Sudden Death in Overtime Part IV Can A Debtor Stop Eviction and Assume a Lease That Has Been Terminated Pre-petition

Sudden Death in Overtime Part IV Can A Debtor Stop Eviction and Assume a Lease That Has Been Terminated Pre-petition

Journal Issue: 
Column Name: 
Journal Article: 
This is the final installment of a four-part series on whether a debtor can stop eviction proceedings by filing a bankruptcy petition and whether it can assume a lease that a landlord has terminated under state law prior to bankruptcy. This final section concerns only the assumption issue.

Cases Holding That a Debtor Cannot Assume a Lease That Has Been Terminated Pre-petition

In Robinson v. Chicago Housing Authority, 54 F.3d 316 (7th Cir. 1995), the landlord, the Chicago Housing Authority, served the tenant with a lease termination notice on Jan. 7, 1993. The landlord filed a forcible entry and detainer action against the tenant on Feb. 23, 1993. The state court entered a judgment of possession for the landlord. On June 3, 1993, the day the writ of possession was to be issued, the tenant filed a chapter 13 petition. Robinson at 317. The tenant argued that there was a distinction between a "terminated" lease and an "expired" lease, and that this distinction allowed the trustee to assume the lease.

The court stated at page 318 of the opinion:

Robinson argues that Congress deliberately drafted §365(c) to apply to non-residential leases that have been terminated under the provisions of non-bankruptcy law in order to draw a distinction between "terminated" leases in §365(c) and "unexpired" leases in §365(a). This distinction, she argues, creates broader federal protections for residential leases because it means that the only non-assumable residential leases are those whose stated term has run. Residential leases that have ended for reasons other than the running of the stated term, she asserts, are "unexpired" while the stated term of the lease is still running, even if the lease has been ended under state law before its stated term. To read the statute otherwise, she claims, would ignore the distinction Congress was trying to make between non-residential leases in §365(c) and residential ones in §365(a).

The Seventh Circuit rejected the tenant's argument at page 319 of the opinion:

[N]either the legislative history of §365(c) nor the debtor here provides any authority for the proposition that Congress intended its choice of words to create expanded federal protection for residential leases. Section 365(c) was added to the Code by the Bankruptcy Amendments and Federal Judgeship Act of 1984 in response to concerns of shopping center owners and tenants. Congress recognized that the long delays attendant to resolution of bankruptcy disputes and the prolonged inaction under an automatic bankruptcy stay are particularly harmful to shopping centers. S. Rep. No. 65, 98th Cong., 1st Sess. 33-43 (1983). Congress was concerned because the fortunes of separate retail businesses in the same shopping center are inextricably linked; if one retail space in the center remains vacant for a long period of time, the business of the other tenants suffers accordingly. Id. Because the bankruptcy of one shopping center tenant so seriously affects other tenants, and because attempts to remedy this problem in the 1978 Bankruptcy Reform Act had not been successful, special provisions, including §365(c), were drafted to expedite these bankruptcy proceedings and protect other tenants. S. Rep. No. 65, 98th Cong., 1st Sess. 35 (1983). Thus, §365(c) is a deliberate addition to the Code crafted to address a specific issue which has nothing to do with residential leases.

The Seventh Circuit goes on to state at page 319 that Congress intended the opposite of the tenant's proposition that amended §365 provided for expanded federal protection of residential tenancies:

Further, in enacting the Bankruptcy Amendments of 1984, Congress stated that "a distinction between residential and non-residential leases is made here and in other provisions in this order to avoid depriving residential tenants of whatever consumer protections they may have under applicable non-bankruptcy law." Sen. Rep. 98-65, 98th Cong. 1st Session 37 (1983) (emphasis added). Therefore, rather than supporting Robinson's claim that Congress was suggesting enhanced federal protections for residential lessees, the legislative history here supports the established practice of looking to state law to determine whether a lease is unexpired.

