Transcript to Webinar PPT - Lease Enforcement Attorney Network

Lessee Bankruptcy Webinar
Current Issues for
Lessors and Lenders
Robert S. Bernstein, Moderator
Robert S.Bernstein
Jay L. Welford
Panelists:
Jay L. Welford, Jaffe, Raitt, Heuer & Weiss, P.C.
Harry W. Greenfield, Buckley King
Kirk B. Burkley, Bernstein Law Firm
January 11, 2012
Harry W. Greenfield
Kirk B. Burkley
LEAN Webinar
LATEST ASSUMPTION/REJECTION
CASES AND CONCERNS
By,
Jay L. Welford, Esq.
Jaffe, Raitt, Heuer & Weiss, P.C.
27777 Franklin Road, Ste. 2500
Southfield, MI 48034
www.jaffelaw.com
I.
A.
What is a lease, for bankruptcy purposes?
The term executory contract is not defined by the Bankruptcy Code
but has been interpeted to include lease obligations. The legislative
history, however, refers to the definition proposed by Professor
Countryman in Executory Contracts in Bankruptcy, Part I, 57 Minn.
L.Rev. 436, 460 as follows:
1.
B.
"A contract under which the obligation of both the bankrupt and
the other party to the contract are so far unperformed that the
failure of either to complete performance would constitute a
material breach excusing performance of the other." Executory
Contracts in Bankruptcy, Part I, 57 Minn. L.Rev. 436, 460.
The term lease also is not defined in the Bankruptcy Code. However,
the legislative history indicates that a lease disguised as financing
should not be treated as a lease. S. Rep. No. 95-989, 95th Cong., 2d
Sess. 64 (1978). The terms "security", "security agreement" and
"security interest" are defined by the Bankruptcy Code. See 11 U.S.C.
§§ 101(49), (50) and (51).
II.
Section 365 of the Bankruptcy Code governs
leases.
A. Section 365 is "intended to relieve the estate of the
debtor's burdensome obligations, while providing a
means whereby the debtor can force others to
continue to do business with it at a time when a
bankruptcy filing might otherwise make them
reluctant to do so. In re Chateaugay Corp., 10 F.3d
944 (2d Cir. 1993). Another purpose is to effect a
breach of the debtor's agreements thereby allowing
the injured parties to file claims in the bankruptcy
case. In re Register, 95 B.R. 73 (Bankr. M.D. Tenn.
1989).
III.
What time limitations are applicable in a
bankruptcy case?
A. In Chapters 9, 11, 12 or 13, the debtor may assume or assign an
executory contract or lease anytime prior to confirmation of the plan. 11
U.S.C. § 365(d)(2).
B.
In a Chapter 9, 11, 12 or 13, the debtor may reject a lease at any time up
until confirmation of its plan.
C.
In Chapter 7 case, a lease must be timely assumed or assigned. 11 U.S.C.
365(d)(1).
D. In a Chapter 7 case, a lease is deemed rejected if it is not assumed within
60 days of the date of the order for relief (usually the filing date),
although the 60 days may be extended for cause, if the motion for
extension is heard/determined within the first 60 days. 11 U.S.C
§365(d)(1).
PRACTICE TIP: IF THE CASE IS A CHAPTER 7 CASE, CALENDAR THE 60TH DAY THAT THE
LEASE WILL BE DEEMED REJECTED. IF THE LEASE IS NOT REJECTED PRIOR TO THAT
DATE, THIS WILL THEN TRIGGER YOUR RIGHT TO SEEK THE RETURN OF YOUR
EQUIPMENT.
IV.
A.
Postpetition Entitlements Prior to
Assumption/Rejection.
In a Chapter 11 case, the debtor must commencing making payments and
otherwise comply with lease terms (such as payment of taxes, etc.) under a lease
on the 61st day after the bankruptcy petition was filed. 11 U.S.C. § 365(d)(5).
1.
Nonperformance by the debtor gives the lessor grounds to move the court
to lift the automatic stay and seek a determination that the lease should be
deemed rejected based on the debtor’s inaction. Sturgis Iron & Metal Co.,
Inc., 2009 WL 3317286, *20 (Bankr. W.D. Mich. 2009).
2.
After day 60, the lessor may file a pleading with the court requesting that
the first sixty-days of rent be paid as an administrative expense.
3.
Some courts will grant the relief; others will allow the debtor to roll the
payment into its plan and pay it when all other Chapter 11 administrative
expenses are to be paid.
4.
To confirm a plan, a debtor must pay all administrative expenses in full upon
confirmation, unless the administrative claimant agrees otherwise.
5.
If the case is a Chapter 11 case, but the property is leased to an individual
for personal, family or household purposes, there is no requirement to
commence lease payments after the first sixty-days.
IV.
Postpetition Entitlements Prior to
Assumption/Rejection.
B. In a chapter 7 case, the trustee does not have the same
