In Re: KP Fashion Company

Filing 9

MEMORANDUM AND ORDER: that the Bankruptcy Court's order is affirmed. (Signed by Judge Naomi Reice Buchwald on 8/26/2011) Copies Mailed By Chambers. (ft)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
----------------------------------X
In re
KP FASHION COMPANY,
MEMORANDUM AND ORDER
Debtor.
---------------------------------X
JOHN S. PEREIRA, Chapter 7 Trustee,

10 Civ. 8429 (NRB)

Appellant,
- against RICH-TAUBMAN ASSOCIATES,
Appellee.
---------------------------------X
NAOMI REICE BUCHWALD
UNITED STATES DISTRICT JUDGE

This is an appeal brought by appellant John S. Pereira, the
Chapter

7

Trustee

of

KP

Fashion

Company

(the

“Trustee”

or

“appellant”) from an order of the United States Bankruptcy Court
for the Southern District of New York (the “Bankruptcy Court”),
entered on September 29, 2010, denying the Trustee’s motion for
an order expunging an administrative claim (the “Administrative
Claim”) of the appellee, Rich-Taubman Associates (“Taubman” or
“appellee”).

For the reasons set forth below, the Bankruptcy

Court’s order is affirmed.
BACKGROUND1

1

The following facts are drawn from the parties’ briefs (Brief of Appellant,
John S. Pereira, as Chapter 7 Trustee of KP Fashion Company (“Trustee’s
Br.”), Brief of Appellee Rich-Taubman Associates (“Taubman Br.”), and Reply

Taubman and KP Fashion Company (the “Debtor”) were parties
to a commercial real estate lease (the “Lease”) dated February
12, 2008, under which the Debtor leased space (the “Premises”)
from

Taubman

in

Connecticut.

the

Taubman

Stamford

Town

maintained

a

Center
letter

in

Stamford,

of

credit

as

collateral.
On

December

31,

2008

(the

“Petition

Date”),

the

Debtor

filed a voluntary petition under Chapter 7 of the United States
Bankruptcy Code.

The appellant was appointed as the Trustee

pursuant to 11 U.S.C. § 701.
filed

a

Notice

of

On January 20, 2009, the Trustee

Presentment

for

the

issuance

of

rejecting the Lease nunc pro tunc to the Petition Date.

an

order

Taubman

filed a limited objection the motion, challenging the request
for nunc pro tunc relief.

In its objection, Taubman stated that

the Premises had not been vacated by the Trustee or returned to
Taubman, that furniture and other equipment belonging to the
estate was still on the Premises, and that representatives of
the Trustee were marketing the space and showing it to potential
assignees.

See Taubman Br. at 3.

On January 30, 2009, the Bankruptcy Court entered an order
which stated “that the [Lease] between the Debtor and [Taubman]

Brief of Appellant, John S. Pereira, as Chapter 7 Trustee of KP Fashion
Company (“Trustee’s Reply Br.”)), and the record before the Bankruptcy Court.
Unless otherwise noted, the facts are not materially in dispute.
We
reference entries on the Bankruptcy Court’s docket with the notation “Bankr.
Dkt.”

2

for the [Premises] be and hereby is rejected effective as of a
date no later than 5:00 p.m. on January 30, 2009, subject to (a)
return to [Taubman] of all keys, and copies thereof, to the
Premises,

and

(b)

immediate

surrender

of

the

Premises

to

[Taubman], all of (a) and (b) being pursuant to 11 U.S.C. §
365(d)(4).” Bankr. Dkt. 82 (emphasis in original).
day

that

the

Bankruptcy

Court

entered

its

On the same
order,

a

representative of the Trustee provided Taubman with the keys to
the Premises.
After

Taubman Br. at 4.

the

Court’s

order,

connection with the Lease.
Claim

Number

5

(the

Taubman

filed

two

claims

in

At issue in this case is Taubman’s

“Administrative

Claim”)

for

$33,614.47,

which reflects the amount due under the Lease on January 1, 2009
(adjusted downward to account for the fact that the Lease was
rejected on January 30, 2009).

