Landlord Liable For Lease Termination Damages

The Seventh Circuit Court of Appeals recently decided that a landlord terminating a lease prior to the bankruptcy of a tenant may be held liable for the receipt of a preferential or fraudulent transfer. This may expose landlords to later having to pay up for taking position of property encumbered by below market leases.

Audrey Noll at Fox Rothschild wrote a compelling article (see link below). article

Tenant Files Bankruptcy: What To Do

Chapter 11 filings by retailers are rising. Here is an outline of a simple strategy for landlords.


Here are three important issues:

I.    Ensure Your Rights To Payment
II.   Will The Lease Be Assumed Or Rejected?
III.  How To Improve Your Odds At Minimal Cost

I.    Ensure Your Rights To Payment. First things first, consult counsel and determine if there is any reason you do not want to file a Proof of Claim.  Then immediately review the tenant's (“Debtor’s”) account and lease files with your bankruptcy counsel. There are three classifications of claims typically filed by landlords:

1) Pre-Petition Claim.
 Everything the Debtor owes you up to the filing of the Bankruptcy Petition.

2) Ordinary Course Administrative Claim.
 Bankruptcy Code Section 365 (d)(3) requires the timely payment of your rent. Is the Debtor using your property to the benefit of the Bankruptcy Estate? Yes, and you are to be paid rent on time from the date the case was filed. If the Debtor is failing in its obligation to keep current on its Post-Petition rent then consider filing a Motion For Stay Relief as a precursor to an eviction proceeding.

3) Lease Rejection Claim. If the Debtor decides to terminate your lease you will be entitled to make a claim for your “Rejection” damages.

II.    Will The Lease Be Assumed Or Rejected?The Tenant will have 120 days to decide to Reject or Assume the lease. This may be extended, for cause (its usually granted), another 90 days. If the lease is assumed all arrearages must be paid immediately or adequate assurance of performance must be provided.

III.    Improve Your Odds At Minimal Cost. One of the best methods for improving your treatment in a Chapter 11 case without coming out of pocket with cash is get appointed to the Creditors' Committee. This is not a big time commitment and you can get lots of bang for the buck. Appoint an administrative staff member to represent your company on the Committee. The Committee will hire professionals (at the expense of the Bankruptcy Estate). Committee members have conference calls as needed. Good professionals will keep the Committee informed and handle the matters on a day-to-day basis. An effective Creditors Committee often will enhance the treatment of unsecured creditors.

Be proactive. Remember get counsel early and ask questions right away. Inquire about the formation of a Creditors Committee.

Is CIT Relevant?

  • CIT provides financing to over 1,000,000 small and mid-sized businesses. 


  • CIT provides more loans than any other lender under the Small Business Administrations most popular program.


    CIT is the provider of capital to America's small businesses. One can argue that there are others such as GE, but no other company has the focus of CIT. Given the other bailouts, saving CIT should be a no brainer. The Wall Street Journal reports that there has not been a ground swell of public support for assistance to CIT.


    Ironically hasn't the public complained that the large banks aren't lending bailout dollars quickly enough to help the economy? CIT likes to make loans, they are good at making loans, and CIT is has the best infrastructure in place for getting out financing for the small businesses that can generate jobs. Importantly they are not punch drunk push-overs that make stupid loans. Their trouble emanates from the current economic contraction.


    The stimulus programs are not going to work unless money is put to work. CIT actually has the infrastructure in place to augment the recovery of small business in America. Here is a great opportunity to save a financial institution worth saving.

US Bankruptcies to Rise 45% in 2009 reports credit insurer Euler Hermes ACI forecasts a 45% increase in bankruptcy filings in 2009. Banks are in danger as US business bankruptcies may be up sharply.


    The FDIC reports year over year charge-offs to commercial and industrial borrowers are up by $4.2 billion as of the end of the first quarter. Credit rating agency DBRS states "business bankruptcies surpassed the peak levels of the previous cycle last year, and there is little to suggest that business bankruptcies have reached their peak."

