In Re Southwest Aircraft Services, Inc., Debtor Anddebtor-in-possession, Debtor.southwest Aircraft Services, Inc., Appellant, v. City of Long Beach, and Atlantic Aviation, Appellees, 831 F.2d 848 (9th Cir. 1987)

We are asked here to resolve a question of first impression in the circuit courts regarding the interpretation of section 365(d) (4) of the Bankruptcy Code. 11 U.S.C. § 365(d) (4) (Supp.1985).¹  The Code permits a debtor in bankruptcy to assume or reject any unexpired lease it may have. Id. Sec. 365(a). Under section 365(d) (4), a nonresidential lease is deemed rejected by a debtor-lessee unless that party assumes the lease within 60 days after filing for Chapter 11 protection or within such additional period as is fixed by the bankruptcy court. In the case before us, the debtor-lessee moved, before the initial 60-day period had expired, for an extension of time within which to assume or reject a commercial lease, but the bankruptcy court did not hear the motion until after that period had ended. The court held that the lease was deemed rejected immediately upon the expiration of the sixtieth day, and that it was without authority to grant the timely filed motion for extension. The bankruptcy appellate panel affirmed; we reverse.

Southwest Aircraft Services, Inc., is an aircraft maintenance company located at the Long Beach Airport. Southwest leases its business premises from the City of Long Beach under a long-term lease it assumed in 1976. Several years later, commercial jet flights into the airport increased, and Long Beach leased a vacant parcel adjoining Southwest's to Atlantic Aviation, which built a jet facility on the newly leased property. Evidently the existence of the new facility resulted in a significant increase in the value of Southwest's parcel.

Southwest filed for Chapter 11 relief on April 18, 1985, and received permission to operate its business as debtor-in-possession. It then closed its pre-bankruptcy checking accounts and opened a new one in its new capacity. The March and April 1985 rent checks, which were written on an old checking account, were returned to Long Beach unpaid. After filing for Chapter 11 protection, Southwest made no further rent payments to the city.

On June 14, 57 days after filing for Chapter 11, Southwest filed a motion to extend the 60-day deadline for assuming or rejecting its lease with Long Beach. The bankruptcy court did not hear Southwest's motion until July 17, 90 days after the bankruptcy filing, and 30 days after the 60-day period had ended. At the hearing, Southwest tendered checks to Long Beach for all outstanding rent, which the city refused.

While the bankruptcy judge declared that he would be inclined to grant the extension motion, he concluded that he no longer had authority to do so, ruling that the lease was deemed rejected pursuant to section 365(d) (4) of the Bankruptcy Code. The court found that in order for a debtor-lessee to obtain an extension of time under that section, not only must that party move for an extension within 60 days of filing for Chapter 11 protection, but the court must hear and grant the motion within that period. In re Southwest Aircraft Servs., Inc., 53 B.R. 805 (Bankr.C.D. Cal. 1985). Under the bankruptcy judge's view, rejection was automatic since the 60-day deadline passed before he had held any hearing or issued any ruling on the motion. The Bankruptcy Appellate Panel affirmed, holding that the language of section 365(d) (4) "is precise and leaves no room for arguing that an extension may be granted or confirmed after 60 days have elapsed." In re Southwest Aircraft Servs., Inc., 66 B.R. 121, 123 (Bankr. 9th Cir. 1986). Southwest promptly appealed.

A. The Proper Interpretation of Section 365(d) (4)

The interpretation of a statute is a question of law which we review de novo. E.g., United States v. Roberts, 747 F.2d 537, 546 (9th Cir. 1984). A court's objective in interpreting a federal statute is to ascertain the intent of Congress and to give effect to its legislative will. E.g., Philbrook v. Glodgett, 421 U.S. 707, 713, 95 S. Ct. 1893, 1898, 44 L. Ed. 2d 525 (1975). The first place a court looks in determining legislative intent is the language of the statute itself. E.g., United States v. James, --- U.S. ----, 106 S. Ct. 3116, 3121, 92 L. Ed. 2d 483 (1986); Blum v. Stenson, 465 U.S. 886, 896, 104 S. Ct. 1541, 1547, 79 L. Ed. 2d 891 (1984).

