In Re Goody's Family Clothing Inc., 09-2168.

Citation610 F.3d 812
Decision Date29 June 2010
Docket NumberNo. 09-2168.,09-2168.
PartiesIn re GOODY'S FAMILY CLOTHING INC., et al., Appellants.
CourtUnited States Courts of Appeals. United States Court of Appeals (3rd Circuit)

COPYRIGHT MATERIAL OMITTED

Ian S. Fredericks, Esquire, Gregg M. Galardi, Esquire (Argued), Marion M. Quirk, Esquire, Skadden, Arps, Slate, Meagher & Flom, Wilmington, DE, for Appellants.

Duane D. Werb, Esquire, Werb & Sullivan, Wilmington, DE, for Appellee Mountaineer Property Co. II, LLC.

Sherry Ruggiero Fallon, Esquire, Tybout, Redfearn & Pell, Wilmington, DE, J. Carole Thompson Hord, Esquire (Argued), Schreeder, Wheeler & Flint, Atlanta, GA, for Appellee Stafford Bluffton, LLC.

John D. Demmy, Esquire, Stevens & Lee, Wilmington, DE, Nicholas W. Whittenburg, Esquire (Argued), Miller & Martin, Chattanooga, TN, for Appellee Eastgate Mall, LLC.

Before: AMBRO, ALDISERT, and ROTH, Circuit Judges.

OPINION OF THE COURT

AMBRO, Circuit Judge.

Goody's Family Clothing, Inc. and certain of its direct and indirect subsidiaries (collectively “Goody's” or “Debtors”) appeal the judgment of the District Court affirming the Bankruptcy Court's decision to award “stub rent” as an administrative expense under 11 U.S.C. § 503(b) to three of the Debtors' landlords-Mountaineer Property Co. II, LLC, Stafford Bluffon, LLC, and Eastgate Mall, LLC (collectively the “Landlords”). “Stub rent” here is the amount due a landlord for the period of occupancy and use between the petition date and the first post-petition rent payment.1 In deciding this issue, we construe further the meaning of 11 U.S.C. § 365(d)(3), first addressed in CenterPoint Properties v. Montgomery Ward Holding Corp. (In re Montgomery Ward Holding Corp.), 268 F.3d 205 (3d Cir.2001). We hold that § 365(d)(3) does not supplant § 503(b) and the Landlords are entitled to “stub rent” as an administrative expense. We thus affirm the judgment of the District Court, and do so for essentially the reasons given by Judge Bumb in her excellent opinion.

I. Facts and Procedural Background

The relevant facts are undisputed. Goody's and the Landlords entered into leases for nonresidential real property in various shopping venues around the country. Each provided that rent would be paid in advance on the first day of every month during the term of the lease. Goody's was current on its rent obligations until June 1, 2008, when it did not pay rent due under the leases.

On June 9, 2008, the Debtors filed voluntary petitions for bankruptcy relief under the Bankruptcy Code. They simultaneously filed a motion with the Bankruptcy Court asking for permission to engage in various activities related to the closing of certain stores, including those leased from the Landlords, and the liquidation of the products in those stores. The store-closing sales were to be handled by an agent specifically hired to perform that task.

The Bankruptcy Court granted the motion, and a store-closing agent was hired soon thereafter. Goody's continued to occupy the properties owned by the Landlords, and the sales occurred on premises. The agent sold the merchandise in the designated stores, taking a portion for itself and turning over the balance of the proceeds to the estate. By Goody's own admission, the sale was “pretty successful” and brought in 105.4% of costs. Additionally, Goody's received from the agent an amount equal to per diem rent associated with use of the Landlords' property to conduct the closing sales, including the entire “stub rent” period.

Goody's, however, has not paid the Landlords for the post-petition occupancy of the stores from June 9 through June 30, 2008. In line with 11 U.S.C. § 365(d)(3), Goody's did pay, and the Landlords accepted, the rent due for the month of July on July 1, 2008. The “stub rent” for June remains in dispute.

The Landlords filed administrative expense claims under § 503(b)(1) for the “stub rent,” characterizing it as unpaid, post-petition rent that was an actual, necessary cost and expense of preserving the estate. Goody's objected, arguing the “stub rent” was due under the Leases prior to the petition date, making it a general, unsecured pre-petition claim entitled to no special priority. Goody's further argued that § 365 was the exclusive source of obligations and remedies under unexpired leases, making any reference to § 503(b)(1) contrary to statutory text and controlling precedent.

The Bankruptcy Court heard argument on the Landlords' motions and granted them all as administrative expenses, but refused to require immediate payment. 392 B.R. 604 (Bankr.D.Del.2008). An appeal was taken to the District Court, which affirmed.2 401 B.R. 656 (D.Del.2009). Debtors then appealed to our Court. The District Court had jurisdiction under 28 U.S.C. § 158(a)(1) over the appeal from the Bankruptcy Court, which had jurisdiction under 28 U.S.C. § 157(b). We have jurisdiction under 28 U.S.C. §§ 1291 and 158(d).

