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Post-Petition Rent Is Not An Actual And Necessary Cost And Expense Of Preserving The Estate When Landlord Had Actual Possession And Control Over The Leased Premises Immediately After The Petition Date

In re: Ace Mortgage Funding, LLC, Chapter 7, Case No. 08-12645 (CSS) (April 15, 2011) (J. Sontchi)

The Court was asked to decide a landlord’s motion seeking allowance and payment of unpaid post-petition rent as an administrative expense.   The debtor was in default under the terms of the lease for failure to pay rent.  Immediately after the petition date, the landlord took possession and control of the leased premises and only provided limited access to the trustee.   The trustee did not move to reject the lease and did not pay post-petition rent or taxes and insurance on the leased premises.   The trustee objected to the motion on two grounds:  (1) a pre-petition assumption and assignment agreement released the debtor from any obligation under the lease and (2) any rent due under the lease was not entitled to administrative priority because the landlord changed the locks immediately after the petition date and had possession and control over the leased premises.

The Court denied the motion because the rent due under the lease was not an actual and necessary cost and expense of preserving the estate.  In reaching this holding, the Court first reviewed the assignment and assumption agreement to find that it did not release the debtor from the remainder of the lease.   However, the Court then held that the claim for post-petition rent was not entitled to administrative priority.  The Court, quoting the recent decision of In re Goody’s Family Clothing, Inc., 443 B.R. 5, 19-20 (Bankr. D. Del. 2010), concluded that the debtor must be engaged in the use and occupancy of the premises in order to grant an administrative expense to a landlord.   Here, the landlord actively prevented the trustee from using and/or occupying the premises.   The landlord changed the locks soon after the petition date.   The landlord took possession of the premises and effectively prevented the trustee from access to the premises.   Therefore, as a matter of law, the landlord was not entitled to an administrative priority on its claim for post-petition rent.