Here, the meaning of the words of section 365(d) (4) is not entirely clear. The section is not plainly susceptible to only one interpretation, and bankruptcy courts are divided on how the statute should be applied. Section 365(d) (4) provides that any unexpired nonresidential lease is deemed rejected unless the debtor-lessee assumes it "within 60 days after the date of the order for relief, or within such additional time as the court, for cause, within such 60-day period, fixes...." 11 U.S.C. § 365(d) (4) (emphasis added). Under the section, the court's ability to extend the 60-day period is limited by a clause which includes three successive terms: "for cause," "within such 60-day period," and "fixes." It is not entirely clear whether the second term--"within such 60-day period"--modifies the term that precedes it or the term that follows it. If we read it as modifying "fixes", then a bankruptcy court would not under the literal words of the statute have the authority to grant a timely motion to extend after the sixtieth day. That is the interpretation advanced by Long Beach, as well as by some bankruptcy courts in this and other cases. See In re House of Deals of Broward, Inc., 67 B.R. 23, 24 (Bankr.E.D.N.Y. 1986); In re Coastal Indus., Inc., 58 B.R. 48, 49 (Bankr.D.N.J. 1986); In re Taynton Freight Sys., Inc., 55 B.R. 668, 671 (Bankr.M.D. Pa. 1985). If, however, the 60-day term modifies "for cause," then while the cause must arise within 60 days (and implicitly the debtor must file its motion to show cause within that period), there is no express limit on when the bankruptcy court must hear and decide the motion. This more liberal reading of the statute would allow the bankruptcy courts to operate with greater freedom and flexibility. It is the one we adopt.

Several bankruptcy courts have held that the more restrictive interpretation of the statute would lead to arbitrary and fortuitous results and have rejected it for that reason. See In re Wedtech Corp., 72 B.R. 464, 468 (Bankr.S.D.N.Y. 1987); In re Musikahn Corp., 57 B.R. 938, 942 (Bankr.E.D.N.Y. 1986); In re Unit Portions of Del., Inc., 53 B.R. 83, 84 (Bankr.E.D.N.Y. 1985). While we recognize that were we to look only to the face of the statute Long Beach's argument would by far be the stronger one, we cannot say with certainty that it is the only plausible interpretation of section 365(d) (4). There is another possible interpretation of the statutory language, one that permits a more reasonable construction--a construction that is more consistent with the normal concepts that govern the functioning of the judiciary. Thus, we turn to the legislative purpose and history for whatever guidance they may provide. See, e.g., Blum v. Stenson, 465 U.S. at 896, 104 S. Ct. at 1547.² 

Like the language of section 365(d) (4), the legislative purpose and history of the section do not provide a definitive answer to the question before us; however, they do offer some support for Southwest's view. Before 1984, debtors in Chapter 11 reorganizations had no fixed deadline to assume or reject unexpired leases, although any party could request the court to fix a time limit. 11 U.S.C. § 365(d) (2) (1983). Congress became concerned about the practical consequences of Chapter 11 filings by tenants of shopping centers. It was particularly concerned that mall operators were facing periods of extended vacancies, that would last until such time as the bankruptcy courts would finally decide to take the initiative and force debtors to make a choice whether to assume or reject the leases. It was also concerned about the effects the extended vacancies were having on other tenants. See 130 Cong.Rec. S8891, S8894-95 (daily ed. June 29, 1984) (statement of Sen. Hatch), reprinted in 1984 U.S.Code Cong. & Admin.News 576, 590, 598-99.