We exercise plenary review over the District Court's conclusions of law, including matters of statutory interpretation. In re Tower Air, Inc., 397 F.3d 191, 195 (3d Cir.2005). Because the District Court sat as an appellate court to review the Bankruptcy Court, we review the Bankruptcy Court's legal determinations de novo, its factual findings for clear error, and its exercises of discretion for abuse thereof. Id.

II. Analysis

The threshold question is simple: does the existence of § 365(d)(3) preclude the attempted use of § 503(b)(1) for the “stub rent”? If so, the inquiry ends there. If not, we must then determine whether the “stub rent” may be considered an administrative expense under § 503(b)(1). We answer “no” to the first question and “yes” to the second.

A. Section 365(d)(3) does not preempt § 503(b)(1)

Section 365(d)(3) of the Bankruptcy Code imposes a special duty with respect to unexpired leases of nonresidential real property:

The trustee shall timely perform all the obligations of the debtor, except those specified in section 365(b)(2), arising from and after the order for relief under any unexpired lease of nonresidential real property, until such lease is assumed or rejected, notwithstanding section 503(b)(1) of this title. The court may extend, for cause, the time for performance of any such obligation that arises within 60 days after the date of the order for relief, but the time for performance shall not be extended beyond such 60-day period. This subsection shall not be deemed to affect the trustee's obligations under the provisions of subsection (b) or (f) of this section. Acceptance of any such performance does not constitute waiver or relinquishment of the lessor's rights under such lease or under this title.

11 U.S.C. § 365(d)(3). In Montgomery Ward, we interpreted what Congress meant when it referred to “obligations of the debtor ... arising ... after the order for relief under any unexpired lease of nonresidential real property.” 268 F.3d at 208. We determined that the “clear and express intent of § 365(d)(3) is to require the [debtor] to perform the lease in accordance with its terms.” Id. at 209. We thus held that “an obligation arises under a lease for the purposes of § 365(d)(3) when the legally enforceable duty to perform arises under that lease.” Id. at 211.

Goody's argues that this completes the inquiry-the rent was due on June 1, 2008, prior to the petition date, so it did not need to pay for the occupancy from June 9 to June 30 because § 365(d)(3) does not mandate it.3 However Montgomery Ward considered only the debtor's obligations under § 365(d)(3) and not, as is asserted here, its obligations under § 503(b)(1). Goody's is not required under § 365(d)(3) to make good on the June 1, 2008, pre-petition obligation, but Montgomery Ward did not address post-petition obligations under § 503(b)(1) of a debtor arising from actual occupancy independent of the lease. We turn to this question.

Section 503(b)(1) is specifically mentioned in § 365(d)(3). The provision imposes the duties discussed in Montgomery Ward “notwithstanding section 503(b)(1) of [the Bankruptcy Code].” 11 U.S.C. § 365(d)(3). The key word here is “notwithstanding.” It means “in spite of” or “without prevention or obstruction from or by.” Webster's Third New Int'l Dictionary 1545 (1971). In this context, § 365(d)(3) is best understood as an exception to the general procedures of § 503(b)(1) that ordinarily apply.

Post-petition obligations are ordinarily given payment priority as administrative expenses, though such claims must still go through standard procedures of notice and a hearing to demonstrate that the costs were actual, necessary expenses of preserving the estate. See 11 U.S.C. § 503(b) (“After notice and a hearing, there shall be allowed administrative expenses, ... including ... the actual, necessary costs and expenses of preserving the estate.”). Section 365(d)(3) operates to dispense with these requirements for post-petition obligations under an unexpired lease of nonresidential real property, meaning it functions “without prevention or obstruction from or by” § 503(b)(1). This is essentially our holding in Montgomery Ward.

Relieving a landlord under § 365(d)(3) of burdensome administrative procedures, however, does not foreclose that landlord's ability to use the more burdensome procedures to recover in situations outside the scope of § 365(d)(3). Put simply, § 365(d)(3) does not supplant or preempt § 503(b)(1). The last sentence of § 365(d)(3) makes this plain: “Acceptance of any such performance [under § 365(d)(3)] does not constitute waiver or relinquishment of the lessor's rights under such lease or under [the Bankruptcy Code].” 11 U.S.C. § 365(d)(3). By accepting the July 1, 2008, payment from Goody's, the Landlords did not give up any other rights under the Bankruptcy Code, including those accorded by § 503(b)(1). Indeed, it would put lessors in an awkward place if, while debtors were required to pay them on time pursuant to § 365(d)(3), accepting such a payment served also to deprive...

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