WHEN THE TENANT FILES BANKRUPTCY
Denise L. Page, Esq.
Barron & Stadfeld, PC
50 Staniford Street, Suite 200
Boston, MA 02114
I. EFFECT OF THE FILING OF A BANKRUPTCY PETITION BY A TENANT
Upon the filing of a Bankruptcy Petition, an Automatic Stay is imposed pursuant
to Section 362 of the Bankruptcy Code, which applies to any litigation which may
involve the Tenant (11 U.S.C. section 362, attached as Exhibit A).
This means that no litigation can be commenced or continued against the Tenant,
whether the Tenant is an individual or a company, including Evictions or actions for
Breach of Contract pursuant to a lease, unless and until Relief from the Automatic Stay is
obtained from the Bankruptcy Court.
The theory behind this Stay is that, once the Tenant/debtor has filed for protection
of the Bankruptcy Court, all property in which the debtor has an interest becomes
property of the “estate” in Bankruptcy, subject only to the control of the Bankruptcy
Court through the Trustee it appoints. It is now the Trustee’s determination as to what
property of the debtor should be liquidated to pay debts, is excluded from liquidation, and
which debts will be paid in whole or in part and/or discharged as a result of the
Bankruptcy Petition. 11 U.S.C. sec. 541.
A. Assumption or Rejection of a Lease by the Trustee in Bankruptcy
The Trustee must examine any leases of which the Tenant may be a party, and decide
as Trustee whether to “assume or reject” that lease, or whether the lease may be assigned,
since leases are considered to be potential “assets” of the debtor’s estate.
1. Assumption of the Lease
If the Trustee assumes the lease, then all the terms of the lease will be adhered to,
and the Tenant will continue to remain in possession of the premises just as if no
Bankruptcy Petition was ever filed. If the Trustee decides to reject the lease, then
possession of the leased premises reverts back to the Landlord.
If the lease is assumed, the obligations thereunder become obligations of the
estate, and any default of the lease obligations which occur after the lease is assumed
will give rise to a claim that the rent that the Landlord is entitled to is an expense of
administering the estate in Bankruptcy, which is a priority claim entitling the
Landlord to collect 100 cents on the dollar. see In Re City Stores Co., 21 B.R. 809
If the lease is in default, and the trustee wants to assume it, the trustee must:
a. cure, or provide adequate assurance of prompt cure of the default;
b. compensate the Landlord for any actual loss arising from the default;
c. and provide adequate assurance of future performance under the lease.
11 U.S.C. sec. 365(b)(1)
This requires a motion and an order at the Bankruptcy Court authorizing the
assumption, which the Landlord has notice and right to object.
2. Rejection of the Lease
The Tenant is required to pay all of the costs of any breach of the lease in the
event that the Trustee rejects the lease. The Landlord may file a Proof of Claim for
damages arising out of the rejection. 11 U.S.C. sec, 502(b)(6). This section limits
damages for rejection of a lease to “the rent required by the lease without acceleration
for the greater of one year or 15 percent, not to exceed 3 years or the remaining term
of the lease.”
3. Assignment of the Lease
The Trustee may decide to assign a (usually commercial) lease to another party if
the rental value of the premises on the open market is significantly more than the
contract rent. The Trustee is required to perform all the obligations of the Tenant in a
commercial lease arising from and after the entry of the order for relief until the lease
is assumed or rejected. 11 U.S.C. sec. 365(d)(3). Although this applies, it doesn’t
4. Time for Acceptance or Rejection by Trustee
The Trustee has up to 60 days to assume or reject both non-residential or
residential leases. 11 U.S.C. sec 365(d)(1) and (4).
a. Commercial Leases --- The Trustee may request up to 60 days as a grace
period to perform the obligations of a commercial or residential lease, but the accrued
and unpaid obligations from the date of the filing of the Bankruptcy are due at the end
of that period. 11 U.S.C. sec. 365(d)(3).
The Trustee may not assume any commercial lease which has expired prior to the
filing of the Bankruptcy Petition. 11 U.S.C. 365 (c)(3). The Bankruptcy Court looks
to state law to determine whether or not a lease has been terminated. A lease may be
determined to have terminated either by the termination clauses in the lease itself, or
by the state court.
