How Bankruptcy Affects
Landlords, Part 3 of 3
By Thomas Rice and Patrick Huffstickler
J. Assignments
In certain instances, the bankrupt may
determine that it is economically beneficial
for the lease to be assumed and assigned to
a third party. While landlords often
oppose such proposed assignments as they
lose control over the identity of their tenants,
the Bankruptcy Code favors assignment
of leases and contracts. Section
365(f) of the Bankruptcy Code provides
that an unexpired lease can be assumed
and assigned to a third party even if the
lease has a specific prohibition against
assignment or subletting. The lease must
be assumed pursuant to the provision of
section 365 (requiring curing of defaults,
adequate assurance of future performance,
and compensation for actual pecuniary
loss) by the debtor and/or proposed
assignee. Section 365(l) also authorizes the
court to require a security deposit in the
event of proposed assignment of debtor’s
interest in the lease and the deposit can
qualify as adequate assurance of future
performance, which is required for assignment
of the lease.
Section 365(f )(1) renders unenforceable
any lease provision which prohibits or
conditions the assignability of a lease. See
In re Standor Jewelers West, Inc., 129 B.R.
200 (B.A.P. 9th Cir. 1991). However, if
applicable law excuses a landlord from
rendering performance to an entity other
than the debtor and the landlord does not
consent to the assignment, then the debtor
may not assume and assign the lease. In re
Lile, 103 B.R. 830 (Bankr. S.D. Tex. 1989),
aff ’d 161 B.R. 788 (S.D. Tex. 1993), aff ’d in
part, 43 F.3d 668 (5th Cir. 1994). Note,
however, that one bankruptcy court, construing
Texas state law that contains a
statutory provision prohibiting assignment
of a lease without the landlord’s consent,
found that the Texas law is not applicable
law excusing the landlord from accepting
performance from another party other
than the debtor so that this provision of
Texas state law does not operate to prohibit
an assumption and assignment of a
lease. In re Federated Dep’t Stores, Inc.,
126 B.R. 516 (Bankr. S.D. Ohio 1990).
In connection with the assumption, or
the assumption and assignment, of a lease
in a “shopping center,” Congress has provided
special protections to landlords. Trak Auto Corp. v. West Town Ctr. LLC
(In re Trak Auto Corp.), 367 F.3d 237 (4th
Cir. 2004). See also, In re Compuadd
Corp., 166 B.R. 862 (Bankr. W.D. Tex.
1994) (recognizing that Congress enacted
special interest legislation benefiting shopping
center landlords and encouraging
shopping center landlords to take their
lobbyists “out to dinner” as a result). In
order to assume a lease of real property in
a shopping center, certain requirements
must be met. The financial standing of the
proposed assignee must be similar to that
of the original tenant on the date the lease
was originally executed. 11 U.S.C. §
365(b)(3)(A) Percentage rent must not
decline substantially. 11 U.S.C. §
365(b)(3)(B). The assumption or assignment
of the lease is subject to all of the
provisions of the lease including (but not
limited to) provisions such as radius, location,
use or exclusivity provisions and the
assignment will not breach any such provision
contained in any other lease,
financing agreement or master agreement
relating to the shopping center. 11 U.S.C. §
365(b)(3)(C). Also, the assumption or
assignment of the lease will not disrupt
any tenant mix or balance in the shopping
center. 11 U.S.C. § 365(b)(3)(D). See also
In re Rickel Home Ctrs., Inc., 209 F.3d 291
(3d Cir. 2000); In re Joshua Slocum, Ltd.¸
922 F.2d 1081 (3d Cir. 1990); In re
Federated Dep’t Stores, Inc.,
135 B.R. 941 (Bankr. S.D. Ohio
1991).
To determine if the lease is
a shopping center lease, as
“shopping center” is not
defined in the Bankruptcy
Code, the bankruptcy courts
review a number of factors to
determine if a “shopping center”
lease exists including:
(1) a combination of leases;
(2)all leases held by a single landlord;
(3) all tenants engaged in the commercial
retail distribution of goods;
(4)the presence of a common parking
area;
(5) the purposeful development of the
premises as a shopping center;
(6)the existence of a master lease;
(7)the existence of fixed hours during
which all stores are open;
(8)the existence of joint advertising;
(9)[sic] contractual interdependence of
the tenants as evidenced by restrictive
use provisions in their leases;
(10) the existence of percentage rent provisions
in the lease;
(11) joint participation by tenants in trash
removal and other maintenance;
(12) the existence of a tenant mix; and
(13) the contiguity of the stores.
