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

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Nov 2001

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Atenant is delinquent in paying his rent or is in default under some other provision
of his lease. The landlord notifies the tenant that he is in default under the terms
of the lease, and then seeks to terminate the leasehold estate by notice of
termination of lease and by eviction proceedings. The tenant, sometime prior to being
physically dispossessed of the premises, files for relief under a chapter of the
Bankruptcy Code. The landlord either files an adversary proceeding seeking a
declaratory judgment that the automatic stay does not stop eviction proceedings because
the lease was terminated pre-petition or files a motion for relief from the automatic
stay provisions of §362. Who wins?

A review of the published opinions reveal that there is a division of authority on
the applicability of the automatic stay to eviction proceedings. Some courts hold that
the automatic stay of §362 stops the eviction, and some hold that the stay is
inapplicable. This dichotomy can be partly explained by the different treatment accorded
by §§362 and 541 of the Code to residential and non-residential tenancies. Some
of this diversity can also be explained by the differences in state law regarding
leasehold estates and eviction proceedings, but bankruptcy courts and U.S. district
courts (there are few U.S. circuit court opinions in this area) have also
interpreted §§362, 365 and 541 in various ways that have also led to
conflicting results. This article catalogs some (but not all) of the varying opinions
on matters involving eviction proceedings and the automatic stay of §362. It will
also examine how the courts have differentiated between residential and non-residential
tenancies under §§362 and 541.

This article will also examine whether a debtor-tenant under §365 can assume a
lease that was terminated by the landlord prior to the end of the stated term of the
lease and prior to bankruptcy. It will also examine whether a lease that was
terminated pre-petition and before the end of the stated term of the lease is
considered property of the estate.

Both the U.S. Senate and the House of Representatives have made significant but
dissimilar proposed revisions to §362 of the Code that would limit the applicability
of the automatic stay to eviction proceedings involving residential tenancies. The Senate
version of the legislation amending the Code also contains new language concerning the
assumption of leases of real property. The impact of these proposed changes will also
be discussed below.

When a tenant stops an eviction by filing for protection under the Bankruptcy
Code, the lease that the landlord has terminated pre-petition basically goes into
overtime. The debtor's effort to assume such a lease may or may not result in sudden
death in overtime.

<h3>Cases That Hold That the Automatic Stay Stops an Eviction</h3>

The facts in the Third Circuit's opinion in <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Atlantic Business and
Community Corp., 901 F.2d 325 (3rd Cir. 1990)</a>, varies somewhat from
the fact scenario that is the concern of this article. In Atlantic Business, the
landlord attempted to dispossess a commercial tenant (a radio station) approximately two
years after the tenant filed a chapter 11 petition. The bankruptcy court found that
the landlord violated the automatic stay provisions of §362, held him in contempt,
and assessed punitive and compensatory damages. The district court affirmed. On appeal,
the landlord argued that the tenant was a mere tenant at sufferance and therefore
§362 did not apply to his efforts to dispossess the tenant. The Third Circuit
stated that the court had not previously addressed the issue of whether the automatic
stay of §362 protected a tenant at sufferance, but noted that the Second Circuit
had addressed this problem in <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re 48th Street Steakhouse Inc., 835 F.2d
427, 430 (2nd Cir. 1987)</a>, which involved the lease of a restaurant.
The Second Circuit in 48th Street Steakhouse held that "mere possessory interest in
real property, without any accompanying legal interest, is sufficient to trigger
protection of the automatic stay." 48th Street Steakhouse at 430. The Third
Circuit in Atlantic Business joined the Second Circuit in holding that a mere
possessory interest in real property is property of the estate under §541, and
therefore protected by §362. Atlantic Business at 328. The Third Circuit's
conclusion was not difficult in light of the fact that the tenant had been a chapter
11 debtor-in-possession (DIP) operating an ongoing business for two years before
the landlord's effort at self-help eviction, but several courts reached the same
conclusion, even though the landlord filed lawful eviction proceedings prior to the
tenant seeking protection under the Bankruptcy Code.