The Code has invalidated clauses in commercial leases which terminate the lease
by virtue of the Tenant’s filing of a Bankruptcy Petition, and clauses that terminate
the lease upon assignment by a Trustee in Bankruptcy. 4A Collier on Bankruptcy
sec. 70.44(3) (Matthew Bender 14th ed. 1978)
The Bankruptcy Courts appear to have waffled in their evaluation of what
constitutes termination via the state courts. Two separate Bankruptcy cases have held
that, where the execution had not yet been levied upon, even though a judgment for
possession had been issued by the state court, the lease could still be resurrected by
the Trustee. In Korenman v. Barr, 6 B.R. 773 (Bankr. E.D.N.Y. 1980), the Court held
that where a “warrant of eviction” had not been executed, the Tenant’s trustee may
seek a state court order vacating the warrant, If successful, the trustee may thereafter
assume the lease under section 365(a) of the Code.; see also Strasser v. R.R.S., Inc.,
7 B.R. 870 (Bankr. S.D.N.Y. 1985).
The Landlord or Tenant may request an earlier determination of assumption or
rejection of the lease by the Trustee. 11 U.S.C. sec. 365(d)(2).
b. Residential Leases --- filing of Chapter 7 Petition (where debtor seeks to
obtain discharge from debts) Trustee must accept or reject within 60 days or the lease
is deemed rejected.
c. Filing of Chapter 11 or 13 Petition --- (where debtor seeks to reorganize)
Trustee may assume or reject an unexpired residential lease any time prior to the
confirmation of the Bankruptcy Court of a Plan to Reorganize under Chapter 11 or
13. 11 U.S.C. section 365(d)(2); see also Local Bankruptcy Rule 6006-1.
Section 365(d)(3) of the Code requires the Trustee to “timely” perform all
obligations of the debtor under the lease, which arise after the filing of the
Bankruptcy including the payment of rent. However there is no real remedy for
violation of this Code provision. Therefore, the filing of a Motion to force the Tenant
to assume or reject the lease early may bring payment from the Tenant on an ongoing
basis, at least during the period when the Trustee is deciding whether to accept or
reject the lease.
If a lease is not assumed or rejected within that 60 day period, and the Trustee has
not obtained an extension of that period from the Bankruptcy Court, then the lease
will be automatically rejected, and the Trustee is required to immediately surrender
the leased premises to the Landlord. 11 U.S.C. sec. 365(d)(4).
II. Default of the Lease Obligations by the Tenant in Bankruptcy
A. Residential Lease Default
In the case of non-residential leases, once an Order for Relief is entered, the trustee is
obligated to pay the Landlord, on a current basis, charges on account of use and
occupancy of the premises. If the trustee does not make these payments, Landlord may
file a Motion to Compel the trustee to surrender the premises and to reject the lease.
B. Commercial Lease Default
Many commercial leases provide for the payment of a fixed rental and obligate the
Tenant to pay additional sums such as taxes, operating costs, utilities, special services and
the like. If the lease is drafted to define the obligations of the Tenant to reimburse the
Landlord for these costs as constituting additional rent, then the failure of the payment of
these costs will have the same default consequences as the fixed rental sum. 11 U.S.C.
If there has been a default of a commercial lease, the Landlord may also use the
strategy of withholding services or supplies which are incidental to the lease if the lease
is a commercial one, such as cleaning services, parking or security services, elevator
service, etc, but only if the Landlord is not being compensated for those services 11
U.S.C. sec. 365(b)(4)
Under 11 U.S.C. sec. 365(d)(3), when the default of the lease has occurred is
important, since it determines how the Landlord should proceed, and whether relief
should be sought as against the Tenant or the trustee. When there is a Prepetition Default
of the lease by the Tenant, the Landlord should seek Modification of the Automatic Stay
for the purpose of terminating the lease against the Tenant.
Postpetition Defaults give rise to a cause of action/claim against the bankruptcy
estate, and possible termination of the trustee’s right to use the premises.
C. Effect of Automatic Stay on Landlord’s Actions Against Tenant
During the time that the Automatic Stay is in place, any litigation that is pending is
effectively suspended in animation—that is to say, nothing can occur with respect to
discovery, motions, or indeed any Court action whatsoever pending resolution of the
Bankruptcy matter or an Order modifying the Stay.
