Commercial Landlord’s Guide to Dealing with Bankruptcy Issues

forAllegheny County Bar Association,

Real Property SectionFEBRUARY 9, 2012, Pittsburgh, PA

by Salene Mazur Kraemer, Esquire & Eric L. Bradley, Esquire

*ALL COPYRIGHTS RESERVED

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Outline of Discussion A. Assumptions B. Prior to a Tenant Filing Bankruptcy

1. Preferential Transfers2. Fraudulent Transfers

 C. Subsequent to a Tenant Filing Bankruptcy1. Automatic Stay2. Time Within Which to Assume or Reject3. Performance During Time Within Which to Assume or Reject4. Rejection5. Assumption6. Assignment D. Other Considerations / Practice Points1. Letters of Credit and Security Deposits2. Non-Bankrupt Guarantors

3. Distraint/Landlord’s Lien

E. Q&A

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A. Assumptions:

• Chapter 11 (Reorganizations)• Bankruptcy of Commercial Tenant

 

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B. Prior to a Tenant Filing Bankruptcy

1. Preferential Transfers or Fraudulent Transfers.

2. Ipso Facto Clauses 

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B. Prior to a Tenant Filing Bankruptcy

1. Preferential or Fraudulent TransfersPreferential Transfers• §547 of the Bankruptcy Code• 90 to 1-year look back• Antecedent Debt• Secured interests• Guarantors as defendants• Settlement agreements

Defense:• Ordinary course• New Value• Contemporaneous Exchange• Kiwi Defense

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B. Prior to a Tenant Filing Bankruptcy

1. Preferential or Fraudulent Transfers

Fraudulent Transfers

• §548 of the Bankruptcy Code• 2 year look back• Under-market rentals

Defense:• Received reasonably equivalent value• Debtor not insolvent

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1. Preferential or Fraudulent Transfers (continued)

Practice Tips!  

•Make sure rent timely paid

•Reasonable and consistent credit monitoring

•Uniform collection policies

•Obtain credit enhancements (security deposits, letters of credit, surety bonds, third-party guaranties

•Obtain Security Interest in Collateral

•Terminate the Lease Pre-petition

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B.Prior to a Tenant Filing Bankruptcy

2. Ipso Facto Clauses

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B. Subsequent to a Tenant Filing Bankruptcy

1. Automatic Stay

2. Time Within Which to Assume or Reject

3. Performance During Time Within Which to Assume or Reject

4. Rejection

5. Assumption

6. Assignment

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B. Subsequent to a Tenant Filing Bankruptcy

1. Automatic Stay. 

•§362 of the Bankruptcy Code, •Prohibits: Collections for unpaid rent, delivery of notice of

termination, eviction proceedings•Drawing on Letter of Credit and Security Deposits•Relief from the Stay Standard

–lack of adequate protection; or –a showing that Debtor has no equity in the project and that property is

not essential to an effective reorganization

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C. Subsequent to a Tenant Filing Bankruptcy (cont.)

1.Automatic Stay. (continued)

•Main Concerns(i) taking back possession of the leased premises, (ii) getting all of the Debtor’s property out of the premises, (iii) collecting any unpaid rent (pre-petition damages) and future rent(iv) relet the space

 •Post-petition expiration of the Lease?

•Filing a Proof of Claim/Checking A Debtor’s Schedules

 

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C. Subsequent to a Tenant Filing Bankruptcy (cont.)

2. Time Within Which to Assume or Reject. •Bankruptcy Code § 365(d)(4) = must decide to assume or reject within

first 120 days of the filing of the bankruptcy case.

•Can be extended by 90 days for cause without Landlord’s consent

or more than 90 days if the Landlord consents in writing. •Pre-packaged plans

•Be mindful of post-petition transfer liability. Bankruptcy Code § 549

 

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C. Subsequent to a Tenant Filing Bankruptcy

3. Performance During Time Within Which to Assume or Reject.

 

•Bankruptcy Code § 365(d)(3) Obligations: “Trustee shall timely perform all the obligations of the Debtor” arising after the petition is filed and before the lease is assumed or rejected.”

-Extension-What obligations are included? -Non-compliance

 

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C. Subsequent to a Tenant Filing Bankruptcy (continued)

 •Administrative Claim Pursuant to

Bankruptcy Code § 503(b)

–Full contract amount v. storage value?

