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In re Schnabel

decided: January 9, 1980.

IN RE: WILLIAM J. SCHNABEL AND ALICE M. SCHNABEL, BANKRUPTS. ; APPEAL OF: MITCHELL D. SERRANO AND MARTHA L. SERRANO.


Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. Nos. 75-B-11445 and 75-11446, Frank J. McGarr, District Judge .

Before Tone, Wood, and Cudahy, Circuit Judges.

Author: Wood

This appeal involves the rights of a trustee in bankruptcy to collect fair rental value for use and occupancy when he has not assumed an unexpired lease. We affirm.

I.

The bankrupt, William Schnabel, was a real estate developer who owned a restaurant known as the Harvester Inn. On February 27, 1975 defendants Mitchell and Martha Serrano entered into a two-year lease with Schnabel to operate the Inn. On December 16, 1975 Schnabel filed and was adjudicated a bankrupt. Charles Myler was appointed trustee in bankruptcy on February 26, 1976 and was qualified to act as trustee on March 9, 1976. The Serranos continued to occupy the Inn without paying rent from the date of filing of the bankruptcy petition until September of 1976, when they vacated the premises.

The trustee brought a petition to recover rents from the Serranos in the bankruptcy court. In an order dated February 18, 1977, Bankruptcy Judge Merrick ruled that the trustee had not made a formal assumption of the lease as required by rule 607 of the Rules of Bankruptcy Procedure. He also held that the Serranos were liable for fair rental value of use and occupancy for the nine-month period in which they continued to occupy the premises, a figure he set at $16,500.

The Serranos appealed that decision to the federal district court. Judge McGarr reversed and remanded directing that a determination be made of whether the trustee's actions had impliedly assumed the lease. On remand, Judge Merrick, without holding a hearing, found that the trustee had not impliedly assumed the lease. Again he set $16,500 as the amount the Serranos owed the trustee for use and occupancy.

The decision was appealed to the district court. This time Judge McGarr affirmed the bankruptcy court's order. The Serranos appealed that decision to this court.

II.

On appeal the Serranos first contend that the failure of the trustee to accept the lease terminates the trustee's rights to collect payment for use and occupancy of the premises.

Rule 607 of the Rules of Bankruptcy Procedure, based on the provisions of section 70b of the old Bankruptcy Act, 11 U.S.C. ยง 110(b) (1976) (amended 1979), gives a trustee in bankruptcy the option to assume or reject an unexpired lease of the bankrupt. If the trustee does not act affirmatively within sixty days after his qualification as trustee, and the court does not extend the time period, the trustee is deemed to have rejected the lease.*fn1 The option of rejecting the unexpired term of the lease enables the trustee to avoid executory contracts which he deems burdensome on the estate and enables him to sell the premises without regard to the unexpired lease. Rejection thus has the effect of relieving the estate of "any future burdens imposed by the contract," but it also means the estate "may no longer avail itself of the contract's benefits . . . ." Danning v. Brunswick Corp., 466 F.2d 1010, 1011 n.1 (9th Cir. 1972), Cert. denied, 409 U.S. 1126, 93 S. Ct. 939, 35 L. Ed. 2d 257 (1973). Rejection of an unexpired lease does not preclude collection of payments for fair rental value of use and occupancy. As Collier has stated a rejection means "that the relation of landlord and tenant is not disturbed, but the contract of rental no longer binds either of them, and the trustee may charge and recover a reasonable rental for the demised premises until the end of the term." 4A Collier on Bankruptcy P 70.44 at 541 n.6 (14th ed. 1967) (quoting In re Freeman, 49 F. Supp. 163, 165 (S.D.Ga.1943)).

We find Collier's view very logical and we adopt it here. Regardless of whether the trustee assumes or rejects the lease, he has title to the underlying premises, as the Serranos concede. Rejection merely frees the estate and the premises from the lease obligation so that the trustee may operate the premises as profitably as possible for the benefit of the estate. For example, he may immediately sell the premises without regard to the lease. Before he decides on a permanent solution the trustee may collect fair rental value for use and occupancy from tenants who remain on the property. Since the Serranos continued to occupy the property after the filing of the petition until September 1976, and since the trustee rejected the lease pursuant to rule 607 but not acting within sixty days of his qualification, the trustee may collect fair rental value for use and occupancy from the Serranos for their use of the underlying premises.*fn2

III.

The Serranos next contend that in basing the amount owed for use and occupancy on the monthly rent figure under the lease the lower courts deprived them of the opportunity to show that fair rental ...


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