Contributed by David G. Litvack
Under section 365(d)(4) of the Bankruptcy Code, an unexpired lease of nonresidential real property is automatically deemed rejected if a debtor-lessee does not assume such lease within 120 days of its bankruptcy filing, or within 210 days with court permission. Although this provision seems straightforward enough, Weil’s Bankruptcy Blog has analyzed many instances where interpretation of this provision has given rise to litigation (see here and here). This entry analyzes what action a debtor must take to timely “assume” an unexpired lease to prevent deemed rejection. Does the act of giving notice to a landlord or filing a motion to assume satisfy the deadline? Or does a court need to enter an order granting the assumption motion before the relevant time period expires in order to prevent automatic rejection? In In re Filene’s Basement, L.L.C., Judge Carey of the U.S. Bankruptcy Court for the District of Delaware held that the act of filing a motion to assume a lease within the relevant statutory period is sufficient to prevent deemed rejection of a lease.
In Filene’s, the bankruptcy court had entered an order extending the time for the debtors to decide whether to assume or reject nonresidential real property leases under section 365(d)(4) until May 30, 2012, or 210 days after commencement of the case – the maximum time period allowed under the statute absent consent of the landlord. On May 8, 2012, the debtor filed a motion to assume the lease at issue, and a dispute arose regarding the appropriate cure amount. The ultimate disposition of the dispute was deferred until after confirmation. (Other issues raised in connection with this dispute, including whether the debtor could abandon its not-yet-approved settlement agreement in favor of a higher offer from a third party, are the subject of another blog entry you can read here.) As part of the section 365(d)(4) dispute, the landlord asserted that, because the court had not granted the debtor’s pending motion to assume the lease prior to May 30, 2012, the lease was automatically deemed rejected under the Bankruptcy Code.
Based upon the language of the statute, the court rejected the landlord’s argument and found that the mere act of filing a motion to assume a lease within the statutory period is sufficient to prevent deemed rejection of a lease. Looking to Cousins Properties, Inc. v. Treasure Isles HC, Inc. (In re Treasure Isles HC, Inc.), one of the few cases since the enactment of BAPCPA that has addressed this issue, the court found that “the deadline provisions of 11 U.S.C. § 365(d)(4) are intended to set a ‘bright line’ regarding how much time the trustee has to decide whether to assume or reject a lease.” Citing to Treasure Isles, the court noted that, without a bright line rule, a debtor’s attempted assumption would depend on the “vagaries of a particular bankruptcy court’s caseload and local procedures.”
The court also noted that when Congress wishes to set a time by which a court must act, it explicitly does so. For instance, each of sections 362(c)(3)(B) (requiring notice and a hearing prior to deadline) and 1121(e)(3)(C) (expressly requiring a signed order to extend the exclusive periods prior to deadline) of the Bankruptcy Code contains explicit language concerning what actions must be taken prior to the expiration of a deadline. Thus, if Congress had intended that a debtor be required to obtain an order approving assumption within the applicable time period, as opposed to merely filing a motion to assume the lease within that time, such language could have been included in the statute.
Further, accepting the landlord’s argument would allow a landlord or other interested party to effectively game the system. For instance, if the section 365(d)(4) deadline was approaching, a landlord, seeking rejection, could find a way to delay an assumption hearing, such as arguing that it needs to take discovery on certain factual issues, thereby delaying the entire process beyond the deadline and ensuring a deemed rejection. Such an interpretation would also leave the debtor subject to the mercy of a court’s calendar. If a hearing could not be scheduled in time for a court to consider a motion to assume, then the lease would be deemed rejected, notwithstanding a debtor’s timely filing of the motion.
The court’s ruling is consistent with the few cases that have ruled on this matter since the enactment of BAPCPA. It gives clarity and certainty to both debtors and landlords. Nevertheless, under the court’s ruling, although landlords are prevented from attempts to “game the system,” a desperate debtor may not be. For instance, a debtor could file a motion to assume a lease just prior to the expiration of the deadline and delay or adjourn the hearing on the motion in order to extend its usage of the property with no true intention of ultimately assuming the lease. Thereafter, a debtor could withdraw its motion, which could have the effect of harming the landlord by delaying the landlord’s efforts to market the property to other potential tenants. With any luck, such instances will be rare.