Case sgj11 Doc 860 Filed 03/09/15 Entered 03/09/15 14:04:19 Page 1 of 31

Transcription

1 Case sgj11 Doc 860 Filed 03/09/15 Entered 03/09/15 14:04:19 Page 1 of 31 Vincent P. Slusher, State Bar No vince.slusher@dlapiper.com Andrew Zollinger, State Bar No andrew.zollinger@dlapiper.com DLA PIPER LLP (US) 1717 Main Street, Suite 4600 Dallas, Texas Telephone: (214) Facsimile: (972) Thomas R. Califano (admitted pro hac vice) thomas.califano@dlapiper.com Daniel G. Egan (admitted pro hac vice) daniel.egan@dlapiper.com DLA PIPER LLP (US) 1251 Avenue of the Americas New York, New York Telephone: (212) Facsimile: (212) Attorneys for the Debtors and Debtors in Possession IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF TEXAS DALLAS DIVISION In re: ALCO STORES, INC., et al. 1 Debtors. Case No.: Chapter 11 Jointly Administered DEBTORS OMNIBUS OBJECTION TO VARIOUS MOTIONS TO COMPEL IMMEDIATE COMPLIANCE WITH LEASE OBLIGATIONS UNDER SECTION 365(d)(3) OF THE BANKRUPTCY CODE AND CERTAIN ADMINISTRATIVE EXPENSE REQUESTS The above-captioned debtors and debtors in possession (collectively, the Debtors ) hereby file this omnibus objection (the Objection ) to various motions to compel immediate compliance with lease obligations under section 365(d)(3) of the United States Bankruptcy Code (the Motions to Compel ) and certain requests for administrative expenses (the Administrative Expense Requests ) asserted against the Debtors by certain of the Debtors lessors (the Lessors ), each as more fully described below. By this Objection, the Debtors request that the Court enter an order, substantially in the form attached hereto as Exhibit B (the Proposed Order ). In support of this Objection, the Debtors respectfully represent as follows: 1 The Debtors in these chapter 11 cases, along with the last four (4) digits of their taxpayer identification number, are ALCO Stores, Inc. (1080) and ALCO Holdings, LLC (0364). The mailing address of the Debtors, solely for purposes of notices and communications, is ALCO Stores, Inc., 751 Freeport Parkway, Coppell, Texas EAST\

2 Case sgj11 Doc 860 Filed 03/09/15 Entered 03/09/15 14:04:19 Page 2 of 31 PRELIMINARY STATEMENT 1. Each of the Motions to Compel and Administrative Expense Requests seeks to convert substantial pre-petition claims for accrued property taxes, common area maintenance and other charges into post-petition administrative expense claims. Granting them would place a substantial burden not only on the Debtors estates, but would also be unfair to certain other of the Debtors landlords whose leases, by mere coincidence, may not provide the ability to assert such claims for post-petition taxes and other charges. Indeed, one of the Motions to Compel seeks payment of taxes assessed for the entire calendar years of 2014 and 2015, thus including both pre-petition and post-rejection periods. (See Cocca Motion to Compel, at 16.) Such gamesmanship by the Lessors should not be countenanced. 2. The pleadings filed in support of the Motions to Compel and Administrative Expense Requests desperately try to convince this Court that case law on this topic is clear. It is most assuredly not. Since the enactment of section 365(d)(3) of the Bankruptcy Code in 1984, courts have struggled with whether to apply a proration approach to a debtor s post-petition rent and occupancy expenses, which would allow an administrative claim based upon the number of days in the post-petition, pre-rejection occupancy period, or a billing date approach based upon when such obligations become due to the debtor-tenant under the applicable lease. Despite the lack of any binding precedent from the Fifth Circuit, the majority of courts have rejected the billing date method approach, instead adopting the proration method of computing pre- and postpetition tax obligations. See 2 NORTON BANKR. L. & PRAC. 3d 46:42 (Jan. 2015) ( The majority of courts hold that 365(d)(3) requires the debtor to pay as an administrative expense only those taxes as can be allocated to the post-petition, pre-rejection period. ). Even assuming that the Lessors are correct in asserting that the billing date method should apply, many of them EAST\

3 Case sgj11 Doc 860 Filed 03/09/15 Entered 03/09/15 14:04:19 Page 3 of 31 fail to meet their burden that such obligations were actually triggered under the leases. For the reasons described below, the Debtors respectfully submit that this Court should follow the majority approach and allow the Lessors to collect a pro-rated portion of the taxes relating to the post-petition, pre-rejection period. Accordingly, to the extent the Motions to Compel and Administrative Expense Requests seek payment of real property taxes and other charges outside of this period, the Motions to Compel and the Administrative Expense Requests should be denied. BACKGROUND The Debtors Chapter 11 Cases 3. On October 12, 2014 (the Petition Date ), each Debtor filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code. 4. The Debtors are operating their businesses and managing their properties as debtors in possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. 5. On October 22, 2014, the United States Trustee for the Northern District of Texas appointed an Official Committee of Unsecured Creditors (the Creditors Committee ). No request for the appointment of a trustee or examiner has been made in these chapter 11 cases. 6. The factual background regarding the Debtors, including their business operations, their capital and debt structure, and the events leading to the filing of these chapter 11 cases, is set forth in more detail in the Declaration of Stanley B. Latacha in Support of Chapter 11 Petitions and First Day Motions [D.I. 3] The Motions to Compel and Administrative Expense Requests 7. On October 15, 2014, the Debtors entered into that certain Agency Agreement (as amended, the Agency Agreement ) by and between the Debtors, on the one hand, and a joint EAST\

