No. 72 B 49
April 26, 1979
Former Bankruptcy Act — Powers of the Court — Rejection of Executory Contract — Administration Priority Claim
A claim for rent on an unexpired lease of real property was not entitled to priority as a cost of administration since the Chapter XI debtor did not retain possession of the premises nor gain any benefit from his neglect to reject the lease in accordance with Sections 313(1), 357(2) and Rule 11-53 of the Bankrupty Act. See Sec. 313(1) at ¶ 3318 and Sec. 365(2) at ¶ 8629, and Sec. 357(2) at ¶ 3364 and Sec. 1123 at ¶ 12,107, and Rule 11-53 at ¶ 20,753.
[Digest of Opinion]
The only question for this court was whether a claim for rent on an unexpired lease of real property was entitled to priority as a cost of administration since the lease was not rejected in compliance with Sections 313(1), 357(2) or Rule 11-53 of the Bankruptcy Act.
In January, 1972 the bankrupt filed a petition for arrangement pursuant to Chapter XI of the Bankruptcy Act. An order of adjudication was entered approximately a year later. The creditor and the bankrupt entered into a sublease contract covering the period from May, 1971 to November, 1973. The bankrupt vacated the premises on or about February, 1972 and so notified the creditor by letter dated January, 1972. Despite efforts by the creditor to relet the premises, they remained vacant during the remainder of the lease's term. The bankrupt, by its trustee, conceded that it did not disaffirm or reject the lease in conformity with Sections 313(1), 357(2) or Rule 11-53 of the Act.
The creditor argued that rejection of an executory contract may be accomplished only by affirmative action which complies with the stated Bankruptcy Sections, and that absent such rejection the contract continues in effect. None of the cases cited by the creditor, however, addressed the question of whether a claim supported by a contract not so rejected was to be accorded priority status. The court cited In re Fredrick Meats, Inc., 483 F.2d 951 (9th Cir. 1973) which held that "the claim did not rest upon the lease, but rather upon the lessor's right to compensation for the receiver's actual use and occupancy of the premises." This view is supported by the Second Circuit. In American Anthracite Bituminous Coal Corp. v. Leonardo Arrivabenene, S.A. 280 F.2d 119 (2d Cir. 1960) the mere fact that the creditor had access to certain ships was not sufficient to establish a priority claim even though a benefit may have been conferred upon the estate. There, the court said, the same sort of benefit would be realized in the case of a lease of real property not occupied by the debtor; the benefit is the value of the optionor to either accept or reject the option, and a priority will be denied. In the instant case, the debtor did not retain possession of the premises in question and the estate did not benefit from its failure to assume or reject the lease in conformity with the Act. Accordingly, the creditor's proof of claim was denied priority and therefore disallowed.