Section 365(d)(3) does not create a per se rule always requiring allowance of an administrative claim for all rent reserved under a lease when the lease is automatically rejected after filing under Section 365(d)(1), according to Bankruptcy Judge Christine M. Gravelle of Trenton, N.J.

In her June 3 opinion, Judge Gravelle employed a case-by-case approach but still gave the landlord an administrative claim for the base rent due before automatic rejection.

On the filing of the chapter 7 petition, most of the corporate debtor’s personal property was located in leased property. With a scheduled value of some $450,000, the personal property was all subject to the lien of the secured creditor, leaving the trustee no interest in the personal property.

The trustee’s value in the leased real property lay in the possibility of assuming and assigning the lease.

The landlord made no move to compel assumption or rejection or to compel payment of so-called stub rent. Rather, the landlord and the secured creditor together filed motions to modify the automatic stay as to the lender’s collateral and the lease. The trustee did not oppose, and Judge Gravelle granted the lift-stay motions about eight weeks after filing.

The trustee had moved neither to reject nor to assume the lease. So, the lease was automatically rejected 120 days after filing under Section 365(d)(1). Two weeks before automatic rejection, the landlord had filed a motion to compel payment of post-petition rent as an administrative expense under Section 365(d)(3).

The landlord’s motion caused Judge Gravelle to focus on Sections 503(b) and 365(d)(3). “After notice and a hearing,” Section 503(b) says that “there shall be allowed administrative expenses . . . including — (1) (A) the actual, necessary costs and expenses of preserving the estate including . . . .”

Section 365(d)(3) provides as follows:

The trustee shall timely perform all the obligations of the debtor . . . 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.

Judge Gravelle cited the Ninth Circuit for the proposition that administrative claims must be “narrowly construed,” and the Third Circuit for the idea that administrative claims must arise from a post-petition transaction and must be “beneficial” in the operation of the business. Regarding Section 365(d)(3), she said it “requires a trustee to timely perform all post-petition obligations of the debtor arising under any unexpired lease of nonresidential real property.”

“But while § 365 imposes an obligation to pay post-petition rent,” Judge Gravelle said, “it makes no mention of the consequences for failure to do so.”

Judge Gravelle discussed In re Goody’s Family Clothing Inc., 610 F.3d 812 (3d Cir. 2010), but said that the Third Circuit had not required payment of an administrative claim post-petition. Rather, the decision only required the payment of stub rent on application by the landlord.

Surveying caselaw, Judge Gravelle said, “The allowance of an administrative claim where a trustee fails to perform under § 365(d)(3) is the presumed remedy for a majority of courts throughout the country.” However, she disagreed with the Ninth Circuit’s holding that “an administrative expense is the only remedy available for a violation of § 365(d)(3).” See In re Pacific-Atlantic Trading Co., 27 F.3d 401 (9th Cir. 1994).

Judge Gravelle was persuaded to follow former Bankruptcy Judge Peter J. Walsh of Delaware, who said that “§ 365(d)(3) creates a new and different kind of ‘obligation’ — one that does not necessarily rest on the administrative expense concept.” In re Valley Media Inc., 290 B.R. 73, 77 (Bankr. D. Del. 2003). She said it was “unlikely that Congress sought to impose a specific remedy through implication when it did not do so explicitly.”

“Instead,” Judge Gravelle said, “the ability to craft a remedy appears to fall squarely within the confines of 11 U.S.C. § 105(a).” Utilizing equitable powers, she decided “that the allowance of an administrative expense may be used as a remedy for the failure to satisfy a § 365(d)(3) obligation.”

Furthermore, she said, “Failing to provide for such a remedy would vitiate the intent of the statute.” She saw “Congressional intent” as making it “clear that landlords should not be saddled with additional post-petition damages during a bankruptcy.”

Reviewing the facts, Judge Gravelle decided that the claim for about $11,000 in stub rent was associated with no value on the estate because that business was not operating and the trustee had no interest in the personal property located in the leased space. She decided that the “only perceived benefit to the estate was allowing the Trustee time to perform his investigation as to whether the Lease has any value.”

Judge Gravelle gave the landlord an unsecured claim for the stub rent and an administrative claim for three months of base rent at about $12,000 a month, less whatever the secured lender had paid the landlord for access to the premises for removal of the collateral.