By
Joseph H. Baldiga, Esq.

A recent decision by a bankruptcy judge in Massachusetts concerning a landlord’s right to collect post-petition administrative rents from a debtor/tenant under a nonresidential lease of real property has drawn a distinction between a Chapter 11 (reorganization) tenant and a Chapter 7 (liquidation) tenant.

Unlike other creditors, lessors of nonresidential real property are frequently forced to extend credit to a bankrupt tenant, in the form of unpaid rent, during the period the tenant is given to decide whether to assume or reject the lease. To address this inequity, the Bankruptcy Code provides that a bankruptcy debtor or trustee must perform its obligations, including the payment of rent, in a timely manner under any unexpired leases of nonresidential real property, pending the debtor/tenant’s decision to assume or reject any such lease. The majority of bankruptcy courts enforce the debtor’s obligation to immediately pay rent charges arising after the bankruptcy filing, even where funds may be insufficient to pay all other post-filing claims. This effectively accords landlords priority over all other administrative expense claims.

However, some courts are reluctant to require immediate payment under certain circumstances. A recent case in point is In re MJ 500, Inc. by Chief Bankruptcy Court Judge Carol J. Kenner. In that case, the landlord asked the bankruptcy court to force the Chapter 7 trustee to make immediate payment of pre-rejection administrative rents in compliance with the trustee’s obligation to honor its nonresidential lease obligations that arose before rejection in a timely manner.

Despite the Bankruptcy Code’s language requiring timely payment, the court in MJ 500, Inc. held that the landlord was not entitled to immediate payment of rent where the estate was administratively insolvent and payment would give the claim priority over all other administrative claims.

The MJ 500 Inc. court noted that its decision departed from the traditional view because the landlord sought payment of rent accrued before conversion of the tenant’s Chapter 11 reorganization to a Chapter 7 liquidation. Additionally, the landlord sought payment from funds that became available due to the trustee’s liquidation of assets at significant administrative expense to the estate.

The court held that immediate payment of the landlord’s claim out of these funds would undermine the Bankruptcy Code’s mechanism for liquidating asset-to-pay claims, since those professionals hired by the trustee to liquidate the assets (attorneys, auctioneers, etc.) would have no assurance of payment if pre-rejection (and pre-conversion) rents took priority over Chapter 7 administrative expenses.

In distinguishing between Chapter 11 and Chapter 7 cases, the court noted that requiring immediate payment is appropriate when the debtor/tenant fails to pay the rent when due and, before the coffers are depleted, the landlord moves quickly for immediate payment from funds that other administrative creditors expect to be applied to pre-rejection rent. In fact, the Court noted that under the latter circumstances, it has granted a landlord’s right to receive payment of rent immediately, even where the estate might be left administratively insolvent.

At Mirick O’Connell, our practice when representing commercial landlords in tenant bankruptcy cases is to promptly demand immediate payment of all post-petition, pre-rejection rents, as well as possession of the premises should the debtor fail to stay current on post-petition rents.

Joseph H. Baldiga, Esq. is a partner and chairs the Creditors’ Rights and Bankruptcy Practice Group at Mirick O’Connell, which has offices in Worcester and Boston, Mass.

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