In November 1993, the debtor/lessee, Koenig Sporting Goods, Inc., entered into a ten-year lease with the lessor, Morse Road Company, under which Koenig was obligated to pay Morse $8,500 on the first of each month for that month's rent. On August 18, 1997, Koenig filed for protection under chapter 11 of the Bankruptcy Code. Thereafter, the debtor notified Morse that it would reject the lease effective December 2, 1997, and the debtor vacated the premises on that date. Morse filed a request with the bankruptcy court seeking payment of rent for the full month of December. Koenig objected to Morse's request, arguing that Bankruptcy Code section 365(d)(3) only entitles Morse to the pro rata value of the rent for the first two days of the month of December when Koenig occupied the premises, or $516.13.
The bankruptcy court granted Morse's request for the full amount of rent for the month of December. The Bankruptcy Appellate Panel of the Sixth Circuit affirmed the bankruptcy court's decision, and the debtor appealed to the United States Court of Appeals for the Sixth Circuit.
The debtor argued that the language of section 365(d)(3), specifically the "obligations of the debtor . . . arising from and after the order for relief," is ambiguous, as evidenced by a split of authority among the bankruptcy and district courts as to whether a debtor is obligated to pay a full month's rent, or only the pro rata share for the days the debtor actually occupied the property. The debtor asserted that, due to the alleged statutory ambiguity, the court is required to look beyond the language of the statute to determine Congress's intent. The Sixth Circuit disagreed and found that the language of the statute was unambiguous with respect to the debtor's rent obligation.In the Sixth Circuit's view, the language of section 365(d)(3) and the terms of the lease are clear. The debtor was obligated to pay Morse $8,500 in advance on the first day of each month. This obligation arose on December 1, 1997, which was within the postpetition, prerejection period. The Sixth Circuit rejected the debtor's argument that policy considerations, equity, and common sense compel adoption of the proration method to avoid a windfall to the lessor. The court found no inequity in its decision, noting that it was fully within the debtor's discretion to decide when to reject the lease. Because the debtor chose to reject after the payment obligation under the lease arose, the debtor was bound by that obligation and was required to pay Morse the full amount of rent due for December. The court noted that its decision is consistent with congressional intent to shift "the burden of indecision" to the debtor. The court observed that the purpose of section 365(d)(3) is to "prevent parties in contractual or lease relationships with the debtor from being left in doubt [during the postpetition, prerejection period] concerning their status vis-`-vis the estate."
Although the Sixth Circuit's decision may appear to benefit only creditors, it also provides a clear rule upon which debtors may rely for determining the best time to reject a lease. In courts within the Sixth Circuit and others that may follow the decision in Koenig, it is clear that the costs to a debtor of delaying lease rejection for even one or two days may be significant if additional rent obligations under the lease will arise.
Koenig Sporting Goods, Inc. v. Morse Road Company (In re Koenig Sporting Goods, Inc.), No. 99-3347, 2000 U.S. App. LEXIS 2020 (6th Cir. 2000).