Id. at 4.2

On August 13, 2010, the Trustee filed a motion for an order
expunging

the

Administrative

Claim.

In

its

motion

to

the

Bankruptcy Court, the Trustee argued (1) that the Lease should
be rejected nunc pro tunc to the Petition Date, (2) that if the
Lease is not rejected nunc pro tunc to the Petition Date, “any
administrative expense allowed to [Taubman,] should be in an
amount far less than that set forth in the Lease between the

2

The full amount due under the lease for the month of January was $34,
734.96.

3

Debtor and [Taubman]”, and (3) that if any administrative claim
is

allowed,

the

Bankruptcy

Court

“should

direct

that

the

proceeds of the irrevocable standby letter of credit in the
amount

of

$360,000.00

drawn

by

[Taubman]

and

which

is

collateralized with cash of the Debtor should be applied first
to the payment of the administrative claim.”

Bankr. Dkt. 324.

On September 8, 2010, Taubman filed a response to the Trustee’s
motion.

Bankr.

Dkt.

September 15, 2010.

331.

The

Trustee

filed

a

reply

on

Bankr. Dkt. 339.

At a hearing on September 16, 2010, the Bankruptcy Court
denied

the

Administrative

Trustee’s
Claim.

The

objections
Bankruptcy

and

upheld

Taubman’s

Court

entered

an

order

denying the motion and upholding the Administrative Claim on
September 29, 2010.

The Trustee filed a Notice of Appeal on

October 8, 2010.
DISCUSSION
I.

Standard of Review
When reviewing a Bankruptcy Court’s decision, we “accept[ ]

its factual findings unless clearly erroneous but review[ ] its
conclusions of law de novo.”

DG Creditor Corp. v. Dabah (In re

DG Acquisition Corp.), 151 F.3d 75, 79 (2d Cir. 1998); see also
Olin Corp. v. Riverwood Int’l (In re Manville Forest Prods.),
209 F.3d 125, 128 (2d Cir. 2000).
II.

Analysis

4

A. Collateral Estoppel
Taubman argues that the Trustee’s request for nunc pro tunc
rejection of the Lease is prohibited by the doctrines of res
judicata

and

collateral

estoppel.

This

is

because,

Taubman

contends, the Bankruptcy Court’s January 30, 2009 Order already
denied the Trustee’s motion for nunc pro tunc rejection and has,
pursuant to Federal Rule of Bankruptcy Procedure 8002, been a
final,

non-appealable

order

since

February

10,

2009.3

In

response, the Trustee contends that “the January 30, 2009 Order
did not deny the Trustee’s request for nunc pro tunc rejection”
because “[i]t would be senseless to have an order entered the
same day that provides for rejection no later than said date.”
Trustee’s Reply Br. at 2 (emphasis in original).
contends

that

the

January

outside

date

for

the

30,

2009

effective

Order

date

of

The Trustee

“merely

fixed

rejection”

an

and,

therefore, “was not a final order concerning the effective date
of rejection of the Lease.”

Id.

“Res judicata evokes the common law principles of judicial
economy and comity.

It provides that a final judgment on the

merits bars a subsequent action between the same parties over
the same cause of action.”

Channer v. Dep’t of Homeland Sec.,

527 F.3d 275, 279 (2d Cir. 2008).

3

“Provided the parties have

Federal Rule of Bankruptcy Procedure 8002(a) provides, inter alia, that a
“notice of appeal shall be filed with the clerk within 14 days of the date of
the entry of the judgment, order, or decree appealed from.”

5

had a full and fair opportunity to litigate the matter, [a]
final judgment on the merits of an action precludes the parties
or their privies from relitigating issues that were or could
have been raised in that action.”

Id. (brackets in original)

(internal quotation marks omitted).

