SONTCHI, Bankruptcy Judge.
Before the Court is a motion seeking allowance and payment of administrative claims for three types of rent. First, under sections 365(d)(3) and 503(b) of the Bankruptcy Code, the moving landlords seek the allowance and immediate payment of rent for the period from the petition date through the first of the following month, commonly referred to as "stub rent." Under the Third Circuit's opinion in Montgomery Ward, the landlord does not have an administrative claim for the stub rent under section 365(d)(3) as the obligation to pay that rent arose pre-petition.
Although an administrative claim for stub rent cannot be allowed under section 365(d)(3), the landlord may have an allowed administrative claim under section 503(b) for the debtors' use and occupancy of the premises during the stub rent period as an actual and necessary expense of preserving the estate. Applying the Third Circuit's holding in Zagata Fabricators, this Court recently held in Goody's Family Clothing that a debtor's post-petition use and occupancy of real property, per se, gives rises to an allowed administrative claim. While Zagata Fabricators provides that rent is an actual and necessary expense, it was inappropriate for this Court to apply a per se rule in Goody's Family Clothing that the use and occupancy of the premises confers a benefit to the estate. Rather, the Court must analyze the evidence submitted and determine, on a case by case basis, the amount of the benefit to the estate. In this case, there is a dispute as to whether the debtors' occupancy of the premises provided any benefit to the estate. The resolution of that dispute requires a further evidentiary hearing.
Second, under section 365(d)(3), the landlords seek as additional rent the allowance and immediate payment of real estate taxes relating to a pre-petition period for which the landlords assert the debtors became liable after the petition date but prior to the rejection of the leases. As the debtor's obligation to pay those taxes did not arise until after the rejection, under Montgomery Ward, the landlords do not have an administrative claim under section 365(d)(3) for real estate taxes relating to the pre-petition period.
As all the landlords' claims are either disallowed or require a further hearing, the Court need not address whether any allowed claims must be paid immediately.
This Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334. Venue is proper in this district pursuant to 28 U.S.C. §§ 1408 and 1409. This is a core proceeding pursuant to 28 U.S.C. §§ 157(b)(2)(B) and (O).
On March 21, 2009 (the "Petition Date"), Sportsman's Warehouse, Inc. (the "Debtor") filed for bankruptcy under Chapter 11. The Debtor's business is the operation of large format retail sporting goods stores. As such, the Debtor is party to numerous leases.
Three affiliated landlords brought the motion before the Court. Cole SP De Pere WI, LLC ("Cole De Pere") is the Debtor's landlord for a store located in De Pere, Wisconsin. Cole SP Wichita KS, LLC ("Cole Wichita") is the Debtor's landlord for a store located in Wichita, Kansas. Cole MT Pocatello ID, LLC ("Cole Pocatello") is, not surprisingly, the Debtor's landlord for a store located in Pocatello, Idaho. The Debtor used and occupied all three premises after the Petition Date. The leases for the De Pere and Wichita stores were rejected as of April 30, 2009. The lease for the Pocatello store was rejected as of May 31, 2009.
The Landlords seek allowance and payment of claims for the following:
The Debtor's rent is due on the first of each month. The Debtor did not pay Cole Pocatello for the rent due on March 1, 2009. Thus, Cole Pocatello seeks unpaid "stub rent" for the period from the Petition Date through March 31, 2009.
On March 31, 2009, the taxing authority with jurisdiction over the Wichita store issued a "Real Estate Tax Statement" to the Debtor for real estate taxes for the period of July 1, 2008 through December 31, 2008. The Debtor is responsible under the lease for payment of real estate taxes. As such, the Wichita lease provides that the Debtor "shall pay [the real estate taxes as additional rent], as and when due and before penalty accrues for nonpayment, all property taxes ..." The tax invoice provides that payment is due on May 13, 2009.
