In Re Goody's Family Clothing Inc.

PRECEDENTIAL

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

No. 09-2168

In re: GOODY’S FAMILY CLOTHING INC., et al.,
Appellants

Appeal from the United States District Court
for the District of Delaware
(D.C. Civil Action No. 1-08-cv-00585/819/820)
District Judge: Honorable Renee M. Bumb

Argued November 17, 2009

Before: AMBRO, ALDISERT, and ROTH, Circuit Judges

(Opinion filed June 29, 2010 )

Ian S. Fredericks, Esquire
Gregg M. Galardi, Esquire (Argued)
Marion M. Quirk, Esquire
Skadden, Arps, Slate, Meagher & Flom
One Rodney Square
P.O. Box 636
Wilmington, DE 19899-0000

Counsel for Appellants

Duane D. Werb, Esquire
Werb & Sullivan
300 Delaware Ave., 13th Floor
P.O. Box 25046
Wilmington, DE 19899-0000

Counsel for Appellee
Mountaineer Property Co. II, LLC

Sherry Ruggiero Fallon, Esquire
Tybout, Redfearn & Pell
750 Shipyard Drive, Suite 400
Wilmington, DE 19899-0000

J. Carole Thompson Hord, Esquire (Argued)
Schreeder, Wheeler & Flint
1100 Peachtree Street, N.E.
Suite 800
Atlanta, GA 30309-0000

Counsel for Appellee
Stafford Bluffton, LLC

John D. Demmy, Esquire
Stevens & Lee
1105 North Market Street

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Suite 700
Wilmington, DE 19801-0000

Nicholas W. Whittenburg, Esquire (Argued)
Miller & Martin
832 Georgia Avenue
Suite 1000, Volunteer Bldg.
Chattanooga, TN 37402-0000

Counsel for Appellee
Eastgate Mall, LLC

OPINION OF THE COURT

AMBRO, Circuit Judge

Goody’s Family Clothing, Inc. and certain of its direct
and indirect subsidiaries (collectively “Goody’s” or “Debtors”)
appeal the judgment of the District Court affirming the
Bankruptcy Court’s decision to award “stub rent” as an
administrative expense under 11 U.S.C. § 503(b) to three of the
Debtors’ landlords—Mountaineer Property Co. II, LLC,
Stafford Bluffon, LLC, and Eastgate Mall, LLC (collectively the
“Landlords”). “Stub rent” here is the amount due a landlord for
the period of occupancy and use between the petition date and

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the first post-petition rent payment.1 In deciding this issue, we
construe further the meaning of 11 U.S.C. § 365(d)(3), first
addressed in Centerpoint Properties v. Montgomery Ward
Holding Corp. (In re Montgomery Ward Holding Corp.), 268
F.3d 205 (3d Cir. 2001). We hold that § 365(d)(3) does not
supplant § 503(b) and the Landlords are entitled to “stub rent”
as an administrative expense. We thus affirm the judgment of
the District Court, and do so for essentially the reasons given by
Judge Bumb in her excellent opinion.

I. Facts and Procedural Background

The relevant facts are undisputed. Goody’s and the
Landlords entered into leases for nonresidential real property in
various shopping venues around the country. Each provided that
rent would be paid in advance on the first day of every month
during the term of the lease. Goody’s was current on its rent
obligations until June 1, 2008, when it did not pay rent due
under the leases.

On June 9, 2008, the Debtors filed voluntary petitions for
bankruptcy relief under the Bankruptcy Code. They
simultaneously filed a motion with the Bankruptcy Court asking
for permission to engage in various activities related to the

1
Though called “rent,” it is not necessarily tied to the rent
amounts in the underlying lease agreements. Here, the parties
have stipulated to the “stub rent” amounts.

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closing of certain stores, including those leased from the
Landlords, and the liquidation of the products in those stores.
The store-closing sales were to be handled by an agent
specifically hired to perform that task.

The Bankruptcy Court granted the motion, and a store-
closing agent was hired soon thereafter. Goody’s continued to
occupy the properties owned by the Landlords, and the sales
occurred on premises. The agent sold the merchandise in the
designated stores, taking a portion for itself and turning over the
balance of the proceeds to the estate. By Goody’s own
admission, the sale was “pretty successful” and brought in
105.4% of costs. Additionally, Goody’s received from the agent
an amount equal to per diem rent associated with use of the
Landlords’ property to conduct the closing sales, including the
entire “stub rent” period.

Goody’s, however, has not paid the Landlords for the
post-petition occupancy of the stores from June 9 through June
30, 2008. In line with 11 U.S.C. § 365(d)(3), Goody’s did pay,
and the Landlords accepted, the rent due for the month of July
on July 1, 2008. The “stub rent” for June remains in dispute.