4 Case sgj11 Doc 860 Filed 03/09/15 Entered 03/09/15 14:04:19 Page 4 of 31 venture among Tiger Capital Group, LLC, SB Capital Group, LLC, and Great American Group WF, LLC (jointly, severally and collectively, the Agent ), on the other hand. Pursuant to the terms of the Agreement, the Agent would act as the Debtors exclusive agent and conduct going out of business, store closing, sale on everything, everything must go, or similarly themed sales or other dispositions of all of the Debtors merchandise located at the Debtors stores (collectively, the GOB Sales ). 8. On November 20, 2014, the Court held a sale hearing, approved the Agency Agreement and authorized the Debtors to enter into and perform under the Agency Agreement [D.I. 369]. Thereafter, on November 21, 2014, the Agent commenced the GOB Sales at each of the Debtors store locations. As of the date hereof, the Agent has concluded the GOB Sales and has vacated the Debtors remaining leased stores. 9. On December 12, 2014, the Debtors filed the Debtors Motion for Entry of an Order Establishing Procedures for the Rejection of Executory Contracts and Unexpired Leases of Nonresidential Real Property [D.I. 492] (the Rejection Procedures Motion ), by which the Debtors sought to minimize the costs attendant to rejecting the Debtors leases as the Agent vacated the various stores through the implementation of certain rejection procedures. On January 9, 2015, the Court entered an order approving the Rejection Procedures Motion [D.I. 613]. 10. Pursuant to the terms of the Rejection Procedures Motion, as of the date hereof, the Debtors have filed twelve notices of rejection of executory contracts and/or unexpired leases (each, a Rejection Notice ). Each of the Lessors who have asserted an Administrative Expense Requests or filed a Motion to Compel has been served with a Rejection Notice informing such Lessor of the Debtors rejection of its lease. EAST\

5 Case sgj11 Doc 860 Filed 03/09/15 Entered 03/09/15 14:04:19 Page 5 of On January 16, 2015, a lessor filed the Application of Lessor, Tom Dawkins, for Allowance of Administrative Expense Claim [D.I. 637] (the Dawkins Application ). Among other things, the Dawkins Application seeks payment, under section 365(d)(3) of the Bankruptcy Code or, in the alternative, as an administrative expense under section 503(b)(1) of the Bankruptcy Code, for certain common area maintenance charges ( CAM ) and real property taxes in the sum of $47, According to the Dawkins Application, these amounts became due under the lease during the post-petition period. However, the amounts relate back to prepetition periods. Indeed, both the CAM and the real property tax charges asserted cover the entire 2014 calendar year. 12. On February 12, 2015, a lessor filed the Motion of Plaza Park Group, L.L.C. Pursuant to 11 U.S.C. 503(b) for Allowance and Payment of Administrative Expense for Occupancy and Use of Nonresidential Real Property During the Period from October 12, 2014 to October 31, 2014 [D.I. 754] (the Plaza Park Administrative Expense Motion ), whereby the lessor seeks an administrative claim for the pro-rated portion of post-petition stub rent for October 12, 2014 through October 31, In a footnote to the Plaza Park Administrative Expense Motion, however, the lessor asserts that the Debtors may be liable for ad valorem taxes and assessments which, while having accrued during 2014, would be due and payable under the applicable lease during the post-petition period. 13. On February 13, 2015, a lessor filed the Motion of MELRJ #1, LLLP and MELRJ #3, LLLP to Compel Immediate Compliance with Lease Obligations and Award Administrative Priority Claims for Certain Lease Obligations [D.I. 769] (the MELRJ Motion to Compel ). The MELRJ Motion to Compel seeks, among other things, payment under section 365(d)(3) or, in the alternative, an administrative expense claim for certain tax and other charges arising under EAST\

6 Case sgj11 Doc 860 Filed 03/09/15 Entered 03/09/15 14:04:19 Page 6 of 31 the leases during the post-petition, pre-rejection period but which relate back to pre-petition periods. In doing so, the MELRJ Motion to Compel urges this Court to reject a proration approach to section 365(d)(3), which approach would require the Debtors to satisfy the prorated amounts of post-petition taxes. 14. On February 19, 2015, a lessor filed the Motion of Certain Cocca Landlords for (A) an Order Compelling Timely Performance of Obligations Under Unexpired Leases of Nonresidential Real Property and (B) Allowance and Immediate Payment of Administrative Expenses [D.I. 784] (the Cocca Motion to Compel and together with the MELRJ Motion to Compel, the Motions to Compel ). The Cocca Motion to Compel seeks, among other things, payment under section 365(d)(3) of those real property and other charges that allegedly arose under the relevant lease during the post-petition, pre-rejection period (but which relate back to pre-petition periods). In doing so, the Cocca Motion to Compel, citing a bevy of cases and legislative history, urges this Court to adopt the performance date or billing date approach, which would provide that an obligation arises for purposes of section 365(d)(3) when such obligation is due under the terms of the lease, rather than the proration approach. 15. On March 5, 2015, a lessor filed Firefly Properties, Inc. s Motion for Allowance and Payment of Administrative Expense [D.I. 850] (the Firefly Administrative Expense Motion and collectively with the Dawkins Application and the Plaza Park Administrative Expense Motion, the Administrative Expense Requests ). The Firefly Administrative Expense Motion seeks payment of stub rent, taxes owing for the period occupied and reasonable attorneys fees and expenses. The taxes requested include real property taxes accruing during the pre-petition period from January 1, 2014 through the Petition Date. EAST\

