Sudden Death in Overtime Part III Can a Debtor Stop Eviction and Assume a Lease That Was Terminated Pre-petition

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Feb 2002

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This article addresses the narrow issue of whether a tenant can stop eviction
proceedings by filing a bankruptcy petition even though the lease has been terminated
pre-petition. This article also examines the case law on whether the tenant can assume
such a lease.

Part One (November 2001) of the article reviewed the cases that held that the
automatic stay stopped eviction proceedings. Part Two (December/January 2002) of
the article set out the cases that held that the automatic stay is inapplicable to
eviction proceedings when the lease has been terminated pre-petition. Part Three concerns
motions to lift stay and the reasons why courts grant them when the lease appears to
have been terminated pre-petition. Part Four, which will appear in the next issue,
concerns the issue of whether a debtor can assume a lease that has been terminated
pre-petition. Each part of the article discusses the possible impact of the proposed
changes to the U.S. Bankruptcy Code on these issues.

<h3>Impact of the Proposed Amendments to §362 of the Code Under Current Case Law</h3>

In Matter of Williams,<a href="#1" name="1a">1</a> the Chicago Housing Authority sought relief from the
automatic stay to proceed with an eviction action commenced pre-petition against a
chapter 13 debtor-tenant. The Seventh Circuit held that the automatic stay applied
to the Housing Authority's pending forcible eviction action. Williams at 546. The
Housing Authority argued that the bankruptcy court had not abused its discretion in
modifying the stay to permit the eviction to go forward because the tenant's lease had
been terminated before her petition was filed and therefore she had no interest that
could be assumed as a part of her bankruptcy estate. The tenant argued that the
Housing Authority had not properly terminated the lease under Illinois law.
Therefore, the lease was "unexpired" and could be assumed as a part of her chapter
13 estate. The Seventh Circuit was skeptical about whether the tenant could prevail
on her defenses to the eviction suit, but it could not say with certainty that the
Housing Authority's termination of the lease was proper. Williams at 549. The
Seventh Circuit believed that eviction proceedings are best left to state courts. State
courts should determine whether or not a lease has been properly terminated and whether
a tenant has a viable lease. If a lease has been properly terminated, then the
tenant has nothing to assume, but if the tenant prevails, the lease can be assumed
as a part of the debtor's estate. The Seventh Circuit believed that the "real" issue
in the case was whether the bankruptcy court abused its discretion by lifting the
stay. The Seventh Circuit found that the bankruptcy court had not abused its
discretion, and reversed the contrary holding of the district court. Williams at
550. The court set out its reasoning at page 550 of the opinion:

There is no abuse of discretion here. Had the bankruptcy court not modified the
stay so that the forcible entry case could go forward, it would then likely
have to determine the merits to her right of possession. With no particular
expertise under this narrow issue of state law, this would not be a particularly
efficient use of judicial resources. Tenants might be encouraged to file a
bankruptcy petition not only to forestall an eviction, but also to seek a more
favorable forum for what might otherwise be a foregone conclusion.

The court in Bell v. Alden Owners Inc.<a href="#2" name="2a">2</a> affirmed the bankruptcy court's
modification of the stay to permit the eviction of the debtor-tenant. In Bell,
the tenant filed a chapter 13 petition minutes after her physical eviction began,
but the landlord did not receive actual notice of the bankruptcy until after the
eviction had been completed. The bankruptcy court lifted the stay to allow the
landlord to terminate the tenant's remaining interest in the leasehold estate because
the lease had been terminated pre-petition, the tenant had been legally evicted (at
least partially), and the tenant could not assume the lease under §365. Bell
at 462.

Some courts have held that the landlord's termination of a lease prior to bankruptcy
constitutes "cause" under §362(d)(1). The court in In re Acorn Investments<a href="#3" name="3a">3</a>
found that the landlord sent the tenant a three-day notice terminating the lease. The
landlord then filed an unlawful detainer action in state court, and obtained a default
judgment declaring the lease forfeited and that the plaintiff was entitled to the
immediate possession of the premises. On Nov. 10, 1980, the landlord secured
a writ of possession that was due to be executed on Nov. 19. The tenant filed
its chapter 11 petition on Nov. 18, 1980. Acorn Investments at 508.
The court found that under California law, issuing a written termination notice did
not put an end to the lease, but the default judgment did terminate the tenant's
right to possession of the premises. Acorn Investments at 509.

