession, then the possibility that [operational payments] could later be subject to a pro-rata reduction would be the knockout
punch. Businesses operating under Chapter 11 would not be able to retain employees, hire outside services, or even maintain accounts with utility companies if each of these payments were subject to refund at a later date if the business eventually converts to liquidation bankruptcy. Practical necessities require that administrative expenses resulting from the ordinary course of business be paid immediately and not be subject to any pro-rata reductions.
Although it appears that no other decision to date has addressed the question,
vendors who receive payments from the trustee or debtor in possession, for value in the ordinary course of business under Section 363(c)(1), need not fear that the money they receive is subject to disgorgement.
Cf
Uniform Commercial Code § 9-306, Comment 2(c) (cash payments by a debtor are not subject to a security interest when transferred in the ordinary course of the debtor’s business).
Thus, operational payments, by their nature, enjoy a de facto priority over other administrative expenses, without any express provision for superpri-ority.
Given this structure of the Code, the language of Section 365(d)(3) should be read as requiring that rental payments be made according to the procedure for operational payments under Section 363(c)(1).
There is nothing in the language of Section 365(d)(3) suggesting that it involves any of the procedures for court supervised payment. To the contrary, Section 365(d)(3) provides that its terms apply “notwithstanding Section 503(b)(1)” — the section providing a right to court supervised payment — and it requires the trustee or debtor in possession to act without application and without court review. Consequently, and contrary to the reasoning of the majority decisions, there would have been no reason for Congress to have provided any express grant of superpriority for Section 365(d)(3) rent payments — such a “superpriority” is implicit in the direction that the debtor make the payments without court involvement.
The absence of an express grant of superpriority cannot, then, be a basis for disregarding the plain language of Section 365(d)(3).
Pursuant to the plain language of Section 365(d)(3), the trustee or debtor in possession has a duty, prior to assumption or rejection of a lease of nonresidential real property, to make timely payment of the full rent due, from any available funds (subject to Section 363(c)(2) of the Code), regardless of the administrative solvency of the estate. No specific remedy is provided by the Code for violation of this duty. However, Section 105(a) of the Code provides authorization to the courts to “issue
any order, process, or judgment necessary or appropriate” to carry out the provisions of the Code. This provision allows the court to fashion an appropriate remedy where the Code is silent.
In re McNeely,
82 B.R. 628, 633 (Bankr.S.D.Ga.1987) (discussing court created remedies for violation of the antidiscrimination provisions of Section 525(b)). The most appropriate remedy in the present case would place Travelers in the position it would have occupied if the debtor had complied with the requirements of Section 365(d)(3). Hence, as requested by Travelers, the court will order the debtor in possession to pay immediately the rent that it was obligated to pay to Travelers during the period September 11 to October 31, 1991. Should the debtor in possession lack funds sufficient to comply with this order, the court will consider a request that enforcement be stayed.
CONCLUSION
The motion of Travelers Insurance is granted. A separate order will be entered in accordance with this opinion.
ORDER
This cause coming on for hearing on the motion of Travelers Insurance Company to compel Telesphere Communications, Inc., to make immediate full payment of $22,-952.49 in postpetition rent, the court having heard the arguments of the parties at the hearing held on this matter, and having reviewed the briefs submitted by counsel for the parties,
IT IS HEREBY ORDERED, for the reasons stated in the accompanying Memorandum of Decision, that the motion of Travelers Insurance for immediate payment of $22,952.49 in postpetition rent pursuant to Section 365(d)(3) of the Bankruptcy Code is granted.