The Landlords filed administrative expense claims under
§ 503(b)(1) for the “stub rent,” characterizing it as unpaid, post-
petition rent that was an actual, necessary cost and expense of
preserving the estate. Goody’s objected, arguing the “stub rent”
was due under the Leases prior to the petition date, making it a

5
general, unsecured pre-petition claim entitled to no special
priority. Goody’s further argued that § 365 was the exclusive
source of obligations and remedies under unexpired leases,
making any reference to § 503(b)(1) contrary to statutory text
and controlling precedent.

The Bankruptcy Court heard argument on the Landlords’
motions and granted them all as administrative expenses, but
refused to require immediate payment. 392 B.R. 604 (Bankr. D.
Del. 2008). An appeal was taken to the District Court, which
affirmed.2 401 B.R. 656 (D. Del. 2009). Debtors then appealed
to our Court. The District Court had jurisdiction under 28
U.S.C. § 158(a)(1) over the appeal from the Bankruptcy Court,
which had jurisdiction under 28 U.S.C. § 157(b). We have
jurisdiction under 28 U.S.C. §§ 1291 and 158(d).

We exercise plenary review over the District Court’s
conclusions of law, including matters of statutory interpretation.
In re Tower Air, Inc., 397 F.3d 191, 195 (3d Cir. 2005).
Because the District Court sat as an appellate court to review the
Bankruptcy Court, we review the Bankruptcy Court’s legal
determinations de novo, its factual findings for clear error, and
its exercises of discretion for abuse thereof. Id.

II. Analysis

2
The issue of immediate payment was not appealed and it is
not before us.

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 The threshold question is simple: does the existence of
§ 365(d)(3) preclude the attempted use of § 503(b)(1) for the
“stub rent”? If so, the inquiry ends there. If not, we must then
determine whether the “stub rent” may be considered an
administrative expense under § 503(b)(1). We answer “no” to
the first question and “yes” to the second.

A. Section 365(d)(3) does not preempt § 503(b)(1)

Section 365(d)(3) of the Bankruptcy Code imposes a
special duty with respect to unexpired leases of nonresidential
real property:

The trustee shall timely perform all the
obligations of the debtor, except those specified in
section 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 section
503(b)(1) of this title. The court may extend, for
cause, the time for performance of any such
obligation that arises within 60 days after the date
of the order for relief, but the time for
performance shall not be extended beyond such
60-day period. This subsection shall not be
deemed to affect the trustee’s obligations under
the provisions of subsection (b) or (f) of this
section. Acceptance of any such performance

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 does not constitute waiver or relinquishment of
the lessor’s rights under such lease or under this
title.

11 U.S.C. § 365(d)(3). In Montgomery Ward, we interpreted
what Congress meant when it referred to “obligations of the
debtor . . . arising . . . after the order for relief under any
unexpired lease of nonresidential real property.” 268 F.3d at
208. We determined that the “clear and express intent of
§ 365(d)(3) is to require the [debtor] to perform the lease in
accordance with its terms.” Id. at 209. We thus held that “an
obligation arises under a lease for the purposes of § 365(d)(3)
when the legally enforceable duty to perform arises under that
lease.” Id. at 211.

Goody’s argues that this completes the inquiry—the rent
was due on June 1, 2008, prior to the petition date, so it did not
need to pay for the occupancy from June 9 to June 30 because
§ 365(d)(3) does not mandate it.3 However, Montgomery Ward

3
Goody’s also argues that § 365 provides the exclusive
avenue through which a debtor can be made to pay lease rent.
We reject this argument for numerous reasons. First, we are not
confronted with lease rent; we are confronted with “stub rent”
under § 503(b)(1), which may or may not be tied to the actual
lease rate. Second, other provisions in the Code address leases,
dispelling any notion that § 365 is exclusive here. See, e.g., 11
U.S.C. § 503(b)(7) (addressing leases that are assumed and then

8
considered only the debtor’s obligations under § 365(d)(3) and
not, as is asserted here, its obligations under § 503(b)(1).
Goody’s is not required under § 365(d)(3) to make good on the
June 1, 2008, pre-petition obligation, but Montgomery Ward did
not address post-petition obligations under § 503(b)(1) of a
debtor arising from actual occupancy independent of the lease.
We turn to this question.

Section 503(b)(1) is specifically mentioned in
§ 365(d)(3). The provision imposes the duties discussed in
Montgomery Ward “notwithstanding section 503(b)(1) of [the
Bankruptcy Code].” 11 U.S.C. § 365(d)(3). The key word here
is “notwithstanding.” It means “in spite of” or “without
prevention or obstruction from or by.” Webster’s Third New
Int’l Dictionary 1545 (1971). In this context, § 365(d)(3) is best
understood as an exception to the general procedures of
§ 503(b)(1) that ordinarily apply.