The court in Acorn Investments then turned to the issue of whether the landlord
had adequate "cause" for relief from the stay. The landlord argued that there was
"cause" because the lease had been terminated prior to bankruptcy and could not be
assumed under §365 of the Code. The court agreed with the landlord and articulated
the reason for lifting the stay: (1) the lease was terminated prior to bankruptcy;
(2) the lease was therefore not assumable under §365, and (3) the inability
to assume was "cause." Acorn Investments at 510. The court made no reference to
§541, and did not use it as an explicit factor in determining cause under §362.
The court also stated that the lease was "expired" not just when it expires by its
terms, but also when the landlord terminates the lease because of the tenant's
default. Acorn Investments at 510. Other courts have also held that the landlord's
termination of a lease pre-petition constitutes "cause" for lifting the stay and allows
the continuation of eviction proceedings.<a href="#4" name="4a">4</a>

Congress has not yet passed the proposed revisions to the Bankruptcy Code. The
version passed by the House of Representatives presumably reflects the Seventh Circuit's
reasoning (quoted above) in In re Williams, supra. The House version would allow
the continuation of any eviction action involving residential real property in which the
debtor resides as a tenant. The House version also allows the commencement of an
eviction proceeding after bankruptcy against a debtor involving residential real property
in which the debtor resides as a tenant and when the rental agreement has been
terminated under the lease agreement or under state law. If the House version becomes
law, the landlord will no longer need to file a motion to lift stay to evict a
tenant from residential property if the landlord stays within the parameters set out
above. Landlords will no longer need to worry about asserting "cause" under §362
in cases involving residential leases, but the House version does not affect commercial
leases. The issue of "cause" will still be important in cases involving eviction of
non-residential tenants.

The Senate version of the amendments to §362 also allows the continuation or
commencement of an eviction proceeding in which the landlord seeks to evict a tenant
from residential premises, but the Senate version is more restrictive than the House
version. The language of both versions is set out in Part I of this article.
The court in In re Kennedy, supra, held that U.S. bankruptcy courts lack
jurisdiction to conduct eviction proceedings, and the Seventh Circuit in In re
Williams, supra, found that such proceedings were best left to state courts. The
pending legislation, if passed, may bring the jurisdiction issue to the forefront
of matters confronting appellate courts because eviction proceedings involving
debtor-tenants are likely to increase.

<h3>Section 525(a) of the Code Does Not Stay an Eviction from Public Housing</h3>

The court in In re Hobbs<a href="#5" name="5a">5</a> had to decide whether §525(a) protects public
housing tenants. Section 525(a) prohibits a governmental unit from denying,
revoking, suspending or refusing to renew a grant solely because the debtor has not
paid a debt that is dischargeable or has been discharged under the Code. The court
cited a long list of cases where the courts had dealt with this issue. Hobbs at
894-895. The court relied principally on In re Bacon.<a href="#6" name="6a">6</a> The court agreed with
the analysis of §525(a) by the Bacon court, and held that the protections of
§525(a) are not operative if the eviction process does not prevent the debtor from
participating in the public housing program in the future. Hobbs at 895. However,
if the public housing authority seeks to preclude a debtor from participating in a
public housing program, then §525(a) would halt an eviction. Hobbs at 895.

<hr>
<h3>Footnotes</h3>

<a name="1">1</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… F.3d 544 (7th Cir. 1998)</a>. <a href="#1a">Return to article</a>

<a name="2">2</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… B.R. 451 (S.D.N.Y. 1996)</a>. <a href="#2a">Return to article</a>

<a name="3">3</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… B.R. 506 (Bankr. S.D. Cal. 1981)</a>. <a href="#3a">Return to article</a>

<a name="4">4</a> See <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Eclair Bakery Ltd., 255 B.R. at 137</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Nasir, 217 B.R. at 997</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Caldwell, 174
B.R. at 652</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Knight Jewelry, 168 B.R. 199, 201 (Bankr. W.D. Mo. 1994)</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re 3220 Erie Blvd.
East Inc., 121 B.R. at 688</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Schewe, 94 B.R. 938, 950 (Bankr. W.D. Mich. 1989)</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… of Annex
Camera, 26 B.R. 587, 589 (Bankr. S.D.N.Y. 1983)</a>. <a href="#4a">Return to article</a>

<a name="5">5</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… B.R. 892 (Bankr. M.D. Fla. 1997)</a>. <a href="#5a">Return to article</a>

<a name="6">6</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… B.R. 60 (Bankr. E.D. Pa. 1997)</a>. <a href="#6a">Return to article</a>

Journal Authors

Keith M. Baker

Journal Date

Friday, February 1, 2002 - 12:00

Bankruptcy Rule

2002