7 Case sgj11 Doc 860 Filed 03/09/15 Entered 03/09/15 14:04:19 Page 7 of In addition to the Administrative Expense Requests and the Motions to Compel, the Debtors, either directly or through their professionals, have received a number of similar requests to pay obligations which allegedly arose under the relevant leases during the postpetition, pre-rejection period, but which relate back to pre-petition periods. 17. As of the date hereof, the Debtors have made the following payments requested by the Lessors in the Motions to Compel and the Administrative Expense Requests: (i) monthly rent payments for November 2014 through January 2015; (ii) pro-rated rent for February 2015 through the relevant date of rejection; and (iii) percentage rent payments that became due during the post-petition, pre-rejection period. The remaining charges alleged to be owed under the Motions to Compel and the Administrative Expense Requests relate to stub rent and real property and other charges that became due under the lease during the post-petition, pre-rejection period, but which relate to pre-petition charges. JURISDICTION AND VENUE 18. This Court has jurisdiction over this Motion under 28 U.S.C. 157 and Venue of these cases and this Motion in this district is proper pursuant to 28 U.S.C and This is a core proceeding within the meaning of 28 U.S.C. 157(b). The statutory predicates for the relief requested herein are Bankruptcy Code sections 502, 503 and 546(c), Bankruptcy Rule 3007 and Local Rule RELIEF REQUESTED 19. By this Motion, the Debtors request entry of an order denying the Motions to Compel and the Administrative Expense Requests to the extent they seek payment of real property taxes and other charges that relate to periods other than the post-petition, pre-rejection period. EAST\

8 Case sgj11 Doc 860 Filed 03/09/15 Entered 03/09/15 14:04:19 Page 8 of 31 BASIS FOR REQUESTED RELIEF 20. Under section 365(d)(3), the debtor in possession shall timely perform all the obligations of the debtor... arising from and after the order for relief under any unexpired lease of nonresidential property. 11 U.S.C. 365(d)(3). Circuit courts are split as to whether obligations should be read as arising when they are billed or when they accrue. 21. Under the proration approach, the obligation to pay rent and other charges is considered to arise on each day the tenant occupies the leased premises. Under this approach, the Debtors would be obligated to pay real property tax and other charges due and owing for the post-petition period based upon a prorated basis for the number of days in the post-petition, prerejection period. Both the Seventh and Ninth Circuits have adopted the proration approach. See In re Handy Andy Home Improvement Centers, 144 F.3d 1125 (7th Cir. 1998) (endorsing a proration approach of lease obligations under section 365(d)(3) and requiring the debtor to prorate taxes between the pre-petition and post-petition periods even though the taxes were due post-petition); In re Treesource Indus., Inc., 363 F.3d 994, 998 (9th Cir. 2004) (noting that rent and tax liabilities accrue over time). 22. In contrast, the billing date approach posits that the obligations arise on the day that they become due and payable under the lease. Under the billing date approach, the Debtors would be obligated to pay rent, real property taxes and other charges that become due under the lease during the post-petition, pre-rejection period, even when such payments may relate back to pre-petition periods. Indeed, stub rent for October 2014 would not be payable under section 365(d)(3) in jurisdictions adhering to the billing date approach, because the stub rent would have been due, in full, on October 1, The Third and Sixth Circuits have 2 The Lessors seek to compel payment of stub rent under section 365(d)(3). This demand is wholly inconsistent with the relief they seek, because, on the one hand, they seek to apply a billing date approach to taxes EAST\

9 Case sgj11 Doc 860 Filed 03/09/15 Entered 03/09/15 14:04:19 Page 9 of 31 adopted the billing date approach. See, e.g., In re Centerpoint Properties v. Montgomery Ward Holding Corp., 268 F.3d 205 (3d Cir. 2001) (holding that the debtor was required to pay real property taxes under a nonresidential real property lease to the landlord post-petition on an administrative basis, even though the time period relating to the taxes was pre-petition); Koenig Sporting Goods, Inc. v. Morse Road Co., 203 F.3d 986, 989 (6th Cir. 2000) (holding that because rent for the coming month was due under the lease on the first of the month and the tenant rejected the lease on the second of the month, the debtor was nonetheless obligated to pay the full month s rent). A. Under The Billing Date Approach, The Administrative Expense Claims And The Motions To Compel Fail To Demonstrate That The Debtors Obligation To Pay Taxes Properly Arose Under The Leases. 23. Under the billing date approach, which the Lessors asserting the Administrative Expense Claims and the Motions to Compel request this Court to apply, a debtor would be legally required to perform under the terms of the lease... when one becomes legally obligated to perform. In re Montgomery Ward Holding Corp., 268 F.3d 205, 209 (3d Cir. 2001). Under this approach, a court must look to the terms of the lease to determine both the nature of the obligation and when it arises. Id. Thus, even under the billing date approach asserted by the Lessors, the Lessors are required to show that the Debtors were obligated, under the terms of the leases, to pay the taxes and other charges. Certain of the Lessors have not met this burden. See Matter of TransAmerican Natural Gas Corp., 978 F.2d 1409, 1416 (5th Cir. 1992) (finding that the burden of persuasion in allowance of administrative claims rests with the movant). 24. The Debtors have reviewed the relevant terms concerning real property taxes provided under each of the Lessors leases and have set forth a detailed analysis attached hereto and other charges, but on the other hand, seek to collect stub rent on the basis of a proration approach. In the event the Court overrules this Objection, the Debtors reserve all rights and defenses relating to payment of stub rent. EAST\