The court concluded at page 320 of the opinion:

Hence, we conclude that federal bankruptcy law draws no meaningful distinction between "expired" and "terminated" residential leases and does not provide greater federal protection for lessees under residential leases, the stated terms of which have not run, even though they have been otherwise terminated. Instead, the federal law allowing "unexpired" leases to be assumed calls for a determination [of] whether a lease has ended under state law. See, e.g., In re Escondido West Travelodge, 52 B.R. 376 (S.D. Cal. 1985); In re Depoy, 29 B.R. 466 (Bankr. N.D. Ind. 1983); In re Collier, 163 B.R. 118; In re Sudler, 71 B.R. 780 (Bankr. E.D. Pa. 1987); Talley, 69 B.R. 219.

The court then looked at Illinois law and found that under state law the landlord had properly terminated the tenant's right to possession prior to bankruptcy. Robinson at 322. Therefore, the Seventh Circuit held that the lease was not assumable under 11 U.S.C. §365(a). Robinson at 323.

The Second Circuit in In re Stoltz, 197 F.3d 625, 629 (2nd Cir. 1999), stated that a tenant may assume an "unexpired" lease, and examined the term "unexpired." The court concluded at pages 629-630 that bankruptcy courts must look at state law to determine whether a lease is "unexpired:"

The term "unexpired" is not defined in the Bankruptcy Code itself or in its legislative history. Instead, because property interests are created and defined by state law, federal courts have looked to state law to determine a debtor's interests, including leasehold interests, in the bankruptcy estate. See, e.g., Nobelman v. American Sav. Bank, 508 U.S. 324, 329, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993) (looking to Texas law); In re Williams, 144 F.3d 544, 546 (7th Cir. 1998) (looking to Illinois law); City of Valdez v. Waterkist Corp. (In re Waterkist Corp.), 775 F.2d 1089, 1091 (9th Cir. 1985) (looking to Alaska law); Gallatin Hous. Auth. V. Talley (In re Talley), 69 B.R. 219, 222-23 (Bankr. M.D. Tenn. 1986) (collecting cases relying on state law). Accordingly, we look to Vermont law to determine Stoltz's interests, if any, in her month-to-month tenancy.

See, also, Cunningham v. Lifelink Corp., 159 B.R. 230 (N.D. Ill. 1993). In Cunningham, the tenant argued that even though her lease had been terminated pre-petition, she could still assume it because the stated term of the residential lease had not expired. The court disagreed. The court looked to state law to see if her lease had been properly terminated. The court found that under Illinois law the lease had been terminated and that the date of termination was prior to bankruptcy. The court, citing its earlier opinion of In re Maxwell, 40 B.R. 231 (N.D. Ill. 1984), held that since the lease had been terminated pre-petition under state law, the tenant could not assume the lease even though the full stated term of the lease had not expired. Cunningham at 235.

In In re Maxwell, 40 B.R. at 236, the court held that the landlord had terminated the debtor's lease under Illinois law by sending the tenant a statutory five-day notice and by filing a suit for possession. The tenant then filed a chapter 11 petition and retained possession of the premises. The landlord filed a motion to lift the stay; the bankruptcy court denied the motion. The district court reversed this decision, stating that generally courts recognize that a debtor/tenant-in-possession does have a slight equitable interest under §541 that is protected by the automatic stay, and cites several cases. Maxwell at 237. The district court, however, makes it clear at page 237 of the opinion that this slight equitable interest cannot be bootstrapped into a viable asset of the estate:

What is crucial to the outcome of this case is that the presence of a limited equitable interest held by a debtor-in-possession has no bearing whatsoever on the issue of assumability of the terminated lease. "The fact that the automatic stay gives limited and temporary protection to a holdover tenant/ debtor, based solely on naked possession, does not mean there is a viable executory contract which a debtor can assume under §363 of the Bankruptcy Code." [quoting from Matter of R.R.S. Inc., 7 B.R. 870, 872 (Bankr. M.D. Fla. 1980).]