The Sixth Circuit joined the Second and Third in <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Convenient Food Mart
No. 114 Inc., 968 F.2d 592, 594 (6th Cir. 1992)</a>, which
also involved a non-residential tenancy. The court found that the debtor-tenant's
"undisputed possessory interest in the property is the legal interest creating jurisdiction
in this case." Convenient Food Mart at 594. The Sixth Circuit cited <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re
48th Street Steakhouse Inc., supra</a>, and <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Atlantic Business and Community
Corp., supra,</a> as authority, and specifically stated: "We join the other circuits
[Second and Third] in holding that a tenancy at sufferance is a possessory interest
in real property within the scope of the estate in bankruptcy under §541."
Convenient Food Mart at 594. In Convenient Food Mart, the tenant's lease
expired by its own terms on Oct. 31, 1989, but under Kentucky law, the
tenant had a one-year leasehold interest subsequent to the expiration of the lease.
The tenant filed a chapter 11 petition in June 1990 before the expiration of the
one-year holdover period on Jan. 7, 1991. The landlord attempted self-help
eviction after the holdover provision ended in October 1990. The tenant refused to
move, and the bankruptcy court ultimately imposed sanctions on the debtor and its
attorney, requiring them to deliver the premises to the landlord. Since the Sixth
Circuit found that possession of real property under an expired lease constitutes
property of the estate, the court reversed the bankruptcy court's sanctions. Convenient
Food Mart at 595.

However, the above holdings of the circuit courts in <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Atlantic Business
and Community Corp., supra;</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re 48th Street Steakhouse, supra;</a> and <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re
Convenient Food Mart No. 144 Inc., supra,</a> rest on an extremely weak, almost
non-existent foundation. The district court in <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re DiGiorgio, 200 B.R.
664, 673 (C.D. Cal. 1996), vacated, 134 F.3d 971 (9th
Cir. 1998)</a> [because the issue was moot], noted the argument of the amicus curiae

that these cases have little value because they rest on cases that did not actually
analyze the issue of whether possession equates to an equitable interest in property.
The Second Circuit in 48th Street Steakhouse did not actually analyze the issue as
to whether the tenant's naked possession of property constituted an equitable interest
or property of the estate under §541. The Second Circuit relied on <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re GSVC
Restaurant Corp., 3 B.R. 491 (Bankr. S.D.N.Y. 1980)</a>, aff'd., <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…
B.R. 300 (S.D.N.Y. 1980)</a>, which merely assumed arguendo that possession
equated to an equitable interest in property. The Second Circuit also relied on <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…
re Onio's Italian Restaurant Corp., 42 B.R. 319 (Bankr. S.D.N.Y.
1984)</a>, but the court in Onio's, in turn, relied on GSVC Restaurant as
authority. The Third Circuit in In re Atlantic Business and Community Corp.

relied on 48th Street Steakhouse and GSVC Restaurant Corp. The Sixth Circuit in
turn relied on 48th Street Steakhouse and Atlantic Business as authority that a
possessory interest in an expired lease is property within the scope of §541. In
re DiGiorgio at 673. In short (and incredibly), three circuit court cases rest
on the decision of the bankruptcy court in Matter of GSVC Restaurant Corp., and
that the decision gives little or no basis for the holdings in the three circuit
court's decisions.

The court in <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… of GSVC Restaurant Corp., supra,</a> issued one of the earliest
opinions that studied the impact of the then-new Bankruptcy Code on whether the
automatic stay stops eviction proceedings when the lease is terminated pre-petition. In
GSVC Restaurant, the landlord initiated summary eviction proceedings in New York
Justice Court. The landlord obtained a judgment awarding him possession of the premises
that the debtor had used to operate as a restaurant. He obtained both the judgment
and the warrant of eviction on April 12, 1979. The tenant on appeal was able
to stay the eviction proceedings for almost a year. The landlord ultimately prevailed
in appellate court, and the eviction was scheduled for March 25, 1980. Two
hours prior to the actual eviction, the tenant filed a chapter 11 petition. There
was no doubt that the leasehold estate had been terminated under New York law prior
to bankruptcy. GSVC Restaurant at 494.

The tenant argued, however, that its actual physical possession of the premises was
an equitable interest protected by the automatic stay. The court agreed that an
equitable interest in property is property of the estate under §541, but the court
failed to examine whether naked possession of property or tenancy at sufferance was in
fact an equitable interest in property. The court did not explicitly base its holding
on whether the tenant's physical possession of property was property of the estate
protected by the automatic stay. The court instead assumed that the tenant's de facto
possession was a "sufficient nexus to invoke the protection of the automatic stay..."
GSVC Restaurant at 494. Unfortunately, GSVC Restaurant is also cited in several
bankruptcy court and district court opinions as the basis for holding that the tenant's
possession of premises is an equitable interest in property.<a href="#1" name="1a">1</a>