In re Sun TV & Appliances, Inc., 234
B.R. 356, 360 (Bankr. D. Del. 1999).
The Bankruptcy Code also provides
that if there has been a default in an unexpired
lease of the debtor, other than a
default arising from the fact that the bankruptcy
case was filed, the trustee or DIP
may not require a lessor to provide services
or supplies incidental to such lease
before assumption of such lease unless the
lessor is compensated under the terms of
such lease for any services or supplies provided
under such lease before assumption
of the lease. 11 U.S.C. § 365(b)(4). Further,
section 365(c)(3) provides that a lease may
not be assumed, or assumed and assigned,
if the lease is of non-residential real property
and it has been terminated under
applicable non-bankruptcy law prior to
the entry of the order for relief in the
bankruptcy case.
K. Nature of Post-Petition Obligations
Under §365(d)(3)
As previously stated, pending the decision
to assume or reject the lease, the
bankrupt is required to timely perform its
obligations under the lease, including paying
rent. There is a split of authority as to
whether the landlord can compel immediate
payment of rent if the tenant fails to
make the rent as required by the lease.
One line of cases finds that landlords,
based primarily on the language of section
365(d)(3), have been granted a superpriority
administrative expense which must be
paid immediately upon request if the
debtor fails to make the payments as
required by the lease. In re Brennick, 178
B.R. 305 (Bankr. D. Mass. 1995); In re
Telesphere Communications, 148 B.R. 525
(Bankr. N.D. Ill. 1992). This right to payment
is without regard to the trustee or
debtor’s use of the leased premises
through the date of rejection (i.e., the payment
is owed regardless of whether debtor
is actually operating in the premises). In re
CompuAdd, 166 B.R. 862 (Bankr. W.D.
Tex. 1994). See also In re Pacific-Atlantic
Trading Co., 27 F.3d 401 (9th Cir. 1994); In
re Worths Stores Corp., 135 B.R. 112
(Bankr. E.D. Mo. 1991). On the other
hand, certain courts have determined that
there must be some benefit to the bankruptcy
estate for the recovery of the lease
obligations. See In re Mr. Gatti’s, 164 B.R.
929 (Bankr. W.D. Tex. 1994). Certain
courts also have determined that immediate
payment of unpaid rent is not
required, especially if the debtor’s bankruptcy
estate may potentially be administratively
insolvent. See, e.g., In re Four Star
Pizza, Inc., 135 B.R. 498 (Bankr. W.D. Pa.
1992); In re Joseph C. Spiess
Co., 145 B.R. 597 (Bankr.
N.D. Ill. 1992).
L. Rejection
Rejection of a lease can
occur under two circumstances.
One is by operation
of law upon the expiration of
the deadline to assume or
reject leases. 11 U.S.C. §
365(d)(4) (providing that the
lease is deemed rejected at
the expiration of the period to assume or
reject and that the lessee should surrender
the premises immediately). On the other
hand, the debtor can file a motion for
entry of an order approving rejection of
the lease. Debtors often file emergency
motions at the very beginning of the case
to reject undesirable leases to prevent the
accrual of administrative rent. The effective
date of rejection is important as it will
determine when the administrative rent
stops accruing. The majority rule appears
to be that rejection is effective on the date
that the bankruptcy court enters an order
rejecting the lease. Thinking Machs. v.
Mellon Fin. Servs. Corp. (In re Thinking
Machs. Corp.), 67 F.3d 1021, 1025 (1st Cir.
1995). Conversely, debtors often ask that
the effective rejection date be the date of
the bankruptcy filing so that administrative
rent claims can be avoided. Constant
Ltd. Partnership v. Jamesway Corp. (In re
Jamesway Corp.), 179 B.R. 33, 39 (S.D.N.Y.
