2010 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

6-29-2010

In Re: Goody's Family Clothing

Precedential or Non-Precedential: Precedential

Docket No. 09-2168

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Recommended Citation

"In Re: Goody's Family Clothing " (2010). 2010 Decisions. Paper 1059.

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PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

 

No. 09-2168

 

In re: GOODY’S FAMILY CLOTHING INC., et al.,

Appellants

 

Appeal from the United States District Court

for the District of Delaware

(D.C. Civil Action No. 1-08-cv-00585/819/820)

District Judge: Honorable Renee M. Bumb

 

Argued November 17, 2009

Before: AMBRO, ALDISERT, and ROTH, Circuit Judges

 (Opinion filed June 29, 2010 ) 

 

Ian S. Fredericks, Esquire

Gregg M. Galardi, Esquire (Argued)

Marion M. Quirk, Esquire

Skadden, Arps, Slate, Meagher & Flom

One Rodney Square
2

P.O. Box 636

Wilmington, DE 19899-0000

Counsel for Appellants

Duane D. Werb, Esquire

Werb & Sullivan

300 Delaware Ave., 13th Floor

P.O. Box 25046

Wilmington, DE 19899-0000

Counsel for Appellee

Mountaineer Property Co. II, LLC

Sherry Ruggiero Fallon, Esquire

Tybout, Redfearn & Pell

750 Shipyard Drive, Suite 400

Wilmington, DE 19899-0000

J. Carole Thompson Hord, Esquire (Argued)

Schreeder, Wheeler & Flint

1100 Peachtree Street, N.E.

Suite 800

Atlanta, GA 30309-0000

Counsel for Appellee

Stafford Bluffton, LLC

John D. Demmy, Esquire

Stevens & Lee

1105 North Market Street
3

Suite 700

Wilmington, DE 19801-0000

Nicholas W. Whittenburg, Esquire (Argued)

Miller & Martin

832 Georgia Avenue

Suite 1000, Volunteer Bldg.

Chattanooga, TN 37402-0000

Counsel for Appellee

Eastgate Mall, LLC

 

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
 Though called “rent,” it is not necessarily tied to the rent 1

amounts in the underlying lease agreements. Here, the parties

have stipulated to the “stub rent” amounts.

4

the first post-petition rent payment. In deciding this issue, we 1

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
5

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 storeclosing 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, postpetition 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
 The issue of immediate payment was not appealed and it is

2

not before us.

6

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. 401 B.R. 656 (D. Del. 2009). Debtors then appealed 2

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
7

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
 Goody’s also argues that § 365 provides the exclusive 3

avenue through which a debtor can be made to pay lease rent.

We reject this argument for numerous reasons. First, we are not

confronted with lease rent; we are confronted with “stub rent”

under § 503(b)(1), which may or may not be tied to the actual

lease rate. Second, other provisions in the Code address leases,

dispelling any notion that § 365 is exclusive here. See, e.g., 11

U.S.C. § 503(b)(7) (addressing leases that are assumed and then

8

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. However, Montgomery Ward 3
rejected). Third, because § 365(d)(3) does not address

residential leases, Goody’s interpretation would imply that a

debtor could occupy residential real property prior to assumption

or rejection, leaving no § 503(b)(1) remedy for a landlord.

Finally, Goody’s attempt to invoke expressio unius est exclusio

alterius (to express one thing is to exclude the others) fails to

support the exclusivity of § 365(d)(3)—here, Congress expressly

preserved other rights under the Code in the text of § 365(d)(3).

9

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
10

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 lessors of the balance of their
11

rights under the Code.

The text of § 365(d)(3) is consistent with the Conference

Report explaining the provision, which we referenced in

Montgomery Ward. See 268 F.3d at 210–11. We specifically

referred to the statements of Senator Orrin Hatch, a conferee on

the originating act:

This subtitle contains three major substantive

provisions which are intended to remedy serious

problems caused shopping centers and their

solvent tenants by the administration of the

bankruptcy code. . . . A second and related

problem is that during the time the debtor has

vacated space but has not yet decided whether to

assume or reject the lease, the trustee has stopped

making payments due under the lease. . . . In this

situation, the landlord is forced to provide current

services—the use of its property, utilities,

security, and other services—without current

payment. No other creditor is put in this position.

In addition, the other tenants often must increase

their common area charge payments to

compensate for the trustee’s failure to make the

required payments for the debtor. The bill would

lessen these problems by requiring the trustee to

perform all the obligations of the debtor under a

lease of nonresidential real property at the time
12

required in the lease. This timely performance

requirement will [e]nsure that debtor-tenants pay

their rent, common area, and other charges on

time pending the trustee’s assumption or rejection

of the lease.

H.R. Conf. Rep. No. 98-882 (1984), 98th Cong., 2d Sess.,

reprinted in 1984 U.S.C.C.A.N. 576, 598–99 (emphasis added).

The statement supports our conclusion that § 365(d)(3) does not

cover the situation in our case. Goody’s never vacated the

space. On the contrary, it continued to occupy the Landlords’

properties to conduct store-closing sales. The purpose of

§ 365(d)(3) is to protect landlords from the burdensome

requirements of § 503(b)(1) in securing payment from nonoccupying debtors; it would be perverse indeed to conclude that

it then precluded the use of § 503(b)(1) to secure “stub rent”

from a debtor actually occupying the premises.

