A Primer for Secured Lessors on the Use of Bankruptcy Code Section 365(d)(10)

In September 1997, a predecessor to Wells Fargo entered into what was nominally identified as a 'master lease agreement' (the 'Master Lease') pursuant to which Circuit-Wise, Inc. (the 'Debtor') purportedly leased certain equipment. From the facts presented, it cannot be determined whether the Master Lease was a true or bona fide lease or merely a disguised financing, and that is the crux of the controversy.

In March 2001, the debtor filed a Chapter 11 petition and immediately ceased making any payments to Wells Fargo. Eventually, in January 2002, Wells Fargo moved under Section 365(d)(10) for an order compelling the debtor to make the periodic payments provided for under the Master Lease. During the period between the filing of the debtor's petition and January 2002, the debtor apparently continued to hold and make use of the equipment and neither assumed nor rejected the Master Lease. Wells Fargo's reliance on Section 365(d)(10) was premised on a belief that because the Master Lease was labeled a lease, it was presumptively a true lease and therefore entitled to the protections of that section. Section 365(d)(10) provides, in relevant part:

The ' [debtor in possession] shall timely perform all of the obligations of the debtor, except those specified in section 365(b), first arising from and after 60 days after the order for relief in a case under chapter 11 of this title under an unexpired lease of personal property (other than personal property leased to an individual primarily for personal, family, or household purposes), until such lease is assumed or rejected '

The Debtor contended that the Master Lease was not a true lease but rather a disguised financing and, therefore, not entitled to the protection of Section 365(d)(10). Wells Fargo argued that because the Master Lease was at least a putative lease, it automatically fell within the ambit of that section. The Bankruptcy Court sided with the debtor and ruled that until the true character of the Master Lease was finally established (ie a true lease or a secured financing), under standard rules of statutory construction Wells Fargo was not entitled to the benefit of Section 365(d)(10). The Bankruptcy Court held that the plain meaning of that section applied only to true lessors and Wells Fargo did not unambiguously belong in that category. Indeed, the Bankruptcy Court stated that it had no discretion to hold otherwise, at least until the facts were more clearly developed. Simply stated, the Bankruptcy Court told Wells Fargo that it could not enjoy the benefits of Section 365(d)(10) until the true economic character of the Master Lease was determined. That ruling is at odds with In re Elder-Beerman Stores Corp., 201 B.R. 759 (Bankr. S.D.Ohio 1996), which held that an agreement that is denominated a 'lease' is automatically entitled to be treated as such. The reasoning behind that decision is that it protected the lessor against the possibility that a case might be converted to Chapter 7 or become administratively insolvent pending a ruling as to whether the 'lease' was a true lease. While the Bankruptcy Court's ruling did not appear to shift the ultimate burden of proof from the debtor to Wells Fargo (See In re Edison Brothers, Inc., et al., 207 B.R. 801 (Bankr. D.Del. 1997) holding that a debtor resisting a secured lessor's efforts to compel payments under Section 365(d)(10) has the burden of proving that a so-called lease is actually a secured financing), it did delay the ability of Wells Fargo to be promptly paid.