As a landlord of commercial property, one of the more frustrating
situations to endure is a tenant in bankruptcy. While the bankruptcy code
provides more protections for commercial landlords than in the residential
context, there are still many gray “no man lands” that can trap a landlord.
One area that can create issues for a landlord is the indemnity
obligation a tenant may owe the landlord under a lease. Consider a scenario where tenant signs a
lease and proceeds to initiate a very expensive build out of the premises only
to file bankruptcy before the construction is completed and the contractor paid. Contractor proceeds to file a mechanics’ lien
on the property. The landlord can be forced to spend significant amounts of
money in litigation and settlement costs with the contractor to resolve and
remove the lien, not to mention the litigation costs in bankruptcy court over
the priority of its related indemnification claim against the tenant debtor.
This was the situation the landlord, WM Inland Adjacent LLC (MW
Inland), found itself in after its tenant, Mervyn’s LLC (Mervyn) filed for
relief under chapter 11 of the Bankruptcy Code.
MW Inland requested that its claim was entitled to priority treatment
under section 365(d)(3) of the Bankruptcy Code while Mervyn objected claiming
it should be treated as a general unsecured claim. Section 365(d)(3) of the Bankruptcy Code
provides that the debtor much timely perform all of its obligations under an
unexpired lease until that lease is assumed or rejected.
Critical to the bankruptcy court’s decision in favor of MW Inland was the
distinction of an “obligation,” which is “something one is legally required to
perform under the terms of the lease” from a “claim,” which is “an unmatured
right to payment.” (WM Inland Adjacent
LLC v. Mervyn’s LLC (In re Mervyn’s Holdings LLC), No. 08-11586, Adv. Pro.
No. 09-50920, 2013 WL 85169 (Bankr. D. Del. Jan. 8, 2013)) The court further
found that the obligation arose when the contractor recorded the mechanics’
liens and sued WM Inland to foreclose upon the liens (prior to rejection of the
lease), which entitled WM Inland’s claim to treatment as WM Inland had
requested under section 365(d)(3).
The takeaway for a commercial landlord is to consult competent
commercial bankruptcy counsel as soon as possible after a tenant files for
relief in the bankruptcy court to develop a useful strategy for preserving pre-and
post-petition claims it might have related to the tenant’s lease obligations.
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