How may theories can a landlord use to obtain full payment of post-petition lease
obligations from a chapter 11 tenant? After a recent district court decision,
the answer remains "two." In an opinion dated July 3, 2006, in The
Official Committee of Unsecured Creditors v. PREIT Services LLC (In re
Hello Corp. of Pennsylvania), 2006 WL 1983214, the U.S. District Court for
the Western District of Pennsylvania denied leave to appeal an order of the
bankruptcy court granting a landlord an allowed administrative claim under §503(b)
for rent and related lease obligations arising between the date of the tenant's
chapter 11 filing and the end of the month in which the case was commenced.
The opinion is instructive as it relates to both the standards for leave to
appeal an interlocutory bankruptcy court order and for a lessor's entitlement
to so-called "stub rent" under §503, notwithstanding the applicability
of the "billing date" approach to determining post-petition rent claims
under the Third Circuit Court of Appeals' holding in Centerpoint Properties
v. Montgomery Ward Holding Corp. (In re Montgomery Ward Holding Corp.),
268 F.3d 205 (3d Cir. 2001).
Hello Corp. of Pennsylvania Inc. (the debtor) filed a voluntary chapter 11
petition on Jan. 3, 2006. The debtor operated stores under multiple nonresidential
real property leases. One of its landlords filed a motion shortly after the
commencement of the case seeking an order under §503(b) of the Bankruptcy
Code allowing and directing the debtor immediately to pay the "stub rent"
arising during the period from Jan. 3-31, 2006.
Had the case been commenced on December 31, there would have been no need for
such a motion since §365(d)(3) imposes an absolute statutory obligation
on a debtor-tenant to pay post-petition rent and related lease charges in full
and on time. Specifically, §365(d)(3) provides in relevant part:
<blockquote>
(3) The trustee shall timely perform all of the obligations of the debtor,
except those specified in §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 §503(b)(1) of the
title.

</blockquote>
The wrinkle in Hello Corp. (as in many retail chapter 11 cases in the
Third Circuit) was Montgomery Ward, which held that the date on which
an obligation arising under a lease is due and payable operates to determine
its character as a pre- or post-petition claim. Although Montgomery Ward
itself dealt with the debtor's obligation to reimburse its landlord for real
estate taxes as distinguished from rent claims, its holding applies with equal
force to rent payable under leases that contain provisions requiring a tenant's
rent payment on the first day of each month in which the lease is in effect.
In the Third Circuit, a case filed at any time after the first of the month
relegates the landlord's claim to the status of a pre-petition general unsecured
claim for purposes of §365(d)(3).
The analysis doesn't end there, however. Even in the Third Circuit, the landlord
may still obtain administrative-claim status for the prorated "stub rent"
obligation under §503(b)(1)(A), which provides in relevant part as follows:
<blockquote>
(b) After notice and a hearing, there shall be allowed, administrative expenses,
other than claims allowed under §502(f) of this title, including—
(1)(A) the actual, necessary costs and expenses of preserving the estate....

</blockquote>
The landlord's argument for administrative priority status in Hello Corp.
was hardly novel. It relied on authority from within and outside the Third Circuit
that, in situations in which the debtor's post-petition use and occupancy of
the leasehold premises is shown to benefit the estate, the landlord is entitled
to an administrative claim to the extent of that benefit. The debtor, joined
by its unsecured creditors' committee and its lender, opposed the landlord's
motion on the ground that relief under §503 was inconsistent with Montgomery
Ward and that accordingly, the January lease claim could properly be construed
only as a general unsecured claim since it arose for billing date purposes two
days before the filing of the petition.

The bankruptcy court granted the landlord's motion for the allowance of its
administrative stub rent claim, subject to the limitation that payment would
be deferred until the debtor assumed or rejected the lease.1 The court's reasoning
with respect to deferring the payment was based on pragmatic considerations
since the issue would become moot if the debtor assumed the lease and cured
the arrears as required by §365(b)(1)(A) of the Code.
Not content, the committee thereafter filed a motion for leave to appeal the
bankruptcy court's order under 28 U.S.C. §158. The committee recognized
that the order granting the landlord's motion was interlocutory and therefore
that leave of the district court was required to prosecute the appeal under
28 U.S.C. §158(a)(3). See also Federal Rules of Bankruptcy Procedure
8001 and 8003.
As a general matter, federal appellate jurisdiction is limited to final decisions
of the lower courts pursuant to 28 U.S.C. §1291. Final judgments or orders
are those that have the effect of terminating the litigation in the court in
which they are entered.2
While a nonfinal interlocutory order may not generally be appealed, Tilden
Financial Corp. v. Palo Tire Service Inc., 596 F.2d 604 (3d Cir. 1979),
exceptions to the general principle are codified in 28 U.S.C. §1292, which
permits appeals from interlocutory orders in certain specified circumstances.
See also DiBella v. U.S., Fla. & N.Y., 369 U.S. 121, 82 S.Ct. 654,
7 L.Ed. 2d 614 (1962) (appeals from interlocutory orders in certain types of
proceedings are allowed where damage of unreviewed error is deemed greater than
disruption caused by intermediate appeal).

