USCA1 Opinion

November 17, 1995 UNITED STATES COURT OF APPEALS

UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
FOR THE FIRST CIRCUIT

_________________________

No. 95-1575

IN RE:

THINKING MACHINES CORPORATION,

Debtor.
_________________________

THINKING MACHINES CORPORATION,

Appellee,

v.

MELLON FINANCIAL SERVICES CORPORATION #1,

Appellant.

_________________________

ERRATA SHEET
ERRATA SHEET

The opinion of

this court

issued on October

17, 1995,

is

corrected as follows:

On page
line

2, line 13;

10; page

365(c)(3)" to "

15,

page 6, line 24;

line

19;

page

page 7, line
17, line

22

2; page 13,
change

365(d)(3)"

On page 7, line 11

change "

365(c)(4)" to "

365(d)(4)"

"

UNITED STATES COURT OF APPEALS

UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
FOR THE FIRST CIRCUIT

_________________________

No. 95-1575

IN RE:

THINKING MACHINES CORPORATION,

Debtor.
_________________________

THINKING MACHINES CORPORATION,

Appellee,

v.

MELLON FINANCIAL SERVICES CORPORATION #1,

Appellant.

_________________________

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MASSACHUSETTS

[Hon. William G. Young, U.S. District Judge]

___________________

_________________________

Before

Selya and Stahl, Circuit Judges,

______________

and Gorton,* District Judge.

______________

_________________________

Kevin J. Simard, with

_________________

whom

Charles R. Bennett, Jr. and

_________________________

Riemer & Braunstein were on brief, for appellant.

___________________

Charles R. Dougherty, with whom Jonathan C. Lipson and Hill

_____________________
__________________
____
& Barlow were on brief, for appellee.
________

_________________________

October 17, 1995

_________________________

______________
*Of the District of Massachusetts, sitting by designation.

SELYA,
SELYA,

Circuit Judge.
Circuit Judge.
______________

This appeal

compels

us

to

address a nagging question of bankruptcy law on which no court of

appeals

divided.

has yet

spoken and

on which

lower federal

courts are

The problem relates to the operation of section 365(a)

of the Bankruptcy Code, 11 U.S.C.

permits a Chapter 11

assume or reject

365(a) (1994), a statute that

trustee, subject to certain conditions,

any unexpired

lease or

executory contract

to

in

existence

on

the

date

the

insolvency

proceeding

commences.

Because the trustee's actions require court approval, and because

the

Code

leases or

treats nonresidential

leases

differently

executory contracts, requiring the

than other

estate to continue

paying rent at the contract rate until rejection takes effect, 11

U.S.C.

365(d)(3), a

question arises:

Is court

approval a

condition precedent or subsequent to the effective rejection of a

nonresidential lease

pursuant to section 365(a)?

is of considerably more than academic interest.

the waiting game

sums

priced

which

can ride

lease.

This question

Time is money in

that Chapter 11 often entails,

on how quickly

In this

date controls

the trustee can

case, for example,

carries with

it a

and substantial

jettison a high-

the determination of

swing of

approximately

$200,000.

The courts

be

answered.

rejection

The

below disagreed on how

bankruptcy

court

of its lease took effect only

In re Thinking Machines Corp., 178

________________________________

1994).

The

ruled

the question should

that

debtor's

on court approval.

B.R.

31 (Bankr.

district court reversed, holding that

the

See
___

D. Mass.

the rejection

was effective on the date that the debtor gave appropriate notice

of

its decision to reject.1

182 B.R.

365 (D. Mass.

statute is

most

See
___

1995).

propitiously

In re Thinking Machines Corp.,

_____________________________

Concluding,

read to

make

as we do,

court

that the

approval

condition precedent to an effective rejection of a nonresidential

lease, we now reverse.

I.
I.

BACKGROUND
BACKGROUND

The material

facts are undisputed.

In 1990, Thinking

Machines Corporation ("TMC" or "the debtor") leased a building in

Cambridge,

Massachusetts,

from

Mellon

Financial

Services

Corporation

#1 ("Mellon").