See, also, In re Huffman, 171 B.R. 649, 653 (Bankr. W.D. Mo. 1994). The court stated that state law determined whether or not a lease had been validly terminated prior to bankruptcy. The court cited as authority In re Kong, 162 B.R. 86, 91 (Bankr. E.D.N.Y. 1993), and Matter of Escondido West Travelodge, 52 B.R. 376, 378 (S.D. Cal. 1985). The court found that the landlord had properly terminated the lease pre-petition. The court held that it could not resurrect the lease, and therefore the tenant could not assume it under 11 U.S.C. §365(c)(3), even though it was vital to an effective reorganization. Huffman at 654-655.

Cases Holding That a Debtor Can Assume a Residential Lease Terminated Pre-petition, but the Stated Term Has Not Expired

The bankruptcy court in Matter of DiCamillo, 206 B.R. 64, 69 (Bankr. D. N.J. 1997), disagreed with the Seventh Circuit's finding in Robinson v. Chicago Housing Authority, supra, that there is no distinction between the terms "expired" and "terminated." The DiCamillo court believed that the plain meaning of the two terms are different: "Expired" means the natural end of a lease by lapse of time, while "terminated" means the premature end to a lease as a result of a breach or forfeiture. DiCamillo at 68.1 The court went beyond examining the meaning of the words "expired" and "terminated" and looked at their context in §365. Section 365(a) allows a trustee to assume an unexpired lease without regard as to whether the lease is for residential or non-residential premises. Under §365(c)(3) as amended in 1984, a trustee may not assume a non-residential lease that terminated under state law prior to the filing of a petition. The court stated at page 69 of the opinion:

In reconciling these sections, we reflect that a nonresidential tenant/ debtor may assume an unexpired lease, but only if the lease has not been terminated pre-petition under state law. In contrast, a residential tenant/debtor may assume an unexpired lease in the context of a chapter 13 plan, even if the lease may be deemed "terminated" pre-petition under state law. We cannot insert the expression "not terminated" as an additional assumption requirement for a residential lessee under §365(a). Nor can we ignore the specific Congressional distinction drawn in §365(c)(3) between "termination" and "expiration" for non-residential lessees only.

The court therefore concluded that the entry of a judgment of possession in favor of the landlord under New Jersey law did not preclude the debtor from seeking to assume his unexpired lease under §365(a). DiCamillo at 71.

A Lease That Has Been Terminated Pre-Petition May Still Be Property of Debtor's Estate

Some states have anti-forfeiture laws that allow a tenant to reinstate a lease that was validly terminated by a landlord prior to the end of the stated term of the lease due to a default under the lease. The Ninth Circuit in In re Windmill Farms Inc., 841 F.2d at 1471-1472, held that even though the lease may have been terminated before the tenant filed its chapter 7 bankruptcy, the trustee may still assume the lease if the trustee is entitled to relief from forfeiture under California law, citing City of Valdez v. Waterkist Corp. (In re Waterkist Corp.), 775 F.2d 1089, 1091 (9th Cir. 1985).2

The Seventh Circuit has also stated that if a lease has terminated prior to bankruptcy, there is nothing left to assume, but the "termination must be complete, and not subject to reversal, either under the terms of the contract or under state law." Moody v. Amoco Oil Co., 734 F.2d 1200, 1212 (7th Cir. 1984), citing In re Fountainebleu Hotel Corp., 515 F.2d 913, 914 (5th Cir. 1975), a pre-Code case.


1 See, also, In re Morgan, 181 B.R. 579, 584 (Bankr. N.D. Ala. 1994), which made the same distinction. Return to article

2 See, also, Wilson v. Bill Barry Enterprises Inc., 822 F.D 859, 861 (9th Cir. 1987), which stated that the right to seek relief from forfeiture of a lease is property of the estate. See, also, In re Atkins, 237 B.R. 816, 820 (Bankr. M.D. Fla. 1999). Return to article

Journal Date: 
Friday, March 1, 2002