Similarly, the doctrine of

collateral

estoppel

bars

relitigation

of

a

legal

or

factual

issue that was previously decided in a prior action where: “(1)
the issues in both proceedings are identical, (2) the issue in
the

prior

proceeding

was

actually

litigated

and

actually

decided, (3) there was [a] full and fair opportunity to litigate
in the prior proceeding, and (4) the issue previously litigated
was

necessary

merits.”

to

support

a

valid

and

final

judgment

on

the

Grieve v. Tamerin, 269 F.3d 149, 153 (2d Cir. 2001)

(quoting United States v. Hussein, 178 F.3d 125, 129 (2d Cir.
1999) (internal quotation marks omitted).
Here, by conditioning the rejection date of the Lease upon
the Trustee’s return of the keys and immediate surrender of the
premises -- neither of which had occurred at the time the Order
was entered -- the Bankruptcy Court’s January 30, 2009 Order
(which was apparently submitted to the Bankruptcy Court as a
proposed order negotiated by the parties (Taubman Br. at 3))
necessarily denied the Trustee’s motion for rejection of the
Lease

nunc

pro

tunc

to

the

Petition

Date.

The

Trustee’s

contention that the January 30, 2009 Order “merely fixed an

6

outside date for the effective date of rejection” ignores the
fact that, under the terms of the Order, any such “outside date”
could not have been the Petition Date because the conditions for
rejection had not been met at that time.

Thus, the Trustee had

a “full and fair opportunity” to litigate this exact issue,
which was “actually litigated and actually decided,” and which
was “necessary to support a valid and final judgment on the
merits.”
B. Retroactive Rejection
Even if the Trustee’s motion for nunc pro tunc rejection
were

not

collaterally

estopped,

we

find

that

the

Bankruptcy

Court did not abuse its discretion in denying the Trustee’s
request for nunc pro tunc rejection of the Lease.4
Section

365(a)

of

the

Bankruptcy

Code

provides

that

a

“trustee, subject to the Court’s approval, may assume or reject
any executory contract or unexpired lease of the debtor.”
U.S.C. § 365(a).

11

Section 365(d)(3) provides that the trustee

“shall timely perform all of the obligations of the debtor,
except those specified in section 365(b)(2) arising from and
after

the

order

for

relief

under

4

any

unexpired

lease

of

Appeals from a bankruptcy court's disposition of a request for retroactive
relief are reviewed for abuse of discretion.
Adelphia Bus. Solutions, Inc.
v. Abnos, 482 F.3d 602, 607 (2d Cir. 2007) (“We . . . follow our sister
circuits, which . . . review . . . retroactivity decisions for abuse of
discretion”); BP Energy Co. v. Bethlehem Steel Corp. (In re Bethlehem Steel
Corp.), 2002 WL 31548723 (NRB), at *2 (S.D.N.Y. Nov. 15, 2002) (citing In re
Thinking Machines Corp., 67 F.3d 1021, 1028 n.8 (1st Cir. 1995).

7

nonresidential real property, until such lease is assumed or
rejected.”

Id. at § 365(d)(3) (emphasis added).

Although there is a split in authority as to the effective
date

of

rejection

for

purposes

of

section

365(d)(3),

“[t]he

majority of courts faced with this issue have held that the
effective

date

of

rejection

is

the

date

of

the

bankruptcy

court's order approving rejection, and that court approval is a
condition precedent to effective rejection.”
Corp.,

179

B.R.

33,

37

(S.D.N.Y.

1995).

In re Jamesway
See,

e.g.,

In

re

Federated Department Stores, Inc., 131 B.R. 808, 814-15 (S.D.
Ohio 1991) (“[T]he effective date of rejection for purposes of
11 U.S.C. § 365(d) was the date of the bankruptcy court's order
approving the rejection[.]”); In re 1 Potato 2, Inc., 182 B.R.
540, 542 (Bankr. D. Minn. 1995) (“[R]ejection of a lease is only
effective upon court approval.”). “The minority view is that
rejection is effective when the landlord receives unequivocal
notice of the debtor's intent to reject, and that rejection may
occur prior to issuance of the order approving rejection.”

In

re Jamesway Corp., 179 B.R. at 37.
Here, the Trustee argues that “the Bankruptcy Court should
have exercised its equitable power and authorized the rejection
of the Lease nunc pro tunc to the Petition Date” because the
Trustee

“could

not

possibly

have

acted

more

expeditiously

without abdicating his obligations to the estate.”

8

Trustee’s

Br.

at

5.