1995). The Ninth Circuit has found that a
court may only order that the effective
date of rejection be retroactive under
exceptional circumstances. Pac. Shores
Dev., LLC v. At Home Corp. (In re At
Home Corp.), 392 F.3d 1064, 1072 (9th Cir.
2004). In Pacific Shores, the Ninth Court
discussed the four factors identified by the
bankruptcy court in determining the definition
of “exceptional circumstances” justifying
retroactive rejection:
whether the debtor delayed in filing the
motion to reject;
whether the debtor delayed in seeking
a hearing on the motion to
reject;
whether the debtor continued to
occupy the premises; and
the motivation of the landlord in
opposing the motion to reject.
Id. at 1072-75. However, not all courts
recognize the retroactive rejection theory,
particularly if the estate has received some
benefit from the unexpired lease. See In re Chateaugay Corp., 10 F.3d 944 (2d Cir.
1993).
In the event retroactive rejection to the
date of filing is not authorized, the debtor
bears the cost of any unpaid administrative
rent claim during the post-petition,
pre-rejection period. See In re Revco D.S.,
Inc., 109 B.R. 264 (Bankr. N.D. Ohio
1989); In re Federated Dep’t Stores, Inc.,
131 B.R. 808 (S.D. Ohio 1991). These courts
point out that retroactive rejection would
leave the landlord in an inequitable position
because it would not be able to relet
the premises even though the debtor may
have already vacated the premises and
stopped paying rent. In re Federated Dep’t
Stores, Inc., 131 B.R. at 815.
Some courts have even held that rejection
is effective upon the filing of a motion
to reject, or upon the debtor giving notice
to the landlord that the lease was rejected,
even though the bankruptcy court did not
enter an order of rejection. See In re 1
Potato 2, Inc., 58 B.R. 752 (Bankr. D.
Minn. 1986). Once the lease is rejected, the
tenant should immediately surrender the
premises to the lessor and if the bankrupt
fails to vacate the premises, the landlord
can seek an order from the bankruptcy
court to obtain immediate possession of
the premises. See In re Elm Inn, Inc., 942
F.2d 630 (9th Cir. 1991). See also, In re Sok
Jun Kong, 162 B.R. 86 (Bankr. E.D.N.Y.
1993). However, it should be noted that
rejection of a lease does not equal termination
of the lease. Fed. Realty Inv. Trust
v. Park (In re Park), 275 B.R. 253, 256
(Bankr. E.D. Va. 2002). The Bankruptcy
Code provides that rejection of an unexpired
lease acts as a breach of the lease as
of the day of the bankruptcy filing. 11
U.S.C. § 365(g). This distinction is important
in the context of cases where a third
party, other than the bankrupt, has an
interest in the lease, such as the leasehold
mortgagee. For example, in Eastover Bank
for Sav. V. Sowashee Venture (In re Austin
Dev. Co.), 19 F.3d 1077 (5th Cir. 1994),
cert. denied, 513 U.S. 874 (1994), the Fifth
Circuit considered whether deemed rejection
of a lease under section 365(d)(4)
constituted termination of the lease such
that the rights of a leasehold mortgagee
would have been likewise terminated. The
Fifth Circuit found that the language of
the Bankruptcy Code was clear in that
rejection and termination are distinct concepts
and that rejection does not equate to
termination, rejecting a line of cases that
held that the statutory breach under section
365(d)(4) arising from rejection plus
surrender of the premises resulted in termination
of the lease. Id. at 1080-84.
IV. LIMITATIONS ON DAMAGES
FOR REJECTION OF LEASES
A. Statutory Cap
Once the lease is rejected, the landlord
can file a rejection damage claim. Claims
arising out of rejection of a lease are treated
as general unsecured claims (i.e., the
claims are treated as arising immediately
prior to the bankruptcy filing). 11 U.S.C. §
502(g). See Mason v. Official Comm. of
Unsecured Creditors (In re FBI Distrib.
Corp.), 330 F.3d 36, 42 (1st Cir. 2003).
