Prior to the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), a debtor tenant could routinely seek to extend the deadline to assume or reject a nonresidential real property lease. Specifically, 11 U.S.C. §365(d)(4) provided:

Notwithstanding paragraphs (1) and (2), in a case under any chapter of this title, if the trustee does not assume or reject an unexpired lease of nonresidential real property under which the debtor is the lessee within 60 days after the date of the order for relief, or within such additional time as the court, for cause, within such 60-day period, fixes, then such lease is deemed rejected, and the trustee shall immediately surrender such nonresidential real property to the lessor.

At first blush, the statutory language appears to require the debtor to obtain an order to extend the time to assume or reject the lease within the 60-day deadline. However, many courts interpreted the language of this statute to mean that so long as the debtor filed a motion to extend the deadline to assume or reject the lease within the 60-day deadline, the debtor had preserved the court's ability to consider the motion and grant such request after the 60-day deadline had passed.²

Changes under BAPCPA to §365(d)(4) appear to drastically alter this interpretation. Specifically, amended §365(d)(4) now provides that unexpired nonresidential real property leases in which the debtor is the lessee are deemed rejected and must be surrendered to the landlord by the earlier of 120 days after the commencement of the case or the date of confirmation of a plan. The court, for cause, may extend the 120-day deadline prior to the expiration of the 120-day period by an additional 90 days on a showing of cause, but any further deadlines may only be granted with the written consent of the landlord.

In short, the changes to §365(d)(4) appear on their face to require the court to rule on a debtor's request for an extension to assume or reject within the 120-day statutory deadline. However, the old version of §365(d)(4) also appeared to include this directive. See pre-BAPCPA §365(d)(4) ("or within such additional time as the court, for cause, within such 60-day period, fixes..."). Nevertheless, as already noted, many courts disregarded this apparent constraint. Thus, the question is whether the courts will adhere to prior reasoning in interpreting the new provisions of §365(d)(3), and whether such reasoning should be applied to this new provision.

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The practical and seemingly sensible approach to assumption and rejection issues under old §365(d)(4) appears to have been foreclosed by new §365(d)(4).

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Existing Cases on Lease Rejection

In order to answer this question, it is appropriate to examine the rationale of some of the seminal cases under old §365(d)(4). The most often-cited case is In re Southwest Aircraft Services Inc., 831 F.2d 848 (9th Cir. 1987). In Southwest, the court looked to the plain language of the statute and concluded that the court's ability to extend the 60-day deadline was limited by a clause in the statute that included three successive terms: "for cause," "within such 60-day period" and "fixes." Id. at 850. The court ultimately determined that the statute was ambiguous because it was not at all clear whether the second term "within such 60-day period" modified the term that precedes it, "for cause," or the term that follows it, "fixes." The court noted that if the court read the term as modifying "fixes," then it would not under a plain reading of the statute have the authority to grant a timely filed motion to extend beyond the 60th day. If, however, the term modified "for cause," "then while the cause must arise within 60 days (and implicitly the debtor must file its motion to show cause within that period), there is no express limit on when the bankruptcy court must hear and decide the motion." Id.

The court then analyzed the legislative history of the statute and the policy considerations attendant to assumption and rejection. Ultimately, the court determined that a rule that would forfeit a party's rights, benefits, privileges or opportunities just because a court failed to rule within a certain period of time would be extraordinary. Id. at 851. The court noted that such a consequence was not expressed by Congress in the legislative history. Id. Moreover, the court determined that a statute that requires a court to grant the motion within the 60-day period would encourage debtors to file "pro forma" motions for extensions of time to assume leases before debtors could properly consider whether such an extension was necessary. This practice would burden the court with numerous unnecessary show cause hearings. Id. at 852. Accordingly, the court ruled that provided a motion for an extension to assume or reject is made within the 60-day time period, a court may consider the motion after the expiration of the 60-day extension period. Id. at 853.

Similar rationales and similar outcomes were reached by the courts in Wedtech, Cook, Garrett Road Supermarket, Chapman, Perfectlite, Oncology, Burger's Travel 2000 and Southern Technical, supra. In sum, the courts' liberal interpretation of §365(d)(4) was derived from the practicalities of hearing motions to extend time and the lack of legislative history on how §365(d)(4) should be applied.

Legislative History of New §365(d)(3)

Such leeway with the statutory provisions under new §365(d)(4), however, does not appear likely. First, there does not appear to be any ambiguity in the plain language of new 11 U.S.C. §365(d)(4), which provides that the 120-day initial period can only be extended within the 120-day period for cause upon the motion of the trustee or lessor. This language is significantly different from old §365(d)(4), where there was a clear ambiguity in what word was modified by the phrase "within such 60-day period." In re Southwest, 831 F.2d at 850. Without the ambiguity in the statute, courts will be hamstrung by the plain meaning.