Apparently,

the environs

were not

sufficiently

conducive to

fertile thought,

for, on

August 17,

1994, TMC filed a voluntary petition seeking relief under Chapter

11 of the Code, 11 U.S.C.

the business as a

the demised

September

court

1101-1145.

debtor in possession.

premises, using only

13, 1994,

to approve

TMC filed

TMC proceeded to operate

It

continued to occupy

a fraction

of the space.

motion asking

its decision to

On

the bankruptcy

reject the lease.

The court

granted the motion on October 4.

Three

possession

of

weeks

later,

the

premises

Mellon

and

moved

payment

for

of

immediate

$345,915.89

____________________

1This date is sometimes

"motion filing date."
the trustee or debtor

called, in bankruptcy parlance, the

The label refers to the

requirement that

in possession must signify an

election to

accept or reject a particular lease

by the filing of a motion to

that effect in the bankruptcy court.

See Fed. R. Bankr. P. 6006,

___

9014.

Mindful of the pithy advice that St. Ambrose is reputed to

have offered St.

Roman

Augustine ("When you

style."), see Jeremy

___

are at Rome

live in

Taylor, Ductor Dubitantium,

__________________

the

I, I, 5

(1660), we shall employ this terminology.

(representing administrative

through the date on

rent accrued

at the

contract rate

which the bankruptcy court had

approved the

debtor's rejection of the lease, plus associated expenses).

parried

effective

this thrust

date

of

by touting

its

the motion

rejection (and,

boundary of its liability under the lease).

filing date

therefore,

It

the

TMC

as the

outer

also tendered to

Mellon $143,326.45 (the

amount due under

the lease through

the

motion filing date).

The bankruptcy

favor,

ruling that the rejection

court had

approved it,

Mellon $210,150.26

under

judge resolved the dispute

the

by

October

the debtor)

charges.2

effect until the

accordingly, the

(the difference between the

lease through

previously made

maintenance

and that,

did not take

and

the

plus interest

in Mellon's

debtor owed

total amount due

partial

payment

and common

See Thinking Machines, 178 B.R.

___ __________________

area

at 34.

When TMC appealed, the district court took a different slant.

held that

motion

were

the

rejection occurred

filing date),

due.

and that,

on

September 13,

therefore, no

See Thinking Machines, 182

___ _________________

1994

It

(the

further payments

B.R. at 369.

This appeal

ensued.

II.
II.

STANDARD OF REVIEW
STANDARD OF REVIEW

We afford plenary review

by a district court

to determinations of law made

sitting in appellate review of

a bankruptcy

____________________

2We note

an $80 discrepancy between

judgment and the

traceable to

total claimed

the court

the bankruptcy court's

arrearage.

papers.

We

do not

This

appears to

pursue the

point,

confident that any necessary adjustment can be made on remand.

be

court order,

See,
___

ceding no special deference to

the district court.

e.g., In re Winthrop Old Farm Nurseries, Inc., 50 F.3d 72,

____ ________________________________________

73 (1st Cir. 1995); In re G.S.F. Corp., 938 F.2d 1467, 1474 (1st
___________________

Cir. 1991); In re Navigation Technology Corp. 880 F.2d 1491, 1493

_________________________________

(1st Cir. 1989).

is in

This standard is fully applicable

here, as it

all cases in which we are asked to decipher the meaning of

a statute.

See, e.g., In re Jarvis, 53

___ ____ ____________

1995); United States

_____________

v. Holmquist,
_________

1994), cert. denied,

_____ ______

115 S.

F.3d 416, 419 (1st Cir.

36 F.3d 154,

Ct. 1797 (1995);

Gifford, 17 F.3d 462, 472 (1st Cir. 1994).

_______

158 (1st

United States
_____________

Cir.

v.

III.
III.

ANALYSIS
ANALYSIS

We

with

organize our

analysis

the statutory framework, the

nonresidential lease

in three

segments, dealing

time when the

rejection of a

becomes effective under that framework, and

the implications of our exercise in statutory construction on the

calculus of relief.

A.
A.

Section

here,

that "the

The Statutory Framework.

The Statutory Framework.
_______________________

365(a) states,

with

trustee, subject to

exceptions not

the court's

relevant

approval, may

assume or reject any executory contract or unexpired lease of the

debtor."

trustee

11

U.S.C.

