Sixth Circuit Denies Landlord's Claim for Rent from Bankrupt Tenant



Posted: Wednesday, May 21, 2008

by
Montgomery McCracken

In a recent decision, the Sixth Circuit Court of Appeals upheld two lower court rulings denying a landlord's claim for rent from a Bankrupt tenant. In In re Baby N' Kids Bedrooms Inc., No. 07-1606 (6th Cir. March 26, 2008) a landlord asserted an administrative priority claim under Bankruptcy Code Section 503(b) (which gives priority payment status to amounts owed by a debtor in bankruptcy for the actual, necessary costs of preserving a bankruptcy estate), for rent that accrued after the debtor filed its bankruptcy petition. The filing occurred on June 8, 2006. Under the lease, rent was due as of the first of June. The bankruptcy court ruled that all rent due for June had to be considered a pre-petition claim because the obligation arose as of June 1, prior to the bankruptcy filing. Therefore, no portion of the June rent could be claimed as a post-petition administrative claim. After the district court affirmed, the matter was appealed to the Sixth Circuit.

Of note was the Court's rejection of the landlord's argument that rent should be apportioned in to pre and post petition amounts, and that it should be paid its pro rata share of the rent, from the June 8 bankruptcy filing date through the end of the month on a priority basis. This runs contrary to most decisions in other jurisdictions that specifically provide landlords with this relief. Courts have found that when a debtor occupies a premises after filing for bankruptcy, the estate receives a benefit and landlords are entitled to paid rent for the time the debtor remains in the premises until the debtor rejects the lease and vacates. The rulings in Baby N' Kids essentially freed the debtor from paying almost a full month's rent simply because of the timing of the bankruptcy filing.

Comment : The decision would seemingly allow debtors to obtain a "free pass" for a month's rent simply by filing on the day after the rent was due, at least in the Sixth Circuit. The reasoning for this can be found in Code Section 363(d)(3) which provides for the payment of rent and other obligations from and after the petition date. Under this provision, some courts have found that lease obligations accruing on the first of the month are in fact pre-petition obligations not entitled to immediate payment. However, many of these same courts have also held that claims for rent due from the filing date through the end of a month are afforded administrative priority status under Code Section 503(b) and paid ahead of unsecured claims. While the Sixth Circuit recognized that claims under 503(b) had to: (i) arise after the filing of the bankruptcy; and (ii) provide a benefit to the estate, it refused to apportion the rent on a pre and post-petition basis, solely because it was due on the first of the month, even though the debtor may received a benefit for the time it occupied the premises. If this position were taken by other courts, for instance in the recent large retail case filings involving multiple leases and numerous sites, it would have a severe negative affect on multiple landlords. Moreover, this would encourage the practice of having debtors file the day after rent was due, in order to fall into the pre-petition category and provide a windfall to the bankruptcy estate for almost the entire month's rent. This has generally not been the case because the jurisdictions where many of these filings have occurred (for instance Delaware) allow for apportionment and payment of rent under section 503(b).

This Article has been viewed 22 times. (Not updated in real-time.)
No comments yet.
We want your comments! If you can read this, you don't have javascript enabled, so you can't use this comment system. Please enable javascript.