10 Case sgj11 Doc 860 Filed 03/09/15 Entered 03/09/15 14:04:19 Page 10 of 31 as Exhibit A. In sum, all of the relevant leases have identical or substantially similar language concerning taxes, and most of the leases obligate the tenant to reimburse the landlord for real property taxes upon two conditions: (i) that such taxes actually become due and owing; and (ii) following the Debtors receipt of tax statements by the Landlord. In other words, unless the Lessor actually submitted tax statements to the Debtors between the Petition Date and the date of rejection, and such taxes became due to the taxing authority between the Petition Date and the date of rejection, then no post-petition obligation became due under the lease. 25. As shown more fully on Exhibit A, based upon the Debtors analysis of the property tax due dates for each relevant taxing authority, as well as whether the Debtors actually received (or the Lessor has otherwise provided evidence that it has actually submitted) the tax statement to the Debtors during the post-petition, pre-rejection period, the Debtors believe that only four of the stores subject to the Motions to Compel and Administrative Expense Requests would actually satisfy the requirements of the billing date approach that they espouse. 26. In an unpublished opinion from this Court that is relied upon by certain of the Lessors, Chief Judge Hauser held that, although she somewhat reluctantly ruled that the billing date approach was appropriate, the landlords in that case were unable to collect the taxes that they asserted were due and owing under the Lease. Under very similar lease provisions as found in the Debtors leases, Judge Hauser identified the triggers to the obligations under the leases: the Leases require the Lessor to bill the Debtor for those taxes and to submit copies of the underlying tax bills (as received from the taxing authorities) to the Debtor in order to trigger the Debtor s obligation to pay the taxes. Once billed, the Debtor is obligated to pay the taxes on or before the time that Lessor shall be required to pay real estate taxes to the taxing authority for such tax year.... EAST\

11 Case sgj11 Doc 860 Filed 03/09/15 Entered 03/09/15 14:04:19 Page 11 of 31 In re FFP Operating Partners, L.P., Case No RJH-11 (Bankr. N.D. Tex. Memorandum Opinion and Order dated June 16, 2004), at *10. Based upon these requirements to trigger the debtor s obligations under the leases, Judge Hauser concluded: Id. at *11. [b]ecause there is no evidence before the Court that would support a finding of a modification of the Leases, and because the Debtor s obligation to pay 2003 taxes has not been triggered in accordance with the express terms of the Leases, 365(d)(3) is not yet applicable to require the Debtor to pay 2003 taxes on the leased premises. 27. Based upon the Debtors analysis attached as Exhibit A, a majority of the Lessors cannot now claim that the relevant obligations became due under their leases. Accordingly, even if this Court were to hold that the billing date approach applies, the Court should overrule the Motions to Compel and the Administrative Expense Requests to the extent that the relevant obligations did not actually become due under the applicable leases during the post-petition, prerejection period. B. The Appropriate Calculation Of The Debtors Obligations Under Section 365(d)(3) Requires Application Of The Proration Approach, Rather Than The Billing Date Approach. 28. The Court s analysis of statutory language must always begin with the text of the statute. United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241 (1989). When interpreting a statute, a court must interpret the relevant words not in a vacuum, but with reference to the statutory context, structure, history, and purpose. Abramski v. U.S., 134 S.Ct (2014). 29. Under section 365(d)(3), the debtor in possession shall timely perform all the obligations of the debtor... arising from and after the order for relief under any unexpired lease of nonresidential property. 11 U.S.C. 365(d)(3). Courts have held that the term arise is ambiguous, and can be understood in either an absolutist or accrual sense. See, e.g., In re Ames EAST\

12 Case sgj11 Doc 860 Filed 03/09/15 Entered 03/09/15 14:04:19 Page 12 of 31 Dept. Stores, Inc., 306 B.R. 43, 66 (Bankr. S.D.N.Y. 2004). In addition, other courts have held that the term obligation is ambiguous. In re Child World, Inc., 161 B.R. 571, (S.D.N.Y. 1993). Indeed, Black s Law Dictionary states that the word obligation has many wide and varied meanings. BLACK S LAW DICTIONARY (10th ed. 2014). 30. Once a court finds that the statute is ambiguous, then legislative history can then appropriately be considered. See, e.g., In re NETtel Corp., 289 B.R. 486, 492 (Bankr. D.D.C. 2002). Prior to 1984, landlords encountered significant obstacles to collecting rent and other post-petition charges as an administrative expense. Recognizing these burdens, Congress enacted 365(d)(3) as part of the Bankruptcy Amendments and Federal Judgeship Act of Section 365(d)(3) was enacted in 1984 as part of the Shopping Center Amendments to the Bankruptcy Code to protect the interests of commercial landlords who, compared to other creditors, were unfairly disadvantaged under the bankruptcy code. Several courts have devoted significant discussion to the limited legislative history of section 365(d)(3) in support of continuing the pre-1984 practice of proration. See Handy Andy, 144 F.3d at 1128; see also In re NETtel Corp, 289 B.R at 492. In NETtel, the bankruptcy court found that the enactment of section 365(d)(3) addressed two problems faced by landlords: (a) that landlords would be given the right to rent payments contemporaneous with the landlord s provision of services to the debtor; and (b) the landlord s claim for occupancy would be fixed by the rental terms of the lease rather than rely upon the actual, necessary provision of section 503(b)(1). NETtel Corp., 289 B.R. at 492. Section 365(d)(3) solved these problems by ensuring that debtors continued to perform obligations under commercial leases in the ordinary course. Nevertheless, 365(d)(3) was not intended to pay landlords for services not actually provided to the estate.... [and] nothing in 365(d)(3) itself plainly requires the elimination of the pre- EAST\

