Real Estate

A Bankruptcy Court May Temporarily Suspend Rent Obligation

By: Matthew Kipnis

St. John’s University School of Law

American Bankruptcy Institute Law Review Staff

 

A Court May Dismiss a Bankruptcy Case Filed in Bad Faith

By: Antonio G. Sciarrotta

St. John’s University School of Law

American Bankruptcy Institute Law Review Staff

 

Claiming Fraud: Requirements for Sufficient Complaints

By: Tara Guarino

St. John’s University School of Law

American Bankruptcy Institute Law Review Staff Member

In re Reval And The Protection Of Lessee Property Rights In The Face Of 11 U.S.C. 363

By: Aaron Z. Leaf

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

For over a decade, courts have struggled with how to reconcile sections 363 and 365(h) of the United States Bankruptcy Code (the “Code”). While neither statute working alone in bankruptcy cases presents much challenge, when invoked together some courts have found them to be incompatible. A court cannot simultaneously allow a trustee to sell property “ free and clear of any interest in such property” and allow a lessee to retain all rights that are “appurtenant to the real property for the balance of the term.” The United States Bankruptcy Court for New Jersey recently addressed sections 363 and 365(h) in In re Reval. After years of poor financial performance, Revel AC, Inc. and its partners, filed petitions under chapter 11 of the Code. Debtors subsequently filed a motion under section 365(a) to reject lease agreements with its tenants. In response, IDEA Boardwalk and other lessees gave a notice of their intent to continue to exercise their “possessory leasehold rights under section 365(h).” Upon the debtor’s request, the court thereafter approved a sale of the debtors’ property to Polo North under section 363 of the Code. After finding that the agreement between the Debtors and Tenants were true leases, the court addressed how the sale would affect Tenants section 365(h) possessory rights. The court held that the tenants possessory rights under section 365(h) eviscerates a debtor’s right under section 363of the Code to sell its property free and clear of any interest.

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.”

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