The facts in <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… of Mimi's of Atlanta Inc., 5 B.R. 623 (Bankr.
N.D. Ga. 1980)</a>, aff'd., <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… B.R. 710 (N.D. Ga. 1981)</a>,
were similar to the facts in GSVC Restaurant. The premises in Mimi's also involved
premises used as a restaurant. In Mimi's, the landlord terminated the lease before
bankruptcy by a letter dated Feb. 6, 1980, as provided by the lease agreement.
The landlord instituted eviction proceedings. Before the state court could issue a
writ, the tenants filed a chapter 11 petition. The landlord filed a motion to
modify the stay and in the alternative requested possession of the premises. The court
found that the tenant-debtors had a "scintilla of equitable interest in the landlord's
premises." Mimi's at 627. The court stated that even though the debtor's estate
in the premises "is nothing more than a tenancy at sufferance, such a conclusion does
not preclude a finding that an equitable interest exists for the purposes of
§541(a)-§362(a)(3)." Mimi's of Atlanta at 627. The court cites for
authority an old case, <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Lane Foods Inc., 213 F. Supp. 133
(S.D.N.Y. 1963)</a>, which held that bankruptcy courts have jurisdiction over
disputes involving real property even when the debtor does not have title to the
property and only has possession of the property. Lane Foods at 136. The district
court did not hold that possession equated to an equitable interest in property that
made it property of the estate. The court's holding turns on the jurisdiction of
bankruptcy courts over such matters. The district court in In re Lane Foods Inc.

lifts a quote from an old U.S. Supreme Court case, <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v. Magnolia Petroleum
Co., 309 U.S. 478, 481, 60 S. Ct. 628, 630, 84 L. Ed.
876 (1940)</a>, as the basis of its holding. The quote is at page 136 of
the opinion in In re Lane Foods Inc.:

<blockquote>
Bankruptcy courts have summary jurisdiction to adjudicate controversies relating
to property over which they have actual or constructive possession. And the test
of this jurisdiction is not title in but possession by the bankrupt at the time
of the filing of bankruptcy.
</blockquote>

Mimi's of Atlanta is often cited along with GSVC Restaurants to support the
conclusion that a terminated leasehold estate is an equitable interest and is property
of the estate under §541 as long as the tenant retains possession at the time of
bankruptcy.<a href="#2" name="2a">2</a> The bankruptcy court in Mimi's, however, relied on In re Lane Foods
Inc., a 1963 district court case, which in turn relied on a 1940 U.S.
Supreme Court decision that based its holding upon the jurisdiction of the bankruptcy
court to enjoin ongoing state court proceedings.

Recent cases have carried forward the concept that naked possession of property
under a lease that was terminated prior to bankruptcy is an interest that is property
of the debtor's estate and protected by the automatic stay of §362. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re
Eclair Bakery Ltd., 255 B.R. 121, 133 (Bankr. S.D.N.Y.
2000)</a>, citing <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re 48th Street Steakhouse, supra;</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Nasir, 217
B.R. 995, 997 (Bankr. E.D. Va. 1997)</a>, citing, inter alia, In
re Atlantic Business and Community Corp.; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Caldwell, 174 B.R.
650, 652 (Bankr. N.D. Ga. 1994)</a>, citing <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Mimi's of Atlanta
Inc., supra;</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. 684,
687 (Bankr. N.D.N.Y. 1990)</a>, citing, inter alia, <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re 48th Street
Steakhouse Inc., supra;</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re McMahon Books Inc., 173 B.R. 868,
876 (Bankr. D. Del. 1994)</a>; and <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Coates, 108 B.R. 823,
825-826 (Bankr. M.D. Ga. 1989)</a>.

The U.S. Senate and the House of Representatives have both added subsections to
§362 in the legislation pending before Congress that would amend the Code. The
House version and the Senate version of a new §362 are very different. It is
important to keep in mind, however, that both versions deal only with residential
tenancies, and do not necessarily undo the circuit court holdings in <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Convenient
Food Mart 114 Inc., supra;</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re 48th Street Steakhouse Inc., supra;</a> or
<a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Atlantic Business and Community Corp, supra,</a> which involved commercial
tenancies. The foundation of many decisions in this area, <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… of GSVC Restaurant
Corp, supra,</a> and <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… of Mimi's of Atlanta Inc, supra,</a> also may be unaffected
because those two decisions also involved leases of commercial properties.