duty to commence making payments on the 61st day. In
most cases a trustee will immediately seek to reject the
lease and eliminate the accrual of administrative lease
obligations, since in almost all Chapter 7 cases the trustee
is not operating the business.
PRACTICE TIP: CALENDAR THE 61ST DAY AFTER THE CHAPTER
11 FILING TO FOLLOW UP ON WHETHER PAYMENT HAS
COMMENCED BY THE DEBTOR. IF NOT, HAVE YOUR COUNSEL
FILE A MOTION TO COMPEL PAYMENT AND A
DETERMINATION THAT THE LEASE SHOULD BE REJECTED.
IV.
Postpetition Entitlements Prior to
Assumption/Rejection.
C.
In determining what rent must be paid commencing on day 61, there is a
split of authority. This so called “stub rent” rule addresses whether a full
month’s rent or only a pro-rata amount of a month’s rent is due for the
rent falling due on day 61. In In re Koenig Sporting Goods, Inc., 203 F.3d
986 (6th Cir. 2000), the court held that rent should not be pro-rated,
such that rent for the entire month must be paid, even if the 61st day fell
on a later date during the month. However, in In re Stone Barn
Manhattan LLC, 2008 Bankr. Lexis 3260, 2008WL 5265739 (Dec.17, 2008)
(f.k.a. Steve & Barry's Manhattan LLC), the court held that the rent would
be pro-rated for the month in which payments were first due.
D.
A lessor is not entitled to suspend any performance requirements which
it has under the lease while the debtor makes the determination
whether to assume or reject the lease. The lessor’s recourse is to: (a)
seek to compel payment of the administrative rent; and (b) file a motion
seeking to compel an earlier determination regarding assumption or
rejection, if warranted and supportable by good cause.
V.
A.
Rejection.
Effect of rejection.
1.
2.
B.
Rejection constitutes a breach of the lease. 11 U.S.C. § 365(g).
Rejection does not invalidate or terminate the lease. In re Continental
Airlines, 981 F.2d 1450 (5th Cir. 1993).
The timing of the rejection and any prior assumption of the lease affects when
the lease is deemed to have been rejected in a case under Chapter 11, 12 or 15:
1.
2.
3.
4.
5.
.
If the rejection occurs prior to assumption, the breach is deemed to have
occurred immediately prior to the date of the filing of the petition. 11 U.S.C.
§365(g)(1).
Where rejection occurs after assumption and the case has not been
converted, then the breach occurs at the time of rejection. 11 U.S.C. §
365(g)(2)(A).
If a case has been converted and the assumption occurred prior to
conversion, the breach occurs immediately before the date of conversion. 11
U.S.C. § 365(g)(2)(B)(I)
If a case has been converted, and the assumption occurred after conversion,
the breach occurs at the time of rejection. 11 U.S.C. § 365(g)(2)(B)(ii).
If the debtor is involved in an individual Chapter 11 case or in a Chapter 13
case and if the lease is not assumed in the plan, the lease is deemed
rejected as of the conclusion of the hearing on confirmation and the stay
automatically terminates. 11 U.S.C. §365(p)(3).
V.
C.
Rejection.
Whether the damages resulting from rejection are an unsecured claim
versus an administrative claim depends on whether the lease was
previously assumed.
1.
If the lease was not assumed prior to being rejected, the damages,
other than lease payments due from and after the filing date, is
generally deemed to be an unsecured claim. Damages include the
rent remaining due under the lease (less only the amount paid postbankruptcy) plus applicable termination penalties, taxes, etc.
2.
If the lease was assumed prior to being rejected (which could
happen based on the debtor failing in its reorganization, the debtor
later shedding a division or otherwise being too optimistic in
assuming leases too early etc.), the damages are entitled to
administrative expense status. In re Klein Sleep Products, 78 F. 3d 18,
28 (2d Cir. 1996); In re Merry-Go-Round Enterprises, Incorporated,
180 F.3d 149, 156 (4' Cir. 1999).
V.
Rejection.
D. The effective date of rejection is important because the
creditor is entitled to an administrative expense claim from
the date of the petition to the date of rejection. At least two
circuits have found that bankruptcy courts have the
equitable authority to approve rejection retroactively. In re
At Home Corp., 392 F.3d 1064 (9th Cir. 2004)(lease rejected
retroactively to the filing date of the motion). In re Thinking
Machines, 67 F.3d 1021, 1028 (lst Cir. 1995)(accord).
PRACTICE TIP: IF YOU RECEIVE A MOTION TO REJECT YOUR