On April 23, 2009, Cole Pocatello sent an invoice to the Debtor for the payment of real estate taxes for the period of July 1, 2008 through December 31, 2008. Again, the Debtor is responsible under the lease for the payment of real estate taxes. The Pocatello lease provides that the Debtor's obligation to pay taxes as additional rent is "as and when due and before penalty accrues for non-payment ..." The tax invoice
All three landlords seek allowance of an administrative claim for real estate taxes that accrued between the Petition Date and rejection of the lease.
The Court conducted a hearing in this matter. The parties stipulated that they would go forward on the application of the law to certain undisputed facts. The Debtor made it clear that it was not agreeing to the allowance or the amount of any claim. The parties agreed that an additional evidentiary hearing would be required in the event that the Court required evidence to determine the allowance or the amount of any administrative claim.
Section 365(d)(3) of the Bankruptcy Code requires the trustee to timely perform all the obligations of the debtor arising from and after the petition date. The Third Circuit held in Montgomery Ward, that an obligation is something that one is legally required to perform under the terms of the lease and that an obligation only arises when a party becomes legally obligated to perform it.
This Court recently held in Goody's Family Clothing that section 365(d)(3) is not the sole basis under which a landlord can be awarded an administrative claim for unpaid rent.
The issue in Goody's Family Clothing was whether three landlords could recover, as administrative claims, the stub rent for the debtors' post-petition use and occupancy of the landlords' real property. The amount of the asserted claim and the debtors' use and occupancy of the premises was undisputed. The sole issues were whether the claim could be allowed as an administrative claim; and, if so, whether the landlords had satisfied their burden of proving that the stub rent was an actual and necessary expense of preserving the debtor's estate.
The debtors argued that section 365(d)(3) could not be a basis for the payment of stub rent as the obligation to pay the applicable month's rent arose pre-petition. The Court quickly disposed of this matter in the debtors' favor by applying the holding in Montgomery Ward.
The debtors further argued that section 365(d)(3) specifically renders section 503(b)(1) inapplicable to post-petition obligations under any unexpired lease of nonresidential real property. In addition, the debtors argued that, under sections 365(b)(1)(A) and 365(g)(1), whether a claim for stub rent may be allowed and paid as an administrative claim depends entirely on whether the debtors assume or reject the applicable lease. The Court rejected the debtors' arguments.
Based upon the use of the word "notwithstanding" in section 365(d)(3), the Court held that section 365(d)(3) does not limit a landlord's remedies for payment of post-petition rent to section 365(d)(3). Rather, it expands those rights by providing for the timely payment of rent obligations without the need for a landlord to file an administrative claim and seek immediate payment. Thus, section 365(d)(3) does not prevent the allowance of a claim under section 503(b).
This Court further held that the effect of a debtor's ultimate assumption or rejection of a lease on the priority of certain elements of a landlord's claim does not prevent the allowance of an administrative claim for stub rent under section 503(b)(1). Based upon cases where courts have allowed administrative claims for a debtor's use and occupancy or real property where the lease has expired or been rejected this Court held that an administrative claim could be allowed under section 503(b) where a landlord's premises are used and occupied post-petition under an unexpired lease that is ultimately rejected.
The final issue before this Court in Goody's Family Clothing was whether the landlord had satisfied its burden under section 503(b) to establish that the debtors' use and occupancy of the premises during the stub rent period was an actual and necessary cost of preserving the debtors' estates. As stated earlier, there was no dispute as to the debtors' use and occupancy or the amount of the claim. Applying the Third Circuit's holding in Zagata Fabricators, this Court held that "the mere fact that the Debtors are occupying the Landlords' premises is sufficient, in and of itself, to establish that payment for that use and occupancy is an actual, necessary expense of preserving the Debtors' estates
Zagata Fabricators was an appeal of a bankruptcy court's denial of a landlord's request for an administrative claim for the debtor's undisputed post-petition use and occupancy of the landlord's premises. The dispute between the landlord and the debtor had its genesis two years before the bankruptcy when the parties entered into a contract for the sale of 10 acres of commercial property by the landlord to the debtor. Prior to closing the sale, it was discovered that the land was contaminated, which precluded the transfer of the property under state law. As the debtor wanted to occupy the land immediately while the seller attempted to remediate the contamination the parties entered into a one-year lease for the property subject to the sale contract. The lease was renewable on December 15th of each year upon the parties' mutual agreement.