While

it

does

appear

that

the

Trustee

acted

expeditiously after the Petition Date,5 the Trustee’s conduct
does not provide a basis upon which to find that the Bankruptcy
Court erred –- let alone abused its discretion –- in signing the
parties’ proposed rejection order and conditioning rejection of
the

Lease

upon

the

Trustee

vacating) the Premises.

turning

over

the

keys

to

(and

Indeed, the Trustee’s request for nunc

pro tunc rejection to the Petition Date seeks relief that would
extend even beyond the “minority view . . . that rejection is
effective when the landlord receives unequivocal notice of the
debtor's intent to reject.”
37.6

In re Jamesway Corp., 179 B.R. at

In any event, the relevant question here is not whether the

Bankruptcy
order7,

but

Court

had

rather

the

whether

discretion
the

5

to

issue

Bankruptcy

a

Court

retroactive
abused

its

At the hearing on the Trustee’s motion to expunge the Administrative Claim,
the Bankruptcy Court commended the Trustee, noting that he “acted very
efficiently and fairly, and . . . got out so as to avoid another month’s
accrual[.]”
Transcript of Sept. 16, 2010 Hearing before Judge Gropper
(“Tr.”), at 26:1-2)).
6
For example, in In re Jamesway Corp., the district court affirmed the
bankruptcy court’s order retroactively setting the rejection date to the last
day for filing objections to the debtor’s rejection motion.
The bankruptcy
court found that the landlord’s objection to the motion was improper and thus
that the court could have authorized the rejection as of the last day for
filing objections. See In re Jamesway Corp., 179 B.R. at 38. (However, the
bankruptcy court denied the debtor’s motion for nunc pro tunc rejection of
the lease to an earlier (pre-motion) date.) Id. at 38. No such comparable
circumstances exist in this case.
7
At the hearing on the Trustee’s motion to expunge the Administrative Claim,
the Bankruptcy Court stated: “I certainly have granted retroactive orders,
retroactive to the date of the bringing of the motion and notice. Especially
when the property is vacant, and the landlord can take possession of it.”
Tr. at 25:20-24.
Furthermore, we note that this Court has held, in a case
involving gas purchase contracts, “that a bankruptcy court is not precluded
as a matter of law from authorizing a rejection date which precedes the

9

discretion by not doing so in this case.

For the reasons set

forth above, we find that the Bankruptcy Court’s rejection order
was reasonable and certainly not an abuse of discretion.
C. The Amount of the Administrative Claim
The

Trustee

Administrative

argues

Claim

is

that,
not

in

the

expunged,

event

“any

that

the

administrative

expense allowed to Taubman should be in an amount far less than
that set forth in the Lease between the Debtor and Taubman.”
Trustee’s Br. at 5.
truly

used”

the

The Trustee contends that because it “never

property,

but

amount should be d[e] minimus.”
Under

section

365(d)(3)

rather

“safeguarded”

it,

“the

Id.
of

the

Bankruptcy

Code,

“[t]he

trustee shall timely perform all obligations of the debtor . . .
arising from and after the order for relief under any unexpired
lease of nonresidential real estate, until such lease is assumed
or rejected, notwithstanding section 503(b)(1) of this title.”
11 U.S.C. § 365(d) (emphasis added). Section 503(b)(1) allows
for administrative expenses for the “actual necessary costs and
expenses of preserving the estate.”

11 U.S.C. § 503(b)(1).

Section 365(d) was amended in 1984 “to relieve the burden
placed on nonresidential real property lessors (or ‘landlords’)
during the period between a tenant’s bankruptcy petition and

filing of objection when the equities demand such remediation.”
Co., 2002 WL 31548723, at *3.

10

BP Energy

assumption or rejection of a lease.”
Inc.

In re Pudgie’s Dev. of NY,

239 B.R. 688, 692 (S.D.N.Y. 1999).

“The majority of

courts agree that § 365(d)(3) now gives landlords a right to
payment in the full amount of rent and other charges under the
lease

without

showing

that

benefit to the estate.”

