Transcript Slide 1

TENANT
BANKRUPTCY
Presented by
GARY S. KESSLER
KESSLER & COLLINS, PC
5950 SHERRY LANE, SUITE 222
DALLAS, TX 75225
GOALS
Obtain control of space
Determine amount and type of claim –
whether to pursue or seek termination by
Debtor
Stay on top of the case and in front of the
Debtor
LANDLORD
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Creditor
Provider of Services after Filing
Holder of Unexpired Lease
Special Claim Rules
Storage Company
TOP TEN THINGS TO REMEMBER TO MAKE A
LANDLORD’S LIFE LESS STRESSFUL IN A TENANT
BANKRUPTCY
10. If the tenant/debtor can, it will ignore the landlord. The landlord must
make itself visible at the earliest possible time and throughout the case.
9.
The goal of bankruptcy is to rehabilitate or liquidate a debtor and
apportion its assets to creditors.
8.
A bankruptcy does not necessarily make a bad tenant a good tenant. It
just puts a little more teeth into the remedies a landlord might have to
encourage the tenant to perform the lease properly.
7.
A secured landlord is better off than an unsecured landlord. A
subordinated landlord is still better off than an unsecured landlord.
6.
Bankruptcy is like a multi-ringed circus. What happens in one ring
affects the whole show. The landlord should be visible in as many rings
as possible to be taken seriously.
TOP TEN THINGS TO REMEMBER TO MAKE A
LANDLORD’S LIFE LESS STRESSFUL IN A TENANT
BANKRUPTCY
5.
The automatic stay means exactly what it says. A creditor cannot try to
collect pre-petition debts or interfere with the property of the debtor.
4.
The tenant/debtor’s property includes anything having to do with the
lease. The debtor’s property is also “property of the estate.” It must be
preserved for the benefit of the tenant/debtor and the creditors.
3.
Notwithstanding the automatic stay, the landlord does have remedies as
long as it files appropriate motions and/or the issue is handled through
the attorneys.
2.
A proof of claim will only get a landlord in the front door. There still
must be assets to fund payment of the claim and the landlord must
prove damages.
1.
Try to look at bankruptcy as an opportunity to turn a bad situation into a
better one.
SAFE LEASING: CLAUSES FOR THE
BANKRUPTCY CONSCIOUS
 Security Deposits
 Lease Guaranties
 Letters of Credit
SAFE LEASING: CLAUSES FOR THE
BANKRUPTCY CONSCIOUS
 Recapture Provisions:
Assignment and Subletting
Landlord Remedy for an Event of Default
 Event of Default/Bankruptcy – Ipso Facto
Clauses
 Notice Clauses
 Landlord’s Liens
 Subordination of Landlord’s Liens
FIVE STEP PROGRAM
 How much rent is owed and what is our risk?
 What does the lease look like?
 How does the lease compare to market?
 What information is available to us?
 Make a business decision!!!
EVALUATE LEASE
 Do we have a Landlord’s lien – statutory or
contractual?
 Do we have a letter of credit or guaranty?
 Does Tenant own the “fixtures?”
 Whose obligation to remove them?
EVALUATE OPTIONS
 Tenant is in trouble – what do we do?
Renegotiate Lease?
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Obtain Recapture Clause
Clean up fixture issues
Eliminate notice provisions
Obtain a release
Obtain additional collateral
Letter of credit
Guaranty
TERMINATE LEASE?