LEASE, REVIEW IT TO DETERMINE IF THE DEBTOR IS SEEKING A
RETROACTIVE REJECTION. IF SO, OBJECT IF YOU ARE IN A
CIRCUIT WHERE RETROACTIVE REJECTION IS NOT PERMITTED.
V.
Rejection.
E. Cap on damages for rejection of leases.
1. There is no cap on the damages assertable based on
the breach of an equipment lease (for real property
leases, there is a cap, equal to the greater of one year’s
rent or 15% of three year’s rent).
2. In determining the damages, any payments due postbankruptcy filing until the date the lease is rejected are
treated as administrative expenses, and the balance
are treated as an unsecured claim.
F. The automatic Stay under §362(a) is automatically
terminated if a lease of equipment is rejected or not
timely assumed by the trustee. 11 U.S.C. §365(p)(1).
VI. Assumption
A. The actions a debtor or trustee must take to assume a lease
depends on the type of lease at issue.
1. A debtor in a Chapter 7 is not required to seek court approval
or other court action when assuming a lease (usually of a
motor vehicle) pursuant to 11 U.S.C. §365(p)(2). Under this
subsection, the debtor may notify the lessee of its desire to
assume the lease. The lessor may accept or decline the
request; if it accepts, the lessor may insist that all outstanding
defaults be cured as a condition of assumption. If assumed,
the debtor and not the Chapter 7 estate will become obligated
going forward under the lease.
2. In all other instances, a debtor is required to seek court
approval to assume a lease.
VI.
B.
C.
Assumption.
What standard must be met before a lease may be assumed?
1. To assume a lease, the debtor must meet the following
requirements: 1) cure any default that currently exists or provide
adequate assurance of prompt cure of the default; 2) provide
adequate assurance of prompt compensation for any monetary loss;
and 3) provide adequate assurance of future performance of the
contract.
What about contracts consisting of several distinct agreements?
1. In re Gardinier, 831 F.2d 974 (11th Cir. 1987), was the first circuit to
develop a test to determine the composition of an executory
contract or lease - whether a contract or lease may be separated into
more than one contract or lease for the sake of assuming one part
and rejecting another.
VI.
Assumption.
2.
Herein, the court considered whether a provision to pay a brokerage
commission, contained within a purchase and sale agreement, constituted a
separate and distinct agreement subject to assumption or rejection pursuant
to §365.
3.
In holding that the brokerage commission provision constituted a separate
agreement between the parties, the court identified three factors it
considered in determining severability: (i) whether the nature and purpose
of the obligations differ, (ii) whether the consideration for the obligations is
separate and distinct, and (iii) whether the obligations of the parties are
interrelated.
4.
Other courts have held that a debtor who assumes a lease must assume the
lease in its entirety. In re Cafe Partners/Washington, 90 B.R. 1 (Bankr. D.C.
Cir. 1988).
VI.
5.
Assumption.
Where a master lease is involved with several schedules, debtors
have sought to reject certain lease schedules and assume others.
Depending on the jurisdiction where the case is pending, the debtor
may or may not be successful in that effort.
PRACTICE TIP: IN STRUCTURING YOUR LEASES, GIVE CONSIDERATION TO
WHETHER YOU WANT TO USE A MASTER LEASE AND SEVERAL SCHEDULES
AS NEW EQUIPMENT IS LEASED, OR INDIVIDUAL LEASES. HAVING A MASTER
LEASE MAY PROHIBIT A DEBTOR FROM CHERRY-PICKING AMONG THE MORE
ATTRACTIVE LEASE SCHEDULES AND WALKING AWAY FROM THE MORE
BURDENSOME ONES.
VI.
Assumption.
D. A debtor or trustee’s determination whether to assume or reject a lease
is within the business judgment of the debtor or trustee.
1.
A court is required to determine if the debtor has exercised correct
“business judgment” in its analysis of a lease’s rejection or
assumption. The court is to look to the terms of the underlying
contract, as well as the circumstances of the debtor, such as the
debtor’s need for the equipment, the ability to make the lease
payments and whether another substitute for the leased equipment,
if needed, is available at a lesser cost.
PRACTICE TIP: MANY DEBTORS WILL SEEK TO NEGOTIATE THE TERMS OF AN
EXISTING LEASE UNDER A THREAT OF REJECTION. BE PREPARED FOR SUCH A
REQUEST.
VII.
Assignment.
A. Section 365(b) prescribes conditions that must be met for
