The U.S. Bankruptcy Court in Delaware recently issued an opinion that appears to alter, in part, its earlier decision regarding the administrative status of stub rent.
In the July issue of the Commercial Restructuring & Bankruptcy Alert, we reported on the opinion in the Goody's Family Clothing case regarding the administrative expense status of rent owed by a debtor's estate for the time period immediately following the petition date, and prior to the date when the next rent payment is due—the so-called "stub period." See Goody's Family Clothing, Inc. v. Mountaineer Prop. Co. II, LLC (In re Goody's Family Clothing, Inc.), 401 B.R. 656 (D. Del. 2009); CR&B Alert, July 2009, p. 8, "Landlord Can Seek Payment for Use During 'Stub' Period."
In a new opinion by the same bankruptcy judge who decided the Goody's case, the court altered its view, at least in part, regarding the allowance of stub rent as an administrative claim and the calculation of the administrative claim. In Sportsman's Warehouse, Inc., the court was asked to opine not only about the stub rent, but also to determine whether real estate taxes, payable by the debtor-tenant under certain of it leases, constituted an administrative claim when that rent was for periods that preceded the chapter 11 filing, but was billed by the taxing authorities to the landlord and was payable by the tenant under the leases after the bankruptcy filing. In re Sportsman's Warehouse, Ch. 11 No. 09 10990 (D. Del. Aug. 3, 2009).
In Sportsmen's Warehouse, the debtor, a retail sporting goods chain, filed its bankruptcy case March 21, 2009. The debtor was the tenant under numerous leases, including the three that are the subject of the court's decision. Under all three leases, the debtor was responsible for paying the real estate taxes associated with the property.
The leases were rejected by the debtor soon after the bankruptcy filing, two as of April 30, 2009 and one as of May 31, 2009. With respect to one of the two leases rejected April 30, 2009, the local taxing authority issued a Real Estate Tax Statement March 31, 2009 covering the period between July 1, 2008 and Dec. 31, 2008. That statement provided that payment was due May 13, 2009. With respect to the lease rejected May 31, 2009, the taxing authority sent the landlord a tax bill for the period between July 1, 2008 and Dec. 31, 2008, providing that taxes would be delinquent if not paid by June 20, 2009.
All three landlords sought allowance of an administrative claim for the "stub rent" period in amount equal to the rent payable under the leases between the bankruptcy petition date and the next rental payment date as well as an administrative claim for the real estate taxes that accrued between the petition date and the date the leases were deemed rejected. None of the landlords was billed for the real estate taxes that accrued during this period.
The Sportsmen Warehouse court noted that under the well-settled law of Montgomery Ward, any rent that was due pre-petition could not be treated as an administrative claim under Code section 365(d)(3); however, as in Goody's, the court observed that another avenue of similar recovery for a landlord with a stub rent claim was Code section 503(b)(1), which provides administrative claim status to claims for actual and necessary expenses of preserving an estate.
In Goody's the issue was whether the landlords could recover their stub rent claims as administrative expense claims. There was no dispute as to the amount of the claim, which everyone agreed was the amount of rent due under the lease during the stub rent period. The Goody's court found that the landlords held an administrative expense claim under 503(b)(1), not 365(d)(3), because the use and occupancy of the premises by the debtor per se provided a benefit to the estate. In this case, however, the court altered its opinion rendered in Goody's by finding that while the debtor's occupancy of leased premises during that "stub" period may have conferred a benefit to the estate, the amount of such benefit was not per se the amount of the fair market value of the occupancy.
Thus, landlords are not necessarily entitled to an administrative claim for use and occupancy under 503(b)(1) equivalent to the fair market value of the occupancy, but rather they must prove the amount of the benefit conferred upon the estate. The court must analyze the evidence submitted to it and determine on a case-by-case basis the amount of benefit conferred upon the estate to determine the appropriate amount of the landlord's administrative expense claim.
As to the claim for unpaid real estate taxes, the court found that pre-petition taxes would be payable as an administrative expense only if the debtor's obligation to pay such taxes arose post-petition and prior to the rejection of the leases. If the lease at issue provides an exact due date for the taxes, that date is easily established. In this case, the leases provided that the taxes were payable prior to the date when a penalty would arise for late or non-payment. That date did not occur until after the leases were rejected, and thus the court found that the claims for the taxes were not entitled to administrative claim status.