365(a).3

This proviso

furnishes

the

with a multipurpose elixir for use in nursing a business

____________________

3For ease in
trustees.

reference, we

discuss the issue

in terms

of

We recognize, however, that under Chapter 11 a debtor

in possession has essentially the same rights, powers, and duties

as a trustee, see 11 U.S.C.
___
under
our

1107(a), 1108, including the right

365(a) to assume or reject a nonresidential lease.

comments and

conclusions,

context permitting,

Thus,

are equally

applicable to debtors in possession.

back to good health.

On one hand, the trustee

may prescribe the

elixir as a tranquilizer to ease the fears of squeamish suppliers

and

customers so that they

bankrupt

corporation.

prescribe

it

as an

will continue doing

On

the

emetic to

other

purge

hand,

business with a

the

trustee

the bankruptcy

may

estate of

obligations that promise to hinder a reorganization.

Having

originally

latitude in dispensing the

the

potion.

Since

contained no temporal

assume

given

Chapter

11

trustees

broad

elixir, Congress subsequently diluted

section

365(a),

as

initially

boundaries within which

enacted,

a trustee had

to

or reject an unexpired lease, and did not require debtors

to pay rent at

commercial

the contract rate while the

landlords

because,

unlike other

extending

credit to

reorganization

felt

themselves

unfairly

creditors, they

the

proceeding.

debtor

See

were forced

during

130

trustee equivocated,

the

Cong.

disadvantaged

to continue

pendency

Rec. 20084,

of

the

20088

___

(daily

ed. June 29,

1984), reprinted in
_________ __

598-99 (statement of Sen. Hatch).

1984 U.S.C.C.A.N. 590,

Whether or not love

of money

is the root of all evil, it is at the least a powerful motivator.

Spurred

by

financial

successfully

Amendments

for

(the

self-interest,

passage

of

the

"S/C Amendments")

the

landlords

so-called

as

part

lobbied

Shopping

of the

Center

Bankruptcy

Amendments and Federal Judgeship Act of 1984, Pub. L. No. 98-353,

98 Stat. 333.

The

S/C

significant respects.

Amendments

alter

First, they

the

direct

equation

in

the trustee,

two

in

timely fashion, to "perform all the obligations of the debtor . .

under any

unexpired

lease of

nonresidential real

until such lease is assumed or rejected."

This

provision requires

the trustee,

11 U.S.C.

inter alia,
_____ ____

property,

365(d)(3).

to

pay rent

under the lease at the contract

rate unless and until he rejects

it, and gives the landlord what

amounts to a preference

form of an administrative claim

365(d)(3)

is

marked

for such avails.

departure

from

the

in the

Thus, section

tenet,

reflected

throughout the

Code, that post-petition

administrative expenses

should be allowed only for "actual, necessary costs and

of

preserving

503(b)(1)(A).

the

[bankruptcy]

estate."

11

U.S.C.

Second, if the trustee fails to take a position in

regard to the lease within sixty days from the date

for relief under Chapter 11 (or within such

court,

expenses

of the order

longer period as the

on application, may fix), the lease is deemed rejected at

that juncture.

See 11 U.S.C.
___

the bankruptcy estate a

365(d)(4).

This provision gives

measure of protection against indecision

or inadvertence on the trustee's part.

These

solve,

that

modifications

several of

historically

ameliorate, but

the problems

have

related to

plagued

surviving problem concerns the

commercial

do

not entirely

tenant bankruptcies

landlords.

One

rampant uncertainty as to whether

a rejection will be deemed effective on the date of the trustee's

decision or only when the court thereafter endorses the decision.

It is to this question that we now turn.

B.
B.

When Is A Rejection Effective?

When Is A Rejection Effective?
_____________________________

The best hope for

capturing congressional intent is by

focusing

on

legislature.

according

the

language

Thus,

purposefully

deployed

statute ordinarily

to its plain meaning.

will

be

by

the

construed

See Estate of Cowart v. Nicklos

___ ________________
_______

Drilling Co., 112 S. Ct. 2589, 2594 (1992); In re Jarvis, 53 F.3d

____________
____________

at 419;

Pritzker v. Yari,
________
____

cert. denied,
_____ ______

42 F.3d

53, 67-68

115 S. Ct. 1959 (1995).

(1st Cir.