assignment of a lease where a default has occurred.
1. The debtor must cure any defaults in the lease and must
provide adequate assurance of future performance before the
lease may be assumed. In the Matter of U.L. Radio Corp., 19
B.R. 537, 541 (Bankr. S.D.N.Y. 1982).
2. The debtor must also provide adequate assurance of future
performance by the proposed assignee of an assumed lease,
before the lease may be assigned. In the Matter of U.L. Radio
Corp., 19 B.R. at 541.
a. Adequate assurance is determined by the circumstances of
each case. In re Sapolin Paints, Inc., 5 B.R. 412, 421 (Bankr.
E.D.N.Y. 1980).
VII.
B.
C.
Assignment.
A lease may be assigned notwithstanding any clauses in the lease restricting
assignment. 11 U.S.C. § 365(f)(1).
1.
The Bankruptcy Code also prohibits enforcement of clauses that modify or
terminate the contract by virtue of its assignment. 11 U.S.C. § 365(f)(3).
2.
Similarly clauses that condition assignment of the lease on the lessor
receiving a portion of the debtor's profit from the assignment are
prohibited. 11 U.S.C. § 365(f)(1).
3.
Lease assignments are permissible, to assist the debtor's reorganization or
liquidation efforts. In re Jamesway Corp., 201 B.R. 73, 78 (Bankr. S.D.N.Y.
1996).
Non-assignable leases
1.
Although 11 U.S.C. § 365(f) specifically invalidates restrictions on
assignment, some types of contracts may not be assumed or assigned.
Contracts for unique personal services, to extend credit, make loans, or issue
securities are generally non-assignable under state law. In the Matter of U.L.
Radio Corp., 19 B.R. at 541.
VIII.
Sale Motions.
A. Motion to assume and assign in connection with a sale motion.
1. It is becoming common place for a debtor in a Chapter 11 case
to seek to sell its assets in what is called a Section 363 sale,
which is a sale conducted under 11 U.S.C. §363 of the
Bankruptcy Code.
2. Most purchasers at a Section 363 sale are looking for a turnkey operation, and so the sale motion will be accompanied by
a motion seeking to assume and assign leases to the
prospective buyer.
3. Usually the motion identifies all of the potential leases which
may be assumed and assigned and states that the buyer will
have a given number of days either prior to the hearing on the
sale or after the hearing on the sale, to designate the leases it
wishes to have assigned to it.
VIII. Sale Motions.
4.
In conjunction with this list of leases will be a proposed list of cure
amounts, which the debtor will assert constitutes the past due
amounts owing to each lessor, needed to “cure” any existing defaults
under the leases.
5.
The motion will set a bar date by which each lessor must object to
the cure amount. If no objection is raised, the amount designated by
the debtor will be deemed to be the only past-due amount which
must be cured in order for the lease to be assumed and assigned.
PRACTICE TIP: IT IS THEREFORE CRITICAL THAT THE LESSOR PAY CLOSE
ATTENTION TO ANY SECTION 363 MOTION, AS IT MAY INCLUDE A MOTION
TO ASSUME AND ASSIGN A GIVEN LEASE AND WILL INCLUDE A BAR DATE
FOR OBJECTING TO THE CURE AMOUNT. MANY LESSORS MISS THIS
DEADLINE AND ARE LEFT WITHOUT RECOURSE FOR THE SHORFALL.
LEAN Webinar
POTENTIAL IMPACTS OF SECTION 363 SALES
ON THE RIGHTS OF PERSONAL PROPERTY AND
REAL PROPERTY LESSEES AND LESSORS
By:
Harry W. Greenfield, Esq.
Buckley King LPA
1400 Fifth Third Center
600 Superior Avenue, E
Cleveland, Ohio 44114
www.buckleyking.com
Cleveland . Columbus . Cincinnati . Atlanta
Gainesville . Phoenix . Las Vegas
Sometimes, a “Lease” Is Not Really a Lease.
Five Factors used by the Seventh Circuit to
characterize a lease vs. secured loan:
1.
2.
3.
4.
5.
Does the “rental” payment equal the
amount borrowed?
Is the final payment a balloon payment?
Is there a “hell or high water” clause?
Does prepayment end the obligations?
Does the “lessor” lose its interest at the
end?
Cleveland . Columbus . Cincinnati . Atlanta
Gainesville . Phoenix . Las Vegas
Sometimes, a “Lease” Is Not Really a Lease.
 PRACTICE POINTER: A lessor should
perfect its security interest under state law,
such as the UCC (for personal property), if it
is conceivable that someone might challenge
whether the transaction is a secured loan
masquerading as a lease -- otherwise, parties
may sue to “recharacterize” the “lease” as a
loan and to “avoid” the “unperfected” lien.
Cleveland . Columbus . Cincinnati . Atlanta
Gainesville . Phoenix . Las Vegas
Lessors or Lenders: The Effects of
Transaction Recharacterization.