13 Case sgj11 Doc 860 Filed 03/09/15 Entered 03/09/15 14:04:19 Page 13 of practice of prorating administrative expenses... during the post-order-for relief, prerejection period. Id. (citing Handy Andy, 144 F.3d at 1128). Any other reading of the statute and its legislative history would undercut its very purpose. See In re Best Prods Co., Inc., 206 B.R. 404, 407 (Bankr. E.D. Va. 1997) ( Put another way, Congress intended the subsection to put landlords on an equal footing, not to grant them a windfall at the expense of other creditors. ). 32. As noted above, circuit courts are split on the appropriate interpretation of section 365(d)(3) of the Bankruptcy Code. And, although the 5th Circuit has not yet resolved whether the billing date or the proration approach controls, the majority of courts deciding the issue have adopted the proration approach. See, e.g., In re Stone Barn Manhattan, LLC, 398 B.R. 359, 366 (Bankr. S.D.N.Y. 2008) ( [F]ailure to prorate leads to an absurd result. ); In re Ames Dep t Stores, Inc., 306 B.R. 43, 80 (Bankr. S.D.N.Y. 2004) ( For the foregoing reasons, the Court is unwilling, in the face of the ambiguity of the statute and its need to sensibly implement bankruptcy policy, to adopt an interpretation of section 365(d)(3) that is so at odds with its true legislative purpose and common sense.... [and therefore] rules that Post-rejection Prorating is necessary. ); NETtel Corp., 289 B.R. at ( Unless 365(d)(3) has a plain meaning that precludes any other interpretation, it is undesirable to interpret 365(d)(3) as operating in a manner (as it would under the performance date approach) that depends on the fortuity of the time of the month of the order for relief or the rejection of the lease. ); El Paso Properties Corp. v. Gonzales (In re Furr s Supermarkets, Inc.), 283 B.R. 60, 69 (B.A.P. 10th Cir. 2002) (finding that the billing date reading of section 365(d)(3) unravels the priority scheme of the Bankruptcy Code); Newman v. McCrory Corp. (In re McCrory Corp.), 210 B.R. 934, (S.D.N.Y. 1997) (adopting the majority approach); see also 2 NORTON BANKR. L. & PRAC. 3d 46:42 (Jan. 2015) EAST\

14 Case sgj11 Doc 860 Filed 03/09/15 Entered 03/09/15 14:04:19 Page 14 of 31 ( The majority of courts hold that 365(d)(3) requires the debtor to pay as an administrative expense only those taxes as can be allocated to the postpetition, prerejection period (collecting cases)). 33. In the only instance that the Bankruptcy Court for the Northern District of Texas published an opinion on the appropriate approach to section 365(d)(3), it did so solely in the context of stub rent and not real property taxes. In In re Imperial Bev. Group, LLC, Chief Judge Houser held that the billing date approach is determinative because, as to stub rent, the proration theory ignores 365(d)(3) s requirement that the debtor s obligation to pay rent must arise... under [the] unexpired lease. 457 B.R. 490, 501 (Bankr. N.D. Tex. 2011) (brackets and emphasis in original). Thus, because the debtor s obligation under the lease to pay rent during the stub period arose pre-petition, the landlord was not entitled to payment as an obligation under section 365(d)(3). 3 Notably, courts treat real property taxes differently under section 365(d)(3) than stub rent. See HA-LO Industries, Inc. v. CenterPoint Properties Trust, 342 F.3d 794, (7th Cir. 2003) (distinguishing the Seventh Circuit s prior holding in Handy Andy, which held that proration of real estate taxes was appropriate, by acknowledging the difference between real estate taxes and rent obligations under section 365(d)(3)). This Court should do the same. 34. As noted previously, Chief Judge Houser also issued a separate, unpublished opinion in which she ruled contrary to the position that the Debtors are espousing on the real estate tax issue. See In re FFP Operating Partners, L.P., Case No RJH-11 (Bankr. N.D. Tex. Memorandum Opinion and Order dated June 16, 2004). The difference between that 3 The Imperial Beverage court did, however, allow an administrative expense claim under section 503(b)(1) for the stub rent payment. But see In re Oreck Corp., 506 B.R. 500, (Bankr. M.D. Tenn. 2014) (holding that, under a billing date approach, because the obligation to pay rent for the entire month arose pre-petition, a lessor s claim for stub rent is not entitled to priority as an administrative expense under section 503(b)(1)). Because the Imperial Beverage court allowed the landlords an administrative expense claim under section 503(b)(1), that court was not faced with the inherent unfairness and subversion of the priority scheme that is present here and discussed infra. EAST\

15 Case sgj11 Doc 860 Filed 03/09/15 Entered 03/09/15 14:04:19 Page 15 of 31 case and this however, is that there is no indication that Judge Houser was faced with the fundamental unfairness where, as here, similarly situated landlords would be treated differently if the billing date approach is used. According to the Debtors analysis, some 48 landlords whose property was occupied by the Debtors post-petition would not be entitled to any payment for post-petition taxes, while other landlords would be paid in full for taxes related to periods prior to when the Debtors occupied the property or after rejection. This result is contrary to a fundamental principle of bankruptcy law, i.e., that similarly situated creditors are treated in the same fashion. See Matter of S.I. Acq., Inc., 817 F.2d 1142 (5th Cir. 1987) (noting the Bankruptcy Code s general policies of securing and preserving the debtor s property and of ensuring equal distribution of the debtor s assets to similarly-situated creditors ). This Court should not allow such subversion of the fundamental tenet underlying the Bankruptcy Code. See In re R.H. Macy & Co., Inc., 170 B.R. 69,73 (Bankr. S.D.N.Y. 1994) ( [E]ven within the fluctuating walls of the plain meaning fortress a court should not resolve questions of statutory interpretation so that a particular Bankruptcy Code section conflicts and disturbs the overall purpose and function of the Code ) (citations omitted). 35. The analysis in this case is complicated by the fact that, in a number of cases, the Debtors were not billed for taxes by the respective landlord but were billed directly by the taxing authority in question (notwithstanding express language in the lease noting that the landlord shall be liable for real property taxes). Sometimes this was done retrospectively, sometimes, prospectively. Some authorities bill annually, some biannually. There is no justification for disparate treatment based on the vagaries of different local taxing authorities. Congress could not have intended to create a situation where some landlords would reap a benefit from a billing EAST\