To address this problem, Congress added two provisions dealing specifically with nonresidential leases in Chapter 11 proceedings. Subsection (d) (3) requires the debtor to perform all lease obligations while deciding whether to assume, but permits the court to delay the debtor's performance during the first 60 days after filing for reorganization. Subsection (d) (4) establishes the 60-day deadline for assumption or rejection, and imposes on the debtor the burden of petitioning the bankruptcy court for a change in the deadline.

According to the legislative history, the so-called Shopping Center Amendments were expressly intended to

lessen the problems caused by extended vacancies and partial operation of tenant space by requiring that the trustee decide whether to assume or reject nonresidential real property lease [sic] within 60 days after the order for relief in a case under any chapter. This time period could be extended by the court for cause, such as in exceptional cases involving large numbers of leases.

1984 U.S.Code Cong. & Admin.News at 599. This is the sole passage in the legislative history that addresses extensions of time. The second sentence discusses the requirement that the court find "cause" for the extension; there is no reference to any requirement that the bankruptcy judge make his finding within any particular period of time. Congress' emphasis on cause for an extension, and its failure to mention any deadline within which the court must act, is fairly indicative of its intent. Congress was concerned that a properly supported motion for extension, i.e., one for good cause, should be permitted under the provision and not that the bankruptcy court should be stripped of its authority to grant an extension if it did not act within a prescribed time period.

We recognize that while the legislative history does not specifically mention that the debtor must file its motion for an extension within 60 days, such a requirement may be fairly implied in the section. It is frequently the case that if an act must be undertaken within a particular time period a request for an extension must be made before that period has expired. Such a rule can hardly be said to be unusual or worthy of special discussion in the legislative history. On the other hand, a rule that forfeits a party's rights, benefits, privileges or opportunities simply because a court fails to act within a particular time period would be quite extraordinary. We think that Congress would not adopt any such rule without clearly indicating in the legislative history its intention to do so and explaining its reasons. Cf. Logan v. Zimmerman Brush Co., 455 U.S. 422, 102 S. Ct. 1148, 71 L. Ed. 2d 265 (1982), discussed infra, note 6.

We, and other circuits, have previously considered whether to construe another deadline-setting provision in a manner that would deprive a court of jurisdiction to act if it failed to consider a timely filed motion within a prescribed time period. The issue was squarely presented is a series of cases involving the former version of Fed. R. Crim. P. 35 (governing reduction in sentence). One major difference was that Rule 35, unlike section 365(d) (4), was unambiguous. The rule explicitly afforded district courts only 120 days within which to act in order to reduce a sentence. Had the circuit courts given the language of the Rule its literal meaning, we would have been forced to hold that district courts had no jurisdiction to act on pending sentence reduction motions once the 120-day period had expired. However, five of the six circuits that considered the issue refused to do so.³  This circuit was firmly in the majority.⁴  Typical of the circuit courts' reasoning was Chief Judge Haynsworth's analysis in his opinion for the Fourth Circuit:

We need not give the Rule so literal a reading, however, and we can not assume that such a reading was intended when the consequences would be so devastatingly and arbitrarily fortuitous. For any number of reasons it may be impossible or impractical for a judge to act promptly upon a motion for reduction of sentence filed with the court long before the expiration of the 120 day period.

United States v. Stollings, 516 F.2d 1287, 1288 (4th Cir. 1975).⁵ 

Similarly here, Long Beach's interpretation of section 365(d) (4) would produce arbitrary and fortuitous results. Under the city's view, a diligent debtor with an unexpired lease--oftentimes an asset critical to a successful reorganization--who moved for an extension of time immediately upon filing his petition for relief would nevertheless automatically lose the lease if the bankruptcy court failed, for whatever reason, to decide the motion within a 60-day period. Also, a debtor who diligently attempted to determine whether he could prudently assume the lease, and sought an extension only after he had determined that more time was in actuality required, might find his leasehold interest forfeited if the bankruptcy judge took even a minimal amount of time to conduct a hearing and reach a decision. The results in both instances would be manifestly unjust--and so might the result here. The bankruptcy judge said that he was inclined to the view that Southwest had demonstrated cause for the grant of an extension; yet, under Long Beach's interpretation, the court would be unable to act, Southwest would be deprived of its place of doing business, and Long Beach might well obtain an undeserved windfall.