Post-petition obligations are ordinarily given payment

rejected). Third, because § 365(d)(3) does not address
residential leases, Goody’s interpretation would imply that a
debtor could occupy residential real property prior to assumption
or rejection, leaving no § 503(b)(1) remedy for a landlord.
Finally, Goody’s attempt to invoke expressio unius est exclusio
alterius (to express one thing is to exclude the others) fails to
support the exclusivity of § 365(d)(3)—here, Congress expressly
preserved other rights under the Code in the text of § 365(d)(3).

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priority as administrative expenses, though such claims must
still go through standard procedures of notice and a hearing to
demonstrate that the costs were actual, necessary expenses of
preserving the estate. See 11 U.S.C. § 503(b) (“After notice and
a hearing, there shall be allowed administrative expenses, . . .
including . . . the actual, necessary costs and expenses of
preserving the estate.”). Section 365(d)(3) operates to dispense
with these requirements for post-petition obligations under an
unexpired lease of nonresidential real property, meaning it
functions “without prevention or obstruction from or by”
§ 503(b)(1). This is essentially our holding in Montgomery
Ward.

Relieving a landlord under § 365(d)(3) of burdensome
administrative procedures, however, does not foreclose that
landlord’s ability to use the more burdensome procedures to
recover in situations outside the scope of § 365(d)(3). Put
simply, § 365(d)(3) does not supplant or preempt § 503(b)(1).
The last sentence of § 365(d)(3) makes this plain: “Acceptance
of any such performance [under § 365(d)(3)] does not constitute
waiver or relinquishment of the lessor’s rights under such lease
or under [the Bankruptcy Code].” 11 U.S.C. § 365(d)(3). By
accepting the July 1, 2008, payment from Goody’s, the
Landlords did not give up any other rights under the Bankruptcy
Code, including those accorded by § 503(b)(1). Indeed, it would
put lessors in an awkward place if, while debtors were required
to pay them on time pursuant to § 365(d)(3), accepting such a
payment served also to deprive lessors of the balance of their

10
rights under the Code.

The text of § 365(d)(3) is consistent with the Conference
Report explaining the provision, which we referenced in
Montgomery Ward. See 268 F.3d at 210–11. We specifically
referred to the statements of Senator Orrin Hatch, a conferee on
the originating act:

This subtitle contains three major substantive
provisions which are intended to remedy serious
problems caused shopping centers and their
solvent tenants by the administration of the
bankruptcy code. . . . A second and related
problem is that during the time the debtor has
vacated space but has not yet decided whether to
assume or reject the lease, the trustee has stopped
making payments due under the lease. . . . In this
situation, the landlord is forced to provide current
services—the use of its property, utilities,
security, and other services—without current
payment. No other creditor is put in this position.
In addition, the other tenants often must increase
their common area charge payments to
compensate for the trustee’s failure to make the
required payments for the debtor. The bill would
lessen these problems by requiring the trustee to
perform all the obligations of the debtor under a
lease of nonresidential real property at the time

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 required in the lease. This timely performance
requirement will [e]nsure that debtor-tenants pay
their rent, common area, and other charges on
time pending the trustee’s assumption or rejection
of the lease.

H.R. Conf. Rep. No. 98-882 (1984), 98th Cong., 2d Sess.,
reprinted in 1984 U.S.C.C.A.N. 576, 598–99 (emphasis added).
The statement supports our conclusion that § 365(d)(3) does not
cover the situation in our case. Goody’s never vacated the
space. On the contrary, it continued to occupy the Landlords’
properties to conduct store-closing sales. The purpose of
§ 365(d)(3) is to protect landlords from the burdensome
requirements of § 503(b)(1) in securing payment from non-
occupying debtors; it would be perverse indeed to conclude that
it then precluded the use of § 503(b)(1) to secure “stub rent”
from a debtor actually occupying the premises.

When a debtor occupies post-petition non-residential
space it leases, that § 365(d)(3) provides when the rent
obligation arises does not erase when lessors may make
§ 503(b)(1) claims for the value conferred post-petition by that
occupancy. We thus conclude that the Landlords may assert a
§ 503(b)(1) claim for “stub rent.”

B. Debtors’ occupancy of the leased premises was
an actual and necessary benefit to the estate

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 As § 503(b)(1) is available to the lessors here, we turn to
whether the “stub rent” is an administrative expense 4 under
§ 503(b)(1). We believe it is.

