A recent decision by the U.S. District Court for the Southern District of New York concluded that a landlord who obtains a judgment of possession and warrant of eviction prepetition, yet is stayed from executing on the warrant due to the debtor's bankruptcy filing, may not be entitled to post-petition rent as an administrative expense. In In re Association of Graphic Communications, Inc., No. 07- 10278 (Bankr. S.D.N.Y. July 13, 2010), the court decided that, under New York law, the prepetition warrant of eviction terminated the lease and annulled the landlord-tenant relationship, freeing the debtor from its obligation to pay post-petition rent pursuant to section 365(d)(3) of the Bankruptcy Code. The bankruptcy court's decision was subsequently affirmed by the district court. See In re Association of Graphic Communications, Inc., No. 10-6413, 2011 WL 1226372 (S.D.N.Y. Mar. 31, 2011).
In Graphic Communications, the debtor was a lessee under a lease of non-residential real property. In the summer of 2006, the debtor ceased its business operations and also stopped paying its rent. The landlord served a demand for rent and, when no rent was forthcoming, commenced a nonpayment proceeding against the debtor in state court. The state court entered a judgment of possession and warrant of eviction. The debtor filed a voluntary petition under Chapter 7 of the Bankruptcy Code one day later – just prior to the landlord executing on the warrant of eviction.
Approximately two months after the petition date, the landlord moved for relief from the automatic stay, so that it could conclude the eviction proceedings. The unopposed motion was granted by the bankruptcy court and a law enforcement officer executed on the warrant of eviction. Nearly two years after obtaining stay relief, the landlord filed a motion with the bankruptcy court seeking payment for post-petition rent as an administrative expense of the bankruptcy estate pursuant to section 365(d)(3) of the Bankruptcy Code. Section 365(d)(3) provides, in relevant part, that a "trustee shall timely perform all the obligations of the debtor ... arising from and after the order for relief under any unexpired lease of nonresidential real property, until such lease is assumed or rejected, notwithstanding section 503(b)(1) of this title." The bankruptcy court concluded that, by virtue of the issuance of warrant of eviction prepetition, the lease expired prior to the commencement of the bankruptcy. Accordingly, the bankruptcy court denied the landlord's claim for administrative rent.
According to the bankruptcy court, New York law is clear. The issuance of a warrant of eviction cancels a lease and terminates the landlord-tenant relationship. Accordingly, to the extent a warrant of eviction has been issued prepetition, there is no unexpired lease for a debtor to assume or reject, and thus no obligation to pay postpetition. The landlord, relying on opinions issued in the P.J. Clarke's Restaurant Corp. and Sweet N. Sour 7th Avenue Corp. cases, argued that the potential for reinstatement under state law renders a lease unexpired for purposes of section 365(d)(3) of the Bankruptcy Code. See In re P.J. Clarke's Restaurant Corp., 265 B.R. 392 (Bankr. S.D.N.Y. 2001); In re Sweet N Sour 7th Avenue Corp., 431 B.R. 63 (Bankr. S.D.N.Y. 2010).
In In re P.J. Clarke's, a state court issued a summary judgment order granting the landlord possession of the debtor's leased premises. Unlike the debtor in Graphic Communications, the debtor in P.J Clarke's filed a Chapter 11 petition before a judgment was entered and a warrant of eviction issued. The bankruptcy court found that, under New York law, the lease was not expired at the time of the bankruptcy filing and therefore the landlord was entitled to receive rent at the contract rate until the lease was assumed or rejected. The Graphic Communications court found P.J. Clarke's to be easily distinguishable because: (1) the warrant of eviction was not issued until after the petition date; (2) the debtor took affirmative steps to challenge the nonpayment proceeding; and (3) the debtor was attempting to reorganize and continue business operations on the leased premises.
In Sweet N Sour, as in Graphic Communications, a state court issued a warrant of eviction immediately prior to the debtor's bankruptcy filing. However, the debtor sought to assume the lease and opposed the landlord's motion for relief from the stay. The bankruptcy court conditioned the continuation of the automatic stay and the debtor's commencement of a proceeding in state court to vacate the warrant of eviction upon the debtor's continued payment of post-petition rent. The landlord in Graphic Communications directed the bankruptcy court's attention to the section of the decision in Sweet N Sour in which the court stated that "a lease may be considered unexpired for purposes of performing post-petition obligations pursuant to 365(d)(3) if it was terminated prior to the petition date but could be reinstated under state law." However, unlike the debtor in Sweet N Sour, the debtor in Graphic Communications did not contest the issuance of a prepetition warrant of eviction or the motion for relief from the stay, nor was the debtor seeking to assume the lease.
Both P.J. Clarke's and Sweet N Sour involved Chapter 11 debtors who, as part of their attempts to reorganize, sought to vacate the warrants of eviction and/or challenge the adverse judgments in the nonpayment proceedings. Moreover, the debtors in these cases continued to operate their businesses on the leased premises. In Graphic Communications, the debtor never sought to assume the lease, nor challenge the landlord's motion to lift the stay in order to proceed with the eviction. Therefore, while the bankruptcy court noted that "in certain circumstances, like those in P.J. Clarke's and Sweet N Sour, a debtor's obligations under section 365(d)(3) may remain in effect, despite a prepetition termination of the lease," the factual circumstances of Graphic Communications did not support such a finding. As the landlord-tenant relationship terminated prepetition and the debtor showed no desire to reinstate it, the landlord was not entitled to post-petition rent as an administrative expense.
As the case law demonstrates, landlords might avoid the harsh fate that befell the landlord in Graphic Communications if they act quickly at the commencement of the bankruptcy case. By waiting nearly two months from the petition date to move for relief from the automatic stay, the Graphic Communications landlord guaranteed that at least three months would pass before the premises could be re-let. A landlord who has obtained a warrant for eviction prior to the petition date would be well-advised to move for stay relief as soon as practically possible. Prompt action by a landlord may result in the landlord obtaining the debtor or trustee's consent to modification of the stay or an agreement to pay post-petition rent, while the trustee decides whether to challenge the state court judgment.
Alternatively, if the debtor remains in possession of the leased premises and desires to assume the lease, it appears that, under P.J. Clarke's and Sweet N Sour, a bankruptcy court might allow the debtor to challenge the warrant of eviction in exchange for the continued payment of rent. However, if the debtor has ceased business operations prior to filing for bankruptcy protection it is unlikely that the debtor will later move to assume the lease and the landlord should operate under the assumption that it will receive no additional rent from the debtor. In this situation, it is that important for a landlord to act quickly in order to protect its rights and consult with bankruptcy counsel.
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