1994),

But, when Congress' words

admit of more than one reasonable interpretation, "plain meaning"

becomes

an impossible dream, and an inquiring court must look to

the policies,

principles and purposes underlying

order to

construe it.

Sullivan
________

v. CIA, 992 F.2d 1249, 1252 (1st Cir. 1993) (explaining

___

that

courts

may

"look

See Pritzker,
___ ________

behind

42 F.3d at

the statute in

statutory

67; see
___

language"

when

also
____

the

legislature "blows an uncertain

trumpet").

Congress, after all,

does not legislate in a vacuum.

Here,

the protagonists

assure us

that the

language is plain, and that we need not go beyond it.

says that under section 365(a)

statutory

The debtor

the rejection of a nonresidential

lease "plainly" becomes effective on the motion filing date (when

notice of rejection is given), subject to defeasance in the event

a judge later vetoes

the trustee's decision.

The

landlord says

that under section 365(a) the rejection of a nonresidential lease

"plainly" cannot

(when

the

decision).

become effective until the

bankruptcy

The

interpretation of

court

authorities

the statutory

places

are

its

court approval date

imprimatur

divided

as

to

language is appropriate.

on

the

which

Some

courts (albeit a minority) believe that section 365(a) should

read,

be

as TMC successfully argued in the district court, to align

judicial

approval as

independently

See, e.g.,
___ ____

N.D. Ill.

condition subsequent

effective rejection

of

to the

trustee's

nonresidential

lease.

In re Joseph C. Spiess Co., 145 B.R. 597, 604 (Bankr.

__________________________

1992); In re 1 Potato 2, Inc.,

________________________

58 B.R.

752, 755-56

(Bankr. D. Minn.

believe, as

1986).

courts (more numerous,

Mellon successfully argued in

that section 365(a)

as

Other

condition

should be read to

precedent

nonresidential lease.

to

an

overall)

the bankruptcy court,

require judicial approval

effective

rejection

of

See, e.g., In re Paul Harris Stores, Inc.,

___ ____ ______________________________

148 B.R. 307, 309 (S.D. Ind. 1992); In re Federated Dept. Stores,
_____________________________

Inc., 131 B.R. 808, 815-816 (S.D. Ohio 1991); In re Swiss Hot Dog
____
___________________

Co., 72 B.R. 569,

___

182 B.R.

540, 542

571 (D. Colo. 1987);

(Bankr. D.

Minn.

In re 1 Potato 2, Inc.,
_______________________

1995); In re Revco Dept.

___________________

Stores, Inc., 109 B.R 264, 267 (Bankr. N.D. Ohio 1989).
____________

No court

of appeals has ventured to answer the question.4

In

our

judgment,

this

collision

of

viewpoints

underscores

the obvious:

plainly indicates that a

although the

text of

section 365(a)

trustee's rejection of a nonresidential

____________________

4Contrary

to

Mellon's

characterization,

In re Arizona
_______________

Appetito's Stores, Inc., 893 F.2d 216 (9th Cir. 1989),

_______________________
point.

There, the Ninth Circuit merely

is not on

observed that "rejection

of an unexpired lease can be accomplished only by an order of the

bankruptcy court."

Id. at
___

correct as far as it goes

issue

here

section
rejection

is

365(a)

not whether

219-20 (dictum).
but

becomes legally

it does not go far enough.

court

clearly, it

The statement

is

effective

secured.

10

approval
but

is required
whether a

before court
______

is

The

under

purported

approval

is

lease

to

is conditional upon court approval, the text is unclear as

whether that

subsequent

365(a)

to

approval constitutes

an effective

is ambiguous

in

a condition

rejection.

this respect.

Gibbens, 25 F.3d 28, 34 (1st

_______

precedent or

Consequently, section

See United States

___ ______________

v.

Cir. 1994) ("A statute is ambiguous

if it can be read in more than one way.").

While

the

competing interpretations

proposed

by the

parties are both reasonable renditions of the statute's language,

we

believe that section 365(a) is most faithfully read as making

court approval a

condition precedent to

the effectiveness of

trustee's rejection

of a

nonresidential lease.

Therefore, the

date of court approval, not the motion filing date, controls.

