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File for Chapter 11, Get the First Month's Rent Free?

By Yitzhak Greenberg

Two recent court opinions, In re Stone Barn Manhattan LLC, 398 B.R. 359 (Bankr. S.D.N.Y. 2008) and In re Goody's Family Clothing, Inc., 401 B.R. 656 (D. Del. 2009), challenge the growing consensus that 11 U.S.C. ' 365(d)(3) (the “Statute,” or “Section 365(d)(3)”) does not require the timely payment of stub rent. Stub rent is “the rent for the interim period between the day the order for relief was entered in the bankruptcy case and the end of that month.” Stone Barn, 398 B.R. at 360-361. In a commercial lease, prepayment of rent is generally due on the first of the month. A debtor usually files after the first of the month. Therefore, stub rent is present in almost every case that involves nonresidential real property leases.

“Courts have differed on whether an obligation to pay rent 'arises' on the day that rent is due (the 'billing-date approach'), or on each day the tenant occupies the leased premises (the 'proration approach') [requiring the timely payment of stub rent].” Goody's, 401 B.R. at 663. While circuit courts generally favor the billing date approach, bankruptcy courts generally favor the proration approach. As will be discussed, this split may well be a result of bankruptcy courts' familiarity with the real world context of the Statute.

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