In the June/July, 1998 issue of Lenders' Alert, (Vol. 6, No. 3), the case of In re Koenig Sporting Goods, Inc. from the Northern District of Ohio was viewed as a potential victory for landlords with bankrupt lessees because the Bankruptcy Court ruled that a debtor's obligation under Section 365(d)(3) of the Bankruptcy Code (to perform its lease obligations under nonresidential property leases until the lease is assumed or rejected) required the debtor to pay for an entire month's rent by the first day of each month even if the debtor rejected the lease on the second day of the same month. This has also been called the "billing date" approach. The Court's rejection of an "accrual" approach in favor of a "billing date" approach has now been affirmed on appeal by a divided Bankruptcy Appellate Panel for the Sixth Circuit ("BAP"). In Koenig Sporting Goods Inc. v. Morse Road Co. (February 16, 1999), the BAP also concluded that the plain language of Section 365(d)(3) of the Bankruptcy Code was intended to assure payment to landlords of ordinary monthly rent which become due post-bankruptcy. The BAP conceded that its "billing date" approach was a minority view among courts that have addressed this issue, and ruled that post-bankruptcy, pre-rejection obligations of the debtor/lessee are not to be viewed as administrative expenses under Section 503(b) (as do courts adopting an "accrual" approach), but as merely obligations that must be timely performed under the lease. The purpose of Section 365(d)(3) was to protect the vulnerable landlords, not the bankruptcy estate. Thus, concepts of pro-ration and allocation are irrelevant.
Landlords should note that the BAP's dissenting opinion in Koenig Sporting Goods criticized the windfall to landlords resulting in the BAP's interpretation on Section 365(d)(3), and warned of potentially "outrageous consequences" from a "billing date" approach. Landlords are well advised to investigate whether local courts adopt the "accrual" or "billing date" approach.
Charles Sterbach can be reached at 530-8566 or via Internet e-mail: crs@gknet.com.