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

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Mar 2002

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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.

<h3>Cases Holding That a Debtor Cannot Assume a Lease That Has Been Terminated
Pre-petition</h3>

In <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v. Chicago Housing Authority, 54 F.3d 316 (7th Cir.
1995)</a>, 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:

<blockquote>
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).

</blockquote>

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

<blockquote>
[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. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; 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.
</blockquote>

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:

<blockquote>
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 subtitle...in 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.
</blockquote>

The court concluded at page 320 of the opinion:

<blockquote>
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., <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Escondido West
Travelodge, 52 B.R. 376 (S.D. Cal. 1985)</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Depoy, 29
B.R. 466 (Bankr. N.D. Ind. 1983)</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Collier, 163
B.R. 118</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Sudler, 71 B.R. 780 (Bankr. E.D. Pa.
1987)</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; 69 B.R. 219</a>.

</blockquote>

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
<a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §365(a)</a>. Robinson at 323.

The Second Circuit in <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Stoltz, 197 F.3d 625, 629 (2nd Cir.
1999)</a>, 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.,
<a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v. American Sav. Bank</a><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…;, 508 U.S. 324, 329, 113
S.Ct. 2106, 124 L.Ed.2d 228 (1993)</a> (looking to Texas
law); <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re</a><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; Williams, 144 F.3d 544, 546 (7th Cir. 1998)</a>
(looking to Illinois law); <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… of Valdez v. Waterkist Corp.</a><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; (In re
Waterkist Corp.), 775 F.2d 1089, 1091 (9th Cir. 1985)</a>

(looking to Alaska law); <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Hous. Auth. V. Talley (In re
Talley)</a><a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…;, 69 B.R. 219, 222-23 (Bankr. M.D. Tenn. 1986)</a>
(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.
</blockquote>

See, also, <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v. Lifelink Corp., 159 B.R. 230 (N.D. Ill.
1993)</a>. 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 <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Maxwell, 40 B.R.
231 (N.D. Ill. 1984)</a>, 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 <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Maxwell, 40 B.R. at 236</a>, 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:

<blockquote>
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
<a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… of R.R.S. Inc., 7 B.R. 870, 872 (Bankr. M.D. Fla.
1980)</a>.]
</blockquote>

See, also, <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Huffman, 171 B.R. 649, 653 (Bankr. W.D. Mo.
1994)</a>. The court stated that state law determined whether or not a lease had been
validly terminated prior to bankruptcy. The court cited as authority <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Kong,

162 B.R. 86, 91 (Bankr. E.D.N.Y. 1993)</a>, and <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… of Escondido
West Travelodge, 52 B.R. 376, 378 (S.D. Cal. 1985)</a>. 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 <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C. §365(c)(3)</a>, even though it was vital to an effective
reorganization. Huffman at 654-655.

<h3>Cases Holding That a Debtor Can Assume a Residential Lease Terminated
Pre-petition, but the Stated Term Has Not Expired</h3>

The bankruptcy court in <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… of DiCamillo, 206 B.R. 64, 69 (Bankr.
D. N.J. 1997)</a>, disagreed with the Seventh Circuit's finding in <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v.
Chicago Housing Authority, supra,</a> 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.<a href="#1" name="1a">1</a> 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:

<blockquote>
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.
</blockquote>

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.

<h3>A Lease That Has Been Terminated Pre-Petition May Still Be Property of Debtor's
Estate</h3>

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 <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Windmill Farms
Inc., 841 F.2d at 1471-1472</a>, 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 <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… of Valdez v. Waterkist Corp. (In re Waterkist
Corp.), 775 F.2d 1089, 1091 (9th Cir. 1985)</a>.<a href="#2" name="2a">2</a>

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." <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v. Amoco Oil Co., 734 F.2d 1200, 1212 (7th Cir.
1984)</a>, citing <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Fountainebleu Hotel Corp., 515 F.2d 913, 914
(5th Cir. 1975)</a>, a pre-Code case.

<hr>
<h3>Footnotes</h3>

<a name="1">1</a> See, also, <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Morgan, 181 B.R. 579, 584 (Bankr. N.D. Ala. 1994)</a>, which made the same distinction. <a href="#1a">Return to article</a>

<a name="2">2</a> 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, <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Atkins, 237 B.R. 816, 820
(Bankr. M.D. Fla. 1999)</a>. <a href="#2a">Return to article</a>

Journal Authors

Keith M. Baker

Journal Date

Friday, March 1, 2002 - 12:00

Bankruptcy Rule

2002