LBJ Creekside LLC v. Door to Door Storage Inc

Filing 11

ORDER affirming the Bankruptcy Court's Order, by Judge Ricardo S Martinez. (SWT)

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UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF WASHINGTON
AT SEATTLE

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In re:

Case No. C17-1385RSM

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DOOR TO DOOR STORAGE, INC.,

Bankruptcy Case No. 16-15618

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Debtor.

ORDER AFFIRMING BANKRUPTCY
COURT

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This matter comes before the Court on appeal by LBJ Creekside, LLC (“LBJ”) from an

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Order of the Bankruptcy Court for the Western District of Washington (“Bankruptcy Court”)

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granting in part an administrative claim against debtor Door to Door Storage, Inc. (“Debtor” or

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“Door to Door”). Dkt. #6.

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I.

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BACKGROUND

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On March 17, 2016, Door to Door Storage, Inc., and LBJ entered into a non-residential

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commercial lease for property located at Building 2, 20425 72nd Avenue, South Kent,

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Washington (the “Lease”). See Dkt. #9 at 12 – 13. The base rent was due on a monthly basis

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on the first day of each calendar month in the amount of $18,312. Id. at 12 and 14. On

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November 7, 2016, Debtor Door to Door filed a chapter 11 petition in the Bankruptcy Court.

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Dkt. #5-1 at 2.

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ORDER AFFIRMING BANKRUPTCY COURT - 1

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The parties agree that on May 17, 2017, the Bankruptcy Court entered an Order

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approving the sale of substantially all of Debtor’s assets free and clear of liens and approved

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the assumption and/or rejection of certain contracts and leases. Pursuant to the terms of the

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Order, Debtor was to reject LBJ’s unexpired lease and provide 10 days’ written notice to LBJ

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before the rejection would be effective.
On May 23, 2017, LBJ received the written notice of rejection by Debtor, which notice
was dated May 22, 2017. Dkt. #9 at 6–7. The notice said in relevant part:
“…you are hereby provided notice that the Debtor is rejecting its
non-residential real property lease with LBJ Creekside, LLC with
respect to the premises located at Building 2, 20435 72nd Avenue
South, Kent, Washington 98032 (the ‘Lease’) as of the date that is
10 days after the date of this notice (the ‘Rejection Date’).”
Id. The date 10 days after May 22, 2017, is June 1, 2017.

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LBJ made an administrative claim for the entire month of June 2017. Id. at 3–5.

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Debtor objected to this claim, id. at 48–52, and the Bankruptcy Court sustained that objection,

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but did allow administrative rent on a pro-rated basis for one day of rent in June. See id. at 58–

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69. In doing so, the Bankruptcy Court specifically noted that the rejection date was June 1,

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2017. Id. at 65. The Court rejected the application of cases cited by the parties, found that

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there was no binding Ninth Circuit authority, and “follow[ed] the majority of Courts that have

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adopted the proration, or accrual method, which follows the pre-Bankruptcy Code practice of

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prorating a debtor’s rent payments due under a lease, regardless of the billing date.” Id. at 66 –

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67 (citing In re Phar-Mor, Inc., 290 B.R. 319, 323-24 (Bankr. N.D. Ohio 2003). The Court

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noted that this outcome “serves the legislative intent of providing landlords with a current

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payment for current services without producing results that are inconsistent with the

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ORDER AFFIRMING BANKRUPTCY COURT - 2

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Bankruptcy Code.” Id. at 67 (citing In re GCP CT School Acquisition, LLC, 443 B.R. 243, 251

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(Bankr. D. Mass. 2010)).

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LBJ appealed, arguing that it is entitled to an administrative claim for the entire month
of June 2017 pursuant to § 365(d)(3) of the Bankruptcy Code.

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II.

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DISCUSSION

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The District Court has original subject matter jurisdiction over Debtor’s chapter 11 case

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and over all civil proceedings arising in or related to the chapter 11 case. 28 U.S.C. § 1334.

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The District Court, acting in its appellate capacity, reviews the bankruptcy court’s legal

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conclusion de novo and its factual determinations for clear error. In re Olshan, 356 P.3d 1078,

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1083 (9th Cir. 2004). However, a bankruptcy court’s order allowing or disallowing a proof of

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claim, including an administrative claim, is reviewed for abuse of discretion. Burlington N.