Id.

the

amount

is

reasonable

or

of

See In re BH S&B Holdings LLC, 401

B.R. 96, 103-04 (Bankr. S.D.N.Y. 2009) (following the majority
rule); In re Comdisco Inc., 272 B.R. 671, 676 (Bankr. N.D. Ill.
2002) (“The debtor in possession is . . . required to timely
perform

the

debtor's

lease

obligations

in

spite

of

anything

contained in § 503(b)(1).”); In re Wingspread Corp., 116 B.R.
915,

925

(Bankr.

S.D.N.Y.

1990)

(stating

that

[the

phrase]

“‘notwithstanding section 503(b)(1)’ [means] that irrespective
of whether the payments required under the lease meet the usual
requirements

for

administrative

status,

reasonableness

and

benefit to the estate, they are unconditionally due (unless the
landlord
denial

has

or

engaged

deferral

in

of

some

act

payment)”).

which
See

Bankruptcy ¶ 365.04[3][g][ii] (16th ed.)
interpret

section

365(3)(d)

as

warrants
also

3

reduction,

Collier’s

on

(“A majority of courts

granting

the

lessor

automatic

administrative expense treatment, independent of section 503(b),
which ordinarily governs allowance of administrative expenses,
for the amount called for by the lease.”).

11

But see In re Orvco,

Inc., 95 B.R. 724 (9th Cir. B.A.P. 1989); In re Mr. Gatti’s, Inc.
164 B.R. 929, 946 (Bankr. W.D. Tex. 1994).
We agree with the majority view and find that, under the
plain language of section 365(d), the lessor need not show that
the amount due is reasonable or of benefit to the estate.

Thus,

the Bankruptcy Court properly denied the Trustee’s objection to
the administrative claim for the amount due under the Lease.
D. Evidentiary Hearing
Next, the Trustee argues that the Bankruptcy Court erred by
not

taking

evidence

concerning

Administrative Claim.
portion

of

the

the

“other

charges”

in

the

Specifically, the Trustee objects to a

Administrative

Claim

that

involved

“other

charges” amounting to $15,148.74 “which was above and beyond the
base rent.”
“[t]here

Trustee’s Br. at 6-7.

was

no

evidence

portion of the claim.”
Under

Federal

presented

The Trustee contends that
at

the

hearing

on

this

Id. at 7.

Rule

of

Bankruptcy

Procedure

3001(f),

a

creditor’s “proof of claim executed and filed in accordance with
[the rules of Bankruptcy procedure] shall constitute prima facie
evidence of the validity and amount of the claim.”

“To overcome

this prima facie evidence, the objecting party must come forth
with evidence which, if believed, would refute at least one of
Reilly v. Novak, 245 B.R. 768,

the allegations of the claim.”
773 (2d Cir. B.A.P. 2000).

12

Here,

Taubman’s

Administrative

Claim

submitted

to

the

Bankruptcy Court included an exhibit setting forth the various
expenses under the lease.

These included, inter alia, fees for

common

electricity,

area

maintenance,

Bankr. Dkt. 324, Ex. A-1.

and

air

conditioning.

Taubman contends, and the Trustee

does not dispute, that these charges “were obligations of the
debtor (and hence the Trustee) under the Lease.”

Taubman Br. at

11. Rather, the Trustee argues that “there is nothing in the
record below which conclusively indicates the propriety of these
‘other

charges’

claims.”

or

that

they

are

properly

administrative

Trustee’s Reply at 3 (emphasis added).

As a preliminary matter, the Trustee’s questioning of the
“other
refute”

charges”
the

is

claim

not

“evidence

(Reilly,

245

which,
B.R.

at

if

believed,

773),

and

would

thus

insufficient to overcome the validity of the claim.

is

In any

event, there appears to be no dispute that these “other charges”
were provided for in the Lease.
administrative claims.
(describing

the

As such, they are properly

See In re Pudgie’s Dev., 239 B.R. at 692

“majority”

view

that

Ҥ

365(d)(3)

now

gives

landlords a right to payment in the full amount of rent and
other charges under the lease”) (emphasis added); 3 Collier’s on
Bankruptcy ¶ 365.04[1] (16th

ed.) (“The statutory requirement

that the trustee ‘timely perform all the obligations

13

. . .

arising from and after the order for relief’ does not appear to
be limited to rent payment obligations.”).8
E. Application of the Letter of Credit
Finally,

the

Trustee

contends

that

the

Bankruptcy

Court

erred by not applying Taubman’s letter of credit proceeds to the
Administrative Claim.