It is worth noting that some courts have held that there exists a more liberal
standard in bankruptcy cases for determining "finality" for appellate
purposes, which takes into consideration the extent to which (1) the order appealed
from leaves the bankruptcy court nothing to do but execute the order, (2) a
delay in obtaining appellate review would operate to prevent the aggrieved party
from obtaining effective relief and (3) a subsequent reversal of the issue would
require recommencement of the entire proceeding (see, e.g., Grovenburg
v. Homestead Ins. Co.), 183 F.3d 883 (8th Cir. 1999). Otherwise, appellate
jurisdiction of bankruptcy court orders is a creature of 28 U.S.C. §158,
which generally identifies those kinds of orders that are appealable to the
district courts. In addition to final judgments, orders and decrees, §158
identifies at least two categories of interlocutory orders that are appealable.
The first consists of those orders relating to extensions or reductions of a
debtor's exclusive periods under §1121 of the Code, which do not require
leave of court. The second somewhat unhelpfully relates to appeals "from
other interlocutory orders and decrees," which require leave of court.
Unlike §1292, which details broad categories of appealable interlocutory
orders, §158(a) contains no such specificity. The district court in Hello
Corp. denied the committee's motion for leave to appeal, observing initially
that while §158(a)(3) confers a general right to seek leave to appeal an
interlocutory bankruptcy court order, neither that statute nor any provision
of the Code provides "guidance...regarding the appropriate standard district
courts should apply in determining whether leave to appeal should be granted,"
citing In re Sandehill, 304 B.R. 692, 693-94 (E.D. Pa. 2004).
 The district court next looked to §1292(b), which defines the scope of
appellate jurisdiction over interlocutory appeals from the district court to
the circuit courts of appeal and applied it in the context of bankruptcy appeals.
The court concluded that under §1292(b), as applied to §158(a)(3),
the district court may hear an appeal from an interlocutory order of the bankruptcy
court if all of the following conditions are satisfied:
<blockquote>
1. The appeal involves a controlling question of law,

2. There is substantial ground for difference of opinion regarding the question
of law, and 
3. An immediate appeal would materially advance the termination of the litigation.

</blockquote>
As to the first element, the district court concluded that no "controlling
question of law" was presented, since (as the bankruptcy court had observed
earlier) the issue might prove moot if and to the extent the debtor assumed
the lease. With respect to the second element, the court appears to have been
wholly unpersuaded by the committee's restrictive interpretation of Montgomery
Ward to preclude the award of an administrative priority under §503(b),
such that there existed no substantial ground for a difference of opinion on
that point. Finally, with regard to the requirement that the appeal would materially
advance the termination of the bankruptcy litigation, the court failed to apprehend
how its determination as to whether stub rent can be afforded priority under
§503(b), even though none was available under §365(d)(3), would achieve
that objective.
Hello Corp. is useful in reminding general bankruptcy litigators of
the limitations of appellate jurisdiction over nonfinal orders and in reinforcing
for landlords' counsel the notion that where stub rent claims are concerned,
there is more than one way to get the landlord paid.
<blockquote>
<blockquote>  </blockquote>

</blockquote>

<hr>
<h3>Footnotes</h3>
 1 See In re Chi-Chi's Inc., 305 B.R. 396 (Bankr. D. Del. 2004); In
re ZB Company Inc., 302 B.R. 316 (Bankr. D. Del. 2003); In re UAL Corp.,
et al., 291 B.R. 121 (Bankr. N.D. Ill. 2003); and In re HQ Global
Holdings Inc., 282 B.R. 169 (Bankr. D. Del. 2002).

2 See, e.g., In re Beef Industry Antitrust Litigation,
607 F.2d 167 (5th Cir. 1979), rehearing denied, 609 F.2d 1008, cert. denied,
452 U.S. 985, 101 S.Ct. 3029, 69 L.Ed.2d 405 (1980).

Journal Authors

Jeffrey Kurtzman

Journal Date

Friday, September 1, 2006 - 12:00

Bankruptcy Rule

2006

none