The debtor filed bankruptcy in September, 1986. After the filing, a dispute arose between the debtor and the landlord over the proper rent for the following year. The parties could not reach agreement and the lease expired on December 15th. The debtor continued to occupy the premises but did not pay any rent from January, 1987 through July, 1987. In June, 1987, the debtor filed a motion seeking to assume the sale contract entered two years earlier. The landlord responded by filing a cross motion for allowance and payment of an administrative claim under section 503(b) for the debtor's use and occupancy of the premises it was seeking to buy.
The Third Circuit held that the landlord in Zagata Fabricators had two avenues of relief: (i) allowance and payment of an administrative claim under section 503(b); and (ii) relief from the automatic stay to dispossess the landlord. In discussing the allowance of a claim under section 503(b), the Court stated that:
The Third Circuit then reversed the bankruptcy court's application of equitable principles in denying the landlord's request for an administrative claim.
There is no ambiguity in the Third Circuit's holding that "rent is clearly an `actual, necessary' cost of preserving the estate, since the debtor's survival depends on its ability to pay the landlord for the right to possess the space necessary to conduct its business."
But, the Third Circuit immediately qualified its statement that rent is an actual and necessary expense by noting that "[b]ecause bankruptcy proceedings are considered to be equitable, however, the landlord's right to collect monetary relief is somewhat curtailed: a debtor is generally required to pay only a reasonable value for the use and occupancy of the landlord's property, which may or may not equal the amount agreed upon in the terms of the lease."
This Court held as much in Goody's Family Clothing, stating that "the amount of the administrative claim for that use and occupancy is the fair market value, which is presumably the lease rate unless there is evidence to the contrary."
Rather, the Court must analyze the evidence submitted and determine, on a case by case basis, the amount of the benefit to the estate. The amount of the benefit to the estate is presumed to be the contract rate of rent.
Cole Wichita and Cole Pocatello seek the payment as an administrative
With respect to the Wichita property, the taxing authority sent its invoice on March 31st. The Wichita lease provides that the "Tenant shall pay, as and when due and before penalty accrues for nonpayment, all property taxes ..." The tax invoice provides that payment is due on May 13, 2009.
The plain meaning of the Wichita lease and tax invoice indicates that the real estate taxes may be paid upon receipt of the invoice but the Debtor was not legally obligated to pay those taxes until the due date, which was post-rejection. Cole Wichita relies on the use of the word "and" in the lease provision stating that payment is due "as and when due and before penalty accrues for nonpayment, all property taxes ..." in arguing that the Debtor's legal obligation to pay the taxes arose upon receipt of the invoice. The Court disagrees. In effect, the lease provides a window for payment by the landlord. It is not until that window is closed, i.e., when a penalty arises, that the landlord has a legally enforceable duty to pay the taxes.
Thus, the Court that the obligation to pay the Wichita real estate taxes did not arise until after the lease was rejected. Thus, SP Wichita is not entitled to an administrative claim. Rather, any claim for those taxes would be a general unsecured claim under section 365(g).
Similarly, Cole Pocatello sent the Debtor an invoice for the real estate taxes on April, 23rd, prior to the rejection date. The Pocatello lease states that the Debtor's obligation to pay taxes is "as and when due and before penalty accrues for nonpayment...." The tax invoice does not specifically indicate a "due date," although it states that "to avoid charges, payments must be received or postmarked by due date." The invoice goes on to state that the taxes are "delinquent if not paid on before June 20, 2009."
For the reasons set forth above, the Debtor was not legally obligated to pay the Pocatello real estate taxes until after the lease was rejected. Thus, SP Pocatello is not entitled to an administrative claim. At best, any claim for those taxes would be a general unsecured claim under section 365(g).
Finally, all three landlords seek allowance of an administrative claim under section 503(b) for payment as additional rent of real estate taxes that accrued between the Petition Date and the rejection of the applicable lease.
As discussed at length above,
For the reasons set forth above:
An order will be issued.
