When a bankruptcy case is dismissed for cause pursuant to section 1112(b) of the Bankruptcy Code, the effect of the dismissal on orders entered during the case is not always clear. A recent District of Delaware decision, In re Scarborough-St. James Corporation,
sheds some light on the effect of an 1112(b) dismissal on a lease rejection order. The court ultimately found that a lease rejection terminates the debtor’s possessory rights in the leased premises and that section 349(b) does not revest those possessory rights to the debtor upon a dismissal. The court also found that its stay relief/adequate protection order, which had given effect to a state court order, would also survive the dismissal.
The debtor was the lessee and sublandlord of a shopping center located in Richmond, Michigan. The debtor, which managed the shopping center and collected rents from eight subtenants, became embroiled in a messy dispute over who was entitled to the rents generated from the subtenants – the debtor or the landlord. On the eve of a state court hearing on an eviction action brought by the landlord, the debtor filed for chapter 11 protection, resulting in a stay of the state court litigation.