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In re Bachrach Clothing

September 30, 2008

IN RE: BACHRACH CLOTHING, INC. DEBTOR.


The opinion of the court was delivered by: Judge Virginia M. Kendall

MEMORANDUM OPINION AND ORDER

Appellant Bachrach Clothing, Inc. ("Bachrach") appeals the decision of the Bankruptcy Court for the Northern District of Illinois which held that holding that 11 U.S.C. § 365(b)(1) requires Bachrach to pay accrued real estate tax obligations under a nonresidential property lease in order to cure a default before Appellee Bachrach Acquisition LLC ("BAC") assumed a lease. For the reasons stated below, this Court affirms the decision of the bankruptcy court.

STATEMENT OF FACTS

The parties agree as to the facts. Bachrach entered into a lease with Barsaled, LLC for a non-residential property. Decision of the Bankruptcy Court ("B.R. Decision") at 1. After Bachrach filed for bankruptcy, BAC was to assume the lease. Id. at 2. The "Agency Agreement and Addendum" that governed the assumption of the lease provided that BAC was responsible only for cure costs as required under 11 U.S.C. 365(b)(1) up to $250,000. Id. at 1. The agreed order regarding the lease required Bachrach to pay $147,364 to cure existing defaults, including $133,197.97 in overdue 2005 real estate taxes. Id. at 2. BAC reserved its right to seek an order determining whether Bachrach was responsible for a portion of the 2006 real estate taxes attributable to the time period during which it held the lease. Id.

The underlying lease required Bachrach to pay all real estate taxes assessed on the property as additional rent. Id. at 1. Specifically, the lease required Bachrach to pay the taxes "annually or semiannually to the appropriate taxing authority, but no more frequently than Landlord is required to make payment." Lease Article 4.B. The lease also defined a "material default" as "any failure by Tenant to pay or make any other payment required to be made by Tenant hereunder within five (5) days after receipt of written notice from Landlord." Lease Article 19(A).

On February 15, 2007, the Bankruptcy Court entered an Agreed Order authorizing the assignment and assumption of the lease. The order required Bachrach to cure existing defaults under the Lease in the amount of $147,364, plus additional interest and penalties related to outstanding 2005 real estate taxes. B.R. Opinion at 2.

As of the assumption date, the taxing authority had not billed the 2006 real estate taxes, and such taxes were not due until several months after the assumption date. Response at ¶ 9. As such, Barsaled had not billed Bachrach for the taxes. BAC reserved the right to seek an order determining whether Bachrach or BAC was responsible for payment of the 2006 real estate taxes. B.R. Decision at 2. On August 2, 2007, the Bankruptcy Court held that BAC was responsible for the 2006 real estate taxes. Id. at 8. BAC appealed that order to this Court and submitted the relevant records for this Court's review.

STANDARD OF REVIEW

This Court reviews the Bankruptcy Court's conclusions of law de novo. In re Boone County Utilities, LLC, 506 F.3d 541, 542 (7th Cir. 2007); In re Cult Awareness Network, Inc., 151 F.3d 605, 607 (7th Cir. 1998).

THE BANKRUPTCY COURT'S DECISION

The Bankruptcy Court held that Bachrach had defaulted on the 2006 real estate taxes and was therefore required to pay them. In so holding, it noted that although the taxes had not come due when the lease was assumed, this was because the taxing authority billed in arrears. Put another way, the taxing authority does not bill for the taxes until the year after they accrued. It noted that there was no controlling authority directly on point, but chose to rely on the Court of Appeals for the Seventh Circuit's opinion in In re Handy Andy Home Improvement Centers, 144 F.3d. 1125 (7th Cir. 1998). Handy Andy held that real estate taxes accrued prepetition are a prepetition obligation, and real estate taxes accrued post-petition are a post-petition obligation, regardless of when the actual billing date occurs. Id. at 1127. That is, the obligation to pay real estate taxes arises piecemeal every day, not on the date the taxes are actually billed. Id. As such, it held that regardless of the billing date under the lease, Bachrach was responsible for the 2006 real estate taxes because they accrued and thus the obligation to pay them arose while Bachrach held the lease. B.R. Decision at 8.

DISCUSSION

On appeal, BAC argues that the obligation to pay the 2006 real estate taxes on its assumed property, having accrued prior to the time of the assumption, constituted such a default that Bachrach was obligated to cure. Bachrach, conversely, argues that no default occurred because by the terms of the lease, it was not yet required to reimburse its landlord for the real estate taxes. This Court agrees with the reasoning of the Bankruptcy Court in requiring Bachrach to pay the 2006 real estate taxes.

Section 365(b)(1) requires that a party to an executory contract be paid all amounts due under the contract before the contract may be assumed in a bankruptcy proceeding. See 11 U.S.C. ยง 365(b)(1) ("if there has been a default in an executory contract or unexpired lease of the debtor, the trustee may not assume such contract or lease unless, at the time of assumption of such contract or lease, the trustee cures or provides adequate assurance that the trustee will promptly cure" the default); In re Superior Toy Manf., Inc., 78 F.3d 1169, 1174 (7th Cir. 1996). However, Section 365 requires only that the debtor cure pre-assumption defaults, not ...


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