The purpose of this article is to educate legal practitioners and real estate professionals who are unfamiliar with the nuances of bankruptcy law about some of the common issues commercial landlords are likely to face in the event a tenant files a petition for relief under the Bankruptcy Code. While it is certainly helpful to have a familiarity with the provisions of the Bankruptcy Code, for purposes of this article, it is certainly not necessary.
Because this article is intended to be a practical guide for nonbankruptcy professionals, the article first discusses some basics of bankruptcy law and then discusses specific issues that a commercial landlord will likely face in the same sequence as those issues will likely arise during the course of the tenant's bankruptcy case. At the end, this article will address several procedures, both preemptive and reactive, a commercial landlord may choose to implement to mitigate damages resulting from a tenant's bankruptcy filing.
II. Bankruptcy Basics
A. The Bankruptcy Process
Bankruptcy cases involving leases are most likely to be filed under Chapter 7 (liquidation cases for both individuals and businesses), Chapter 11 (reorganization cases, primarily for business, but may include high-net worth individuals), or Chapter 13 (cases involving individuals with regular income).2 All bankruptcy cases are commenced upon the filing of the debtor's petition.3 For the most part, at least insofar as landlords are concerned, it does not matter much whether a tenant's bankruptcy has been commenced under Chapter 7 or Chapter 11.4 In fact, the line between a Chapter 11 reorganization and a Chapter 7 liquidation, while still very much distinct, has become somewhat blurred, as more and more practitioners are filing Chapter 11 petitions though they have no intention of reorganizing but, rather, simply want to liquidate, while retaining control of the process.5 Nevertheless, the following is a brief summary of Chapter 7, Chapter 11, and Chapter 13.
This article was written with the typical factual circumstances in mind. Every legal representation is different, and a simple change in the factual circumstances of a particular client or case can be significant and lead to a different result.
2 See 11 U.S.C. § 109; 2 PHILIP J. HENDEL, LEASE DRAFTING IN MASS.: IMPACT OF BANKR. ON THE LANDLORD-TENANT RELATIONSHIP § 12.1.1 (2005).
3 11 U.S.C. § 301(a) (2008).
4 Indeed, most issues confronted by commercial landlords in bankruptcy cases are governed by Chapters 3 and 5 of the Bankruptcy Code, which apply in all cases administered under Chapters 7, 11, and 13. See 11 U.S.C. § 103(a); David L. Pollack, Defaults, Landlord and Tenant Litigation and Bankruptcies, SN013 ALI-ABA 1255, 1259 (2008).
5 Pollack, supra, note 3, at 1259.