As a preliminary matter, we note that the

Trustee does not address this argument in its reply brief.

In

any event, the Bankruptcy Court did not err by rejecting it.

We

agree with the Bankruptcy Court’s assessment of the cases cited
by

Trustee,

“none

of

which

apply

against the administrative claim.”

[letter

of

Tr. at 17:08.

credit]

funds

For example,

in In re Stonebridge Technologies Inc., 430 F.3d 260 (5th Cir.
2005), the Fifth Circuit held that where a landlord did not file
a claim against the estate, it could draw upon its letter of
credit to recover damages beyond the capped amount under 11
U.S.C. § 502(b)(6).9

And in In re AB Liquidating Corporation,

8

The Trustee further contends that Taubman admits that some of the “other
charges” “‘do not reflect actual usage.’”
Trustee’s Reply at 3-4 (quoting
Taubman Br. at 11 n.7). As noted above, however, the relevant issue for the
assessment of an administrative claim is not “actual usage.”
Here, the
Trustee does not dispute that under the terms of the lease, some of the
charges were not based on actual usage.
9
11 U.S.C. § 502(b)(6) limits the claim “of a lessor for damages resulting
from the termination of a lease of real property” to the extent that the
“claim exceeds –
(A) the rent reserved by the lease, without acceleration, for the
greater of one year, or 15 percent, not to exceed three years, of the
remaining term of such lease, following the earlier of –
(i) the date of the filing of the petition; and
(ii) the date on which such lessor repossessed, or the lessee
surrendered, the leased property; plus
(B) any unpaid rent due under such lease, without acceleration, on the
earlier of such dates[.]”

14

416 F.3d 961 (9th Cir. 2005), the 9th Circuit held that funds from
a letter of credit should be applied against the capped claim
under § 502(b)(6), instead of gross damages.10
As the court stated in In re PYXSYS Corporation, 288 B.R.
309, 319 (Bankr. D. Mass. 2003), “it is clearly the case that
Congress intended the amount of a security deposit to be applied
to a landlord’s pre-petition claims, whether by way of lease
arrearages or lease rejection damages.”).

See also In re Far

West Corp. of Shasta Cnty., 120 B.R. 551, 552 (Bankr. E.D. Cal.
1990) (noting the “parties[’] agreement that a security deposit
generally cannot be applied against a landlord's postpetition
administrative rent claim but, rather, must be applied against
any prepetition, unsecured claim the landlord might have against
the debtor/tenant.”).

Here, the Trustee does not dispute that

the funds from the letter of credit, which Taubman drew upon and
applied to its pre-petition claims under the lease, were in fact
insufficient to satisfy the pre-petition amount due to Taubman.
Those

funds

were

properly

claim,

and

thus

the

Trustee’s

motion

for

applied

Bankruptcy
the

funds

to
Court
to

Taubman’s
properly
be

pre-petition
denied

applied

to

the
the

Administrative Claim.

10

Indeed, in response to the Bankruptcy Court’s inquiry as to whether there is
any case authority to support the application of letter of credit proceeds to
an administrative claim, counsel for the Trustee stated that he did not
believe there was. Tr. at 16:15-16.

15

CONCLUSION

For the foregoing reasons,

the Bankruptcy Court's order is

affirmed.

Dated:

New York, New York
August 26, 2011

Copies of the foregoing Order have been mailed on this date to

the following:

Attorney for Appellant:

Harold D. Jones, Esq.

Jones & Schwartz, P.C.

1 Old Country Road, Suite 384

Carle Place, NY 11514

Attorney for Appellee:

Donna H. Lieberman, Esq.

Jule D. Dyas, Esq.

Halperin Battaglia Raicht, LLP

555 Madison Avenue, 9 th Floor
New York, NY 10022-3301

16