Creditors and Landlords Trying To Collect a Debt

  • Assuming and assigning leases is allowed under bankruptcy law for unexpired leases and executory contracts. The tenant must cure any defaults and provide adequate assurance of future performance. This can be an asset for the tenant in bankruptcy, as valuable contracts and leases may be assigned to third parties as part of a 363 sale.
  • Landlords have a lot of rights under bankruptcy code. Probably the two strongest positions to be in are as a lender or a landlord. Even if the lease winds up getting rejected in Chapter 11, you still have the period from the petition date until the rejection. That is an administrative priority claim.
  • To assume a lease, a debtor must show two things: (1) curing of the lease, meaning pay any past due amounts, and (2) adequate assurance of future performance. Sometimes judges also allow other fees, like attorneys’ fees, to be part of the cure.
  • Under a 363 sale, the debtor can sell substantially all of the company’s assets, including executory contracts and leases. These rights can be valuable in cases where, for example, a lease is below market value or a supply contract has favorable terms. The debtor must cure any outstanding defaults and show adequate assurance of future performance to assume and assign these contracts.
  • Landlords can terminate a lease prior to the bankruptcy filing by providing notice of termination. If the lease is terminated before the filing, there is nothing left to assume or assign in bankruptcy. Post-petition, landlords must obtain relief from the automatic stay to terminate a lease. Sending a termination letter before filing ensures there is no assumption or assignment during the bankruptcy process.
  • Landlords can file claims for unpaid rent as either pre-petition unsecured claims or post-petition administrative priority claims, depending on the timing of the default. If the lease is rejected, landlords have a general unsecured claim for the entire remaining term of the lease. There is a cap on damages to about one year of rent, plus whatever is past due. They can add attorney fees but must subtract out any security deposit retained.
  • If a guarantor personally guaranteed the lease, the landlord can pursue them for the full amount due under the lease, even if the tenant files for bankruptcy. However, if the guarantor also files for bankruptcy, the automatic stay will apply to the guarantor’s obligations, and the landlord may need to file a claim in that case as well.
  • Once a tenant files for bankruptcy, the automatic stay prohibits landlords from pursuing rent collection or eviction actions without court approval. However, the debtor must continue to pay post-petition rent as an administrative priority claim. If they fail to do so, landlords can file a motion to compel payment or seek relief from the automatic stay to evict the tenant.
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