Terminating a lease for default does not mean there is no automatic stay under Section 362(b)(10), according to Bankruptcy Judge Thomas J. Tucker of Detroit, who ruled on an issue where the courts are split.
The debtor was the operator of a hotel who leased the land and building. The landlord issued a notice of default and terminated the lease. The tenant sued in state court, hoping to block eviction. The state court ruled that the tenant had defaulted, that the landlord validly terminated the lease, and that the tenant had no right to possession.
Four days before the date set by the state court for the tenant to vacate, the tenant filed a chapter 11 petition. The debtor appealed to the state appellate court, but the appeal was stayed as a result of bankruptcy.
The landlord sought a ruling by the bankruptcy court that the automatic stay did not apply. The landlord relied on Section 362(b)(10), which provides that the automatic stay does not apply to a lease for nonresidential real property if the lease “has terminated by the expiration of the stated term of the lease before the commencement of or during” bankruptcy.
Similarly, Section 541(b)(2) says that property of the estate does not include the lessee’s interest “under a lease of nonresidential real property that has terminated at the expiration of the stated term of such lease before the commencement of the case . . . .”
Backed by several bankruptcy court decisions, the landlord argued that terminating the lease for default before bankruptcy invoked Section 362(b)(10) and meant there was no automatic stay to prevent eviction and enforcement of the state court’s decision. The landlord wanted Judge Tucker to rule that the automatic stay did not apply.
Under Indiana law, Judge Tucker ruled in his June 18 opinion that he was bound by the doctrine of issue preclusion to view the lease as validly terminated, unless and until the debtor were to win a reversal from the state appellate court. But a terminated lease did not end the discussion, because a landlord ordinarily would need a modification of the automatic stay to evict a tenant even if the lease had been validly terminated.
Thus, Judge Tucker turned to the question of whether there was an exception to the automatic stay under Section 362(b)(10).
Although some courts have ruled that the stay does not apply, Judge Tucker cited the Collier treatise, commentators and several courts that believe termination of a lease for default does not invoke Section 362(b)(10).
In what he viewed as “the only reasonable reading of the statutory language,” Judge Tucker concluded that early termination for default does not square with the pivotal phrase in subsection (b)(10), “terminated at the expiration of the stated term of such lease . . . .” [Emphasis added.]
The year 2034 was to be the end of the term of the lease. From the language of the lease itself, Judge Tucker also held that the stated term of the lease would remain the same even if it were cancelled as a result of the tenant’s default.
Judge Tucker’s opinion does give landlords a ray of hope in drafting new leases. Assume that the lease, in its own language, were to provide that the stated term of the lease would expire upon the tenant’s breach. Would a lease drafted in that fashion invoke Section 362(b)(10) and provide an exception to the automatic stay?
Because the landlord had only sought a declaration about the applicability of Section 362(b)(10), Judge Tucker denied the motion without prejudice to a new motion seeking modification of the stay. His opinion could be read as a hint that he might not modify the stay while the debtor was pursuing a reversal in the state appellate court.