IN RE: OSCAR HORNSBY, INC. CASE NO. 00-61313 ORDER REGARDING TAXES OWING ON PILOT LEASE

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
CORBIN

IN RE:

OSCAR HORNSBY, INC. CASE NO. 00-61313

DEBTOR

ORDER REGARDING TAXES OWING ON PILOT LEASE

This matter is before the court on motion of Pilot Development Corporation ("Pilot") to compel payment of certain city and county tax bills totalling $5,143.54, if paid before January 31, 2001, for property located in Corbin,Whitley County, Kentucky and leased by the debtor from Pilot. (Document # 47). On January 17, 2001 the trustee filed a response to the motion (Document # 76), and on January 18, 2001 counsel for Pilot filed a reply (Document # 89). The court heard argument of counsel on January 18, 2001. (See Document # 85).

On December 12, 2000 Oscar Hornsby, Inc. ("Hornsby") filed in this court a skeletal petition for relief under chapter 7 of the U. S. Bankruptcy Code. On that same day Maxie E. Higgason was duly appointed as interim trustee. (Document # 6). A Section 341 hearing was scheduled for and conducted on January 11, 2001. On December 27, 2000 counsel for the debtor filed a motion to extend the time to file a complete petition. (Document # 21). The motion was heard on January 12, 2001 (see Document # 62), and an order was entered on that date extending the time for filing to February 2, 2001. (Document # 63). At the hearing counsel for the debtor stated that gathering information in order to prepare the schedules in this case is difficult due to the size of the case and the fact that much of the information is known by Mr. Hornsby personally. (1) On January 9, 2001 the trustee filed a motion to extend the time for performance of obligations under unexpired leases of nonresidential real property, pursuant to 11 U.S.C. § 365(d)(3). (Document # 45). On January 10, 2001 he filed a motion to extend the time to assume or reject executory contracts or unexpired leases, pursuant to 11 U.S.C. § 365(d)(1), (3), and (4). (Document # 51). On January 19, 2001, at a continued hearing on the motions, the motion to extend time to perform obligations was granted and the time for performance was extended to January 30, 2001. (Document # 95). The motion to extend time to assume or reject leases was continued to hearing on January 29, 2001. (Document # 96).

The parties are in agreement as to the facts at issue. Under the terms of the lease dated November 2, 1995 between Pilot as lessor and Oscar Hornsby, Inc. as lessee, Hornsby is responsible for the payment of all tax bills. The lease reads, "As an additional rental hereunder, Lessee shall pay and discharge as they become due, [sic] all taxes and assessments on the Leased Premises, including license fees." (Document # 94, Ex. "A," p. 2, ¶ 7). In his affidavit the president of Pilot, Robert L. Brown, III, states that throughout the term of the lease the debtor has paid the tax bills directly to the taxing authorities, that Pilot never paid taxes owing on the property, never invoiced for reimbursement on taxes paid by Pilot.

The bills at issue are for taxes which accrued during the year 2000. Counsel for Pilot asserts that some two weeks before the tax obligations became due the trustee declined to sign an agreed order which would have rejected the lease with Pilot. (Document # 89). Offered as proof of this assertion is a copy of the agreed order with cover letter to the trustee dated December 19, 2000, that is, seven days after the filing of the bankruptcy petition. (Document # 94, Ex. "F").

As authority that the tax bills should be paid in full, counsel for Pilot cites the so-called "Billing Date Approach" applied in Koenig Sporting Goods, Inc., 203 F.3d 986 (6th Cir. 2000), and Krystal Company, 194 B.R. 161 (Bankr. E. D.Tenn. 1996). As authority that the tax bills should be prorated with payment being only for the portion determined to be post-petition and pre-rejection, counsel for the trustee cites the so-called "Accrual (Allocation/ Proration) Approach" applied in Handy Andy Home Improvement Centers, Inc., 144 F.3d 1125 (7th Cir. 1998). Counsel for the trustee also refers to the opinion issued by this court in Quaker Coal Company, Inc., Case Nos. 00-51374 and 00-51376 - 00-51394 (jointly administered) regarding 11 U.S.C. 365(d)(3) in the context of coal mining royalties. (Documents # 595 & 729). This court finds all of the cases cited by counsel distinguishable to the facts presented here and therefore not controlling in this case. Furthermore, the precise question presented here has not been addressed by this circuit.

