Help Center

Bankruptcy Headlines

A Sublessee’s Rights in the Face of A Debtor-Sublessor’s Rejection of an Unexpired Lease Under Chapter 11

By: Adam Lau

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In In re Overseas Shipholding Group, Inc., a bankruptcy court held that rejection of a lease by a debtor constituted a pre-petition breach of the lease and was not a termination of the lease. The debtor, Overseas Shipholding Group, Inc., entered into a lease agreement with TST/Commerz East Building (“TST”) that was set to expire on December 31, 2020. Two years into the lease, debtor subleased a part of the space to Maritime Overseas Corporation (“Maritime”). After filing voluntary petitions under chapter 11, the debtor and Maritime entered into a stipulation with the assignee of TST whereby the debtor and Maritime agreed to reject the lease and the sublease. Maritime then vacated the premises and proceeded to file a claim against debtor for $30,788.32 for return of its security deposit under the sublease, but amended its claim, adding $367,858 for damages from rejection of the sublease, including moving expenses, increased rent, electricity, and legal fees relating to Maritime’s relocation. The debtor objected to the amended claim, and asked the court to disallow the claim for rejection damages and to limit the recovery to the amount of the security deposit. The debtor argued that the rejection of the lease constituted a termination of the lease, which would, under Clause 2 in the sublease, preclude Maritime from recovering rejection damages. Clause 2 provided that, “this Sublease shall terminate (in whole or in part, as applicable) on the date of such termination as if such date had been specified in this Sublease as the Expiration Date and Tenant shall have no liability to Subtenant with respect to such termination.” The debtor relied on Chatlos Systems, Inc. v. Kaplan, where the court held that a debtor’s rejection of a non-residential lease resulted in termination of the lease. In response, Maritime argued the Bankruptcy Code establishes that the rejection of the overlease was not a termination of the lease but merely a pre-petition breach. The court was not persuaded by the debtor’s argument, finding that the Chatlos case was not applicable because that case involved a lessee of the debtor who chose to remain in possession of the property, whereas Maritime did not elect to remain on the premises. However, while the bankruptcy court agreed with Maritime’s argument that the rejection of the lease constituted a breach and not termination, Maritime was still precluded from claiming rejection damages because Clause 22(j) in the sublease provided that the “subtenant shall look solely to Tenant's interests in the Lease to enforce Tenant's obligations hereunder and shall not seek any damages against Tenant or any of the Tenant's Related Parties.”

Bankruptcy Court Enforced 20-Year Old Orders Barring Asbestos Claims Against Insurance Company

By: Amanda Hoffman

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In In re Johns-Manville Corporation, the United States Bankruptcy Court for the Southern District of New York enforced orders it issued in 1986, confirming a plan (the “Plan”) of reorganization for Johns-Manville. Pursuant to the Plan, a settlement agreement was reached in which insurers contributed $770 million to a trust benefitting asbestos personal injury claimants. In exchange, the insurers of Johns-Manville, including long-time insurer Marsh USA (“Marsh”), were relieved of all liability related to their insurance of Johns-Manville and the insurers would be protected from claims via injunctive orders of the Bankruptcy Court. Marsh contributed $29.75 million to the trust in exchange for the injunction, which barred future claimants from bringing action against Marsh as an insurer of Johns-Manville. This settlement agreement was approved by the court, resulting in the court entering a confirmation order of the Plan (the “Confirmation Order), and an Insurance Settlement Order, together known as the “1986 Orders”. Under the 1986 Orders, Johns-Manville and its insurers were released from further liability, but present and future claimants could claim against the trust. Part of the settlement agreement included the appointment of a legal representative by the Bankruptcy Court, in order to ensure the rights of future claimants.

Innocence is Required to Discharge a Debt Created by Agent’s Fraud

By: Arielle Cummings

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

With certain limited exceptions, an individual debtor may have his debts discharged in bankruptcy. Debts resulting from a debtor’s fraud, however, are generally not dischargeable. In In re Glenn, the United States Court of Appeals Seventh Circuit affirmed the lower court’s holding that if a debt is the result of fraud, the court can discharge the debt in bankruptcy if the debtor was not complicit in the fraud and that the court can still discharge the debt even if the fraud was created by the debtor’s agent, provided, again, that the debtor was not complicit in it. In Glenn, the defendants, the Glenns, asked a loan broker, Karen Chung to get them a short-term “bridge” loan of $250,000. Chung told the Glenns that a bank had agreed to give the Glenns a $1 million line of credit, but that the line for credit would not be available for a few weeks—hence the need for the “bridge” loan. Brian Sullivan, a lawyer and friend of Chung, agreed to lend the Glenns the $250,000. The loan was never repaid and the $1 million line of credit was never approved because Chung never applied for it in the first place. The Glenns declared bankruptcy and the lower court found that neither of the Glenns had committed fraud and refused to impute Chung’s fraud to either of them under an agency theory. The court granted the Glenn’s discharge. The court reasoned that “[p]roof that a debtor’s agent obtains money by fraud does not justify the denial of discharge to the debtor, unless it is accompanied by proof which demonstrates or justifies an inference that the debtor knew or should have known of the fraud.”

Malpractice Claims Arising Before Chapter 7 Conversion Belong to Bankruptcy Estate

By: Anna Chen

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In Cantu v. Schmidt (In Re Cantu), the Court of Appeals for the Fifth Circuit held that malpractice claims that arise during chapter 11 reorganization but before chapter 7 liquidation belong to the bankruptcy estate. In Cantu, the debtors, the Cantus, filed for chapter 11 bankruptcy. The debtors hired an attorney, Ellen Stone, to represent them in the bankruptcy case. Upon the request of a group of creditors, the bankruptcy court converted the debtors’ chapter 11 case to chapter 7 and a trustee was appointed. Following conversion, the creditors filed a complaint seeking a judgment declaring that the debtors’ debts were not dischargeable. After a two-day trial, the bankruptcy court determined that the debtors’ debts would not be discharged. The court pointed out a number of “omissions, misstatements, and controversies” that plagued the chapter 11 bankruptcy, such as the Cantus’ failure to disclose significant assets and transactions, an improper transfer of $50,000 of what would have been estate property to a close friend during the bankruptcy case, and the Cantus’ lack of cooperation with the court and trustee. A few years later, the Cantus hired an attorney to investigate a possible legal malpractice claim against Stone for her representation during the Cantus’ bankruptcy. The trustee informed the new counsel that he believed the claims against Stone were “property of the estate and under the trustee’s sole authority to prosecute.” The bankruptcy court agreed with the trustee and authorized him to investigate the legal malpractice claims. After conducting his investigation, the trustee filed a malpractice suit against Stone in state court. After removal to federal court, Stone and the trustee settled for $281,710.54. The district court referred the case to the bankruptcy court to determine whether the settlement proceeds belonged to the debtors or the bankruptcy estate. The bankruptcy court held that the settlement proceeds belonged to the estate. On appeal, the district court and the Fifth Circuit affirmed the bankruptcy court’s decision, holding that the proceeds belonged to the debtors’ estate.

Pages