16 Case sgj11 Doc 860 Filed 03/09/15 Entered 03/09/15 14:04:19 Page 16 of 31 date, while others whose property is used post-petition would be unable to recoup tax obligations for that period simply because the tax bill in question was received prior to a chapter 11 filing. 36. To be sure, several other courts have held that real property taxes that become due during the post-petition, pre-rejection period would be an obligation under section 365(d)(3), and thus payable notwithstanding that such tax bills would relate to pre-petition periods. See Centerpoint Props v. Montgomery Ward Holding Corp., 268 F.3d 205, 211 (3d Cir. 2001) (holding that the debtor was required to pay real property taxes under a nonresidential real property lease to the landlord post-petition on an administrative basis, even though the time period relating to the taxes was pre-petition); In re R.H. Macy & Co., 152 B.R. 869, 873 (S.D.N.Y. 1993) ( As [the landlord] correctly notes, [debtor] is not directly liable for the... taxes but only contractually obligated to pay such amounts to [the landlord and]... [a]ccordingly, the... taxes represent an obligation of [debtor] under the Lease that arose after the order for relief which must be timely performed. ). 37. Yet, many more cases hold, in the context of real property taxes, that the proration approach is preferable. In doing so, most courts find that section 365(d)(3) is ambiguous and therefore rely upon its legislative history. For instance, in In re Child World, the District Court for the Southern District of New York faced a situation analogous to the present case, where payment under the lease of real property tax obligations for the second half of the fiscal year occurred post-petition. 161 B.R. 571 (S.D.N.Y. 1993). The district court endorsed the pro-rated approach, allowing the debtor to reimburse the landlord for its share of real estate taxes arising during the post-petition, pre-rejection period. The court conclude[d] that 365(d)(3) is ambiguous as to when a debtor-tenant s obligation under a lease to reimburse the landlord for real estate taxes arises. Id. at 574. Thus, the court turned to the legislative history, finding that EAST\

17 Case sgj11 Doc 860 Filed 03/09/15 Entered 03/09/15 14:04:19 Page 17 of 31 [t]he legislative history provides compelling evidence that Congress did not intend 365(d)(3) to include debtor-tenants rental obligations arising prepetition, but billed postpetition. Id. To hold otherwise would have produced results which, given the legislative history, we cannot believe were intended by Congress. Id. (citing In re R.H. Macy & Co., Inc., 152 B.R. 869 (Bankr. S.D.N.Y. 1993) (holding that a debtor was required to pay a post-petition tax bill from its landlord seeking reimbursement for six calendar years, a period which was almost entirely prepetition). 38. In In re Ames Dep t Stores Inc., the bankruptcy court similarly adhered to the proration rule in the context of real property taxes. 150 B.R. 107 (Bankr. S.D.N.Y. 1993). The bankruptcy court took a pragmatic approach, noting that [l]andlord s contention would lead to an inequitable and incongruous result. Id. at 109. By way of example, the bankruptcy court noted the unfairness result if a Chapter 11 debtor rejects a lease one day before its annual reimbursement obligation for the past years real estate taxes become payable, then that landlord would have neither a pre-petition nor post-petition claim to assert against the estate, if the payment due date is determinative. Id. The bankruptcy court concluding that [i]t is profoundly more sensible to conclude that, as of the filing, a landlord has an unmatured, prepetition claim for reimbursement of the taxes which had accrued pre-petition.... [and t]hereafter, a landlord would have an administrative claim for those taxes which accrue postpetition but before rejection. Id. 39. The unfairness highlighted by the Ames Dep t Stores bankruptcy court should not be overlooked. The record propounded by the Administrative Expense Requests and the Motions to Compel are conveniently asserted for those landlords solely because they are EAST\

18 Case sgj11 Doc 860 Filed 03/09/15 Entered 03/09/15 14:04:19 Page 18 of 31 fortunate that the Lessors leases allegedly 4 provide for a tax payment date somewhere between the Petition Date and the applicable rejection date. Based upon the Debtors current estimates, nearly 25% of the Debtors landlords would receive no payment on account of taxes if the billing date approach were followed, simply because the billing date under the applicable lease falls outside the post-petition, pre-rejection period. 40. Accordingly, in this case the Court is faced with potentially disparate treatment of the Debtors landlords. This unfairness can only be remedied by allowing the Debtors to pay real property taxes and other charges based upon a pro-rated amount during the post-petition, pre-rejection period. Indeed, this Court has, in the past, acknowledged that in other analogous instances where payment of an entire contractual benefit is grossly out of proportion to the benefits derived by the estate, proration is the appropriate result. See In re Phones for All, Inc., 249 B.R. 426, 431 (Bankr. N.D. Tex. 2000) (holding that severance pay triggered during the post-petition period that may otherwise be included as an administrative expense for wages, should be instead pro-rated to the portion attributable to work performed post-petition, because [p]ayment of his entire contractual benefit of $432, is completely out of proportion to the benefits derived in that limited period of time of service, post-petition.... [and] would harm the creditors by depleting beyond a pro rata assessment their distributions from the estate. ). 41. To rule otherwise and adopt the billing date approach would, as the Seventh Circuit recognized, lead to gamesmanship, whereby a landlord could merely delay transmitting a tax bill until after the petition date to ensure a fully ripened administrative claim. Matter of Handy Andy Home Improvement Centers, Inc., 144 F.3d 1125 (7th Cir. 1998). Doing so would convert pre-petition taxes into a post-petition administrative obligation. Judge Posner, like other 4 As noted more fully, supra, and in Exhibit A attached hereto, certain of the Lessors inexplicably seek administrative expense claims even when the relevant due date of real property taxes under the lease falls outside of the post-petition, pre-rejection window. EAST\

