In Re: KOENIG SPORTING GOODS, INC. v. Morse Road Company

1
RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
ELECTRONIC CITATION: 2000 FED App. 0056P (6th Cir.)
File Name: 00a0056p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
_________________
In Re: KOENIG S PORTING
GOODS, INC.,
Debtor.
________________________
KOENIG S PORTING GOODS,
INC.,
Appellant,
v.
M ORSE R OAD C OMPANY ,
Appellee.
;>

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No. 99-3347
On Appeal from the Bankruptcy Appellate
Panel of the Sixth Circuit.
No. 97-15635—David F. Snow, Bankruptcy Judge.
Argued: January 25, 2000
Decided and Filed: February 15, 2000
Before: GUY, RYAN, and BOGGS, Circuit Judges.

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2 In re Koenig Sporting Goods, Inc. No. 99-3347
1The $8,500 monthly rent payment included $500 in charges for
common area maintenance.
_________________
COUNSEL
ARGUED: Jeffrey C. Toole, BUCKLEY, KING & BLUSO
CO., Cleveland, Ohio, for Appellant. Ellen Maglicic Kramer,
KOHRMAN, JACKSON & KRANTZ, Cleveland, Ohio, for
Appellee. ON BRIEF: Jeffrey C. Toole, Harry W.
Greenfield, BUCKLEY, KING & BLUSO CO., Cleveland,
Ohio, for Appellant. Ellen Maglicic Kramer, Jonathon M.
Yarger, KOHRMAN, JACKSON & KRANTZ, Cleveland,
Ohio, for Appellee.
_________________
OPINION
_________________
RALPH B. GUY, JR., Circuit Judge. Koenig Sporting
Goods, Inc. (debtor) appeals from the judgment of the
Bankruptcy Appellate Panel (BAP) affirming the bankruptcy
court’s decision to grant Morse Road Company’s request for
a full month’s rent. On appeal, the debtor claims that the
bankruptcy court and the BAP erred in ruling that 11 U.S.C.
§ 365(d)(3) requires a debtor in bankruptcy to pay rent for an
entire month when the debtor has rejected the lease of
nonresidential real property and vacated the premises on the
second day of the month. After a review of the record and
arguments presented on appeal, we affirm.
I.
The facts are not disputed. In November 1993, Morse, as
landlord, and the debtor, as tenant, entered into a ten-year
lease under which the debtor was obligated to pay Morse
$8,500 on the first of each month for that month’s rent.1 The
debtor operated a sporting goods store on the property. On
No. 99-3347 In re Koenig Sporting Goods, Inc. 7
4Morse relies on Vause as well. Both sides argue that the following
sentence from Vause strengthens their argument: “Section 502(b)(6) is
not difficult to apply when a lease does not make rent payable in arrears.”
Vause, 886 F.2d at 798-99. Our dicta as to the application of § 502(b)(6)
in a different context than was present in Vause is not controlling.
Further, the parties’ conflicting interpretations of the case undermine their
respective reliance upon it.
5“[A] farm lease is unique in that the lessee is permitted to occupy
and make use of the land but not pay for such use until the end of
occupancy.” Vause, 886 F.2d at 796. In contrast, the debtor here was
permitted to occupy Morse’s property if it paid in advance for that right.
period. That is a sensible adjustment of this particular debtor-
creditor relationship.”)
The debtor’s reliance on our decision in Vause is
unavailing.4 There, we considered the meaning of the term
“due” in 11 U.S.C. § 502(b)(6) to determine whether
Congress intended to give lessors damages for unpaid rent
“owing” under the lease or “payable” under the lease. In
Vause, the debtor farmers were obligated to pay the lessor
$36,000 on December 1 of each year for the prior year’s
occupancy.5 On November 27, 1985, four days before the
rent for 1985 became due, the debtors filed for bankruptcy
and sought permission to reject the lease. The farmers argued
that because the previous year’s rent was not due until
December 1, they were not obligated to pay any portion of the
rent. We found the term “due” to be ambiguous in that
context, and concluded that such a result, under the unique
facts of that case, would be inequitable and ruled in favor of
the lessor.
No such facts or inequities are present in this case. While
the debtor characterizes Morse’s receipt of a full month’s rent
for December 1997 as a “windfall,” we disagree. Rather,
Morse would receive that to which it is entitled under
§ 365(d)(3) and the debtor is obligated to pay under the lease.
AFFIRMED.