The Bankruptcy Code, at section
502(b)(6), sets out a “statutory cap” governing
the allowance of unsecured claims
held by lessors for rejection damages
incurred by the landlord upon lease rejection/
termination. Section 502(b)(6)
imposes a cap on the amount of damages
a landlord can assert from rejection of a
lease. While section 502(b)(6) is often
believed to replace the state law calculation
of damages arising from termination of a
lease, it is more accurate to view section
502(b)(6) as a limitation on the damages
recoverable by the landlord, as the statutory
cap is applied after the amount of actual
damages under state law is determined.
See, e.g., Smith v. Sprayberry Square
Holdings, Inc. (In re Smith), 249 B.R. 328
(Bankr. S.D. Ga. 2000). Further, section
502(b)(6) addresses all damages due to
non-performance including breaches of
lease covenants. In re McSheridan, 184
B.R. 91 (B.A.P. 9th Cir. 1995); In re Crown
Books Corp., 291 B.R. 623 (Bankr. D. Del.
2003). The rationale behind section
502(b)(6) is that it provides a limitation on
potentially large claims of lessors, which
would otherwise arise upon rejection of
long-term leases. See EOP-Colonnade of
Dallas Ltd. P’ship v. Faulkner (In re
Stonebridge Techs., Inc.), 430 F.3d 260,
268-69 (5th Cir. 2005). It is often stated
that this section is designed to compensate
the landlord for its loss while not permitting
a claim so large (based on the longterm
lease) as to prevent other general
unsecured creditors from recovering a dividend
in the bankruptcy. See Lesie Fay
Cos. V. Corporate Property Assocs. 3 (In
re Leslie Fay Cos.), 166 B.R. 802 (Bankr.
S.D.N.Y. 1994). Moreover, the statutory
cap is often times strictly applied and
equitable arguments to disregard the cap
are not generally respected. See In re
Federated Dep’t Stores, Inc., 131 B.R. 808
(S.D. Ohio 1991).
Section 502(b)(6) limits the landlord’s
claim for damages arising out of termination
of the lease to the following:
(1) the rent reserved in a lease
without acceleration for the greater
of one year or 15% (not to exceed 3
years) of the remaining term of the
lease calculated from the earlier of
either the petition date or the date
upon which the lessor repossessed
or the lessee surrendered the premises;
(2)any unpaid rent due under
the lease on the earlier of either the
petition date or the date upon which
the lessor repossessed or the lessee
surrendered the lease premises.
11 U.S.C. § 502(b)(6). Again, the courts
have stated that the proper mechanism for
determining the appropriate rejection
damage claim is to determine the landlord’s
actual damages under state law and
to the extent that those actual damages
would be higher than the statutory cap of
section 502(b)(6) to impose the cap to
limit the claim. In re Henderson, 297 B.R.
875, 886 (Bankr. M.D. Fla. 2003). Of
course, if actual damages are lower than
the statutory cap, the landlord would only
have a claim for its actual damages. This
circumstance might arise where there are
only a few months remaining on the lease
from the time it’s rejected or the landlord
is able to immediately relet the premises.
It is also important to note that the
courts have recognized that various lease
obligations such as utility charges, taxes,
professional fees, maintenance and insurance
can be included as rent and are
addressed by the cap. See, e.g. In re
Clements, 185 B.R. 895 (Bankr. M.D. Fla.
1995); In re Rose’s Stores, 179 B.R. 789
(Bankr. E.D.N.C. 1995). Further, in In re
Mr. Gatti’s, Inc., 162 B.R. 1004 (Bankr.
W.D. Tex. 1994), the court found that the
debtor’s covenant to repair and maintain
the premises was also subject to the statutory
cap on rejection damages. The In re
Rose’s Stores case came to the opposite
conclusion. In re Rose’s Stores, 179 B.R. at
789. In In re McSheridan, the Ninth
Circuit Bankruptcy Appellate Panel set out
a three-part test to determine whether an
additional charge under a lease was rent
for the purposes of the application of section
502(b)(6). The factors were:
(1) The charge must be designated
as rent or additional rent in the
lease or be provided as the
tenant/lessee’s obligation under the
lease;
(2)The charge must be related to
the value of the property or the lease
of the property; and
(3)The charge must be properly
classifiable as rent because it is a
fixed, regular, or periodic charge.
