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:

(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.

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:

(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....

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:

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.

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.

 

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Footnotes

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).