The Landlord is also prevented from sending any Notices to the Tenant of default,
acceleration, or termination, as these Notices may be deemed “acts to obtain possession
of the property of the estate or to exercise control over property of the estate.” 11 U.S.C.
If a Landlord has a Judgment for possession and account annexed against a Tenant,
no enforcement or collection of that judgment can occur unless or until the Automatic
Stay has been lifted by a Bankruptcy judge. This includes levy on the execution by
attempting to acquire possession, or any action to attempt to collect rental sums due
under a judgment. It also applies to the security deposit. Once a Bankruptcy Petition has
been filed, even if the Tenant has vacated the subject premises and owes rent, the
Landlord may not take possession of the security deposit without first obtaining Relief
from the Automatic Stay.
It is also clear that the Automatic Stay enjoins a Landlord from enforcing any rights
under the lease, in the event of a default which occurs prior to or during the pendency of
the Bankruptcy Petition, and that the Landlord must apply to the Bankruptcy Court for
relief from Stay in order to enforce such rights. see 11 U.S.C. sec. 362(d) and Omni Int’l,
ltd. v. Mimi’s of Atlanta, Inc. 2 C.B.C.2d 805, 5 b.R. 623 (Bankr. N.D. Ga. 1980) aff’d
11 B.R. 710 (N.D. Ga. 1981).
The Stay is in effect until the earliest of the following events:
a. the Bankruptcy case is closed;
b. the Bankruptcy case is dismissed;
c. a discharge is granted to the Tenant/debtor by the Bankruptcy Court; or
d. Relief from the Stay is granted to the Landlord/creditor.
11 U.S.C. sec. 362(c)
1. Commercial Property
An important exception from the Automatic Stay is available to Landlords of
commercial property. If the lease for commercial premises expires by its terms
prior to or during the Bankruptcy proceeding, and the commercial Tenant
continues to occupy the subject premises after the expiration of the lease, the
commercial Landlord may proceed to compel the commercial Tenant to vacate,
without first seeking any modification or relief from the Automatic Stay from the
Bankruptcy Court. 11 U.S.C. sec. 362(b)(10); In the Matter of Hejco, Inc., 87
B.R. 80 (Bankr.D.Neb. 1988). This is because the lease ceases to be “property of
the debtor’s estate” once it has expired. However, if the commercial Landlord
seeks to evict a commercial Tenant by virtue of a judgment for possession, or for
grounds that the lease has been prematurely terminated due to non-payment of
rent or other breaches of the commercial lease terms, the Landlord must seek
permission from the Bankruptcy Court to proceed with a Request for Relief from
2. Grounds for Seeking Relief from Stay
The Landlord may petition the Bankruptcy Court for Relief from Stay by
Motion requesting to either terminate, annul, modify or condition the Stay for
purposes of commencing or continuing with Summary Process litigation, or to
enforce a Summary Process Judgment or Execution. 11 U.S.C. sec. 362(d). The
grounds for seeking such relief are set forth as follows:
a.) Lack of Adequate Protection
This is considered the “for cause” provision as to when the Relief from
Stay should be granted. The Bankruptcy Code is less than clear as to what
circumstances entitle a Landlord to proceed against a Tenant by granting
Relief from Stay because the Landlord lacks adequate protection of his/her
interest in the leased property. This provision generally applies to the
assignment of rent.
Nevertheless, some courts have held that a Landlord’s right to payment
under section 365(d)(3) constitutes an interest which is entitled to “adequate
protection” if there is no ongoing payment of rent. In Re RB Furniture, Inc.,
141 B.R. 706, 714 (Bankr. C.D. Cal. 1992); In Re Mr. Gatti’s Inc., 164 B.R.
929, 946 (Bankr. W.D. Tex. 1994)
b.) No Equity of the Debtor
This is primarily targeted to provide relief to creditors who hold
mortgages, when the debtor has no equity in the property. 11 U.S.C. sec.
362(d)(2). The legislative history of this code provision indicates specifically
“The section is not intended to apply if the business of the debtor is managing
or leasing property...even though the debtor has no equity if the property is
necessary to an effective reorganization of the debtor.” 124 ong.Rec.
H11,092-93 (Sept. 28, 1978); see Empire Enter.,Inc. v. Koopman’s, 6
C.B.C.2d 1414, 1417-21, 22 B.r. 395, 405-08 (Bankr. D. Utah 1982.