We

are guided to this conclusion by several signposts.

First and foremost, we think that the

Bankruptcy

Chapter

Code and

nature of

judicial

oversight in

rejection.

authorization to

Bankruptcy is inherently

moment that a debtor's

be a condition

Norton,

(1994).

precedent to

a judicial process.

petition is filed

From

in the bankruptcy

court, the debtor's property is in custodia legis.

________ _____

C.

the

11 milieu combine to make it highly likely that Congress

intended judicial

the

the

structure of the

See 1 William
___

Jr., Norton Bankruptcy Law and Practice 2d

________________________________________

3:2

From that point forward, the bankruptcy court is charged

with overseeing the trustee's management in order

to ensure that

the interests of the bankruptcy estate are served.

supra,
_____

See 4 Norton,
___

77:4.

Judicial oversight of the reorganization

process takes

11

two

forms.

Many

routine decisions

are

made by

the

trustee

without any specific clearance from the bankruptcy court, and are

reviewed (if at all) only in

the course of an examination of the

trustee's overall stewardship (say, when a plan of reorganization

is proposed

decisions

or when an

are

not

application for

effective

sanctioned by the court.

is

almost

judicial

Arranging

oversight,

condition

matters

Congress

formula.

would

in

We can

abruptly

More importantly,

wished to inaugurate

they

precedent

this

minimizes false

efficiency of the process.

why

unless

In those instances,

invariably a

action.5

fees is filed).

judicial approval

to the

sequence

starts,

specifically

and

trustee's

facilitates

enhances the

think of no convincing reason

depart

we are

so radical

are

Other

from

this tried-and-true

confident that if

a change, it

Congress

would have

taken

pains to mark the trail brightly.

A second

reason for reading section

365(a) to require

judicial

approval as

nonresidential

a condition

lease is

section 365(a) as

rooted

part of

precedent

to rejection

in history.

Congress

the Bankruptcy Code

court approval of such rejections

of a

enacted

of 1978,

making

obligatory for the first time.

____________________

5We

note

several

leasing property

examples.

of the

Before

estate outside

using,

selling,

or

the ordinary course

of

business, the trustee must seek court approval.

363(b)(1).

Unless each

collateral

consents, the

entity that
trustee

has

may not

See
___

11 U.S.C.

an interest
use cash

collateral

unless the bankruptcy court

first grants authorization.

U.S.C.

If the

363(2)(A),

(B).

post-petition financing,
See 11 U.S.C.
___
of

the

approval.

estate,

364(b).
even

See 11 U.S.C.
___

he

trustee seeks

must first

in cash

See
___

11

extraordinary

obtain court

approval.

And the trustee may not abandon property

if burdensome,
554(a).

12

without

obtaining

court

The

predecessor

to

section

Bankruptcy Act of 1898,

the applicable bankruptcy

to

365(a),

11 U.S.C.

section

70(b)

110(b) (repealed

of

the

1978), and

rule governing actions taken

pursuant

section 70(b), Fed. R. Bankr. P. 607 (repealed 1978), did not

explicitly require judicial approval

a lease, and

many courts

of a trustee's rejection of

held that the

could make a rejection stick.

trustee, acting

alone,

See, e.g., Villas & Sommer, Inc.

___ ____ ______________________

v. Mahony (In re Steelship Corp.),

_______________________________

576 F.2d 128, 132

(8th Cir.

1978).

The conclusion is irresistible that Congress, by changing

the protocol in 1978, intended to involve bankruptcy courts

actively

of

in the decisional process.

increased involvement

approval

as

a condition

more

We believe that this policy

is better

served by

precedent

to the

viewing judicial

effectiveness

of a

rejection instead of as a condition subsequent.

In

found

a related

support

precedent

to

for

vein, we

requiring

rejection

in

court

two

procedure, namely, Fed. R. Bankr.

Revco, 109
_____

B.R. at 268.

trustee who

that

effect.

