The Dispute over Stub Rent Continues in the Eighth Circuit

Whether or not a bankrupt tenant is required to pay post-petition rent, and when that rent needs to be paid, are issues of significant importance to both debtors and landlords. A recent decision by the Bankruptcy Appellate Panel of the Eighth Circuit (the jurisdiction that encompasses Minnesota) adds yet another dimension to the spectrum of cases addressing the payment of "stub" rent by a bankrupt tenant under a non-residential lease of real property and at the same time highlights the importance of working with legal counsel whenever a tenant is in financial distress.

Stub rent is a bankruptcy term of art. It refers to the rent due for the period commencing on the petition date and ending on the last day of the month in which the petition is filed. Because rent is typically paid in advance and due on the first of the month, it is not uncommon for a tenant to skip rent and then file for bankruptcy, knowing that the Bankruptcy Code will stay the landlord's collection efforts.

Section 365 of the Bankruptcy Code addresses a bankrupt tenant's lease obligations. Section 365(d)(3) provides that the debtor "shall timely perform all [of its] obligations -- arising from and after the [petition date] under any unexpired lease of nonresidential real property, until such lease is assumed or rejected, notwithstanding section 503(b)(1) of [the Bankruptcy Code]." If stub rent qualifies as an obligation of the debtor "arising from and after" the petition date, it needs to be timely paid in full. If not, the landlord will typically have to wait until the end of the case for the stub rent to be paid as an actual and necessary expense of administration.

The courts are generally divided as to the treatment of stub rent in bankruptcy. Some courts view the statutory language as clear, holding that Section 365(d)(3) encompasses any obligation that becomes due and payable on or after the filing date. Under the "performance" or "billing date" approach, if the petition is filed after the first of the month, the landlord is not automatically entitled to prompt payment of stub rent. Other courts see more ambiguity in the statute and look elsewhere for guidance, concluding that a tenant's lease obligations arise when they accrue. Under the "accrual" or "proration" approach, a landlord will generally have a claim for timely payment of stub rent.

This summer, the Bankruptcy Appellate Panel for the Eighth Circuit issued an opinion that takes the billing date approach to the extreme. In Burival (In re Burival, 406 B.R. 548 (8th Cir. B.A.P. 2009)), the BAP held that Section 365(d)(3) creates a bright-line rule pursuant to which the debtor must timely perform all postpetition, pre-rejection lease obligations as they become due, with no proration. While the typical commercial lease contemplates payment of rent in advance on the first of the month, in Burival the lease at issue was a crop lease and the tenant was required to make just two payments per year. One of these was due on December 1, 2007, for what the debtor argued was the crop year that ended prior to the bankruptcy filing. According to the BAP, because the debtor filed for bankruptcy on November 29, 2007, when December 1, 2007, rolled around, the landlord became entitled to the full rent payment required under the lease.

While a strong dissent would have limited the landlord's administrative expense claim to the extent that the lease actually benefitted the estate, the decision in Burival adds a unique gloss to the jurisprudence on stub rent. And while landlords may find the outcome in Burival appealing, had the tenant filed for bankruptcy two days after the billing date (rather than two days before), the reception might not be so warm.

In addition to taking an aggressive role in a tenant's bankruptcy, a landlord can negotiate lease provisions at the inception or renewal of a lease to be better positioned for payment of stub rent in the event of a tenant bankruptcy.