In re McSheridan 184 B.R. at 99-100.
The McSheridan test was applied in the
case of In re Edwards Theatres Circuit,
Inc., 281 B.R. 675, 684 (Bankr. C.D. Cal.
2002), to determine that construction obligation
was not rent under the rejected
lease. In In re Pacific Arts Publ., 198 B.R.
319 (Bankr. C.D. Cal. 1996), the bankruptcy
court found that attorney’s fees could
not be collected in connection with the
rejection of a lease and were not allowable
as a portion of rent reserved under the
lease for rejection damage purposes.
The concern relating to the statutory
cap may also affect the landlord’s ability to
assert claims against letters of credit that
were provided by the debtor as additional
security for payment of rent. Recently, the
Fifth Circuit exposed a loophole for lessors in EOP-Colonnade of Dallas Ltd.
Partnership v. Faulkner (In re Stonebridge
Technologies, Inc.), 430 F.3d 260 (5th Cir.
2005). In Stonebridge, the lessor obtained,
among other things, an irrevocable letter
of credit to secure the payment of
amounts owing by the debtor under the
lease. Following the debtor’s bankruptcy
filing the lessor and debtor submitted an
agreed order for the debtor’s rejection of
the lease. Since the rejection constituted a
breach of the lease under section 365, the
lessor could assert a claim for damages
based upon the breach. Instead of filing a
claim in the bankruptcy case, the lessor
submitted a draw request to the letter of
credit issuer to recover the damages, ultimately
receiving proceeds in excess of the
amount that would be calculated under
the rejection damage cap of section 502.
Based upon the rejection damage cap, the
liquidating plan trustee filed suit against
the lessor to recover the difference
between the amount of the proceeds
received by the lessor and the amount of
the rejection damage cap. The Bankruptcy
Court agreed with the trustee awarding the
difference, and the District Court
affirmed. On further appeal, however, the
Fifth Circuit reversed.
The Fifth Circuit explained that while
the rejection of a lease constitutes a breach
of the lease, the Bankruptcy Code does not
automatically recognize a claim in favor of
the lessor for the damages caused by the
breach. Id. at 269. Instead, the lessor must
file a claim for such damages in order for
the claim to be included in the bankruptcy
case for distribution purposes. Id. Where
such a claims is filed, the claim is deemed
allowed unless and until an objection to its
allowance is lodged under section 502(b).
Id. at 268. Pursuant to section 502(b)(6), a
lease rejection damage claim must be disallowed
to the extent that it exceeds the
rejection damage cap. Id. According to the
Fifth Circuit, such liability is not limited
automatically. Id. at 269. Based upon such
analysis, the Fifth Circuit concluded that
“the damages cap of § 502(b)(6) does not
apply to limit the beneficiary’s entitlement
to the proceeds of the letter of credit
unless and until the lessor makes a claim
against the estate.” Id. at 270.
Thus, applying the holding of
Stonebridge, a lessor should carefully analyze
whether or not to file a claim in the
bankruptcy case following the rejection of
its lease. In particular, if (a) the damages
caused by the rejection are in excess of the
rejection damage cap, and (b) the amount
of available letter of credit proceeds is
greater than the rejection damage cap,
then the lessor should not file a rejection
damages claim in the case since the landlord
could realize a greater recovery by
asserting its claim solely against the letter
of credit.
B. Mitigation Issues
Once a lease is rejected, the landlord is
entitled to file a rejection damage claim
capped by section 502(b)(6). An issue that
often arises, however, is the argument by
the debtor that the landlord is required to
mitigate its damages under applicable state
law and certain bankruptcy courts have
analyzed whether the creditor properly
mitigated its damages so as to further limit
its claim (outside the context of section
502(b)(6)). See, Heck’s, Inc. v. Cowron &
Co., 123 B.R. 544 (Bankr. S.D. W. Va. 1991);
In re Atlantic Container Corp., 133 B.R.