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R.R. Co. v. Dant & Russell, Inc. (In re Dant & Russell, Inc.), 853 F.2d 700, 707 (9th Cir. 1988);

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Bitters v. Networks Elec. Corp. (In re Networks Elec. Corp.), 195 B.R. 92, 96 (9th Cir. BAP

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1996). A bankruptcy court abused its discretion if it applied the wrong legal standard or its

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findings were illogical, implausible or without support in the record. TrafficSchool.com, Inc. v.

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Edriver Inc., 653 F.3d 820, 832 (9th Cir. 2011).

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As an initial matter, the Court agrees with the Bankruptcy Court’s determination that the

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rejection date was June 1, 2017. The Debtor’s notice was sent on May 22, stating that the

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rejection was effective ten days later. Although, the notice was not received until May 23, under

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Federal Rule of Bankruptcy Procedure 9006(f), adding time for mailing only occurs if there is a

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response allowed after the service. There was no response allowed, therefore it was served on

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May 22, 2017.

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ORDER AFFIRMING BANKRUPTCY COURT - 3

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LBJ argues that it is entitled to an administrative claim for the entire month of June

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2017 pursuant to § 365(d)(3) of the Bankruptcy Code. LBJ cites to the same cases before the

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Bankruptcy Court, namely In re Koenig Sporting Goods Inc., 203 F.3d 986, 989 (6th Cir.

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2000); In re Montgomery Ward Holding Corp., 268 F.3d 205 (3rd Cir. 2011); In re Cukierman,

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265 F.3d 846 (9th Cir. 2001); and Pacific Atlantic Trading Company, 27 F.3d 401, 405 (9th

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Cir. 1994). Dkt. #7. LBJ argues that Cukierman stands for the proposition that there is a

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“bright-line rule” that clearly provides that “all obligations due as of rejection are entitled to

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administrative priority.” Id. at 8.

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In Response, the Debtor argues that Pacific-Atlantic Trading “confirms that a landlord

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holds an administrative expense claim for the post-petition, pre-rejection time period under

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Bankruptcy Code section 365(d)(3), regardless of the value of the lease to the bankruptcy

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estate,” and that this case “involved no issues relating to determination of the pre-rejection time

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period.”

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Dkt. #8 at 9.

Similarly, the Debtor dismisses In re Cukierman, stating that it

“confirms that a landlord holds an administrative expense claim for postpetition obligations

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under a lease, even if they do not relate to the property, so long as they are designated as rent,”

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and that this case “involved no issues relating to determination of the pre-rejection time

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period.” Id. at 10. The Debtor cites to cases it cited before the Bankruptcy Court in support of

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its position that the Court should use the “accrual” or “proration” approach. Id. at 10–11

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(citing, inter alia, In re Treesource Industries, Inc., 363 F.3d 994, 2004 WL 764909 (9th Cir.

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2004)). Although the Bankruptcy Court ignored these cases, it properly followed the majority

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of courts in applying the accrual approach to the LBJ administrative expense claim, according

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to the Debtor. The Debtor points out that the Bankruptcy Court followed the Ninth Circuit rule

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ORDER AFFIRMING BANKRUPTCY COURT - 4

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that administrative expenses are to be construed narrowly.

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Industries, 66 F.3d 1091, 1094 (9th Cit. 1995)).

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Id. at 13 (citing In re Dak

The Court finds that the Bankruptcy Court did not abuse its discretion in rejecting in part
LBJ’s administrative claim. The Bankruptcy Court correctly determined that none of the cases

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cited by the parties were directly on point or binding, and followed the majority of Courts that

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have adopted the proration, or accrual method. LBJ has failed to convince the Court that this

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was the wrong legal standard to apply, or that the conclusion that the Debtor owed one day of

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rent was “illogical, implausible or without support in the record.” See TrafficSchool.com,

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supra. Accordingly, the Bankruptcy Court’s Order will be affirmed.
III.

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CONCLUSION

For the reasons stated herein, the Bankruptcy Court's Order is AFFIRMED. This case is
CLOSED.
DATED this 20th day of April, 2018.

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A
RICARDO S. MARTINEZ
CHIEF UNITED STATES DISTRICT JUDGE

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ORDER AFFIRMING BANKRUPTCY COURT - 5