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6 In re Koenig Sporting Goods, Inc. No. 99-3347
left in doubt concerning their status vis-a-vis the estate.’”
Tully Constr. Co. v. Cannonsburg Envtl. Assocs., (In re
Cannonsburg Envtl. Assocs.), 72 F.3d 1260, 1266 (6th Cir.
1996) (quoting H.R. R EP . No. 95-595, at 348 (1978),
reprinted in 1978 U.S.C.C.A.N. 5963, 6304). The legislative
history also suggests that the purpose was “to relieve the
burden placed on nonresidential real property lessors (or
‘landlords’) during the period between a tenant’s bankruptcy
petition and assumption or rejection of a lease.” Omni
Partners, L.P. v. Pudgie’s Dev. of NY, Inc. (In re Pudgie’s
Dev. of NY, Inc.), 239 B.R. 688, 692 (S.D.N.Y. 1999) (citing
130 C ONG . R EC. S8894-95 (daily ed. June 29, 1994)
(statement of Sen. Hatch)).
Under the terms of the lease the debtor was obligated to pay
Morse $8,500 in advance on the first of each month for that
month’s rent. The specific obligation to pay rent for
December 1997 arose on December 1, which was during the
postpetition, prerejection period. Under these circumstances,
§ 365(d)(3) is unambiguous as to the debtor’s rent obligation
and requires payment of the full month’s rent.
The debtor argues that policy considerations, equity, and
“common sense” compel adoption of the proration method in
this context. We disagree. The debtor alone was in the
position to control Morse’s entitlement to payment of rent for
December. If the debtor had rejected the lease effective
November 30, 1997, rather than December 2, it would not
have been obligated to pay rent for December under 11 U.S.C.
§ 365(d)(3). Instead, an election was made to reject the lease
effective December 2, one day after the debtor’s monthly rent
obligation would arise. In this case, involving a month-to-
month, payment-in-advance lease, where the debtor had
complete control over the obligation, we believe that equity
as well as the statute favors full payment to Morse. See
Krystal, 194 B.R. at 164 (emphasizing that “Congress
intended § 365(d)(3) to shift the burden of indecision to the
debtor: the debtor must now continue to perform all the
obligations of its lease or make up its mind to reject it before
some onerous payment comes due during the prerejection
No. 99-3347 In re Koenig Sporting Goods, Inc. 3
August 18, 1997, the debtor voluntarily filed for bankruptcy
under Chapter 11 and later obtained leave from the
bankruptcy court to conduct going-out-of-business (GOB)
sales at its remaining retail stores. The debtor subsequently
moved for an extension of time within which it could assume,
assume and assign, or reject unexpired leases of
nonresidential real property. The debtor sought the right to
reject the leases, upon seven-days’ notice, covering the
properties where the GOB sales were to be held. Morse
received the debtor’s motion, but did not object. The
bankruptcy court granted the motion on November 6, 1997.
On November 25, 1997, the debtor notified Morse that it
was rejecting the lease effective December 2, 1997, which
was the date that the debtor vacated the property. On January
29, 1998, Morse filed a request with the bankruptcy court
seeking payment of the rent for the full month of December.
The debtor objected to paying rent for the entire month and
argued that Morse was entitled to receive only $516.13,
representing the pro rata value of rent for December 1 and 2.
The bankruptcy court disagreed and granted Morse’s request.
See In re Koenig Sporting Goods, Inc., 221 B.R. 737 (Bankr.
N.D. Ohio 1998). Following the debtor’s appeal, this circuit’s
BAP affirmed, with one judge dissenting. See Koenig
Sporting Goods, Inc. v. Morse Road Co. (In re Koenig
Sporting Goods, Inc.), 229 B.R. 388 (B.A.P. 6th Cir. 1999).
The debtor’s appeal to this court followed.
II.
The debtor claims that the bankruptcy court and the BAP
erred in ruling that Morse was entitled to a full month’s rent
under 11 U.S.C. § 365(d)(3). Based upon the statute’s
language, legislative history, common sense, and equity, the
debtor argues that it was only required to pay for the two days
that it actually occupied the premises at the beginning of
December.
“Whether an appeal comes to our court by way of a district
court or the BAP, our review is of the bankruptcy court’s
decision.” Corzin v. Fordu (In re Fordu), ___ F.3d ___, No.