Bankruptcy courts, like district courts, may have numerous reasons that make it impractical or impossible for them to act within a fairly short time deadline. Construing Congress' action in adopting section 365(d) (4) as an attempt by the legislative branch to force bankruptcy courts to act at an earlier time than they would otherwise deem proper would not only result in hasty, ill-considered decisions by bankruptcy courts but might in addition exacerbate rather than alleviate the judicial backlog problem. Such an interpretation would also encourage debtors to make pro forma motions for extension of time before they had a full opportunity to consider whether an extension was necessary--conceivably as soon as the petition for reorganization was filed--simply to minimize the possibility that the vagaries of bankruptcy court scheduling would deny them a timely hearing. See In re Wedtech Corp., 72 B.R. at 470; In re Musikahn Corp., 57 B.R. at 941-42. Bankruptcy courts would then be burdened with numerous unnecessary show cause hearings. Moreover, extensions would undoubtedly be granted in cases in which, but for the restrictive interpretation of the provision, requests for extensions would not ever have been made. The cumulative effect might well be even greater delays in deciding assumption of lease issues than previously existed. In any event, Long Beach's interpretation would impose an arbitrary and unreasonable restriction on bankruptcy courts as well as work an injustice on many debtors.

Our holdings with respect to former Rule 35 are pertinent here. While in our case, unlike the Rule 35 cases, we need not reject the only possible literal reading of the provision at issue in order to reach a reasonable result, we are nevertheless influenced in our decision by the rule announced almost one hundred years ago by the Supreme Court: "If a literal construction of the words of a statute be absurd, the act must be so construed as to avoid the absurdity." Church of the Holy Trinity v. United States, 143 U.S. 457, 460, 12 S. Ct. 511, 512, 36 L. Ed. 226 (1892). This is still good law today. "It is a familiar rule that a thing may be within the letter of the statute and yet not within the statute, because not within its spirit nor within the intention of its makers." Philbrook v. Glodgett, 421 U.S. at 714, 95 S. Ct. at 1898 (quoting Church of the Holy Trinity, 143 U.S. at 459, 12 S. Ct. at 512); see INS v. Cardoza-Fonseca, 107 S. Ct. at 1213 n. 12; United States v. James, 106 S. Ct. at 3121, Consumer Prod. Safety Comm'n v. GTE Sylvania, Inc., 447 U.S. at 108, 100 S. Ct. at 2056.

Long Beach's interpretation of section 365(d) (4) would produce fortuitous and inequitable results. It would also require us to assume that Congress intended to take the most unusual and highly questionable step of interfering with the normal operation of the judicial branch by ordering the termination of jurisdiction over a particular issue whenever a court failed to make a ruling within a brief period. In light of those circumstances, we cannot conclude that the more restrictive interpretation of the section accurately reflects the intent of Congress.⁶ 

Rather, the interpretation we believe best comports with congressional intent is the one that preserves the authority of the bankruptcy court to rule on timely filed motions. It strikes the balance between creditor protection and debtor relief that Congress intended, and is eminently reasonable, fair and sensible. We fully agree with the bankruptcy courts that have previously adopted that view. In re Wedtech, Corp., 72 B.R. at 469-71; In re Musikahn Corp., 57 B.R. at 942; In re Unit Portions of Del., Inc., 53 B.R. at 84-85.

For all the above reasons, we hold that if cause for an extension arises within the 60-day period and a motion for an extension is made within that period, a bankruptcy court may, even after the 60-day period has expired, consider the debtor's motion and, if it finds there was sufficient cause at the time the motion was filed, grant the requested extension.

