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Bankruptcy & Unequivocal Intent To Assume The Lease


The Law on Assumption or Rejection of Leases

Pursuant to Bankruptcy Code §365(a), a debtor in possession of real property, “subject to the court’s approval, may assume or reject any executory contract or unexpired lease of the debtor.” (11 U.S.C. §365(a).) In conjunction with Bankruptcy Code §365(a), the law further provides:

[A]n unexpired lease of nonresidential real property under which the debtor is the lessee shall be deemed rejected, and the [debtor] shall immediately surrender that nonresidential property to the lessor, if the [debtor] does not assume or reject the unexpired lease by the earlier of— (i) the date that is 120 days after the date of the order for relief; or (ii) the date of the entry of an order confirming a plan. (11 U.S.C. §365(d)(4)(A).

Section 365(d)(4)(B)(i) further provides that a bankruptcy court:

may extend the period determined under subparagraph (A), prior to the expiration of the 120-day period, for 90 days on the motion of the [debtor] or lessor for cause. (11 U.S.C. § 365(d)(4)(B)(i).)

In re Scarborough-St. James Corporation,

Facts

On March 15, 2015, the debtor, Scarborough-St. James Corporation (the “Debtor”), voluntarily filed a petition for relief under chapter 11 of the Bankruptcy Code with the United States Bankruptcy Court for the District of Delaware. In its schedule for assets and liabilities, the Debtor included a non-expired commercial lease concerning a shopping center.

Within a month of the Debtor’s petition, the landlord responded by filing a motion seeking relief from the automatic stay to proceed with the landlord’s state court action demanding immediate possession and the Debtor’s eviction. The bankruptcy court granted the landlord’s request. (See In re Scarborough-St. James Corporation (2015) 535 B.R. 60.)

On July 29, 2015, pursuant to Bankruptcy Code §365(d)(4), the landlord filed a motion to terminate the lease and evict the Debtor based on the Debtor’s failure to assume or reject the unexpired lease by the prescribed time in §365(d)(4)(A).

Thereafter, the Debtor filed an opposition wherein the Debtor argued for the application of In re Casual Male Corp’s holding. There the court held that bankruptcy code §365(d)(4) does not mandate the debtor to file a motion to assume the lease within the statute’s prescribed time. (In re Casual Male Corp. (1990) 120 B.R. 256, 261.) Rather “timely and unequivocal statements to the lessor of [debtor’s] intention to assume” the lease during the prescribed period will suffice. (Id.) For that reason, in its opposition, the Debtor argued that it made statements to the landlord regarding its intent to assume the lease.

The District Court’s Analysis

The district court agreed with the bankruptcy court’s holding that the Debtor was time-barred from filing his motion to assume the lease. (See In re: Scarborough-St. James Corporation v. 67500 South Main Street, Richmond, LLC. (2016) 2016 WL 3746580.) Consequently, the Debtor lost the right to continue the lease.

Particularly, the district court agreed that Debtor was not allowed to rely on the “intent” standard set by Casual Male because there was no evidence that the Debtor, itself, made statements to the landlord of its intent to assume the lease. (Id. at *6.) If anything, it was the Debtor’s counsel who made contingent statements to the landlord of assuming the lease. Notably, the district court held that counsel’s statements of assuming the lease were “at best . . . a contingent desire to assume the lease, assuming all issues between the parties [were] decided in the [Debtor’s] favor” in the parallel state action. (Id.)

Even if the Debtor’s counsel made the required unequivocal statement to the landlord, the district court implied that it was the Debtor, and not the Debtor’s counsel, who was required to deliver the statements of intent. (See Id.) Accordingly, the Debtor failed to communicate to the landlord the unequivocal statement of assuming the lease within the prescribed period of time. (Id.)

Final Points

It is important to note that the district court declined to determine if Casual Male’s standard (i.e., the “unequivocal intention”) was sufficient under §365(d)(4). However, until there is law that says otherwise, the district court’s holding guides the actions that could potentially satisfy the Casual Male standard.

First, the debtor, and not the debtor’s counsel, should provide the landlord with the unequivocal statement of assuming the unexpired lease. Also, a debtor should avoid making contingent intentions of assuming the lease. Lastly, whether a debtor elects to make an unequivocal statement, or decides to play it safe by filing a motion to assume the lease, it is imperative that either of these actions fall within the time provisions of the §365(d)(4).

At Schorr Law, our real estate attorneys are constantly faced with changing situations in the landlord tenant context.  If you need help with your real estate matter, contact us today. Phone: 310 954 1877, email: info@schorr-law.com.

By Randy Aguirre, real estate attorney in Los Angeles.

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