Read

note that several

approval

extant

rules

as

courts have

of

condition

bankruptcy

P. 6006 and 9014.

See, e.g.,
___ ____

together, these rules

require a

desires to reject a lease to file a formal motion to

This,

too,

constitutes

an

innovation

for,

previously,

rejecting

the rules

leases.

did not

We think

become

formal

this is another

process,

and, thus, reinforces our vision of court approval as a

valid rejection

13

lease.

involved

sign that Congress

courts

precedent to

more

procedure for

intended

condition

to

provide a

in

of a

the

decisional

nonresidential

The

statute

in the

third reason

for

manner favored

our view

by the

is

that reading

district court

the

tends to

reduce a bankruptcy court's order of approval to a bagatelle.

So

interpreted, the provision would trivialize judicial oversight of

the rejection

process.

Court orders are

customarily important

events in the life of a judicial proceeding; they are the primary

means through

which courts

speak, see, e.g.,

___ ____

Corp. v. Isla Rica Sales, Inc.,

_____
_____________________

and they should

Advance Financial
_________________

747 F.2d 21, 26 (1st Cir. 1984),

carry commensurate weight.

We see no reason for

allowing a trustee to substitute his voice for that of the court.

The trustee may sing all he wants, but it is

call the tune.

Cf. W.A. Mozart,

___

the court that must

Le Nozze di Figaro, Act 1, sc.2

__________________

(1786) (Figaro's Aria).

Along

the

court's "valid,

182 B.R.

scenario,

off

the sole reason for

post-petition

under the

place

contract rate

unexpired

the

district

Thinking Machines,
_________________

In the rejection

seeking court approval

liability, imposed

is to cut

by

nonresidential lease.

section

If

the

never had any meaningful legal existence in

the trustee will remain liable for rent at the

from the

judicial approval

rejection

that

disapproves the trustee's motion for rejection,

then the "rejection"

As

we think

at 368, is largely bereft of meaning.

bankruptcy court

the first

lines,

but voidable" construct, see

___

the debtor's

365(d)(3),

same

inception of the

will

always

be

insolvency proceeding.

the

last

step

in

the

pavane, it follows that the trustee's repudiation of a

14

lease can never be valid in any meaningful sense until the

court

has acted.

A final reason for

treating a

rejection as

our view stems from a

"valid, but

concern that

voidable" from the

motion

filing date forward would further ensnarl the tangles inherent in

the complexities

of modern commerce.

If "valid,

but voidable"

were the rule, the parties could act on the trustee's notice, and

their

actions would

disagreed.

have

to

Traditionally,

be

undone

attempts

if

to

the

court

unwind

later

bankruptcy

transactions after the fact have proven nettlesome, see, e.g., In

___ ____ __

re Stadium Mgmt. Corp., 895 F.2d 845, 849 (1st Cir. 1990); In re
_______________________
_____

Texaco, 92 B.R.
______

assume

that

38, 50 (S.D.N.Y. 1988), and

Congress

intended

to

we will not lightly

invite

these

myriad

complications.

This round

trip back to the future serves to highlight

the importance of factual certainty in the rejection process.

adopting

requirement of

court

precedent that allowed trustees to

they had either

assumed or rejected

approval,

In

Congress overruled

show by informal conduct that

leases (or other

executory

contracts, for that matter).

been designed at least

upon informal or

Thus, the requirement seems to have

in part to remedy the

equivocal rejections

problems attendant

particularly the lack of

clear notice to landlords as to when they could safely redeem and

relet

their property.

See
___

Gregory

G.

Hesse,

A Return to
_____________

Confusion and Uncertainty as to the Effective Date of Rejection

_________________________________________________________________

of Commercial Leases in Bankruptcy,

___________________________________

15

9 Bankr.

Dev. J. 521, 531

(1993) (discussing

legislative history).

Treating

a trustee's

rejection of a nonresidential lease as "valid, but voidable" tugs

in

the

opposite direction,

promoting

uncertainty

rather than

dispelling it.6

In an effort to resist the force of these four reasons,

TMC counters with two principal points.

language

used

in

section

365(a)

is

traditionally employs the vocabulary

inserting

requirement of

actions.

after notice

TMC

and

visualizes

atypical.

Congress

of prior authorization when

court approval

example, the statutes cited in note

court,

First, it notes that the

the Code.