(1.) Relief from Stay to Obtain Possession of Premises
In general, the Stay will not be modified solely because:
a. There has been a default under the lease before the Bankruptcy
Petition was filed; see Rutland Indus.,Dev.Corp. v. Kors, Inc. 5
C.B.C.2d 872, 13 B.R. 683 (Bankr. D. Vt. 1981)
b. The Landlord has a new Tenant for the premises at equal or higher
rent; Chase v. The Great Scott Food Market, 21 C.B.C. 226,
(Bankr. D.R.I, 1979)
c. It is unclear whether the Tenant/debtor will be able to successfully
reorganize pursuant to Chapter 11 or 13; Pennsylvania Real Estate
Inv.Trust v. Fountainbleau Hotel Corp., 515 F.2d 913, 916 (5th Cir.
d. The Tenant has many locations and the premises in question would
not affect the ability of the Tenant to reorganize under Bankruptcy
law; In Re. J.M.Fields, Inc., Food Fair, Inc. arrangements Nos, 78
B 1764-73 (S.D.N.Y., filed October 1978)
A Landlord Will Generally Be Granted A Relief From Stay To Obtain Possession Of The
a) The Landlord can prove that the Tenant has no legal or equitable interest in the
(i.) Commercial leases where tenancy already expired before Bankruptcy
Petition was filed----Landlord should be automatically entitled to Relief from
Stay pursuant to above discussion.
(ii.) Bankruptcy Petition is filed after Notice to Quit and Eviction
Complaint has been served, and time to Answer for Tenant has expired.
Although a Notice to Quit purports to terminate a tenancy, in
Massachusetts, there are defenses that the Tenant can assert which may defeat
a Landlord’s action for possession of the premises, even in non-payment of
rent cases, such as when the Tenant asserts pre-existing violations of the State
Sanitary Code pursuant to M.G.L, Ch. 239 sec. 8A. Therefore, unless the
Tenant has asserted no valid defenses to the eviction, or unless the Landlord
has obtained a judgment and execution, it is arguable that the Tenant still has
an “equitable” interest in the subject property.
iii.) Bankruptcy Petition filed after entry of Final Judgment---
There is a 10 day appeal period after the issuance of a Judgment in an
eviction. When a judgment for possession in favor of Landlord has entered,
but no appeal has been filed within the 10 day period, or an appeal has been
filed and a decision rendered upholding the judgment in favor of the Landlord,
the Tenant/debtor no longer has any interest in the property, either legal or
equitable, and therefore the Landlord is entitled to levy on the execution for
However, the Landlord STILL should seek permission from the
Bankruptcy Court in this instance that the Tenant/debtor has no interest in the
property, and it is entitled to proceed, since although this has been clearly
established in the Bankruptcy Courts of New York, there is no clear decision
from the First Circuit Court of Massachusetts regarding whether or not the
Landlord must still seek permission to levy the execution when there is a final,
The U.S. District Court for the Southern District of New York has found
the Stay inapplicable when the Landlord had a final judgment for possession.
The Court stated in its decision, “Section 362(a) stays any act to obtain
possession of property of the estate, including enforcement of a judgment,
obtained before the commencement of a bankruptcy case, against the property
of the estate. The term “property of the estate”...provides in relevant part that
the estate is comprised of...”all legal and equitable interests of the debtor in
property as of the commencement of the case. Thus the Automatic Stay does
not operate to enjoin actions respecting property in which the debtor no longer
has an interest at the time of the filing of the petition. Because the New York
law of res judicata would preclude the state courts from permitting the Debtor
to relitigate its claims to the leasehold, this Court and the Bankruptcy Court
are equally barred from doing so.” In Re Cohoes Industrial Terminal, Inc.
(S.D.N.Y. 1984) 70 B.R. 214 aff’d without opinion, 831 F.2d 283 (2d Cir.).
The Massachusetts Bankruptcy Court has similarly held that after entry of
a final state court judgment for possession, the debtor/Tenant no longer has an
equitable or legal interest in possession which would prevent a Landlord from
executing on a judgment for possession. In Re Norwood Aviation, Inc.
(Bankr. D. Mass. 1985 47 B.R. 155. However, until there is a local decision
which definitively sets forth the entitlement of a Landlord who holds an
execution for possession obtained before a Bankruptcy Petition was filed to
levy on the execution without any actual Relief from Stay required, the
Landlord should still seek that permission determining that the Tenant has no
interest in the property, from the Bankruptcy Court.