Section 365 provides 3 options for lessors with respect
to leases. The debtor may:
 Assume the lease (which entails curing various
defaults, as well) and continue paying on it;
 Assume the lease and then assign it to another
person, who assumes and is responsible for making
future payments on it; or
 Reject the lease and (in most instances) turn the
property over to the lessor / owner.
See 11 U.S.C. § 365(a), (b), (f).
Cleveland . Columbus . Cincinnati . Atlanta
Gainesville . Phoenix . Las Vegas
Lessors or Lenders: The Effects of
Transaction Recharacterization.

Debtors under secured transactions have more options. The
debtor may:

Keep the property and pay for any diminution in its value.
Any difference between the value and the debt is
considered an unsecured claim. See 11 U.S.C. § 506(a).

Protect the creditor’s interest by either making periodic
payments, providing a replacement lien, or providing the
creditor with the “indubitable equivalent” of its interest, but
only once the creditor requests it and then only to the
extent the value of the collateral decreases. See, e. g., 11
U.S.C. §§ 361; 362(d); 506(a).

Restructure the secured debt in a Chapter 11 plan, by (for
instance) extending the repayment period, changing the
amortization schedule, reducing the interest rate, etc. See,
e.g., 11 U.S.C. §§ 1123(b)(5); 1129(b)(2)(A).
Cleveland . Columbus . Cincinnati . Atlanta
Gainesville . Phoenix . Las Vegas
Lessors or Lenders: The Effects of
Transaction Recharacterization.

