Administrative Expense Claim for Ad Valorem Tax Denied
In re WCI Communities, Inc., Case No. 08-11643 (KJC) (September 2, 2010) (J. Carey)
WCI and related entities (the “Debtors”) filed for relief under chapter 11 of the Bankruptcy Code on August 4, 2008 (the “Petition Date”). As of the Petition Date, WCI was the lessee under two leases, hereafter referred to as the Ground Lease and the Welcome Center Lease (collectively, the “Leases”) of overlapping property with Kiva, Inc., the predecessor to Fremont Building Company (“Fremont”). The Leases were “net leases” that required WCI to pay all taxes and other charges owing with respect to the leased properties as “additional rent.” In its application, Fremont sought payment of one outstanding ad valorem tax obligation in the amount of $131,774.95, alleged to be due under both Leases.
However, effective February 27, 2009, the Leases were rejected by the Debtor. Accordingly, the Court undertook to determine when the obligation to pay the taxes under the Leases arose and whether payment of such taxes conferred a benefit on the estate.
First, the Court determined that the obligation to pay the taxes did not arise under the Ground Lease prior to rejection of the Ground Lease, and was unable to determine when the obligation arose under the Welcome Center Lease. Relying upon Montgomery Ward, in which the Third Circuit held that “an obligation arises under a lease for purposes of § 365(d)(3) when the legally enforceable duty to perform arises under that lease,” the Court evaluated the terms of the Ground Lease and the Welcome Center Lease to deduce when the obligation to pay the taxes arose. The clear terms of the Ground Lease provided that the obligation arose on March 1 of each year, after the February 27 rejection. The terms of the Welcome Center Lease provided that the payment was due at some point between November 1 and April 1, though the Court could not conclude precisely when in that time frame payment was due. Accordingly, the Court denied the administrative expense application under § 365.
Second, the Court considered whether the obligation to pay the ad valorem taxes should be treated as an allowed administrative expense claim under § 503(b). Fremont primarily relied upon In re Goody’s Family Clothing, Inc., 610 F.3d 812 (3d Cir. 2010) in asserting that § 365(d)(3) does not preempt the landlord’s ability to seek recovery under § 503(b) for unpaid rent. However, the Court distinguished the instant case from Goody’s due to the absence in the record of any conceivable benefit to the estate payment of the ad valorem taxes may have conferred. Accordingly, the Court denied the application under § 503(b), as well.
