September 03, 2019

MONTH-IN-BRIEF: Bankruptcy & Finance

Janet M. Nadile, Taryn Darling

Bankruptcy Law

Stub Rent Issues Linger On

By Michael Enright

Section 365(d)(3) of the Bankruptcy Code was expected to simplify the treatment of the claims of landlords in Chapter 11 cases, providing them with a timely payment right for postpetition rents that come due prior to rejection of a real estate lease. However, all these years later, landlord claims continue to generate interesting decisions on a very regular basis, mostly around the interplay of Section 365(d)(3) with Section 503(b)(1)(A).  The U.S. Bankruptcy Court, District of Nebraska, was faced with just such a case in Matter of Specialty Retails Shops Holding Corp., Case No. 19-80064 (Bankr. D. Neb. Aug. 26, 2019).  The petition date in this Chapter 11 case was January 16, 2019, so the “stub rent” period ran from January 16th to January 31st.  In the context of two 8th Circuit opinions touching on the stub rent issues, the court was left to reconcile this precedent and apply it to the lease obligations owed by the debtor for that short period after the petition date and before the first full month of rent came due on February 1 under the leases. The court made the following holdings: (1) Section 365(d)(3) claims are entitled to immediate payment, but Section 503(b)(1) claims are not; (2) the landlords are entitled to Section 503(b)(1) claims for stub rent; (3) the landlords were not entitled to administrative rent claims for the prorated portion of base rent or additional rent items (taxes, utilities, etc.) billed or payable post-rejection but attributable to the post-petition/pre-rejection period; and (4) the landlords were not entitled to administrative expense claims for additional rent items attributable to the pre-petition period that became due or payable post-rejection. As the court noted in the decision, prior decisions on these issues have “recognized that the application of the billing date approach could have consequences that are perceived as unfair to one side or the other.” Holdings on these and similar stub rent issues vary from jurisdiction to jurisdiction, and are sometimes inconsistent within a particular jurisdiction.  Anyone dealing with a claim for obligations under a lease of real property that arise in the first month post-filing will want to take a close look at how the courts in that jurisdiction may have dealt with these fact-specific issues.  

Janet M. Nadile

Counsel; Simpson, Thacher & Bartlett LLP

Janet M. Nadile is Counsel at Simpson, Thacher & Bartlett LLP.  Her practice focuses on a broad array of commercial law with an emphasis on issues regarding Articles 8 and 9 of the Uniform Commercial Code.  She advises lenders and borrowers on all aspects of drafting and negotiating collateral security documents in a wide variety of secured transactions, including credit facilities, asset based lending, secured bond transactions, project finance and funds finance.  She also advises on all matters involving collateral subject to the UCC and other statutes, frequently for the technology, media, telecommunications, automotive, healthcare and natural resources industries.  Janet created and conducts the Firm-wide CLE seminars on various aspects of secured lending.

Taryn Darling

Board Member, William H. Dwyer Inns of Court

Taryn began her career as a bankruptcy lawyer almost ten years ago. Her practice includes reorganization, insolvency, receivership, work-outs, and bankruptcy and all related litigation. Taryn has litigated at the trial level and appellate level on behalf of her clients in a number of adversary proceedings and in consumer protection litigation. Taryn’s clients include individuals, business owners, and closely held corporations and businesses. Her breadth of experience in the area of bankruptcy and insolvency enables her to take a preventive approach when clients come to her at the outset of a problem. Taryn develops creative solutions to mitigate the impact or consequences when it becomes clear that a bankruptcy or receivership is the best course of action.