Recognizing there is a split of authority, with a substantial minority of courts holding that under Section 365(d)(3) a debtor-tenant under a nonresidential property lease must pay in full all bills received from the landlord during the period of time that is post-petition and pre-assumption or rejection without regard to when the charges accrued, this court is persuaded by the rationale of the majority of courts which hold that a debtor's obligation under a lease of non-residential real property should be prorated to cover the "postpetition, prerejection period" regardless of the billing date.

As for case law, this court's opinion entered in the Quaker Coal bankruptcy case is inapplicable here because the facts of that case involved coal mining royalties. Furthermore, the Sixth Circuit cases of Koenig, 203 F.3d 986, and Vause, 886 F.2d 794 (6th Cir. 1989), are not compelling to this factual situation. Those two chapter 11 cases involved rent, not taxes- in Koenig, monthly rent on a sporting goods store, due on the first day of each month or, in other words, in advance; in Vause, annual rent on a farm, due at the end of the year or, in other words, payable in arrears. (2) Reliance by counsel for Pilot on Koenig, although decided under Section 363(d)(3) unlike Vause which was decided under Section 502(b)(6), is misplaced. The opinion in Koenig was rendered in the context of "a month-to-month, payment-in-advance lease." In sum, both cases out of the Sixth Circuit were decided under the unique facts of those cases.

As for the argument of counsel for Pilot that the trustee had "control" of the lease, comment made by the courts in Koenig and Krystal, those cases were decided in the context of chapter 11 and concerned debtors in possession, not a chapter 7 trustee. Furthermore, as anyone involved in this case is abundantly aware, neither the trustee nor the creditors have yet seen the schedules- at a hearing on January 12, 2001 this court reluctantly granted counsel for the debtor until February 2, 2001 in which to complete the petition, based on representations that gathering information about the assets and liabilities of the debtor is difficult. Additionally, it should be noted the agreed order offered by Pilot to the trustee in which the Pilot lease would have been rejected was sent by letter dated only a week after the filing of this bankruptcy and appointment of the trustee. Lastly, in seeking additional time in which to assume or reject leases, the trustee has cited the need to"fully and accurately assess the extent and scope" of the lease obligations of the debtor which as of the date of the motion, January 10, 2001, numbered twenty-five. (Document # 51). In short, the trustee cannot be said to have had "control" of the leases in this case.

There being no precedent in the Sixth Circuit regarding the issue presented here and having read the lower court opinions in Koenig and being mindful that bankruptcy court is a court of equity, this court holds, and it is so ordered, that the Pilot's motion to compel payment in full of certain city and county tax bills is overruled. The debtor is obligated to pay that portion of the city and county tax bills which arose under a non-residential real property lease between Oscar Hornsby, Inc. and Pilot Development Corporation dated November 2, 1995 and which taxes accrued from the date of filing of the chapter 7 petition in this court, December 12, 2000, until the lease is assumed or rejected by the trustee.

Dated:

By the court -



______________________________

JOSEPH M. SCOTT, JR.

U. S. BANKRUPTCY JUDGE





Copies to:



Robert L. Brown III, Esq.

John E. Hinkel, Esq.

Maxie E. Higgason, Jr., Esq.

Caryn L. Belobraidich, Esq.

U. S. Trustee



 

1. Oscar Hornsby testified at a hearing on 12/15/00 that he is sole shareholder and president of the debtor corporation which operated 18 gasoline and food marts ("convenient stores") in Georgetown, Lexington, Morehead, and Somerset, Kentucky and which owns 2 "bulk plants" in Lexington and Somerset, Kentucky.

2. Despite language in the Pilot-Hornsby lease that taxes are considered to be additional rent, the reality of the situation is these are bills by taxing authorities, not rent payable to the landlord.