980, 990 (Bankr. N.D. Ill. 1991). Also, certain
courts have stated that, if mitigation
has taken place through reletting the
premises to a new tenant, the amount of
rent received from the new tenant is
deducted from the overall damage claim
prior to application of the statutory cap. In
re Bob’s Sea Ray Boats, Inc., 143 B.R. 229
(Bankr. D.N.D. 1992). In Texas, landlords
are now required to mitigate damages
(although this was not always the case).
Tex. Prop. Code Ann. § 91.006 (Vernon
1984 and 2001 Supp.). See also, Austin Hill
Country Realty v. Palisades Plaza, 948
S.W.2d 293 (Tex. 1997) (Texas Supreme
Court determines that a landlord has a
duty to make a reasonable attempt to mitigate
its damages upon default by commercial
tenant).
C. Pre or Post-Petition Obligation—
Billing Date v. Proration Approach
An issue related to determining the
amount of the rejection damage claim is a
determination as to whether or not a claim
is treated as a pre-petition or post-petition
obligation (payable under section
365(d)(3)). In many instances, the courts
have found that the filing of a bankruptcy
case in the middle of a month requires proration of the various lease obligations.
See In re Swanton Corp., 58 B.R. 474
(Bankr. S.D.N.Y. 1986). On the other
hand, certain courts have found that when
the payment is due under the lease determines
whether it is a pre or post-petition
obligation. See In re Appletree Markets,
139 B.R. 417 (Bankr. S.D. Tex. 1992) (payment
due on January 1st under lease,
where bankruptcy filed January 2nd, was a
pre-petition obligation and proration was
not appropriate, even in connection with
leases that provided for quarterly and
yearly payments).
The issue of whether a lease obligation
is pre-petition or post-petition (payable
under §365(b)(3)) turns on whether the
court adopts the billing date or proration
approach. Representative billing date cases
are Centerpoint Props. v. Montgomery
Ward Holding Corp. (In re Montgomery
Ward Holding Corp.), 268 F.3d 205 (3d
Cir. 2001); In re Comdisco, Inc., 272 B.R.
671 (Bankr. N.D. Ill. 2002); Koenig
Sporting Goods, Inc. v. Morse Road Co.
(In re Koenig Sporting Goods), 203 F.3d
986 (6th Cir. 2000); In re R.H. Macy &
Co., 152 B.R. 869 (Bankr. S.D.N.Y 1993); In
re Duckwall-Alco Stores, Inc., 150 B.R. 965
(D. Kan. 1993). Conversely, many courts
have followed the proration approach,
including In re Handy Andy Home
Improvement Ctrs., 144 F.3d 1125 (7th Cir.
1998); In re Ames Dep’t Stores, Inc., 306
B.R. 43 (Bankr. S.D.N.Y. 2004); In re Child
World, 161 B.R. 571 (S.D.N.Y. 1993); In re
McCrory Corp., 210 B.R. 934 (S.D.N.Y.
1997); In re Victory Mkts., 196 B.R. 6
(Bankr. N.D.N.Y. 1996); In re All for a
Dollar, 174 B.R. 358 (Bankr. D. Mass.
1994).
D. Damages that arise following
Rejection of an Assumed Lease
If the trustee or DIP assumes a lease
under section 365, then all liability under
the lease is transformed into an administrative
expense. In re Monica Scott, Inc.,
123 B.R. 990, 993 (Bankr. D. Minn. 1991).
In the event the trustee or DIP is later
required to reject the previously assumed
lease, then all liabilities stemming from the
rejection are entitled to priority as an
administrative expense of the estate. In re
Frontier Properties, Inc., 979 F.2d 1358,
1367 (9th Cir. 1992). Additionally, prior to
the enactment of BAPCPA, the claims for
future rent due under such lease were
administrative expenses not subject to the
cap on damages under section 502(b)(6).
Nostas Assocs. v. Costich (In re Klein
Sleep Prods.), 78 F.3d 18, 30 (2d Cir. 1996).