In relevant part, Section 363(f) provides:
(f) The trustee [which includes debtors-in-possession in
chapter 11 reorganizations] may sell property under
subsection (b) or (c) of this section [363] free and clear of
any interest in such property of an entity other than the
[bankruptcy] estate, only if—
(1) applicable nonbankruptcy law permits sale of such property
free and clear of such interest;
(2) such entity consents;
(3) such interest is a lien and the price at which such property is
to be sold is greater than the aggregate value of all liens on
such property;
(4) such interest is in bona fide dispute; or
(5) such entity could be compelled, in a legal or equitable
proceeding, to accept a money satisfaction of such interest.
11 U.S.C. § 363(f)
Cleveland . Columbus . Cincinnati . Atlanta
Gainesville . Phoenix . Las Vegas
Sale of “Leased” Property.

The risk that a lessor’s or landlord’s property may
be sold can exist even if the bankruptcy court has
not yet decided whether the lease is a “true lease”
or a secured loan. This is because a lawsuit
regarding whether the “lease” is a “true lease” or a
“loan” creates a “bona fide dispute” that triggers the
power to sell under Section 363(f)(4). See, e.g., In
re Daufuskie Island Properties, LLC, 431 B.R. 626
(Bankr. D.S.C. 2010); In re Robotics Vision
Systems, Inc., 322 B.R. 502 (Bankr. D.N.H. 2005).
Cleveland . Columbus . Cincinnati . Atlanta
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Sale of “Leased” Property.
 “The goal of §363(f)(4) is to ‘allow the sale of
property subject to dispute so that liquidation
of the estate's assets need not be delayed
while such disputes are being litigated.’”
Daufuskie, 431 B.R. at 645
Cleveland . Columbus . Cincinnati . Atlanta
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Sale of “Leased” Property.
 Adding insult to injury, the asset purchaser –
rather than a debtor or trustee – sometimes
is the party with the greatest incentive to
challenge whether a “lease” is actually a
loan.
 In In re Gateway Ethanol, L.L.C., 415 B.R.
486 (Bankr. D. Kan. 2009), for example, the
purchaser argued that the lease really was a
security agreement, so that the purchaser
could escape the obligations to make any
future lease payments.
Cleveland . Columbus . Cincinnati . Atlanta
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Woes for Real Estate Tenants.



Qualitech illustrated the power of Section 363(f) and its
interplay with other Bankruptcy Code sections.
Specifically, Section 365(h) provides that a tenant under a
“rejected” real estate lease has the right to either:

Treat the lease as being terminated (if the lease rejection
would have that effect under the lease, non-bankruptcy
law, or any other agreement), or

Retain its rights under the lease (including the right to
continued possession) for the remainder of the lease -including any renewal or extension periods -- and offset
future rent to reduce any damage caused by the
debtor/landlord’s nonperformance after the lease is
rejected.
The Seventh Circuit noted in Qualitech that, in the face of a
bankruptcy sale, non-debtor parties can seek “adequate
protection” of their interests under Section 363(e).
Cleveland . Columbus . Cincinnati . Atlanta
Gainesville . Phoenix . Las Vegas
Woes for Real Estate Tenants.
 PRACTICE POINTER: At least in the Seventh
Circuit, a real estate lessee that receives proper
notice of a sale hearing, but that fails to appear and
defend its leasehold rights (or fails to seek adequate
protection of its interests), may find itself with no
remedy and no one to pursue. And even if a
commercial tenant does timely appear and defend its
rights, it may lose anyway, as in MMH. Lessors and
landlords must act diligently to defend their rights, or
risk losing them.
Cleveland . Columbus . Cincinnati . Atlanta
Gainesville . Phoenix . Las Vegas
Can a Lessor or Lessee “Undo” a
Sale Order?

Trying to “undo” a sale is an uphill battle.



Sale orders typically enjoin pursuit of the purchaser
for any assets or payment.
Attempts to recover the proceeds from other creditors
will be problematic and expensive.
Sale orders typically are “final” orders that are largely
immune from attack.