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4 In re Koenig Sporting Goods, Inc. No. 99-3347
97-3936, 1999 WL 1222643, at *13 n.1 (6th Cir. Dec. 22,
1999). We review de novo the legal conclusions of the
bankruptcy court. See id. In granting Morse the right to a full
month’s rent, the bankruptcy court held that
section 365(d)(3) was, at the least, intended to assure the
landlord payment of ordinary monthly rent payments
which become due during the postpetition prerejection
period. Since Congress was no doubt well aware that
rent[] is usually paid monthly in advance, it is not really
possible to reconcile section 365(d)(3) with according the
Debtor the option not to pay its monthly rent when due,
even though payment would impinge to some extent
upon normal bankruptcy principles and priorities.
Statutory interpretation is a question of law also subject to de
novo review. See Vause v. Capital Poly Bag, Inc. (In re
Vause), 886 F.2d 794, 798 (6th Cir. 1989).
“The starting point in interpreting a statute is its
language[.]” Good Samaritan Hosp. v. Shalala, 508 U.S.
402, 409 (1993). “Our interpretation of legislative acts is
limited, for ‘[i]f the statutory language is unambiguous, in the
absence of a clearly expressed legislative intent to the
contrary, that language must ordinarily be regarded as
conclusive.’” Nixon v. Kent County, 76 F.3d 1381, 1386 (6th
Cir. 1996) (quoting Reves v. Ernst & Young, 507 U.S. 170,
177 (1993)). When a statute is unambiguous, resort to
legislative history and policy considerations is improper. See
Forbes v. Lucas (In re Lucas), 924 F.2d 597, 600 (6th Cir.
1991). “Departure from the language of the legislature and
resort to judicially created rules of statutory construction is
appropriate only in the ‘rare cases [in which] the literal
application of a statute will produce a result demonstrably at
odds with the intentions of its drafters . . . or when the
statutory language is ambiguous.’” Nixon, 76 F.3d at 1386
(quoting Kelley v. E.I. DuPont de Nemours & Co., 17 F.3d
836, 842 (6th Cir. 1994)). When a statute is ambiguous, we
look to its purpose and may consider the statute’s policy
implications in determining what Congress intended. See
No. 99-3347 In re Koenig Sporting Goods, Inc. 5
2A debtor’s obligations under § 365(d)(3) should not be analyzed by
reference to the principles governing administrative claims under
§ 503(b)(1). See Towers v. Chickering & Gregory (In re Pacific-Atlantic
Trading Co.), 27 F.3d 401, 405 (9th Cir. 1994).
3Both McCrory and Krystal, which involve a debtor’s obligation to
pay taxes pursuant to a lease, are cited simply to show the competing
views on the more general issue of proration versus full payment in the
§ 365(d)(3) context.
American Textile Mfrs. Inst., Inc. v. The Limited, Inc., 190
F.3d 729, 738-39 (6th Cir. 1999).
Section 365(d)(3) states in pertinent part:
The trustee shall timely perform all the obligations of
the debtor . . . arising from and after the order for relief
under any unexpired lease of nonresidential real property,
until such lease is assumed or rejected, notwithstanding
section 503(b)(1) of this title.2
The debtor argues that the language referring to the
“obligations of the debtor . . . arising from and after the order
for relief” is ambiguous and requires us to resort to judicially
created rules of statutory construction. Both parties have
identified the split of authority within the district and
bankruptcy courts as to the proper interpretation of this
provision. One line of cases generally supports the debtor’s
position that Morse is entitled to only a pro-rata share of
December rent for those days the debtor actually occupied the
property, see, e.g., Newman v. McCrory Corp. (In re McCrory
Corp.), 210 B.R. 934 (S.D.N.Y. 1997) (proration approach),
while the other line generally supports Morse’s entitlement to
a full month’s rent, see, e.g., In re Krystal Co., 194 B.R. 161
(Bankr. E.D. Tenn. 1996) (performance date approach).3
Neither the Sixth Circuit nor any other circuit has addressed
this issue in the context presented here.
The purpose of § 365(d) is to “‘prevent parties in
contractual or lease relationships with the debtor from being

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