(2.) Relief from Stay to Collect Rental Sums
In no event can the Landlord obtain Relief from Stay to collect past rental sums due
prior to the filing of Bankruptcy Petition, even when there is a final judgment on the
Summary Process action, once a Bankruptcy Petition is filed. To collect past rental sums
due, the Landlord must go through the Bankruptcy Court and file a Proof of Claim, as
(c.) Helpful Practice and Procedures
In light of the vast powers of the Bankruptcy Court regarding leases and tenancies, it
is wise for the Landlord to consider the following procedures in connection with
termination of tenancies before the filing of a Petition for Bankruptcy:
(1.) Notice to Quit served before Bankruptcy Petition is Filed:
If a Notice to Quit has been served, the Landlord should be very careful not to
engage in any act which could be construed to have evidenced an intention to “waive”
All rental checks should be accepted with a limiting endorsement, indicating that
acceptance is without prejudice to or waiver or the Landlords’ rights pursuant to
Tenant’s default, or summary process proceedings.
Landlord should avoid any conduct which can be construed to have “lulled” the
Tenant into a false sense of security, leading the Tenant to believe that Landlord does
not intend to pursue an eviction action, seek possession, or other promises. In
addition, the Landlord should be careful to avoid conduct that may be deemed to
constitute harassment. No statements should be made which might indicate that the
Landlord is seeking, or may be able to recoup higher rent for the premises.
Once a Bankruptcy has been filed, the Landlord may not proceed further without
relief from Stay from the Bankruptcy Court, as previously discussed.
(2.) Eviction Complaint before Petition Filed
No Bankruptcy has been filed, the Notice to Quit and Summary Process
proceeding should be pursued vigorously, and as quickly as possible to maximize the
potential that the judgment for possession will become final prior to the filing of the
Bankruptcy Petition. The execution should be obtained from the court as quickly as it
can be, and once the execution for possession is received, it should be levied upon
From a practical standpoint, the following devices are available to a Landlord
once a Bankruptcy Petition has been filed:
i. Motion to Compel Rejection or Assumption of the Lease under section
365(d)(4) which requires the trustee to accept or reject the lease within 60
days of the filing of the Bankruptcy Petition;
ii. Motion seeking Modification or Lifting of the Automatic Stay under
section 362(d); or
iii. Motion to Compel the Trustee to perform the Tenant’s obligations under
iv. Objection to the Plan presented by the Tenant in Bankruptcy Court. The
only drawback to this tactic, is that the plan often is not presented until
several months after the filing of the Bankruptcy Petition, so the Landlord
may lose significant rental sums if this is the only strategy utilized.
v. Objecting to the Debtor’s discharge of the Landlord’s Debt. This is an
Adversary Proceeding which may be filed in the Bankruptcy Court which
the Landlord may file if the Tenant has engaged in an act or omission that
would give the Landlord grounds to object to the discharge of the debt. It
is rare that this occurs
vi. Discovery served by Landlord to Tenant. As a creditor, the Landlord is
entitled to serve Requests for Production of Documents, Admissions, and
Interrogatories to the Tenant along with the Motion to Modify Stay or
Motion to Assume or Reject Lease.
It may be good strategy to file a Motion to Modify the Stay and to Compel
Assumption or Rejection of the lease at the same time, shortly after the Tenant has filed
bankruptcy. This forces the Court to act on one or the other, and it can take up to four to
eight weeks for a hearing. Also, even though the trustee is required to accept or reject the
lease within 60 days, for a number of reasons the trustee sometimes does not act within
the prescribed time period. Consequently, it is wise for the Landlord to protect their
rights to obtain a cure of arrears, and to potentially receive the ongoing rent, or in the
alternative to obtain permission from the Bankruptcy Court to proceed with eviction, to
force the hand of the trustee early on to “fish or cut bait”. Aggressive action most often
results in the Tenant working with the Landlord toward a resolution, get quicker action
from the trustee, or obtain a faster ruling from the Bankruptcy Court.