B. The Effect of Violating Section 365(d) (3)

Long Beach makes one other argument beyond its reliance on section 365(d) (4). The city asserts that because Southwest violated section 365(d) (3), by failing to perform its obligations under the lease after filing for Chapter 11 relief, the lease should be deemed rejected as a penalty for the violation. As the bankruptcy court noted, subsection (d) (3) does not expressly state what consequences follow from a debtor's violation of its terms. Only its companion provision, subsection (d) (4), addresses the circumstances in which a debtor's nonresidential lease is deemed rejected--and it does not include any reference to a violation of the earlier subsection. Nothing in either subsection, in any other part of the Bankruptcy Code, or in the legislative history of that Code suggests a reading such as is suggested by the city. Of the two cases Long Beach cites in support of its position, In re Barrister of Del., Ltd., 49 B.R. 446 (Bankr.D. Del. 1985), and In re Condominium Admin. Servs., 55 B.R. 792 (Bankr.M.D. Fla .1985), the former does not hold or even suggest--directly or impliedly--that non-performance under subsection (d) (3) leads to automatic rejection, while the latter does so without citation of authority except for a wholly unsupported reference to "legislative history".

Long Beach's interpretation is a draconian one that, like its view of subsection (d) (4), would serve to deprive the court of the ability to make fair and just evaluations of the circumstances. We believe that Congress intended the bankruptcy courts to have the discretion to consider all of the particular facts and circumstances involved in each bankruptcy case and to decide whether the consequence of a violation of subsection (d) (3) should be forfeiture of the unassumed lease, some other penalty, or no penalty at all. Accordingly, we hold that the failure to make payments under subsection (d) (3) constitutes simply one element to be considered, along with all the other relevant factors, in determining whether cause exists under subsection (d) (4) to extend the 60-day period for assumption or rejection. See In re Beker Indus. Corp., 64 B.R. 890, 898 (Bankr.S.D.N.Y. 1986). Thus on remand the bankruptcy court shall take Southwest's failure to make rental payments into account when it hears its motion for extension of time. However, at that time, the court should also consider the fact that Southwest tendered its past due rent at the bankruptcy court hearing on the extension motion.

Application of our views on the proper interpretation of sections 365(d) (3) and 365(d) (4) to this case is a straightforward matter. The bankruptcy court retains the authority to decide Southwest's motion for an extension of time. We reverse and remand so that the court may hear that motion. Southwest's failure to make proper rental payments does not require that the bankruptcy court deem the lease rejected. That failure should, however, be considered at the hearing, along with all other relevant factors, including Southwest's previous tender of all sums due.

REVERSED and REMANDED.

ANDERSON, Circuit Judge, dissenting:

In my view, dissents should be sparing. We should strive for open-minded unanimity. In this case, try though I have, it is not possible to make that decision. Respectfully, my disagreement seems to demand a dissent from the majority opinion.

The Bankruptcy Appellate Panel was eminently correct when it observed that the language of section 365(d) (4) "is precise and leaves no room for arguing that an extension may be granted or confirmed after the 60 days has elapsed." In re Southwest Aircraft Services, Inc., 66 B.R. 121, 123 (Bankr. 9th Cir. 1986).

The majority attempts to find a "possible" ambiguity in order to allow more freedom and flexibility. That ambiguity simply does not exist. The majority ignores the plain meaning and the structure of the pertinent portions of section 365(d) (4). Webster's Third International Dictionary, Unabridged, 1978, defines "within" in several different ways: "on the inside or the inner side," "internally," "inside the bounds of a place or region," and "used as a function word to indicate enclosure or containment." In any definition of the word, in any application, there is not the slightest hint that something within the parameters of containment can also, at the same time, be "without."¹ 

The majority complains that 60 days is a short period of time to act and uses that as a reason for creating an exception or extension that clearly was not contemplated by Congress. The assertion is also made that a plain reading renders the section harsh and inequitable.² 

Sixty days is really not that short. It is six times longer than that fixed to take a criminal appeal. It is twice as long as that fixed for taking a civil appeal. It is one-sixth of a year. Significant and important decisions are often made in those time frames. It may be safely assumed that debtors, their lawyers and accountants are familiar with this time frame and have (or should have) already assessed the pros and cons of accepting or rejecting a nonresidential lease prior to filing a bankruptcy petition so that they may act or advise the trustee.