The appeal time is short: only 14 days (subject to
potential extension). Fed. R. Bankr. P. 8002(a).
Section 363(m) protects good faith purchasers from a
sale being unwound if the sale closes before a stay of
the sale order is in place.
Doctrines of finality, such as “equitable mootness,”
likewise may bar a lessor’s litigation path.
Cleveland . Columbus . Cincinnati . Atlanta
Gainesville . Phoenix . Las Vegas
So What Should a Lessor or Lessee
Do? (More Practice Pointers.)

If there is any doubt that a lease is a “true lease,” a real estate
or equipment lessor should “perfect” its interest in the property
under law - as if the lease is a security agreement or financing
arrangement.

This may discourage an opportunistic debtor-in-possession
or trustee from trying to “tee up” a Section 363(f) sale by
attacking the lessor’s interests as being an “unperfected”
lien in disguise.

Even taking these measures, though, will not stop a
determined debtor-in-possession from trying to
“recharacterize” a lease as a loan, if the debtor seeks to
retain the affected property, restructure the “secured debt,”
and, potentially, pay much less for it under a Chapter 11
plan than the promised “rent.”
Cleveland . Columbus . Cincinnati . Atlanta
Gainesville . Phoenix . Las Vegas
So What Should a Lessor or Lessee
Do? (More Practice Pointers.)

Equipment lessors, commercial landlords, and commercial real
estate tenants should diligently review ALL NOTICES AND
PAPERS

If a debtor or trustee seeks to “recharacterize” a real estate
or equipment lease as a secured loan, it typically must
commence an adversary proceeding to accomplish this.
Fed. R. Bankr. P. 7001(2), (9).

Lawsuits tend to draw a defendant’s close attention.
Sometimes, though, the “lease vs. loan” issue can emerge
in objections or other filings that may seem innocuous or
that may appear to be directed against others.
Cleveland . Columbus . Cincinnati . Atlanta
Gainesville . Phoenix . Las Vegas
So What Should a Lessor or Lessee
Do? (More Practice Pointers.)
 Even if a debtor is not proposing adverse
action, a lessor should make sure its
interests are presented to the bankruptcy
court in a timely and effective manner.
Cleveland . Columbus . Cincinnati . Atlanta
Gainesville . Phoenix . Las Vegas
So What Should a Lessor or Lessee
Do? (More Practice Pointers.)

For equipment lessors and lenders:

If the transaction is a “true lease”:



If the transaction is a financing lease:



The non-debtor should file a motion to seek a date certain by
which the lease must be assumed as part of the sale.
The non-debtor should respond to any notice regarding the
amount or timing of payment of any “cure” amounts.
The “lessor” should seek adequate protection of its interests,
including the right to “credit bid” the amount of its
secured claim at any sale of its property.
The “lessor” should consider seeking relief from stay or taking
other action to protect its interests as a “secured creditor.”
If the non-debtor is a commercial tenant whose landlord
files for bankruptcy:


