I. Introduction.
Bankruptcy Code § 365(d)(3) requires the trustee or the debtor in possession to "timely perform all the obligations of the debtor . . .arising from and after the order for relief under any unexpired lease of nonresidential real property, until such lease is assumed or rejected, notwithstanding section 503(b)(1)." In 2001 the Third Circuit construed this section to require the debtor to perform the lease in accordance with its terms. CenterPoint Properties v. Montgomery Ward Holding Corp. (In re Montgomery Ward Holding Corp.), 268 F.3d 205 (3d Cir. 2001).
Commercial lessors have long enjoyed certain individualized protections under section 365 of the Bankruptcy Code. The Third Circuit’s recent decision in In re Goody’s Family Clothing, Inc., __ F.3d ___, 2010 WL 2671929 (3d Cir. June 29, 2010), makes it clear that commercial lessors also can take advantage of the more general protections available to creditors to obtain payment for goods and services they provide to a debtor after it files for bankruptcy where the specific protections are not applicable.
Section 365(d)(3)
On August 4, 2010, the New Jersey Superior Court, Appellate Division extended equitable principles previously applied in mortgage foreclosure cases to how far an unsecured judgment creditor could go to satisfy its lien against a debtor, deciding to follow a line of cases standing for the principal that “even in the absence of express statutory authorization, a court has inherent equitable authority to allow a fair market value credit in order to prevent a double recovery by a creditor against a debtor.” Moreover, in the case, MMU of New York, Inc. v.
Can a debtor seeking debtor-in-possession (“DIP”) financing under Section 364 of the Bankruptcy Code grant a lender a lien on a leasehold interest in the face of an express anti-hypothecation provision in the underlying lease?
Anyone in the commercial real estate business can tell you that the past couple of years have seen a significant uptick in the number of commercial foreclosures and owner bankruptcies. While it does appear that the market is improving, we’re certainly not out of the woods. We are likely to see headlines declaring the latest big bankruptcy or foreclosure for a few more quarters. Sometimes lost in the headlines is the impact such issues have on the tenants in these commercial properties.
Introduction
In re Heller Ehrman, LLP No. 10-CV-03134 2011 WL 635224 (N.D. Cal. Feb. 11, 2011)
In In re Heller Ehrman, LLP, the court analyzed whether the statutory cap imposed on a landlord’s damages resulting from the rejection of a lease should be computed based on the time remaining in the lease, or the full damages resulting from the rejection. While noting a split of authority, the District Court determined that the computation of the cap should be based on a temporal measure to be consistent with statutory language.
A Delaware bankruptcy judge recently held that a landlord's right of first refusal to purchase a debtor/tenant's liquor license (the "Option") was unenforceable since the debtor rejected the lease containing the Option1. Disagreeing with a ruling of the First Circuit Court of Appeals2, the Delaware court held that the Option provision was a non-severable part of an executory contract that was not subject to specific performance.
The Facts
A commercial landlord’s failure to terminate properly a commercial lease can lead to long drawn-out legal battles between the commercial landlord and tenant, before and after the tenant files for chapter 11 bankruptcy protection. In particular, a commercial landlord’s failure to elect and effectively pursue its remedy of lease termination may preclude any subsequent action in bankruptcy to gain possession of the premises even after a writ of possession has issued.