19 Case sgj11 Doc 860 Filed 03/09/15 Entered 03/09/15 14:04:19 Page 19 of 31 courts approving of the proration approach, relied upon the context of the statutory language of section 365(d)(3). The Seventh Circuit chose not to adhere to a rule that would make the rights of creditors turn on the happenstance of the dating of tax bills and the strategic moves of landlords and tenants, warning that [w]hen context is disregarded, silliness results. Id. at Such gamesmanship by landlords is best exemplified by the fact that, in other cases, landlords often file motions to compel under 365(d)(3) and administrative expense requests, but on the basis that the court should apply the proration approach. See, e.g., Stone Barn Manhattan, LLC, Case No (Bankr. S.D.N.Y.). In that case, fourteen separate landlords filed motions seeking a proration approach, with the debtor espousing a billing date theory. C. Section 503(b)(1) Cannot Be Relied Upon For Payment Of Taxes And Other Charges Accruing During the Pre-Petition Period. 42. Certain of the Lessors, as an alternative argument, seek payment of real property taxes and CAM charges under section 503(b)(1). The Court should reject this argument. Such an argument only applies in the event this Court denies application of the billing date method and adheres to the proration approach. In such an instance, allowance of real property taxes and CAM under section 503(b)(1) necessarily mean that the taxes and CAM accrue on a per diem basis. Under those circumstances, any taxes or CAM that accrued prior to the Petition Date or subsequent to the rejection date are not, by their very nature, administrative claims since the Debtors estates would not have received any corresponding benefit for these obligations. See, e.g., Oreck Corp., 506 B.R. at 508 ( Only post-petition debts, however, can be treated as administrative expenses; pre-petition debts may not be granted administrative expense priority.... ) (quoting In re Baby N Kids Bedrooms, Inc., 2008 WL , at *2 (6th Cir. Mar. 26, 2008)). Nor could these charges, by their nature, satisfy the actual, necessary costs and EAST\

20 Case sgj11 Doc 860 Filed 03/09/15 Entered 03/09/15 14:04:19 Page 20 of 31 expenses of preserving the estate standard required under section 503(b)(1) because they never actually inured to the benefit of the debtor-in-possession, an entity separate and distinct from Alco Stores prior to the Petition Date. See In re SGS Studio, Inc., 256 B.R. 580, 582 (Bankr. N.D. Tex. 2000) (noting that [t]he words actual and necessary are to be construed narrowly and that the debt must benefit [the] estate and its creditors. ) (brackets in original). 43. For all of the foregoing reasons, the Debtors request that this Court deny the Motions to Compel and disallow the Administrative Expense Requests to the extent they seek payment of real property taxes and other charges that accrued outside of the post-petition, prerejection period. SEPARATE CONTESTED MATTER 44. Each of the above objections to the Administrative Expense Requests and Motions to Compel constitutes a separate contested matter as contemplated by Bankruptcy Rule The Debtors request that any order entered by this Court with respect to an objection asserted herein shall be deemed a separate order with respect to each Administrative Expense Request and Motion to Compel. [Remainder of page intentionally left blank] EAST\

21 Case sgj11 Doc 860 Filed 03/09/15 Entered 03/09/15 14:04:19 Page 21 of 31 WHEREFORE, the Debtors respectfully request that the Court enter an order, substantially similar to the Proposed Order attached hereto as Exhibit B, granting (i) the relief requested herein and (ii) such other and further relief as it deems just and proper. Dated: March 9, 2015 Dallas, Texas DLA PIPER LLP (US) By: /s/ Vincent P. Slusher Vincent P. Slusher, State Bar No Andrew Zollinger, State Bar No DLA Piper LLP (US) 1717 Main Street, Suite 4600 Dallas, Texas Telephone: (214) Facsimile: (214) Thomas R. Califano (admitted pro hac vice) Daniel G. Egan (admitted pro hac vice) DLA Piper LLP (US) 1251 Avenue of the Americas New York, New York Tel: (212) Fax: (212) Attorneys for the Debtors and Debtors in Possession EAST\

22 Case sgj11 Doc 860 Filed 03/09/15 Entered 03/09/15 14:04:19 Page 22 of 31 Exhibit A (Lease Analysis) EAST\

23 Case sgj11 Doc 860 Filed 03/09/15 Entered 03/09/15 14:04:19 Page 23 of 31 Identifying Document Dawkins Application Store Slaton, TX (Store #263) Applicable Lease Provision As additional rental, the Tenant agrees to pay to the Landlord its pro rata share of taxes and assessments levied and assessed against the Shopping Center and that shall become due and payable during the original or any renewed term thereof.... The Landlord shall submit tax statements for reimbursement on an annual basis. (Slaton, TX Lease 22.) Due Date to Tax Authority December 31, 2014 (during post-petition, pre-rejection period) Evidence of Tax Statements Sent to Tenant Yes Debtors Analysis Under Billing-Date Approach, the obligation became due under the lease during the postpetition, pre-rejection period Plaza Park Administrative Expense Motion [D.I. 754] Chillicothe, IL (Store #375) As additional rental, the Tenant agrees to pay to the Landlord the ad valorem taxes and assessments levied and assessed against the Leased Premises that shall become due and payable during the original or any renewed term thereof.... Landlord shall provide tax statements to the Tenant at least thirty (30) days in advance of... any payment date. (Plaza Park Lease 21.) In Peoria County, the first installment due date is June 10 and the second installment due date is September 10. See Peoria County Government, Treasurer: Tax Information, iacounty.org/ treasurer/tax info). No Under Billing Date Approach, the obligation did not become due under the lease during the post-petition, prerejection period. MELRJ Motion to Compel [D.I. 769] Kingman, KS (Store #207) As additional rental, the Tenant agrees to pay to the Landlord, when due, the amount of all taxes and assessments levied and assessed against the premises and that shall become due and payable during the original or any renewed term thereof. (Kingman Lease 25.) In Kingman County, the first installment is due on December 20 and the second installment is due on May 20. Not required under Lease Under Billing-Date Approach, one tax installment obligation became due under the lease during the postpetition, pre-rejection period EAST\

