Equities Can Adjust Administrative Claim for Stub Rent

By: Timothy Poydenis
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
 
The Bankruptcy Court for the District of Delaware recently held in In re Sportsman’s Warehouse, Inc., that landlords who seek payment of administrative claims for stub rent, the rent for the period from the petition date through the first of the following month, are not per se entitled to an administrative priority.[1] In this case, Sportsman’s Warehouse, a retail sporting goods store, filed for bankruptcy under chapter 11 on March 21, 2009. Sportsman’s Warehouse was renting the warehouse in which it operated its business. Despite the fact that rent was due and payable on the first of each month, Sportsman Warehouse failed to pay the rent due on March 1, 2009. Consequently, the landlord sought the allowance and immediate payment of the unpaid stub rent for the period from March 21, 2009, through March 31, 2009.[2] Although the court recently held that a debtor’s post-petition use and occupancy of leased premises, per se, creates an administrative claim,[3] the court held that its previous holding was a “misapplication of the law and will no longer be followed by this Court.”[4] Rather, the court held that a case-by-case analysis “must” be used to determine the amount of the benefit to the estate. The result of that determination will provide the amount of payment the landlord is entitled to as an administrative claim under section 503(b).
 
The court made clear that because bankruptcy proceedings are “equitable,” the landlord’s ability to collect stub rent “is somewhat curtailed.”[5] Since chapter 11 proceedings are designed to assist a debtor in rehabilitating its business, a debtor should only be required to pay its landlord an amount equal to the benefit the debtor received by occupying the premises.[6] While an administrative claim for unpaid rent is permitted under section 503(b) as an actual and necessary expense of preserving the estate,[7] the actual use and occupancy of the leased premises “may provide little or no benefit to the estate.”[8] Therefore, even though a business generally needs a tangible space to occupy, and the amount specified in the lease is presumed to be the amount of benefit to the estate,[9] the court explained that the debtor is entitled to rebut that presumption.[10] The debtor may submit evidence, including but not limited to proof of the fair market value of the rent, to establish that the benefit is less than the contract rate.[11]
 
Through use of a case-by-case analysis rather than a per se rule, courts can provide chapter 11 debtors a better chance to successfully reorganize. One of the main purposes of the Code is to provide a debtor with a “fresh start” after filing for bankruptcy.[12] Permitting a debtor to dispute whether its occupancy of the premises provided a benefit to the estate that was less than the contract rate provides a debtor with the most auspicious opportunity to successfully reorganize. The focus of the analysis is placed on the actual benefit to the estate, not the loss incurred by the landlord. Mandating that landlords are entitled to the contract rate of rent is inconsistent with the purposes of the Code because debtors, the individuals who are supposedly starting anew, could be required to owe an amount that exceeds the actual amount of the benefit to the estate. Such a mandate would diminish the “fresh start” policy of bankruptcy and effectively force the debtor to start in the hole, rather than starting anew. While the onus may be on the debtor to rebut the presumption, this decision demonstrates that, for at least one court, a landlord is no longer guaranteed an administrative claim for stub rent that equals the contract price. 
 

[1] No. 09-10990, 2009 WL 2382625, at *6 (Bankr. D. Del. 2009).
[2] Id. at *2. 
[3] In re Goody’s Family Clothing, Inc., 392 B.R. 604 (Bankr. D. Del. 2008); see In re Sportsman’s Warehouse, 2009 WL 2382625, at *5 (explaining “Goody’s Family Clothing” stated “that the use and occupancy of leased premises, per se, provides a benefit to the estate in the amount of the fair market value of occupancy.”).
[4] In re Sportsman’s Warehouse, 2009 WL 2382625, at *5–*6 (stating per se rule “is a misapplication of the law” and “the Court must analyze the evidence submitted and determine, on a case by case basis, the amount of benefit to the estate”).
[5] Id. at *5 (quoting Zagata Fabricators, Inc. v. Superior Air Prods. (In re Zagata), 893 F.2d 624, 627 (3d. Cir. 1990)).
[6] Id. at *7.
[7] Id. at *3.
[8] Id. at *5.
[9] See, e.g., In re Garden Ridge Corp., 321 B.R. 669, 676–77 (Bankr. D. Del. 2005); In re DVI, Inc., 308 B.R. 703, 708 (Bankr. D. Del. 2004); In re ZB Co., 302 B.R. 316, 319 (Bankr. D. Del. 2003).
[10] In re Sportsman’s Warehouse, 2009 WL 2382635, at *6.
[11] Id.
[12] See BFP v. Resolution Trust Corp., 511 U.S. 531, 563 (1994) (stating “fresh start” is “at the core of federal bankruptcy law”); In re Armstrong World Indus., Inc., 320 B.R. 523, 532 (Bankr. D. Del. 2005) (explaining importance of debtor’s “fresh start” in bankruptcy).