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Threatre Holding Corp. v. Mauro

June 1, 1982

THREATRE HOLDING CORP., DEBTOR-APPELLANT,
v.
MARCELLA PINCUS MAURO, JOHN E. MAURO AND PAUL MAURO, LANDLORDS-APPELLEES.



Debtor Theatre Holding appeals from a decision of Stewart, J. (S.D.N.Y.), affirming an order of Bankruptcy Judge Schwartzberg which granted the appellant-debtor thirty days to assume or reject its unexpired lease from appellee under 11 U.S.C. § 365(d) (2). Affirmed.

Before: LUMBARD, KAUFMAN and KEARSE, Circuit Judges.

Per Curiam:

Debtor Theatre Holding Corporation appeals from an order of Stewart, J. (S.D.N.Y.), which affirmed an order of Bankruptcy Judge Schwartzberg giving Theatre Holding 30 days to assume or reject its ground lease on 18 acres of land in Rockland County, New York. 11 U.S.C. § 365(d) (2) (Supp. IV 1980). We affirm for reasons which differ from those of the district court.

The land holds the Nanuet Dinner Theatre, a one-story plus mezzanine and dome building made of masonry and steel which once sat more than 3,000 as a regular theatre and now sits 1,106 at 196 tables as a dinner theatre. The theatre and its parking lot cover 5.5 of the 18 acres at issue here. The Mauros, lessors and appellees, own the land but not the theatre. In 1973 they leased the land to Theatre Go Round, Ltd. for 22 years, with options to renew, at a rent starting at $57,500 per year during 1973-82, and rising with the consumer price index in 1983 and 1988. The lease provides that title to the theatre, in addition to possession of the land, reverts to the Mauros upon breach of the lease. Theatre Go Round in 1973 borrowed $1.8 million at 11 percent from three savings institutions. In return, Theatre Go Round granted a mortgage on the theatre and assigned the lease. Theatre Go Round defaulted in 1976. The institutions foreclosed in 1977, and set up Theatre Holding Corp. as a subsidiary to hold the lease. Theatre Holding Corp. as a subsidiary to hold the lease. Theatre Holding subleased the property to Coachlight Dinner Theatre of Nanuet. Coachlight filed a Chapter 11 bankruptcy petition in January 1981. Theatre Holding filed its own Chapter 11 petition on May 14, 1981.

Theatre Holding successfully contended in bankruptcy court that it was not in actual possession of the land and theatre and, therefore, did not have to pay the Mauros anything for use and occupancy. 2 Collier on Bankruptcy P365.03[02] (L. King 15th Ed. 1981). As a Chapter 11 debtor, Theatre Holding owed the Mauros nothing until it either assumed the lease (in which case it would be liable thereunder) or rejected the lease (in which case it would be liable for breach). The Mauros moved under 11 U.S.C. § 365(d) (2) to require Theatre Holding to assume or reject by a date certain. Theatre Holding asked for 180 days. Bankruptcy Judge Schwartzberg at a hearing on June 27, 1981, gave Theatre Holding 30 days from that date to assume or reject. He subsequently extended the time to August 3. Theatre Holding appealed to the district court for more time and lost on January 18, 1982. This appeal was heard on May 7. We affirm. Our analysis shows that the passage of time has vitiated the debtor's arguments.*fn1

Section 365(d) (1) requires the trustee of a debtor in Chapter 7 -- liquidation -- to assume or reject an executory contract or unexpired lease within 60 days of filing a petition. Paragraph (2) of the subsection, however, provides no time limit for reorganization cases but leaves the matter to the court:

(2) In a case under chapter 9, 11 or 13 of this title, the trustee may assume or reject an executory contract or unexpired lease of the debtor at any time before the confirmation of a plan, but the court, on request of any party to such a contract or lease, may order the trustee to determine within a specified period of time whether to assume or reject such contract or lease.*fn2

Under the Bankruptcy act of 1898, the trustee in reorganization proceedings or the debtor-in-possession had a reasonable time to decide whether to accept or reject an unexpired lease. Philadelphia Co. v. Dipple, 312 U.S. 168, 174 (1941); In re United Cigar Stores Co. of America, 89 F.2d 3, 6 (2d Cir. 1937) (Swann, J.); In re Chicago Rapid Transit Co., 129 F.2d 1, 7 (7th Cir.), cert. denied, 317 U.S. 683 (1942); In re Gulfco Investment Corp., 520 F.2d 741 (10th Cir. 1975). Cases under the 1898 Act remain good law under the new Code, because Congress considered, and rejected, changing then existing law by imposing time limits on reorganizing debtors. The first version of § 365(d) (2) would have provided:

In a case under chapter [9 or 11] an executory contract or unexpired lease may be assumed at any time prior to the confirmation of a plan or in the plan, but [the court] upon request of any party to the lease or contract shall order the assumption or rejection by the trustee within a specified period of time, not exceeding thirty days, if further delay would result in prejudice to such a party.

Report of the Commission on the Bankruptcy Laws of the United States, H.R. Doc. 93-137, 93d Cong., 1st Sess., Part II § 4-602(a) (2) (1975) and S. 236, 94th Cong., 1st Sess. § 4-602(a) (2) (1975). Both houses of Congress dropped all references to a time limit and proposed the section in its present language in two later bills, H.R. 6, 95th Cong., 1st Sess. § 365(d) (2) (1977); S. 2266, 95th Cong., 1st Sess. § 365(d) (2) (1977). Therefore under the new Code, as under the old Act, the trustee or debtor in reorganization is allowed a reasonable time to decide whether to assume or reject. In re H & S Mfg. Inc., 13 Bankr. 692, 695 (Bankr. E.D.N.Y. 1981); 2 Collier on Bankruptcy P365.03[1] at 365-20.

What constitutes a reasonable time is left to the bankruptcy court's discretion in the light of the circumstances of each case. In re Flying W. Airways, 328 F. Supp. 1256, 1258 (E.D. Pa. 1971). This discretion should be informed by applicable law. First, cases from the 1898 Act remain relevant under the new Code. Second, § 365(d) (2) has pertinent legislative history. Finally, § 365(d) (2) must be construed in the context of the broad purposes of the entire Code.

The bankruptcy court ruled from the bench, resting its decision primarily on the fact that Theatre Holding Corp. was not paying for use of the property even though it was trying to maintain its freedom to assume or reject the lease. The court said this state of affairs allowed the debtor to "have its cake and eat it too."*fn3

The bankruptcy court might also have noted that the Mauros could in no event collect more than three years' rent from Theatre Holding as a claim for breach of the lease upon its rejection, 11 U.S.C.§ 502(b) (7). Thus the debtor's continued occupation of the land, coupled with its failure to pay taxes, could damage the lessors beyond the compensation available under the Bankruptcy Code.

On the other hand, the lease is Theatre Holding's primary asset. Theatre Holding's decision to assume or reject the lease would be central to any plan of reorganization in this Chapter 11 proceedings. In giving the debtor only 30 days to assume or reject, the bankruptcy court did not consider that Congress had rejected a 30-day limit in § 365(d) (2). In its decision, the bankruptcy court did not address prior case law, which held that "the right of receivers or trustees to a reasonable time is paramount to the lessor's right to re-enter." In re Chicago Rapid Transit Co., 129 F.2d 1, 7 (7th Cir. 1942). Under the old Act, the trustee's right was paramount "in furhterance of what Congress has sought to achieve in Chapter XI, for unless a debtor has the leeway needed to appraise its financial situation ...


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