Second, and perhaps more significantly, it appears that the legislative history of the amendments to §365(d)(4) foreclose any option to hear a motion outside the initial 120-day period. According to the Congressional Record, Sen. Orrin Hatch spoke on March 10, 2005, in favor of S. 256 (BAPCPA) and noted that "the bankruptcy legislation cures some abuses in the Bankruptcy Code regarding executory contracts and unexpired leases." Sen. Hatch expanded on this comment by noting:

Presently, §365(d)(4) provides a retail debtor 60 days to decide whether to assume or reject its lease. A bankruptcy judge may extend this deadline for cause—and therein is the problem. Some experts believe that too many bankruptcy judges have allowed this exception essentially to eliminate any notion of a reasonable and firm deadline on a retail debtor's decision to assume or reject a lease. Some bankruptcy judges have been extending this deadline for months and years, often to the date of confirmation of plan.
This legislation...acts to curb this abuse. It imposes a firm deadline on a retail debtor's decision to assume or reject a lease. It permits a bankruptcy trustee to assume or reject a lease on a date which is the earlier of the date of confirmation of a plan or the date which is 120 days after the order for relief. A further extension of time may be granted, within the 120-day period, for an additional 90 days, for cause, upon the motion of the trustee or lessor. Any subsequent extension can only be granted by the judge upon the prior written consent of the lessor; either by the lessor's motion for an extension or by a motion of the trustee, provided that the trustee has the prior written approval of the lessor. This is important. We are limiting the bankruptcy judges' discretion to grant extensions of the time for the retail debtor to decide whether to assume or reject a lease after a maximum possible period of 210 days from the date of entry of the order of relief. Beyond that maximum period, there is no authority in the judge to grant further time unless the lessor has agreed in writing to the extension.

S. Res. 256, 109th Cong., 1st Sess., 151 Cong. Rec. 2461 (2005).

In short, it appears to be the intent of the legislature to set a hard and fast deadline within which a debtor may assume or reject a nonresidential real property lease with 210 days set as the deadline absent some agreement with the landlord.

Impact of the Change

There appears to be at least two consequences that will arise from this drastic change to §365(d)(4). First, attorneys will now have to ensure that motions to extend the deadline for 90 days for cause are filed and heard within the initial 120-day period. This will likely mean more motions to shorten time. In order to alleviate this problem in large cases, debtors' counsel will probably obtain standing orders to bring such motions on shortened time and limited notice.

Second, and perhaps more significantly, debtors will have to address their lease issues very early in a case. This will often mean making decisions on leases well before the debtor may have an idea of how it intends to reorganize. In large cases, this may not have much impact on the case because such debtors usually have undertaken studies well in advance of filing to determine which locations are most viable. The same cannot be said for small-business debtors, where pre-bankruptcy planning is often minimal. As a result, it is likely there will be costly mistakes in assumption and rejection matters in small-business cases, leading to large administrative claims subject only to reasonableness constraints. Even worse, debtors may close operations that could have been salvaged with additional time to determine their best course of action. Such results may even cause a debtor that could have been reorganized to turn to liquidation—clearly, a distasteful result.

The changes to §365(d)(4) will have broad-reaching consequences for debtors and landlords. The practical and seemingly sensible approach to assumption and rejection issues under old §365(d)(4) appears to have been foreclosed by new §365(d)(4). As a result, reorganizations have been made more difficult because of the legislature's perceived abuses under old §365(d)(4).

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Footnotes

¹ This article was prepared with the research assistance of Foster Pepper & Shefelman PLLC associate Courtney Anderson and summer associate Terrance Keenan. Return to article

² See In re Southwest Aircraft Services Inc., 831 F.2d 848 (9th Cir. 1987); United States v. Oncology Assocs. P.C., 269 B.R. 139 (D. Md. 2001); In re Travel 2000 Inc., 264 B.R. 451 (Bankr. W.D. Mich. 2001); In re Berger's Babes N' Bears Inc., 149 B.R. 715 (Bankr. M.D. Fla. 1993); In re Southern Technical College Inc., 148 B.R. 550 (Bankr. E.D. Ark. 1992); In re Perfectlite Co., 116 B.R. 84 (Bankr. N.D. Ohio 1990); Chapman Inv. Assocs. v. Am. Healthcare Mgmt. Inc., 94 B.R. 420 (N.D. Tex. 1989), aff'd., 900 F.2d 827 (5th Cir. 1990); In re The Casual Male Corp., 120 B.R. 256 (Bankr. D. Mass. 1990); In re Kroh Brothers Dev., 100 B.R. 480 (W.D. Mo. 1989); In re Cook United Inc., 83 B.R. 456 (Bankr. N.D. Ohio 1988); In re Wedtech Corp., 72 B.R. 464 (Bankr. S.D.N.Y. 1987); In re Unit Portions of Del. Inc., 53 B.R. 83 (Bankr. E.D.N.Y. 1985); In re Bon Ton Restaurant and Pastry Shop Inc., 52 B.R. 850 (Bankr. N.D. Ill. 1985); In re By-Rite Distributing Inc., 55 B.R. 740 (D. Utah 1985). Return to article