Real Property Law

Nancy J. Newman specializes in commercial and real estate litigation with Steinhart & Falconer LLP in San Francisco, and is co-author of Tenant Bankruptcies: Postpetition Rent Claims and Relief from Stay, CA Landlord-Tenant Practice, chap 14 (2d ed Cal CEB 2000) published by CEB.

Introduction
As the economy slows and businesses struggle, many commercial property owners and managers find themselves in uncertain territory when their tenants seek refuge in the bankruptcy court. When these clients turn to their trusted counsel for guidance, you can help them protect their rights even if you do not consider yourself a bankruptcy lawyer. Understand the automatic stay. Learn the rules of lease assumption and rejection. Take action when necessary to protect your client’s rights, and make sure to file a claim on time.

Automatic Stay
Understanding the automatic stay is essential for all lawyers confronted with a bankruptcy. The automatic stay is created and defined in Bankruptcy Code §362. It provides broad, instant protection from lawsuits, claims, and collections that are in progress when the bankruptcy is filed. All efforts against the debtor or against property of the bankruptcy estate to collect on prepetition debts or obligations (i.e., those arising before the bankruptcy was filed) are stopped in their tracks and cannot be pursued without permission from the bankruptcy court. If the debtor is doing something that is creating an immediate harm for which relief from the stay is needed, you must make a motion to the bankruptcy court for that relief. The penalties for violating the stay are substantial – actions taken are deemed void, and parties responsible can be held in contempt. For more information about the possible grounds for moving for relief from the stay, and for useful forms, see California Landlord-Tenant Practice, chap 14.

Bankruptcy Code §365
Lawyers representing landlords also need to understand the basics of Bankruptcy Code §365. This statute governs assumption and rejection of executory contracts, and provides important protections of landlord rights. Unexpired leases of real property are executory contracts that debtors can elect to assume, assume and assign, or reject in bankruptcy. Assuming a lease means the debtor continues to be responsible for performing the lease obligations, and must cure all prepetition defaults; rejection terminates a lease and gives the landlord an unsecured claim for damages. Debtors often try to assume and assign leases that have value. Bankruptcy Code §365(b) requires that a proposed assignment provide for prompt cure of all defaults, and include a showing of "adequate assurance of future performance." If your client is a shopping center, "adequate assurance of future performance" includes a showing that percentage rent is not likely to decline, and that the assignment will not violate existing use, radius, or similar restrictions in the lease. Bankruptcy Code §365(b)(3). The debtor is required to perform all post-petition lease obligations pending a decision to assume or reject the lease, and the time allowed to make that decision is limited to 60 days from the date the petition is filed, or such extended date as the court may allow on a showing of cause. Bankruptcy Code §365(d)(3) and (4).

"Scream or Die"
Even if you are familiar with the protections of §365, vigilance is key to effective representation of a landlord in a tenant’s bankruptcy proceeding. You cannot rely upon the statute to protect your client’s rights. Bankruptcy is not just a two-way dispute like many commercial cases. Debtors make motions that materially affect their relationships with whole classes of third parties, like landlords. Each separate party affected by the relief sought is responsible for knowing about the motion, and objecting on time, or the relief may be granted simply by default. Bankruptcy practitioners sometimes refer to this reality as "scream or die."

Indeed, virtually every right provided to landlords by §365 can be waived by failure to assert the right in a timely way. This means if the debtor moves to extend the time to assume or reject and has not been paying rent, you should object and note the violation of debtor’s obligations to stay current on post-petition rent while deciding. It means if the debtor moves to assume and assign its shoe store lease to a dry cleaner, you need to object and note that such an assignment would violate the use clause. It means if the debtor moves to assume your lease and sets the cure amount at "zero," you need to object and insist that any prepetition default the debtor may not have noted must be cured when the lease is assumed. Thus, to protect your client’s rights in bankruptcy, you need to find out what is going on, stay informed, and object on time if you have cause to do so.

Getting and Staying Informed
PACER
Fortunately, getting informed and staying informed of developments in a bankruptcy is easy. Almost all bankruptcy courts are accessible on-line through PACER. If you have not used it before, go to http://pacer.psc.uscourts.gov and get a PACER account number and password. When you first learn that a bankruptcy has been filed, find out in what court it was filed and obtain the case number. Then find that court on the PACER system, and search the case number. PACER will show you the docket sheet listing every paper that has been filed, in chronological order, and often will also have pdf files of key documents (like the initial petition, schedules, and court orders) available to print out instantly for just 7 cents a page.

Serve a Request for Notice
After checking the docket sheet to find out what is happening, immediately file and serve a request for notice. This is a simple form to add yourself to the master service list. See California Landlord-Tenant Practice, §14.58. This will allow you to receive service of all motions, pleadings, and papers in the proceeding, in time to take action if necessary. It is important to request notice promptly. A lot can happen in a bankruptcy if you are not paying attention. Many large retail tenant bankruptcies are planned for months in advance, so the debtors sometimes make dozens of motions in the first few days. You need to get on the service list quickly, to make sure you get notice of everything that might affect your client’s rights.

Claims Bar Date
Once your client’s lease has been assumed, then your vigilant action will have ensured that you have a suitable tenant in place and all defaults have been cured. If your client’s lease has been rejected, then you just need to make sure you file proof of claim for any resulting damages before the claims bar date. The "claims bar date" is exactly that: it is the date by which you must file your claim, or it will be barred. Landlord claims on rejected leases typically include the full amount of any prepetition default, plus a limited amount of the damages from the rejection, typically the greater of one year’s rent or 15 percent of the total rent due. See Bankruptcy Code §502(b)(6) and California Landlord-Tenant Practice §§14.58 and 14.59. After the claim is filed in a timely manner, there is often little further activity that will affect your client in the case. If the claim draws an objection, respond; otherwise, just monitor the case for any distributions on the claim. Distributions sometimes arrive years later, but are a delightful surprise to a client that may have long ago given up on ever collecting anything on that old debt.

So when a tenant files bankruptcy, know what to do. Get informed, stay on top of it, object if your client’s rights are threatened, and be sure to file your claim on time.

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California Landlord-Tenant Practice
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