The Treatment of "Stub Rent" in the Goody's and Stone Barn Retail Apparel Bankruptcies

The Treatment of "Stub Rent" in the Goody's and Stone Barn Retail Apparel Bankruptcies

 
Two recent decisions in retail apparel bankruptcy cases, in Delaware and New York, highlight the ongoing uncertainty regarding "stub rent". While the ultimate financial outcomes for the landlords in the two cases are similar, the different approaches taken by the courts leave open questions regarding when and to what extent those claims will be paid.
 
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The court in Stone Barn did not require the landlords to follow as circuitous a path as the Goody's court to pursue "stub rent". The United States Bankruptcy Court for the Southern District of New York concluded that holding the debtor immediately responsible for "stub rent", measured on a daily basis as it accrued after the date of the order for relief until the end of that month, was the proper construction of Section 365(d)(3). The court reasoned that the "proration" approach is faithful to the purpose of Section 365(d)(3) because it "afford[s] landlords an enhanced right to timely performance under a commercial lease during [the post-petition, pre-rejection period]" and is faithful to the "purpose of the bankruptcy laws as a whole."

The court noted that although a number of bankruptcy courts have eschewed the "proration" method, "very few of these courts have been willing to draw the obvious conclusion that rent for the first month is a pre-petition claim only, based on the "billing date" approach, and that the debtor has the right to use the leased property during the stub period without further liability." Instead, these courts fill the gap by allowing landlords an administrative claim for rent under Section 503(b). Indeed, that was the result in Goody's. Thus, the New York Bankruptcy Court implied that the "proration" approach under Section 365(d)(3) is a more straightforward mechanism of reaching a result that would likely be the same under Section 503(b)(1).

The court emphasized that Congress intended Section 365(d)(3) to nullify the requirement that a creditor prove benefit to the estate before it can obtain administrative expense status for a post-petition rent claim. Under the "billing date" approach, the landlords would have to prove, in order to prevail on a Section 503(b)(1) claim, that a debtor's use and occupancy was necessary and beneficial to the estate during the stub period. Therefore, the court reasoned that the "billing date" approach contradicts the plain purpose of Section 365(d)(3)—to give landlords an irrefutable right to rent at the contract rate during the bankruptcy. Still, the New York Bankruptcy Court noted that this is an issue on which different courts have come to different conclusions, and that its decision therefore may be an appropriate candidate for appeal to higher courts in the Second Circuit. [footnotes omitted]
 
 
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