State or Federal Court When Evicting a Bankrupt Tenant?
Legal Alerts
6.03.10
Many landlords are very familiar with provisions of the United States Bankruptcy Code dealing with assumption and rejection of leases. However, the particular consequences of lease rejection may not be as well known. For example, once a lease is rejected or deemed to be rejected, a landlord may not know its rights with respect to regaining possession of the leased premises. A recent case from a Florida bankruptcy court shed some light on this issue when it held that after a debtor has rejected a lease, the tenant must surrender the premises to the landlord. In In re The Deli Den, LLC, 2010 WL 841366 (Bankr. S.D. Fla. March 12, 2010), a debtor-tenant remained in its leased commercial premises for over 120 days after the bankruptcy petition date without moving to assume or reject the lease. Under § 365(d)(4) of the Bankruptcy Code, the failure to make a timely election resulted in the lease being deemed rejected.
Rather than vacate the leased premises, however, the debtor asserted that the landlord still had to use state court eviction proceedings to regain possession. This result would seem to be very unfair to the landlord, since the debtor had retained use and possession of the leased premises and presumably had not been paying any rent for quite some time. Nonetheless, the debtor cited bankruptcy court cases from Georgia, Pennsylvania, and Minnesota in support of its argument. Fortunately for the landlord, the Florida court rejected the debtor's argument. Instead, it relied upon another part of § 365(d)(4), which specifically provides that when a debtor fails to assume the lease within 120 days or any further extension of that period granted by the court, "the trustee shall immediately surrender that nonresidential real property to the lessor." The court rejected the reasoning of the cases, which required the landlord to initiate state court eviction proceedings, relying on the specific provisions of the Bankruptcy Code and many other courts in other jurisdictions, including Michigan, which supported the ruling that state court remedies were unnecessary. The Deli Den court granted the landlord's emergency motion for possession and gave the debtor just four days to vacate the leased premises.
The conclusion reached by the Deli Den court appears to be, by far, the majority view on this issue. While the Seventh Circuit, which includes Illinois, Indiana, and Wisconsin, has not yet faced this issue, it is likely that it would adopt the majority view and require a debtor that has rejected or has been deemed to have rejected its lease to vacate the leased premises without requiring the landlord to file a separate eviction proceeding in state court.
Given the decision of In re Deli Den, a landlord with a tenant in bankruptcy proceedings would be well served to closely monitor the time period for the tenant to assume or reject the lease, as this decision will dictate the landlord's rights going forward. If a tenant rejects the lease, the landlord should be prepared to take quick action to regain possession of the leased premises.
For questions about this alert, please contact Neil T. Neumark at 312-627-2276.
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