24 Case sgj11 Doc 860 Filed 03/09/15 Entered 03/09/15 14:04:19 Page 24 of 31 Identifying Document MELRJ Motion to Compel [D.I. 769] Cocca Motion to Compel [D.I. 784] Cocca Motion to Compel [D.I. 784] Store Webster, SD (Store #209) Cresco, IA (Store #409) Palacios, TX (Store #407) Applicable Lease Provision As additional rental, the Tenant agrees to pay to the Landlord, when due, the amount of all taxes and assessments levied and assessed against the premises and that shall become due and payable during the original or any renewed term thereof. (Webster Lease 25.) As Additional Rent, the Tenant agrees to pay to the Landlord the ad valorem taxes and assessments levied and assessed against the Leased Premises as a separate tax parcel, that shall become due and payable during the initial or any additional term of the Lease.... Landlord shall provide tax statements to the Tenant at least thirty (30) days in advance of... any payment date. (Cresco Lease 22.) As Additional Rent, the Tenant agrees to pay to the Landlord the ad valorem taxes and assessments levied and assessed against the Leased Premises as a separate tax parcel, that shall become due and payable during the initial or any additional term of the Lease.... Landlord shall provide tax statements to the Tenant at least thirty (30) days in advance of... any payment date. (Palacios Lease 22.) Due Date to Tax Authority In Webster County, the first installment is due on October 31 and the second installment is due on April 30. In Howard County, tax bills are payable in two installments, with the first installment due on March 31 and the second installment due on September 30. See Iowa County Treasurers, Important Dates For Property Tax, atreasurers. org/pdates.php). Full amount of property taxes are due on January 31. Evidence of Tax Statements Sent to Tenant Not required under Lease Yes No Debtors Analysis Under Billing-Date Approach, one tax installment obligation became due under the lease during the postpetition, pre-rejection period Under Billing Date Approach, the obligation did not become due under the lease during the post-petition, prerejection period. Under Billing Date Approach, the obligation did not become due under the lease during the post-petition, prerejection period. EAST\

25 Case sgj11 Doc 860 Filed 03/09/15 Entered 03/09/15 14:04:19 Page 25 of 31 Identifying Document Cocca Motion to Compel [D.I. 784] Cocca Motion to Compel [D.I. 784] Cocca Motion to Compel [D.I. 784] Store San Saba, TX (Store #376) Hebbronville, TX (Store #410) Beaver, UT (Store #406) Applicable Lease Provision As Additional Rent, the Tenant agrees to pay to the Landlord the ad valorem taxes and assessments levied and assessed against the Leased Premises as a separate tax parcel, that shall become due and payable during the initial or any additional term of the Lease.... Landlord shall provide tax statements to the Tenant at least thirty (30) days in advance of... any payment date. (San Saba Lease 22.) As Additional Rent, the Tenant agrees to pay to the Landlord the ad valorem taxes and assessments levied and assessed against the Leased Premises as a separate tax parcel, that shall become due and payable during the initial or any additional term of the Lease.... Landlord shall provide tax statements to the Tenant at least thirty (30) days in advance of... any payment date. (Hebbronville Lease 22.) As Additional Rent, the Tenant agrees to pay to the Landlord the ad valorem taxes and assessments levied and assessed against the Leased Premises as a separate tax parcel, that shall become due and payable during the initial or any additional term of the Lease.... Landlord shall provide tax statements to the Tenant at least thirty (30) days in advance of... any payment date. (Beaver Lease 22.) Due Date to Tax Authority Full amount of property taxes are due on January 31. Full amount of property taxes are due on January 31. Full amount of property taxes are due on December 1. Evidence of Tax Statements Sent to Tenant No No Yes Debtors Analysis Under Billing Date Approach, the obligation did not become due under the lease during the post-petition, prerejection period. Under Billing Date Approach, the obligation did not become due under the lease during the post-petition, prerejection period. Under Billing-Date Approach, one tax installment obligation became due under the lease during the postpetition, pre-rejection period EAST\

26 Case sgj11 Doc 860 Filed 03/09/15 Entered 03/09/15 14:04:19 Page 26 of 31 Identifying Document Firefly Administrative Expense Motion [D.I. 850] Store Greenville, IL (Store #392) Applicable Lease Provision As Additional Rent, the Tenant agrees to pay the Taxes levied and assessed against the Leased Premises, that shall become due and payable during the Term.... Landlord shall provide tax statements to the Tenant at least thirty (30) days in advance of... any payment date. (Greenville Lease 24.) Due Date to Tax Authority In Bond County, tax bills are payable in two installments, with the first installment due on July 30 and the second installment due on September 30. Evidence of Tax Statements Sent to Tenant Yes Debtors Analysis Under Billing Date Approach, the obligation did not become due under the lease during the post-petition, prerejection period. EAST\