For a commercial lessor’s claim to get administrative
expense treatment under § 503(b)(1), the debtor’s occupancy of
the leased premises must confer an actual and necessary benefit
to the debtor in the operation of its business. See Calpine Corp.
v. O’Brien Envtl. Energy, Inc. (In re O’Brien Envtl. Energy,
Inc.), 181 F.3d 527, 532–33 (3d Cir. 1999) (citing Cramer v.
Mammoth Mart, Inc. (In re Mammoth Mart, Inc.), 536 F.2d 950,
954 (1st Cir. 1976)). Proving this is the lessor’s burden. Id. at
533. Thus, the Landlords “must . . . carry the heavy burden of
demonstrating that the [‘stub rent’] for which [they] seek[]
payment provided an actual benefit to the estate and that
[incurring ‘stub rent’ was] necessary to preserve the value of the
estate assets.” Id. (citation omitted).

We look to the Mammoth Mart test we adopted in
O’Brien, and note that “[w]hen third parties are induced to
supply goods or services to the debtor-in-possession pursuant to
a contract that has not been rejected, the purposes of
[administrative claims] plainly require that their claims be

4
Administrative expenses, including the “actual, necessary
costs and expenses of preserving the estate,” may be allowed
after notice and a hearing. 11 U.S.C. § 503(b)(1). There is no
dispute that notice and a hearing occurred here.

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afforded priority.” In re Mammoth Mart, 536 F.2d at 954. In
contrast, when the contract has been fully performed prior to the
petition date, it is no longer executory and thus not entitled to
payment priority as an administrative expense. In our case,
Goody’s has continued to occupy the premises post-petition, and
it is attempting to do so without providing any post-petition
consideration to the Landlords who were still providing services
for the premises in the time prior to rejection.

This is similar, though not directly analogous, to the
situation in Zagata, where we held that “[a]t a minimum, [a
creditor] is . . . entitled to a reasonable value for the use and
occupancy of its land as an administrative cost under section 503
of the Bankruptcy Code.” Zagata Fabricators v. Superior Air
Prods., 893 F.2d 624, 627–28 (3d Cir. 1990). Although it
addressed an expired lease, Zagata supports that the Debtors’
retaining possession of the premises, thereby inducing post-
petition services from the Landlords, is sufficient under the
O’Brien and Mammoth Mart inquiries to be a transaction
justifying administrative priority. This accords with the
application of Zagata in the Bankruptcy Courts of our Circuit.
See In re DVI, Inc., 308 B.R. 703, 707–08 (Bankr. D. Del. 2004)
(“A landlord is entitled to an administrative claim in the amount
of the fair market value of the premises when a debtor occupies
and uses them post-petition.” (emphasis added)); In re ZB Co.,
302 B.R. 316, 319 (Bankr. D. Del. 2003) (“It is beyond dispute
that all of the Debtors’ landlords whose properties are occupied
and used post-petition have valid administrative claims.”

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(emphasis added)); In re HQ Global Holdings, Inc., 282 B.R.
169, 173 (Bankr. D. Del. 2002) (“A lessor is generally entitled
to an administrative claim under section 503(b) for the fair
rental value of the lessor’s property actually used by the debtor.”
(emphasis added)); cf. In re Unidigital, Inc., 262 B.R. 283, 288
(Bankr. D. Del. 2001) (unexpired lease of equipment sought to
be abandoned with no continuing use thereof denied
administrative priority); In re Pinnacle Brands, Inc., 259 B.R.
46, 51–52 (Bankr. D. Del. 2001) (denying administrative
priority because indemnification, though under a pre-petition
contract, is not an ongoing actual use of services); In re Mid-
Am. Waste Sys., Inc., 228 B.R. 816, 821 (Bankr. D. Del. 1999)
(same).

Although mere occupancy is not always an actual and
necessary expense that benefits an estate, there can be no
reasonable dispute that the occupation of the leased premises
here conferred a benefit. Goody’s obtained a better than 105%
recovery from the store-closing sales, and these sales were an
integral part of the bankruptcy proceedings. The sales required
a physical venue, and remaining in existing premises was just as
necessary and beneficial to the estate as leasing new premises
specifically for store-closing sales. Indeed, Goody’s own
conduct indicates that it saw the occupation of the Landlords’
premises as a necessary expense when it charged (and collected
from) its liquidation agent “actual [o]ccupancy [e]xpenses”
equal to per diem rent pursuant to the store closing agreement
approved by the Bankruptcy Court. See App. 937, 977–78. It

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would be illogical to allow Goody’s to collect the equivalent of
“stub rent” from its liquidation agent, but not to require payment
to the Landlords of “stub rent” as “necessary expenses.” Thus,
the Landlords are entitled to a reasonable “stub rent” as an
actual and necessary expense for the benefit of the estate.

* * * * *

The Landlords are entitled to receive payment under
Bankruptcy Code § 503(b)(1) for use of their nonresidential real
property during the stub period of June 9–June 30, 2008.
Section 365(d) does not preempt § 503 in this regard. The
judgment of the District Court is affirmed.

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