Commercial Bankruptcy Filings On The Rise

    Chelsea Emery of Reuters covers corporate bankruptcy and restructuring. On Reuters shop-talk blog, Chelsea reports that commercial bankruptcy filings in May were up sharply from the same month a year earlier. 7,514 bankruptcy petitions were filed for businesses in 2009 compared with 5,354 for May 2008.



Improve the Odds of Getting Paid - Form a Creditors' Committee

    The president of a tire company called me to discuss what to do as a result of a customer going into Chapter 11. He asked what could he do that isn’t going to require him to come up with any cash, is not going to take much time, and has the potential to be very effective?

    I responded that participation on an official creditors committee might make the difference in a satisfactory resolution with the customer that filed chapter 11. While there are no guarantees as to the outcome of a case, often I have been able to use the power of a creditors committee to significantly enhance the treatment of unsecured creditors.

    An active creditors committee has a powerful voice in a Chapter 11 case and the ear of the court. Bankruptcy Judges want to hear from the creditors’ committee on the many issues in a Chapter 11 case. Federal law provides for a seat at the negotiating table for committees. A committee’s activities include oversight of the debtor, and scrutinizing debtor’s affairs, and evaluation of the fairness and feasibility of a debtor’s actions. The bottom line is a well-run pro-active committee can create value for unsecured creditors.

    An attractive aspect of official committees is that they are usually structured so that there is no direct charge to the members for the cost of professionals that advise committees. Thus a mechanism is in place to level the playing field for creditors (or sometimes shareholders) in the negotiations that take place in formulating how a debtor will be restructured or liquidated.

    And the absence of a committee can result in the creditors getting the short end of the stick! Don’t assume that someone else is going to be looking out for creditors; it is the responsibility of the creditors to lookout for themselves – make use of this powerful tool – an Official Creditors Committee.

    I’ll write more on this soon, but for now see that a committee gets formed. Call me if you need help.

Will California Go Bankrupt?

    Wall Street Journal columnist John Fund thinks a federal bailout [with conditions] will be negotiated. The state's revenues are in free fall and a budget deal is not expected to be approved next week by voters.


    In a video posted on the Wall Street Journal website, Mr. Fund opines that the Obama administration will provide the money and California will agree to not cut spending.

Global Economic Outlook: The Baseline Scenario

MIT Professor Simon Johnson is a thought leader on the Global Economy. His blog The Baseline Scenario is a great resource for understanding today's financial crisis. Last week he presented his Global Economic Outlook to the Senate Budget Committee.


I'm of the opinion that The Baseline Scenario is the best place on the web to stay easily updated on the  crisis. Johnson and his 2 co-founders are stimulating conversation and making this difficult subject understandable.

Financial Bailouts - A Letter To Congressman Brian Bilbray

Dear Sir:

The goal of federally financed bailouts should only be to augment feasible plans of reorganization, not to prolong the life of businesses beyond hope.

Bailout recipients should be required to devise and execute a feasible "Plan of Reorganization" as in Chapter 11 of the Bankruptcy Code. The financing could be in 2 parts: 1) the first part can provide interim financing while a Plan of Reorganization is developed; and 2) the second part will be "Exit Financing" that should only be provided to companies that can prove a that they have a feasible Plan of Reorganization.

All of the laws to administer the process are present in the Bankruptcy Code, with the exception of any legislation needed to let the government step into the shoes of the provider of the money. The Bankruptcy Courts also provide the only forum where certain issues can be dealt with (renegotiation or cancelation of existing contracts, protection for warrantee holders, etc.).

To handout money without conditions is not fair to the taxpayers, however given the seriousness of the financial problems we are faced as a nation perhaps a structure that requires responsible action by the recipients (with a recovery for the government) makes sense.


Richard Feferman, Certified Insolvency and Restructuring Advisor
Corporate Recovery Associates
3830 Valley Centre Drive, Suite 705-152
San Diego, CA 92130
Tel: (858) 792-7473


Alternative Sources of Recovery: Lehman Brothers' Directors & Officers

 A couple of articles in the Wall Street Journal here and here are the basis for my bet that we are going see claims against Lehman's directors and officers insurance coverage. Perhaps even a fight over who is entitled to make claims against any policies. See Kimberly Melvin's article for background on D&O Policy Proceeds as Bankruptcy Estate Assets.