(d.) Proof Of Claims
Any Landlord who seeks to recoup funds that are due from the Tenant at the time of
the filing of the Bankruptcy Petition must file a Proof of Claim. This includes rental
sums, taxes, damages to property, utilities, etc. All creditors of the Tenant which the
Tenant lists on his or her Petition in Bankruptcy receive notice of the filing of the Petition
along with a blank Proof of Claim form. (refer to sample attached). There is a bar date
on the notice to the creditor by which time the Proof of Claim must be filed. If no Proof
of Claim is filed, then the debt owed to the Landlord may be discharged in Bankruptcy
Section 502(b)(6) of the Code provides that the Landlord is entitled to a claim for
damages resulting from the termination of a lease of real property, but there is a limit to
the claim to the extent it exceeds (a) the rent reserved by such lease, without acceleration,
for the greater of one year, or 15 percent, not to exceed three years, or the remaining
terms of such lease, following the earlier of: the date the petition was filed, the date on
which the Landlord obtained possession of the premises, or the date the Tenant
surrendered the property. (b)any unpaid rent due under such lease, without acceleration,
on the earlier of the dates described in (a).
A Proof of Claim is deemed allowed unless an objection is made to it.
If an Objection is filed, then there is a notice and hearing to determine the amount of
the disputed Claim.
The Claim relating to a debt of a Landlord will be allowed unless—
(1) The Court determines the claim to be unenforceable because there is no
agreement or law to support the Claim;
(2) the Claim is for interest that is not yet due;
(3) if the Claim is for taxes, the amount exceeds the value of the Tenant’s interest in
(4) if the Claim is for services of an insider or attorney of the debtor, the claim
exceeds the reasonable value of the services;
(5) claim is for a debt that was unmatured as of the filing of the Bankruptcy Petition;
(6) for a claim for damages resulting from termination of a lease, the claim exceeds
the limit as described above;
(7) the proof of claim was not timely filed.
It is well settled that a properly executed and filed proof of claim is prima facie
evidence of the validity and the amount of the claim. Bankruptcy Rule 3001(f); 11
U.S.C. sec. 502(a). A party objecting to a proof of claim bears the burden of producing
evidence to defeat the claim. In Re Bildner & Sons 106 B.R. 8 (Bkrtcy.D.Mass. 1989)
(1.) Security Deposits
If within 90 days prior to the filing of the bankruptcy, the Landlord applies a
security deposit to a default of the lease that occurred sometime prior to the
application of the security deposit, the trustee may argue that this is a voidable
preferential transfer pursuant to Section 547b of the Code and attempt to recover the
To support voiding the Landlord’s entitlement to the security deposit, the trustee
1) If the security deposit was applied for accelerated rent not yet due pursuant to the
lease, that the Landlord is an unsecured creditor, and application of the security
deposit is therefore voidable as a preference, since all unsecured creditors must
receive the same payment percentage on their claims at the same time. In Re
Valentine, 125 B.R. 11 (Bankr. S.D. Ohio 1991)
Once the Bankruptcy Petition has been filed, the Landlord is precluded by the
Automatic Stay from applying the security deposit to rent owed unless a Motion for
Relief from Stay is allowed.
If a Landlord has been found to have improperly applied the security deposit, or if the
Landlord has been found to violate the security deposit law M.G.L. Ch. 186 sec. 15B
which provides exactly for the precise circumstances under which the security deposit
can be applied, the Tenant may not be entitled to collect the “treble damages” as
provided, if the Landlord files bankruptcy, in the security deposit statute. This is because
under the Code, the Landlord must be found to have engaged in affirmative misconduct
to defraud the Tenant in applying the security deposit. In Re Bologna 206 B.R. 628, 635
(Bkrtcy.D.Mass. 1997). However, the Court has held in another decision that the security
deposit statute creates a trust relationship and fiduciary duties for the Landlord, and
therefore in the case of Guaracino v. Hoffman 246 B.R. 130 (Bankr.D.Mass 2000) Judge
Young refused to allow the debt for failure to return a security deposit to a Tenant to be
discharged as an obligation pursuant to section 523(a)(4). If the Tenant sues the
Landlord and obtains a judgment, not only for violation of the security deposit law, but a
consumer protection violation pursuant to M.G.L. Ch. 93A, which requires a finding of
willful failure to return a security deposit, and obtains a judgment in state court prior to
the Bankruptcy Petition filing, it is likely to be non-dischargeable as a debt.