Counsel for commercial landlords should be aware of the Seventh Circuit’s recent opinion in Great Lakes Quick Lube LP v. T.D. Investments I LLP (In re Great Lakes Quick Lube LP).[1] The Seventh Circuit held that a pre-bankruptcy termination of a lease was a “transfer” to the landlord for purposes of the preferential and fraudulent transfer provisions of the Bankruptcy Code, 11 U.S.C. §§ 547 and 548. Accordingly, the unsecured creditors’ committee could recover the “value” of the leases from the landlord for the benefit of the bankruptcy estate.
The opinion creates significant potential liability for commercial landlords with distressed tenants. When negotiating the termination of a lease, a landlord should be careful to assess the whether the “transfer” fits within any of the defenses to §§ 547 and 548 of the Bankruptcy Code.
In Quick Lube, the debtor (Quick Lube) operated over 100 stores that provided “oil changes and other automotive maintenance services.” Quick Lube typically leased each store location under a long-term lease. Just 52 days before filing bankruptcy, Quick Lube negotiated a termination of two leases with T.D. Investments I LLP (the “landlord”), who was a creditor of Quick Lube.
After Quick Lube filed for bankruptcy, the unsecured creditors’ committee filed an adversary proceeding against the landlord seeking to recover the value of the terminated leases. The committee contended that the termination of the leases was a preferential transfer under § 547 and a constructively fraudulent transfer under § 548. According to the committee, the leases were actually profitable to Quick Lube, and their value could be recovered for the benefit of the bankruptcy estate.
After trial, the bankruptcy court entered judgment for the landlord, concluding that terminating a lease was not a “transfer” for purposes of §§ 547 and 548.
On direct appeal, the Seventh Circuit reversed. In an opinion by Judge Posner, the Seventh Circuit emphasized the breadth of the Bankruptcy Code’s definition of “transfer,” which includes “each mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with (i) property; or (ii) an interest in property.”[2]
Here, Quick Lube “had an interest in property — namely the leaseholds — which it parted with by transferring that interest” to the landlord. This was a “transfer” under the Bankruptcy Code’s definition.
The landlord argued that § 365(c)(3) of the Bankruptcy Code effectively exempted nonresidential lease terminations from the definition of “transfer” because it prohibited debtors from assuming leases if they terminated prior to the bankruptcy case.[3] Therefore, permitting the committee to avoid the lease terminations under §§ 547 and 548 would provide an “end around” § 365(c)(3). The Seventh Circuit disagreed; the committee was not seeking to assume the leases, but merely to recover “the value of the leases” (emphasis in original). Accordingly, the court’s interpretation of “transfer” did not undermine § 365(c)(3).
The Seventh Circuit ultimately remanded the case to the bankruptcy court to determine the value of Quick Lube’s transfer to the landlord and whether the landlord had any defenses to the committee’s claims under §§ 547 and 548.
[1] 816 F.3d 482 (7th Cir. 2016).
[2] 11 U.S.C. § 101(54)(D) (emphasis added).
[3] 11 U.S.C. § 365(c)(3).