We are often contacted by former and prospective clients in Manhattan and other boroughs of New York City, and elsewhere, who are faced with a potential eviction involving a commercial or residential lease and wonder what their bankruptcy options are.
1. Bankruptcy Filing Creates Automatic Stay
A bankruptcy filing by the tenant (whether residential or commercial) creates an “automatic stay.” This is a mandatory injunction that arises by operation of law without the need for a hearing or order of the Bankruptcy Court. The automatic stay operates like a legal “Stop Sign” to freeze a creditor’s efforts to pursue collections, litigation or judgment enforcement. The automatic stay operates to protect the debtor and the property of the debtor’s bankruptcy estate.
In the case of a lease, whether commercial or residential, the critical issue is whether a writ of eviction has already been issued from the landlord-tenant court. There is a significant body of case law from the U.S. Bankruptcy Court for the Southern District of New York and U.S. Bankruptcy Court (covering Manhattan, Bronx and White Plains) and U.S. Bankruptcy Court for the Eastern District of New York (covering Brooklyn, Queens, Staten Island and Long Island) that once a writ of eviction has issued from the landlord-tenant court the interest of the tenant in the lease has terminated.
2. Options for Tenant in Bankruptcy
For a tenant who files for bankruptcy, the available options depend upon what chapter (type) of bankruptcy the debtor tenant’s files.
a) Chapter 11 Bankruptcy. For a business that has a valuable long term below market lease a chapter 11 bankruptcy will permit it the opportunity to sell that lease to a buyer. The buyer would need to cure any defaults in connection with the purchase – which would need Bankruptcy Court approval. In addition the buyer would need to be able to show that it has the financial ability to perform under the lease.
The tenant is supposed to continue to pay on a current basis post-bankruptcy rent that comes due after the date of bankruptcy filing. If the tenant doesn’t stay current with post-bankruptcy rent the landlord can seek apply to the Bankruptcy Court for “relief from the automatic stay” to permit the landlord to move forward to evict the tenant in state court.
Since the 2005 amendments to the Bankruptcy Code the tenant does not have very long to make a decision regarding assumption or rejection of its lease.
b) Chapter 13 Bankruptcy. For an individual debtor who has a lease – and has fallen behind on payments – chapter 13 bankruptcy can provide the opportunity to cure the arrears (past due rent) over time in a chapter 13 plan. For more information about chapter 13, see our prior blog post — New York Chapter 13 Bankruptcy Eligibility Requirements and Issues, and Frequently Asked Question discussing chapter 13 — What are the benefits of chapter 13?
Please feel free to contact us at 888-867-8165 for further information or to schedule a consultation.