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The recent flood of retail bankruptcy filings brings to the forefront the divergent positions taken by various circuits, and even different courts within the same circuit, regarding payment of "stub rent."1 As courts continue to reach different conclusions on whether payment of stub rent2 is an obligation that must be timely performed at the outset of a bankruptcy case, and debtors argue that stub rent should be treated as a general unsecured claim/ a recent decision from the U.S. District Court for the District of Delaware provides a new twist on this recurring dispute.
In an opinion in In re Goody's Family Clothing.4 issued March 31. 2009. Hon. Renee Marie Bumb (D. N.J., sitting by designation), took the opportunity to suggest that the Third Circuit's decision in Montgomery Ward,5 in which the Third Circuit adopted the "billing date approach" for the treatment of lease obligations, should not be applied to stub rent because the result contradicts Congress' intent in enacting §365(d)(3) of the Bankruptcy Code and. taken to the extreme, arguably renders §365(d)(3) meaningless with respect to almost all rent payments.6 The district court was not asked to directly address the applicability of §365(d)(3) to stub rent and affirmed the bankruptcy court's ruling that stub rent was properly allowed as an administrative claim under §503(b)(l ) of the Code. However, in a lengthy footnote, the district court provided three suggestions as to why §365(d)(3) could require payment of the full month's rent for the month during which the case filed, not just the prorated portion of the stub rent period.
A Brief Primer on Recovery of Stub Rent
Landlords have two statutory means to seek payment of stub rent: §365(d)(3) and 503(b)(1). Whether a jurisdiction follows the billing-date approach or proration approach will inform how the landlord proceeds with respect to stub rent. Section 365(d)(3), added to the Bankruptcy Code in 1984. requires a debtor-in-possession (DIP) to "timely perform all the obligations.. .arising from and after the order for relief under any unexpired lease of nonresidential real property, until such lease is assumed or rejected, notwithstanding § 503(b)(1)."7 The purpose of §365(d)(3) was to save landlords the expense and burden of having to file motions for payment of rent and demonstrate under...