 Below Market Lease
 Worried about assumption and assignment
 Not “caught up” in the bankruptcy proceeding
 If space is essential, you can get some leverage
FIRST 60 DAYS
 First Day Motions
 Motion for Approval of DIP financing
 Motion to use cash collateral
 Motion to extend time to assume or reject lease
 Notice from Court
Date filed
Date of Section 341 hearing
Bar Date
341 Creditors Meeting
 Short meeting (15 minutes to one hour)
 Presiding officer is Trustee
 2004 Examination
 Meeting may be continued
 Tapes are available
PREVENTS ANYONE FROM INTERFERING
WITH DEBTOR’S PROPERTY OR
EFFORTS TO REORGANIZE
Includes:
 Commencement or continuation of lawsuit
 Enforcement of judgments (monetary or otherwise)
 Obtaining possession of property of estate
 Collection efforts
 Set off of debts
STAY’S EFFECT ON
LANDLORD/TENANT RELATION
You cannot:
 Evict tenant
 Hinder operation of
business
 Lockout tenant
 Change locks
 Seize tenant’s property
 Give eviction notice
 Shut off utilities
 Terminate lease
 Show
property
prospective tenant
to
 Apply security deposit
debtor’s
 Declare a default
 Threaten tenant
 Move property of a tenant that
has vacated
STAY’S EFFECT ON
LANDLORD/TENANT RELATION
You Can:
 Collect rent and other charges which have accrued
since bankruptcy filing
 Draw down letter of credit
 Take action to continue a security interest in
property
 Take action to remove tenant whose lease has
expired by its own terms prior to or during the
bankruptcy case (this should be done carefully)
ASSUMPTION OF A LEASE
 Test is business judgment
 Priority claim if rejected after assumption
 Three part test
Cure or provide adequate assurance of prompt
cure
Compensate or provide adequate assurance of
compensation for pecuniary loss
Provide adequate assurance of
future
performance
SHOPPING CENTER AMENDMENTS
 Must provide adequate assurance of source of rent
and show that financial condition and operating
performance of assignee shall be similar to
financial condition of operating performance of
debtor at time of lease
 Percentage rent will not decline substantially
 Assumption or assignment is subject to all
provisions in the lease including radius, use,
location and exclusivity and will not breach any
other lease agreement
 Not disrupt tenant mix
HOT ISSUE REGARDING
ASSIGNMENT
 Designation Rights
IMPORTANT EXCEPTIONS TO
ASSUMPTION AND ASSIGNMENT
 Cannot assign:
If applicable law excuses Landlord from
accepting performance from any entity other than
Debtor
If Landlord extended financial accommodation to
Debtor
If lease terminated prior to bankruptcy
WHY FILE A CLAIM?
 Only way to get paid
 Previous suits, judgments, awards, etc.
Make no difference
LANDLORD CLAIMS
 Secured – Extent defined by lease.
 Unsecured – Most common
 Administrative – Post-petition expense. Highest
priority
 Prior to rejection
 After rejection
 “STUB RENT” Issue
 Property Tax / Expenses – Pro-rated
 Environmental – Did claim arise pre-petition or postpetition?
THE LANDLORD CLAIM CONTINUUM
Filing
of
Bankruptcy
General Claim vs. Estate
or
Secured Claim Depending
on Lease Language
Assumption: Must cure all
defaults and lease continues
as before
Administrative claim
per rent reserved in
lease until rejection
when claim is
measured by benefit to
the estate
Rejection:
-Constitutes breach of lease from
date of filing.
-General claim or secured claim
depending on lease.
-Claim capped at greater of:
(1)one year's rent or
(2)15% of rent for remaining term of
lease (3 year cap)
CALCULATION OF
“REJECTION DAMAGES”
 Calculate whatever damages are for breach under the lease
 Cap the damages at equivalent of one year’s rent reserved in lease
Or
 Cap the damages at the rent reserved for 15% of the remaining
time under the lease not to exceed three years
i.e., (10 years x 15% = rent for 1.5 years)
(7 years x 15% = rent for 1.05 years)
All amounts are subject to mitigation if new tenant takes possession
CHAPTER 11 PLAN
 Disclosure Statement
 Voting
 Confirmation
 Cram Down
SOURCES OF PAYMENT
 Post confirmation operations of debtor
 Sale of property
 Recoveries from lawsuits filed on behalf of
estate
 Fraudulent conveyances
 Preferences
 Turnover suits
 Business tort and related suits
EXCEPTIONS TO PREFERENCE
 Intended to be a contemporaneous exchange
for new value and was a substantially
contemporaneous exchange
 Debt incurred in the ordinary course of
business of the debtor and the transferee, made
in the ordinary course of business and made
according to ordinary business terms
EXCEPTIONS TO PREFERENCE
 If a security interest, it:
Secures new value that was given to the debtor to
acquire the property and
Was used to acquire the property and
Was perfected within 20 days after the date the
debtor received the property