For

5, supra, all say that

_____

"the

a hearing,"

in

may authorize

the somewhat

different

particular

wording

of

section

risky

365(a) as betokening a

to

read too

formulation,

unwilling,

explicit

different mechanism.

much into

Congress'

use of

But it is

an alternative

especially when the new language is opaque.

without

more, to

construe

reference to securing

intentional departure

from the

the mere

We are

absence

of an

court approval in

advance as an

pattern of prior

court approval

woven throughout the fabric of the Bankruptcy Code.

____________________

6We do

not think that

it is any

real answer to

insinuate

that "valid, but voidable" is workable because a bankruptcy court

will usually

support a

nonresidential
might suffer
particular
rejected

lease.

rejection after
premises,

Congress

unexpired

or

the

subsequently disapproved a

landlord

incurred

in adopting

date of a rejection.
intended to add an

the motion
We

diligently relet

substantial

advertise them, brings into

unfairness inherent

scrap an

The magnitude of the harm that a landlord

if the bankruptcy court

rehabilitate or

effective

trustee's desire to

expenses

the

to

focus the potential

filing date

as the

have no reason to think that

element of Russian

roulette to the

already

tumultuous effects

of

the

reorganization process

on

commercial landlords.

16

Next,

approval

burdens

respect,

as

TMC

the

the scarce

complains

termination

resources

section 365(a), in

departs from one of the

that

date of

using the

of

court

nonresidential

lease

of bankruptcy

date

estates.

In this

conjunction with section 365(d)(3),

general themes of Chapter 11 in

that it

hinders

the trustee's

unnecessary

general;

instances.

baggage.

they are

efforts to

But

rid the bankruptcy

general themes

not necessarily

are, by

controlling in

estate of

definition,

all specific

Since the S/C Amendments purposefully discounted this

general theme in relation to the specific circumstances presented

by nonresidential leases, TMC's

policy argument is best directed

to the legislative, not the judicial, branch.

We need go no

we

further.

For the reasons

limned above,

hold that a rejection of a nonresidential lease under section

365(a) becomes legally effective only after judicial approval has

been obtained.

C.
C.

Relief Under Section 365(a).

Relief Under Section 365(a).
___________________________

Although we have decided the precise issue presented on

appeal, we think it behooves us to make clear that nothing in our

holding

today precludes

a bankruptcy

court, in

section 365(a)

case, from approving

nonresidential

lease retroactive to the

an appropriate

a trustee's rejection

motion filing date.

of a

We

explain briefly.

Bankruptcy courts

Litton, 308 U.S.

______

Chapter

11

295, 304-05

context,

they

are courts of equity,

(1939), and,

may

sometimes

17

see Pepper v.
___ ______

particularly in

abandon

the

mechanical

solutions in favor

of the pliant reins of

Winthrop Old Farm Nurseries, 50

____________________________

bankruptcy

court,

fairness.

F.3d at 75

applying principles

of

(explaining that

equity,

discretion choose between valuation methods).

context, this means that

See, e.g.,
___ ____

may in

its

In the section 365

bankruptcy courts may enter retroactive

orders of approval, and should do so when the balance of equities

preponderates in favor of

such remediation.

See In re Jamesway
___ _______________

Corp., 179 B.R. 33, 39 (S.D.N.Y. 1995) (holding that a bankruptcy

_____

court

can order

rejection retroactive

avoid penalizing the

debtor for an

to an

earlier date

unnecessary delay caused

"to

by

the creditor"); see also

___ ____

154

(Bankr. D.D.C.

unfair

tunc

In re Garfinckels, Inc., 118

_______________________

1990)

(suggesting that,

in the

B.R. 154,

absence of

prejudice, a bankruptcy court may enter an order nunc pro

setting the

approval);

see
___

motion filing

generally
_________

11

date as

U.S.C.

bankruptcy courts to "issue any order,

the effective

105(a)

date of

(authorizing

process, or judgment that

is necessary or appropriate to carry out the provisions" of Title

11).

Of course,

are

not unlimited.

service

the equitable powers

They

can only

of the Bankruptcy Code.

be brought

to bear

courts

in the

See Norwest Bank, Worthington,

___ _________________________

v. Ahlers, 485 U.S. 197, 206 (1988).

______

exercise of its residual equitable

of bankruptcy

Thus, a bankruptcy court's

powers must be connected

to,

and

advance the

purposes of,

specific provisions in

See, e.g., In re Hoffman Bros. Packing Co.,

___ ____ _______________________________

(Bankr. 9th

Cir. 1994)

the Code.