Under BAPCPA, Congress created a
statutory cap on the administrative
expense damages that an estate will incur
upon rejection of a previously assumed
lease. Section 503(b)(7) provides:
After notice and a hearing, there
shall be allowed administrative
expenses, other than claims allowed
under section 502(f) of this title,
including-
(7) with respect to a nonresidential
real property lease previously
assumed under section 365, and
subsequently rejected, a sum equal
to all monetary obligations due,
excluding those arising from or
relating to a failure to operate or a
penalty provision, for the period of
2 years following the later of the
rejection date or the date of actual
turnover of the premises, without
reduction or setoff for any reason
whatsoever except for sums actually
received or to be received from an
entity other than the debtor, and the
claim for remaining sums due for
the balance of the term of the lease
shall be a claim under section
502(b)(6).
11 U.S.C. § 503(b)(7). This provision
limits the administrative claim to two
years from the later of the rejection of the
lease or turnover of the premises.
Furthermore, it grants the estate credit for
any mitigation of damages that the creditor
is able to achieve. Additionally, any
anticipated damages beyond two years
becomes a general unsecured claim subject
to the cap under section 502(b)(6). These
provisions ease some of the burden that
the trustee and DIP will face in trying to
determine whether to assume or reject
under the shortened time periods provided
for in the newly established section
365(d)(4).
V. CONCLUSION
As can be readily discerned by the foregoing,
there are a number of issues to
address in the context of leases and contracts
involved in a bankruptcy case. For
leases, as a practical matter, the landlord
should focus on two issues. The first issue
is whether the landlord needs quick certainty
as to the status of the lease. If the
answer to that question is yes, the landlord
should pursue a motion in the bankruptcy
court to require the debtor to immediately
assume or reject the unexpired lease, or, at
a minimum, oppose any potential extension
of the initial one hundred twenty
(120) day time period to assume or reject
the lease. Obviously, economic factors,
and the landlord’s business plan are paramount
in this determination.
On the other hand, should the landlord
determine that time is not of the essence
with respect to certainty regarding the status
of the lease, the landlord should focus
on ensuring that its claims are properly
presented to the bankruptcy court.
Foremost, the landlord should ensure that
the debtor pays its post-petition lease obligations
(which are a requirement of the
Bankruptcy Code pending the decision to
assume or reject). Additionally, to the
extent applicable, the landlord should file
a claim for any unpaid pre-petition lease
obligations and for its rejection damages,
should the lease be rejected.
Finally, while the landlord should recognize
that delay is inevitable in connection
with any bankruptcy case, the landlord
should also recognize that the
Bankruptcy Code provides certain protections
to landlords that other creditors do
not receive such that the landlord should
insist on those protections during the pendancy
of the bankruptcy case and in connection
with any assumption of the lease
by the bankrupt. As a practical and last
point, however, it should be noted that the
protections provided by the Bankruptcy
Court for landlords are often disregarded
by trustees and DIPs unless the landlord is
diligent in protecting its interests under
the Bankruptcy Code.
2 Previously, section 365(d)(4) of the
Bankruptcy Code provided that the trustee or DIP
had sixty (60) days to decide whether to assume or
reject an unexpired lease of non-residential real
property.
3 The “Ride-Through” Doctrine is inapplicable
to nonresidential real property leases, since section
365(d)(4) requires automatic rejection, if such
lease is not timely assumed.
Thomas Rice is a shareholder with the
law firm of Cox Smith Matthews
Incorporated specializing in bankruptcy
matters. He has practiced law for 6 years
and has extensive experience in representing
debtors, creditors, and chapter 11
Trustees in numerous national, regional,
and local bankruptcy cases. Mr. Rice graduated
from the University of California,
Los Angeles in 1995 and from the
Pepperdine University School of Law in
1999 (cum laude).
Patrick L. Huffstickler is a shareholder
with the law firm of Cox Smith Matthews
Incorporated specializing in bankruptcy
matters. He has practiced law for 20 years
and has extensive experience in representing
landlords and tenants in numerous
national, regional, and local bankruptcy
cases . Mr. Huffstickler also handles uniform
commercial code and other commercial
litigation matters. Mr. Huffstickler
re p resents commercial landlords, including
retail malls and shopping centers, with
respect to numerous issues involving real
property lease s, including negotiating and
d rafting termination and modification
agreements, in both bankruptcy and nonbankruptcy
matters. Mr. Huffstickler graduated
from Trinity University in 1983 (cum
laude) and from the University of Texas
School of Law in 1986 (with honors).
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