The tenant should assert its rights under Section 365.
The tenant should request adequate protection under Section
363(e).
Cleveland . Columbus . Cincinnati . Atlanta
Gainesville . Phoenix . Las Vegas
LEAN Webinar
Chapter 9 Municipal Bankruptcies
and Impact on Lessors/Lenders
By,
Kirk B. Burkley, Esq.
Bernstein Law Firm, P.C.
707 Grant Street Suite 2200
Pittsburgh, PA 15219
www.bernsteinlaw.com
Chapter 9
• A result of the Great Depression, in 1934 (Pub. L. No. 251, 48 Stat.
798 (1934)).Congress formulated the first version of Chapter 9 to
protect debt laden cities and municipalities. Chapter 9 of Title 11 of
the United States Code (the “Bankruptcy Code”) is only available to
municipalities and provides municipalities protection from creditors
while allowing the municipality to create a plan to restructure its
debts.
• In the past, filing for Chapter 9 protection was considered a last
resort because of the uncertain results for everyone involved
including municipal employees and bondholders.
• In the current economic downturn, more and more debt laden cities
and municipalities are finding themselves considering the Chapter 9
option.
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Chapter 9 Eligibility
• In order to be eligible for Chapter 9 protection several
factors must be present. Those factors are found in
Section 109(c) of the Bankruptcy Code. Upon the filing
of a petition under Chapter 9, the bankruptcy Court will
determine whether proposed debtor meets these
requirements.
• The chief judge of the court of appeals for the circuit
embracing the district in which the case is commenced
shall designate the bankruptcy judge to conduct the
Chapter 9 case.
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What is a Municipality?
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A municipality is defined as a "political subdivision or public agency or
instrumentality of a state" (11 U.S.C. § 901).
Municipalities include political subdivisions such as counties, parishes, cities,
towns, villages, boroughs and townships. A municipality may also include
public agencies or instrumentalities that are organized for the purpose of
constructing, maintaining and operating revenue producing enterprises
(Bankruptcy Act § 81(1), former 11 U.S.C. § 404 (1976); In re County of
Orange, 183 B.R. (594)).
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In addition to being defined as a municipality, a proposed Chapter 9 debtor
must also have specific state authorization to be a debtor under Chapter 9.
D. A municipality must be financially insolvent to be a debtor under Chapter
9, meaning that the municipality cannot and has not been paying its debts
as they come due.
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The Plan of Adjustment
• The plan of adjustment must provide for the restructuring of
the municipality’s debts similar to a Chapter 11 plan of
reorganization for private entities (both businesses and
individuals).
• In Chapter 9, like Chapter 11, creditors holding impaired
claims are entitled to vote to accept or reject the plan of
adjustment.
• In order to be confirmed the plan must receive votes
accepting the plan by 51% in number of creditors voting and
2/3 in dollar amount of votes cast, as well as satisfy all of the
other Bankruptcy Code.
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A plan will only be confirmed if it satisfies the
following criteria set forth in 11 U.S.C. § 943:
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(1) the plan complies with the
provisions of this title made
applicable by sections 103(e) (1) and
901 of this title;
(2) the plan complies with the
provisions of this chapter;
(3) all amounts to be paid by the
debtor or by any person for
services or expenses in the case or
incident to the plan have
been fully disclosed and are
reasonable;
(4) the debtor is not prohibited by law
from taking any action
necessary to carry out the plan;
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(5) except to the extent that the
holder of a particular claim
has agreed to a different treatment of
such claim, the plan
provides that on the effective date of
the plan each holder of a
claim of a kind specified in section
507(a)(2) of this title will
receive on account of such claim cash
equal to the allowed amount
of such claim;
(6) any regulatory or electoral
approval necessary under
applicable nonbankruptcy law in order
to carry out any provision
of the plan has been obtained, or such
provision is expressly
conditioned on such approval; and
(7) the plan is in the best interests of
creditors and is
feasible (11 U.S.C. § 934(b)(1-7)).
Benefits of Filing for Chapter 9
Bankruptcy
• Chapter 9 allows a municipality to restructure debt and rebuild with
minimal effect as possible on the people. It also provides a path for
repayment of creditors while discouraging citizens from taking direct
legal action against the municipality.
• The Court cannot force a city to sell assets nor restrict the hiring of
professionals such as accountants or lawyers or auditors. The
normal restrictions on “disinterestedness” of professionals found in
Section 327 of the Bankruptcy Code do not apply to Chapter 9.
• One of the most controversial, yet beneficial, aspects of Chapter 9 is
a municipality’s ability to reject onerous collective bargaining
agreements (“CBA”) with its unionized workforce.
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Effects on Lessors/Lessees
• Section 365 of the Bankruptcy Code applies in Chapter 9
proceedings. See 11 U.S.C. Section 901(a)
• However, Section 363 of the Bankruptcy Code does not apply in
Chapter 9 cases.
• The Bankruptcy Court is not empowered to convert a case filed
under Chapter 9 or force the Debtor to liquidate its assets.
• Section 365(g) still determines the time of the breach for a contract
rejected under Chapter 9.
• Section 929 of the Bankruptcy Code provides that a lease to
municipality shall not be treated as an executory contract or
unexpired lease for the purpose of section 365 or 502(b)(6) solely
by reason of it being subject to termination in the event the debtor
fails to appropriate rent.
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