The House version of amended §362 would add proposed Paragraphs 22 and 23.
The language of these two paragraphs is as follows:

(22) under subsection (a)(3), of the continuation of any eviction,
unlawful detainer action or similar proceeding by a lessor against a debtor
involving residential real property in which the debtor resides as a tenant under
a rental agreement;
 (23) under subsection (a)(3), of the commencement of any eviction,
unlawful detainer action or similar proceeding by a lessor against a debtor
involving residential real property in which the debtor resides as a tenant under
a rental agreement that has terminated under the lease agreement or applicable
state law...
</blockquote>

Proposed Paragraph 22 gives a blanket exemption from the automatic stay to a lessor
prosecuting an eviction action against a debtor occupying residential property when the
eviction proceedings were initiated before bankruptcy. Proposed Paragraph 23 allows a
landlord to commence an eviction of a residential tenant after the filing of a
bankruptcy petition, but only when the lease has been terminated pre-petition.

The Senate version of the new legislation adds Paragraphs 23, 24 and 25 to
§362 as follows:

<blockquote>
(23) under subsection (a)(3), of the commencement or continuation of any
eviction, unlawful detainer action or similar proceeding by a lessor against a
debtor seeking possession of residential property—

<blockquote>
I. on which the debtor resides as a tenant, and

II. with respect to which—

<blockquote>
A. the debtor fails to make a rental payment that first becomes
due under the unexpired specific term of a rental agreement or
lease or under a tenancy under applicable state or local rent
control law, after the date of filing of the petition or during the
10-day period preceding the date of filing of the petition, if
the lessor files with the court a certification that the debtor has
not made a payment for rent and serves a copy of the certification
upon the debtor, or
 B. the debtor has a month-to-month tenancy (or one of shorter
term) other than under applicable state or local rent control law
where timely payments are made pursuant to clause (i) if the
lessor files with the court a certification that the requirements of
this clause have been met and serves a copy of the certification upon
the debtor.
</blockquote></blockquote>

(24) under subsection (a)(3), of the commencement or continuation of
any eviction, unlawful detainer action or similar proceeding by a lessor
against a debtor seeking possession of residential property, if during the
two-year period preceding the date of filing of the petition the debtor or
another occupant of the leases premises—

<blockquote>
III. commenced another case under this title, and

IV. failed to make any rental payment that first became due under
applicable non-bankruptcy law after the date of filing of the petition
for that other case.
</blockquote>

(25) under subsection (a)(3), of an eviction action, to the extent that
it seeks possession based on endangerment of property or the illegal use of
controlled substances on the property, if the lessor files with the court a
certification that such an eviction has been filed or the debtor has endangered
property or illegally used or allowed to be used a controlled substance on the
property during the 30-day period preceding the date of filing of the
certification, and serves a copy of the certification upon the debtor.
</blockquote>

The Senate version of a revised §362 therefore would allow a landlord to proceed
with the eviction of a tenant of residential premises only when the specific exceptions
set out in Paragraphs 23, 24 and 25 above occur. The Senate version is much
more restrictive than the House version of proposed §362.

<hr>
<h3>Footnotes</h3>

<a name="1">1</a> See <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… of R.R.S. Inc., 7B.R. 870, 872 (Bankr. M.D. Fla. 1980)</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… of Ruby's Florida Inc., 11 B.R.
171, 175 (Bankr. M.D. Fla. 1981)</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Clifton Steel Corp., 35 B.R. 732, 735 (Bankr. N.D.N.Y.
1983)</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Onio's Italian Restaurant Corp., 42 B.R. 319, 320 (Bankr. S.D.N.Y. 1984)</a>. <a href="#1a">Return to article</a>

<a name="2">2</a> See <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Lewis, 15 B.R. 643, 644 (Bankr. E.D. Pa. 1981)</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Fidelity American Mortg. Co., 19 B.R.
568, 573 fn. 44 (Bankr. E.D. Pa. 1982)</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Babco Inc., 25 B.R. 325, 328 (W.D. Pa. 1982)</a>;

<a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Pagoda Intern. Inc., 26 B.R. 18, 20 (Bankr. D. Md. 1982)</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… of Marcott, 30 B.R. 633 (Bankr.
W.D. Wis. 1983)</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Trang, 58 B.R. 183, 188 (Bankr. S.D. Tex. 1985)</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… of Terramar Min. Corp.,
70 B.R. 35, 37 (Bankr. M.D. Fla. 1987)</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Caldwell, 174 B.R. 650, 652 (Bankr. N.D. Ga.
1994)</a>. <a href="#2a">Return to article</a>

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Journal Authors

Keith M. Baker

Journal Date

Thursday, November 1, 2001 - 12:00

Bankruptcy Rule

2001