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No Proration of Lessors' Payments in Bankruptcy
On March 15, 2007, the U.S. Court of Appeals for the Third Circuit (the 'Third Circuit') issued an important decision regarding the rights of equipment lessors who find themselves ensnarled in court proceedings as a result of a lessee's filing for bankruptcy protection. In Re: Federal-Mogul Global Inc v. Computer Sales International considered whether two lower courts properly modified an equipment lease under 11 U.S.C. '365(d)(5) of the Bankruptcy Code ' formerly codified at 11 U.S.C. '365(d)(10) ' by permitting proration of payment obligations as of the date of rejection of the leases. The Third Circuit reversed, holding that modification of the lease terms was improper.
In October 2001, Federal-Mogul Corporation, a large automotive parts supplier ('Federal-Mogul' or the 'Debtors') filed for relief under Chapter 11 of the Bankruptcy Code in Delaware. Computer Sales International ('CSI') is a lessor of computer equipment. CSI's customers identify equipment from third-party vendors that they wish to lease and then the customer and CSI execute a sale and lease-back transaction. Starting in 1992, CSI and Federal-Mogul entered into a Master Lease Agreement that set forth the basic terms of all future equipment leasing transactions. Over the following years, Federal-Mogul leased thousands of pieces of equipment from CSI under some 70 leasing schedules. The Master Lease Agreement provided for monthly rental payments that were due in advance on the first day of each month.
In 2002, Federal-Mogul negotiated a new computer leasing arrangement with IBM. As a result of that, the Debtors requested Bankruptcy Court approval of the new leases as well as the rejection of the CSI leases. Federal-Mogul planned to replace more than 4,200 pieces of equipment in 60 locations. In order to minimize costs, Federal-Mogul sought permission to reject the leases in piecemeal fashion, as each individual item was replaced. The Bankruptcy Court held a hearing and granted permission to reject the leases, despite the opposition of CSI. The order directed that the rejection would take effect 'upon the Debtors giving notice to the applicable Computer Equipment Lessor' (the '2002 Order').
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