173 B.R. 177, 185-86

(invalidating nunc pro

tunc order

that

18

contradicted

an

express

Code

provision).

There

is

little

question, however, that a retroactive order may be appropriate as

long

as

it

promotes

the

purposes

of

section

365(a).7

Consequently, we rule that a bankruptcy court, when principles of

equity

so dictate, may

approve a rejection

of a nonresidential

lease pursuant to section 365(a) retroactive to the motion filing

date.8

The fact

approve the

that the

bankruptcy court has

trustee's rejection

lease retroactive to the

effect; it should act

of an

the power

to

unexpired nonresidential

motion filing date has a

as a stimulus to all parties

salutary side

to cooperate

in getting the trustee's motion to reject heard and determined at

the

earliest practicable

retroactivity

Witness,

date.

Moreover,

the possibility

of

helps to explain the seeming rift in the case law.

for example, In re Joseph C. Spiess Co., 145 B.R. 597

____________________________

(Bankr. N.D. Ill. 1992),

the leading case cited by

the district

court in support of its "valid, but voidable" rationale.

reading of Spiess indicates

______

ultimate

conclusion

that

that the court may have

the

rejection took

A close

reached its

effect

on the

____________________

7Retroactive approval orders do not

While

that provision

contract rate until

not

stipulate

retroactively.

commands the

are

appeals from

trustee to

365(c)(3).

pay rent

a nonresidential lease is rejected,

that

rejection

cannot

be

made

at the

it does
to

apply

See Jamesway, 179 B.R. at 37.

___ ________

8We note, in this

orders

contradict

within

connection, that because such retroactive

the

bankruptcy

a bankruptcy court's

court's

sound

discretion,

disposition of a

request for

retroactive relief will be reviewed only for abuse of discretion.

See, e.g., Jarvis, 53 F.3d at 420; Grella v. Salem Five Cent Sav.
___ ____ ______
______
____________________
Bank, 42 F.3d 26, 30
____

(1st Cir. 1994); In re Gonic Realty Trust,

_________________________

909 F.2d 624, 626 (1st Cir. 1990).

19

motion filing date as opposed to the court approval date

basis

of

equitable, rather

court's actual holding is

the trustee's rejection of

date

that trustee takes

than

statutory,

illuminating.

principles.

affirmative steps to

"apply retroactively to

court held that

an unexpired nonresidential

the date the

to the

reject said lease

such as serving notice on motion to reject," the

could

The

After determining "that

a lease should be retroactive

a court-approved rejection of

on the

lease

trustee notices the

motion requesting same."

can

fairly

be

recognizing

equitable

that

powers

read

as

Spiess, 145 B.R. at 606.

______

an

retroactive

under

instance

of

approval

section

orders

365(a),

and

Thus, Spiess
______

bankruptcy

are within

acting

on

court

its

that

realization.

Reading

conflict

Spiess
______

in the case law.

in

this manner

the apparent

Doctrinal incoherence vanishes, and a

single black-letter rule emerges:

does

bridges

rejection under section 365(a)

not take effect until judicial approval is secured, but the

approving court

has the equitable

power, in suitable

cases, to

order a rejection to operate retroactively.9

IV.
IV.

CONCLUSION
CONCLUSION

We reverse

the decision of the

district court, vacate

its order, and direct that it remand the matter to the bankruptcy

court (which, if it

so elects, may in its

discretion reconsider

____________________

9Because
attempt to

no

spell

justify the use of

fashion.

two cases
out

the

are

exactly alike,

range of

we

circumstances

eschew any
that

might

a bankruptcy court's equitable powers in this

That exercise is best handled on a case-by-case basis.

20

its original order in light of this opinion).

The judgment of the district court is reversed, and the

The judgment of the district court is reversed, and the
_______________________________________________________

cause is remanded to the district court with instructions to

cause is remanded to the district court with instructions to
_________________________________________________________________

remit the case to the bankruptcy court.

remit the case to the bankruptcy court.
__________________________________________

appellant.
appellant.
_________

Costs in favor of
Costs in favor of
___________________

21