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March 26, 2003


The opinion of the court was delivered by: Vaughn R. Walker, United States District Judge


Appellant Pacific Shores Development, LLC, appeals the decision of the bankruptcy court below, which ordered debtor and appellee At Home Corporation's leases with appellant rejected effective nunc pro tunc to the date appellee filed its rejection motion. For the reasons detailed herein, the court AFFIRMS the decision below.

In February 2000, At Home leased two office buildings located in Redwood City from Pacific Shores. At the time, At Home anticipated that the nonresidential lease space would help accommodate its growth needs. At Home suffered a severe downturn in business, however, and on September 28, 2001, At Home sought Chapter 11 bankruptcy protection. See App. (Doc #12) at 4.

The same day, At Home moved under 11 U.S.C. § 365 (a) to reject unexpired nonresidential real property leases, including its leases with Pacific Shores for buildings it had never occupied. Id. at 1-16. Notice of the motion was provided to Pacific Shores the same day. Id. at 148. The emergency motion sought rejection to apply retroactively to the date of filing. Id. at 1-16.

At Home's first day emergency motions hearing was held on October 1, 2001. Id. at 30. At that hearing, Judge Carlson set the emergency motion concerning rejection of nonresidential leases to be heard on October 9, 2001. Id. at 77-78. During this time, At Home did not deliver a formal surrender notice to Pacific Shores. Id. at 134. On October 4, 2001, Pacific Shores filed a limited objection; it did not oppose lease rejection but moved to prevent retroactive application. Id. at 91-100.

At the October 9, 2001, bankruptcy hearing, At Home explained that its decision not to provide formal surrender notice was meant as a precautionary measure to prevent Pacific Shores from claiming over $1,000,000 held in a construction escrow account as a result of default. Id. at 134, 140-41. Moreover, At Home reiterated that it did not occupy the premises in question because construction had not yet been completed; hence, the rent Pacific Shores would have received under the lease would have forced At Home and its shareholders and creditors to pay significant sums for which they had received no commensurate benefit. Id. at 137. Finally, At Home contended that its rejection motion provided ample notice to Pacific Shores, as of the date the notice was filed, that At Home intended to reject the leases in question and that Pacific Shores suffered no loss of interest from the absence of formal notice of surrender during the time until the motion was heard. Id. at 139-40, 148.

In opposition, Pacific Shores contended that section 365 does not allow bankruptcy courts to exercise their equitable powers to allow rejection to apply retroactively prior to the date of court approval or prior to the time of formal surrender. Furthermore, because At Home had not provided a formal notice of surrender and was still legally in possession of the premises, Pacific Shores could not re-let the premises to another tenant. In addition, according to Pacific Shores, "[d]ebtor must bear the burden of the small delay associated with rejecting the leases." Id. at 93.

The bankruptcy court determined that this was "a close question" but ultimately sided with At Home and exercised its equitable powers to order that rejection of the leases be applied retroactively to September 28, 2001, the date of filing, rather than October 9, 2001. Ruling from the bench, the court below explained:

[O]n reviewing the Thinking Machines case and interpreting these facts as best I can, I believe this is a case where a nunc pro tunc order is appropriate under * * * the equitable relief section of Thinking Machines.
And I so determine because of the following facts and circumstances. First, I note that the Debtor moved immediately * * * to reject the lease * * *. I note, second, that the Debtor set this matter for hearing promptly. It wasn't perfect. It wasn't done absolutely as soon as possible, but it was done without any delay. There was a [court] holiday in here. * * * There was neither any deliberate use of a long notice period to keep their options open nor in fact as I can see it any indifference to the timing concerns of the landlord. This is virtually as soon as possible in this particular case.
Third, I note that the Debtor is not in possession of the premises. I think that is a factor that makes it easier for the landlord to re-let and also has some effect on interpreting what the Debtor did. And last, I note that the landlord's opposition was to any nunc pro tunc effect generally without any suggestion here that this process should be speeded up so that they could get — the landlord could get its indefeasible right to re-let the premises more quickly.
I'm going to grant the relief requested by Debtor here because lam convinced that the opposition to this relief is motivated by the landlord's interest in running the administrative rent, and it is not motivated by a — primarily by a concern to get this indisputable right to start re-letting the premises as quickly as possible.
App. (Doc #12) at 153-54.

In addition to the arguments raised at the bankruptcy court hearing, Pacific Shores argues that the court below clearly erred in finding that At Home was not in "possession" of the lease premises because it had not formally surrendered the premises. Id. at 8.


As a preliminary matter, the court considers At Home's late-filed motions to strike portions of its own brief as well as portions of Pacific Shores's reply brief and to oppose Pacific Shores's Request for Judicial Notice. See Doc #19. Pacific Shores opposes these requests. See Doc #21.

Bankruptcy LR 9013-1(e) provides that, except for relevant judicial opinions published after the date the Opposition or reply was filed, "once a reply is filed, no additional memoranda, papers or letters shall be filed without prior Court approval." Here, At Home's motion to strike was filed on October 23, 2002, more than five months after Pacific Shores's reply was filed. See Appellant Repl B.R. (Doc #14) (filed May 17, 2002). At Home did not seek or obtain court approval for its extraneous filing. Accordingly, the court disregards At Home's motion to strike.

Pacific Shores, in connection with its reply brief, requests judicial notice of two documents: a memorandum concerning one of the leases at issue and excerpts of a transcript of a 1998 hearing in the Bankruptcy Court for the District of Delaware, in which the presiding judge presented his views on circumstances that warrant retroactive relief for nonresidential lease rejection. The court takes judicial notice of the transcript, as part of the public record, but declines to take judicial notice of the memorandum concerning the lease terms as unnecessary.

In its opening brief, At Home had argued in a footnote that because the leases at issue "state that their terms would have commenced as of the date that (1) the Premises were actually occupied by the Debtors or (2) a certificate of occupancy was issued for the Premises, it is questionable whether the Debtors were even entitled to possess * * * the Premises." Appellee B.R. (Doc #11) at 5 n2. As Pacific Shores points out, however, it is clear that At Home did not raise this argument before the bankruptcy court and, accordingly, that ...

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