Nonresidential Leases: What Does It Take To Avoid Deemed Rejection?

In re Simbaki, Ltd., 520 B.R. 241 (Bankr. S.D. Tex. 2014) –

A chapter 11 debtor sought to assume a restaurant lease.  The landlord objected, arguing among other things that the lease was not timely assumed and so was deemed rejected.

Generally “the trustee [or debtor in possession], subject to the court’s approval, may assume or reject any executory contract or unexpired lease of the debtor.”  However, under Section 365(d)(4) of the Bankruptcy Code, “an unexpired lease of nonresidential real property under which the debtor is the lessee shall be deemed rejected, and the trustee shall immediately surrender that nonresidential real property to the lessor, if the trustee does not assume or reject the unexpired lease by [certain deadlines].”

As modified in 2005, the deadline is the earlier of (1) 120 days after the bankruptcy commences and (2) confirmation of a plan of reorganization, subject to an extension by the court of up to 90 days, with subsequent extensions allowed only if the lessor consents.

In this case the debtor had filed a motion but the court had not yet issued an order by the deadline.  The sole issue addressed by the court was whether a timely motion to assume a lease was sufficient to prevent deemed rejection.  The landlord argued that an order must also be issued before the deadline, while the debtor argued that filing the motion was sufficient regardless of when the order issued.

The court framed the issue as follows (citations omitted):

The meaning of the term “assume” in the context of §365(d)(4)(A) can only be determined in two ways.  “If the statute is unambiguous, the court is to interpret the statute in accordance with its plain meaning and without regards to any extraneous materials.”  If a statute is ambiguous, however, the court should analyze the statute in light of the intent of Congress.

On the one hand, the court concluded that it would be reasonable to interpret Section 365(d)(4)(A) as implying that a lease can be unilaterally assumed or rejected.  On the other hand, Section 355(a) requires that assumption or rejection be approved by the court, so that assumption would not occur until the court issued an order.  It found both interpretations to be reasonable in light of the plain language of the statute.  Consequently, the statute was ambiguous.

In considering the intent of Congress, the court concluded “it is apparent that filing a motion to assume satisfies the statutory deadline.”  It reasoned that Congress enacted the deadline in order to “establish a firm, bright line deadline” for assumption or rejection.  In the court’s view, requiring court approval would destroy the purpose since (1) theoretically a motion could be filed on the day of the petition but, through no fault of the debtor, not be approved by the court in time, and (2) the period for making a business decision on assumption could vary between courts based on their case loads and procedures.  Besides, the section references action by the trustee, not the court.

The court also noted that “an overwhelming majority of courts” hold that it is sufficient to file a motion to assume before the deadline.  Although the landlord argued that courts have split on this issue, it did not cite any cases.

Accordingly, the court determined that the lease was not automatically terminated since the  motion to assume was timely filed, and it was not necessary to obtain an order before the deadline.

Although the 5th Circuit ruled that filing a motion to extend the deadline was sufficient to preserve an extension, it had not yet ruled on whether a motion without an order was sufficient in the context of an assumption motion.  Language that a lease not assumed by a deadline is deemed rejected has been in the Bankruptcy Code since it was adopted in 1978, and the current version of the statute has been in effect since the 2005 amendments.  Given that the Bankruptcy Code is a discrete statute that has been around for more than 45 years, the number of common issues where there is no binding precedent is somewhat surprising.

Vicki R. Harding, Esq.

About BankruptcyRealEstateInsights

Vicki R. Harding was a partner in the Detroit office of Pepper Hamilton LLP who moved to Arizona seeking warmer weather. Ms. Harding continues to handle commercial transactions with an emphasis on real estate and bankruptcy issues (but no longer owns a snow shovel).
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