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C. Subsequent to a Tenant Filing Bankruptcy (continued)

–When Does an Obligation Arise? : Is a Claim Pre-petition or Post-Petition?

•Proration Rule

•Billing Date Rule

-Stub Rent

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C. Subsequent to a Tenant Filing Bankruptcy (continued)

4. Rejection. 

•If the bankrupt Tenant does not elect to assume the lease prior to the expiration of the 120 day (or 210 day if extended) period (either by a motion or through a plan), the lease is deemed rejected.

•TEST: “reasonable business judgment”: (1) generally benefits the bankruptcy estate and collective creditors, (2) relieves the estate from a burdensome lease, and/or (3) aids the Debtor’s reorganization efforts.

•Considered breach immediately before Petition Date.

•Three possible claims follow rejection (pre-petition, future rent, and administrative claim) 

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C. Subsequent to a Tenant Filing Bankruptcy (continued)

4.Rejection (continued).

Bankruptcy Code § 502(b)(6) states that a rejected lease claim is limited to any unpaid rent (without acceleration) due, plus the greater of (1) one year’s rent, or (2) a sum equal to 15% of the remaining rent due under the lease, not to exceed three years’ rent. Bankruptcy Code § 502(b).

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Bankruptcy Code § 502(b)(6)

Lease Rejection Damages = the sum of

(1) prior unpaid rent (without acceleration) then due under the applicable lease [which is not limited];

plus (+)(2) the lesser of

(A) three years of rent under the applicable lease, or (B) the greater of

(i) one year’s rent under the applicable lease, or (ii) a sum equal to 15% of the remaining rent due

under the applicable lease for the remainder of the term.

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Bankruptcy Code § 502(b) (continued)

TWO CAP METHODS

(1) Rent measurement cap method (used by majority of courts) which calculates 15% of the total rent due over the remaining life of the lease; or

(2) Term measurement method (applicable in PA), where the 15% cap is measured is by rent due under the first 15% of remaining lease term. In re Allegheny Int’l., Inc., 145 B.R. 823 (Bankr. W.D.PA. 1992).

 

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Bankruptcy Code § 502(b) (continued)

•Are damages, other than rent and “rent reserved”, subject to the 502(b)(6) cap?

–Debtor’s failure to repair premises–Debtor’s environmental remediation

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C. Subsequent to a Tenant Filing Bankruptcy (continued)

5. Assumption. 

A Debtor must assume or reject a lease within 120 days of the petition date or, if extended 90 days, then within 210 days of the petition days (that’s about seven (7) months after filing). Three (3) prerequisites:

•All defaults must be cured.

•Adequate assurance that Landlord will be compensated for any losses associated with such defaults.

•Adequate assurance that Tenant will perform in future. 

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C. Subsequent to a Tenant Filing Bankruptcy (continued)

6. Assignment. If the lease has been assumed (see above requirements), a bankrupt

Tenant may assign the lease despite restrictions on assignment contained in the lease. Bankruptcy Code § 365(f)(1).

•Anti-assignment provisions are VOID in bankruptcy.

•Proposed assignee must be able to provide “adequate assurance”.

•Use and exclusive use clauses in the lease will be enforced.

•Special rules for shopping centers.

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D. Other Considerations

1. Security Deposits and Letters of Credit •Property of the Estate?•Offset to Claim against Debtor •Relief from the Automatic Stay•Should security deposit or letter of credit be applied to

the 502(b)(6) claim cap to further reduce the allowed claim?

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D. Other Considerations

2.Non-Bankrupt Guarantors. 3.Distraint or Landlord’s Lien.4.Confession of Judgment

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PresentersSalene M. Kraemer, Esq.

MAZURKRAEMER BUSINESS LAW

3205 Pennsylvania Avenue, Suite B.

Weirton, WV 26062

salene@mazurkraemer.com

BLOG: www.mazurkraemer.wordpress.com

TWITTER: @salenekraemer

FACEBOOK: http://www.facebook.com/#!/pages/In-Plain-English/167415046667515

LINKEDIN: http://www.linkedin.com/in/salenekraemer

Eric L. Bradley, Esq.

Principal

Dickie, McCamey & Chilcote, P.C.

Two PPG Place, Suite 400

Pittsburgh, PA 15222

(412) 392-5322

(412) 392-5367 (facsimile)

EBradley@dmclaw.com

www.dmclaw.com

LINKEDIN: http://www.linkedin.com/pub/eric-bradley/2/229/550

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