When a debtor occupies post-petition non-residential

space it leases, that § 365(d)(3) provides when the rent

obligation arises does not erase when lessors may make

§ 503(b)(1) claims for the value conferred post-petition by that

occupancy. We thus conclude that the Landlords may assert a

§ 503(b)(1) claim for “stub rent.”

B. Debtors’ occupancy of the leased premises was

an actual and necessary benefit to the estate
 Administrative expenses, including the “actual, necessary 4

costs and expenses of preserving the estate,” may be allowed

after notice and a hearing. 11 U.S.C. § 503(b)(1). There is no

dispute that notice and a hearing occurred here.

13

As § 503(b)(1) is available to the lessors here, we turn to

whether the “stub rent” is an administrative expense under 4

§ 503(b)(1). We believe it is.

For a commercial lessor’s claim to get administrative

expense treatment under § 503(b)(1), the debtor’s occupancy of

the leased premises must confer an actual and necessary benefit

to the debtor in the operation of its business. See Calpine Corp.

v. O’Brien Envtl. Energy, Inc. (In re O’Brien Envtl. Energy,

Inc.), 181 F.3d 527, 532–33 (3d Cir. 1999) (citing Cramer v.

Mammoth Mart, Inc. (In re Mammoth Mart, Inc.), 536 F.2d 950,

954 (1st Cir. 1976)). Proving this is the lessor’s burden. Id. at

533. Thus, the Landlords “must . . . carry the heavy burden of

demonstrating that the [‘stub rent’] for which [they] seek[]

payment provided an actual benefit to the estate and that

[incurring ‘stub rent’ was] necessary to preserve the value of the

estate assets.” Id. (citation omitted).

We look to the Mammoth Mart test we adopted in

O’Brien, and note that “[w]hen third parties are induced to

supply goods or services to the debtor-in-possession pursuant to

a contract that has not been rejected, the purposes of

[administrative claims] plainly require that their claims be
14

afforded priority.” In re Mammoth Mart, 536 F.2d at 954. In

contrast, when the contract has been fully performed prior to the

petition date, it is no longer executory and thus not entitled to

payment priority as an administrative expense. In our case,

Goody’s has continued to occupy the premises post-petition, and

it is attempting to do so without providing any post-petition

consideration to the Landlords who were still providing services

for the premises in the time prior to rejection.

This is similar, though not directly analogous, to the

situation in Zagata, where we held that “[a]t a minimum, [a

creditor] is . . . entitled to a reasonable value for the use and

occupancy of its land as an administrative cost under section 503

of the Bankruptcy Code.” Zagata Fabricators v. Superior Air

Prods., 893 F.2d 624, 627–28 (3d Cir. 1990). Although it

addressed an expired lease, Zagata supports that the Debtors’

retaining possession of the premises, thereby inducing postpetition services from the Landlords, is sufficient under the

O’Brien and Mammoth Mart inquiries to be a transaction

justifying administrative priority. This accords with the

application of Zagata in the Bankruptcy Courts of our Circuit.

See In re DVI, Inc., 308 B.R. 703, 707–08 (Bankr. D. Del. 2004)

(“A landlord is entitled to an administrative claim in the amount

of the fair market value of the premises when a debtor occupies

and uses them post-petition.” (emphasis added)); In re ZB Co.,

302 B.R. 316, 319 (Bankr. D. Del. 2003) (“It is beyond dispute

that all of the Debtors’ landlords whose properties are occupied

and used post-petition have valid administrative claims.”
15

(emphasis added)); In re HQ Global Holdings, Inc., 282 B.R.

169, 173 (Bankr. D. Del. 2002) (“A lessor is generally entitled

to an administrative claim under section 503(b) for the fair

rental value of the lessor’s property actually used by the debtor.”

(emphasis added)); cf. In re Unidigital, Inc., 262 B.R. 283, 288

(Bankr. D. Del. 2001) (unexpired lease of equipment sought to

be abandoned with no continuing use thereof denied

administrative priority); In re Pinnacle Brands, Inc., 259 B.R.

46, 51–52 (Bankr. D. Del. 2001) (denying administrative

priority because indemnification, though under a pre-petition

contract, is not an ongoing actual use of services); In re MidAm. Waste Sys., Inc., 228 B.R. 816, 821 (Bankr. D. Del. 1999)

(same).

Although mere occupancy is not always an actual and

necessary expense that benefits an estate, there can be no

reasonable dispute that the occupation of the leased premises

here conferred a benefit. Goody’s obtained a better than 105%

recovery from the store-closing sales, and these sales were an

integral part of the bankruptcy proceedings. The sales required

a physical venue, and remaining in existing premises was just as

necessary and beneficial to the estate as leasing new premises

specifically for store-closing sales. Indeed, Goody’s own

conduct indicates that it saw the occupation of the Landlords’

premises as a necessary expense when it charged (and collected

from) its liquidation agent “actual [o]ccupancy [e]xpenses”

equal to per diem rent pursuant to the store closing agreement

approved by the Bankruptcy Court. See App. 937, 977–78. It
16

would be illogical to allow Goody’s to collect the equivalent of

“stub rent” from its liquidation agent, but not to require payment

to the Landlords of “stub rent” as “necessary expenses.” Thus,

the Landlords are entitled to a reasonable “stub rent” as an

actual and necessary expense for the benefit of the estate.

* * * * *

The Landlords are entitled to receive payment under

Bankruptcy Code § 503(b)(1) for use of their nonresidential real

property during the stub period of June 9–June 30, 2008.

Section 365(d) does not preempt § 503 in this regard. The

judgment of the District Court is affirmed.