In my experience, judges at all levels are quick to respond to urgent and emergency situations. An ex parte emergency motion for extension of time is clearly an option open to the debtor or the trustee in this situation. It simply was not done.

While the majority does mention and pay some lip service to the legislative history concerning the problems Congress was addressing, it fails to acknowledge that Congress, as it has the undoubted power to do, was attempting to correct a "harsh" and "inequitable" situation that was perceived as chaotic for lessors of nonresidential properties. The plain and intended meaning of section 365(d) (4) is also supported by this same legislative history. As pointed out by the bankruptcy judge in In re Bernard, 69 B.R. 13, 14 (Bankr.Ha.1986):

The legislative history of Sec. 365(d) (4) shows that it was the result of heavy lobbying by the [sic] lessors. Previous to the enactment of the 1984 statute, the lessors were often frustrated by the long delay in regaining possession of their property from the debtors-lessees. As a result, many leased premises were often-times left vacant while the debtors-lessees delayed in determining whether to assume or reject a lease.

The purpose of the section was clearly intended to provide protection to lessors by requiring the trustee or debtor in possession to make prompt decisions (if not already made) to either assume, reject, or to file to extend the period in which the debtor or trustee must do one or the other. The majority decision is unsupported and unsupportable. "The Court would truly be gazing with a jaundiced eye were it to perceive some ambiguity within Sec. 365(d) (4)." In re Coastal Industries, Inc., 58 B.R. 48, 50 (Bankr.D.N.J. 1986).

It may be trite, but underlying most trite expressions there is a vast well of human experience. Harshness or inequity is all too often in the mind and eye of the beholder. Or, as my livestockman grandfather used to say, "It just depends on whose ox is being gored!"

This statute clearly and positively demands a fixing of additional time within the sixty-day time frame, and that requirement was not satisfied.

The majority opinion relies on a line of cases interpreting former Rule 35, Fed. R. Crim. P. Whatever else may be said for that line of authority as support for the majority conclusion, it should be noted that Congress corrected the problem. That is the avenue of relief to be pursued in this case. Additionally, it is significant to point out that former Rule 35 contained no provision for an extension of time. Section 365(d) (4) does have that safety valve. Research fails to disclose any cases upsetting similar deadline setting rules. This leads me to believe that such judicial determinations are the exception rather than the rule justifying the assertion of a power to do so. As was stated by the Supreme Court in Crooks v. Harrelson, 282 U.S. 55, 60, 51 S. Ct. 49, 75 L. Ed. 156 (1930):

Courts have sometimes exercised a high degree of ingenuity in the effort to find justification for wrenching from the words of a statute a meaning which literally they did not bear in order to escape consequences thought to be absurd or to entail great hardship. But an application of the principle so nearly approaches the boundary between the exercise of the judicial power and that of the legislative power as to call rather for great caution and circumspection in order to avoid usurpation of the latter. [cite omitted]. It is not enough merely that hard and objectionable or absurd consequences, which probably were not within the contemplation of the framers, are produced by an act of legislation. Laws enacted with good intention, when put to the test, frequently, and to the surprise of the law maker himself, turn out to be mischievous, absurd or otherwise objectionable. But in such case the remedy lies with the law making authority, and not with the courts.

The reasons were sufficient to persuade Congress to act. We do not sit to second-guess the wisdom of their choices and "the course Congress has set." Heckler v. Turner, 470 U.S. 184, 212, 105 S. Ct. 1138, 1153, 84 L. Ed. 2d 138 (1985).

We should affirm the Bankruptcy Appellate Panel. In my view, the majority opinion leads to unprincipled decision making.