United States: Lease Claims: Sometimes Privity Matters

Last Updated: August 1 2013
Article by Vicki Harding

In re Parrott Broadcasting Ltd. P'ship , 492 B.R. 35 (Bankr. D. Idaho 2013) –

A chapter 7 trustee objected to a proof of claim filed by a landlord for rent and late charges due under a lease.  The debtor was an assignee of the tenant, but was not a party to the lease, and the landlord did not consent to the assignment.   Under the circumstances, the bankruptcy court disallowed the landlord's claims.

Hilo Broadcasting (Hilo) held a license for a radio station and owned a transmission tower located on property of the landlord (Kani).  A lease agreement between Hilo and Kani gave Hilo the right to use a portion of the property for the tower for radio broadcasting purposes.  The lease prohibited assignment of the agreement or any part of Hilo's interest in the agreement.

The debtor (Parrott) acquired the radio station assets, including the tower, from Hilo.  A post-closing agreement between the parties provided that the debtor would assume and accept assignment of Hilo's rights and duties under the lease notwithstanding the prohibition on assignment.  The parties agreed that Hilo would retain the lease in its name, but that the debtor would have all of the benefits under the lease, specifically including access to the tower site.

Kani filed an amended proof of claim in Parrott's bankruptcy asserting that ~$44,000 was due for post-petition rent and late charges (~$19,900 for rent and ~$23,800 for late charges).  Under the Bankruptcy Code and rules, a timely filed proof of claim is deemed allowed, unless a party objects, and is prima facie evidence of the validity and amount of the claim.  If an objection is made (as was the case here), the court must make a determination, with the burden on the objector to overcome the prima facie validity of the claim.

As an initial procedural matter, the response to the trustee's objection was filed by Kani's president (who was not a lawyer).  Although an officer of a corporation may file a proof of claim on behalf of the entity, the court agreed with the trustee that a corporation must be represented by counsel in filing a pleading or appearing in a case.  (The court also noted that the amended proof of claim listed the president, as opposed to Kani, as the creditor.  However, there was no evidence that the claim had actually been transferred by Kani to its president in compliance with the bankruptcy rules.  So, the court continued to treat the claim as held by Kani.)

The court concluded that it could strike Kani's response to the trustee's objections since it was not filed by an attorney.  However, since Kani could ask for reconsideration once it was represented by counsel, in the interests of expediency the court also addressed the merits of the issues.

Although the purchase agreement between the debtor and Hilo required Hilo to obtain third party consents for assignment of contracts, the post-closing agreement recited that it was "impractical to obtain an assignment" of the lease.  The court speculated that Kani either refused to give consent or was never asked to do so.

The agreement between Hilo and the debtor included several provisions intended to isolate the debtor from the landlord, including (1) requiring the debtor to make payments to Hilo, who in turn would remit them to Kani, and (2) requiring that all communications with Kani be conducted exclusively by Hilo.

Regardless, the landlord eventually became aware of their agreement, since it sought to use the debtor's assignment/assumption agreement with Hilo as part of the basis for its lease claim.  However, while acknowledging that there was no doubt that the debtor was liable to Hilo for its obligations as tenant under the lease agreement, the court concluded that the debtor did not have any direct liability to the landlord: Hilo was expressly prohibited from assigning the lease without consent; Kani did not consent; so no privity of contract existed between Kani and the debtor.

In addition, Section 365(d)(4) of the Bankruptcy Code provides that a non-residential real property lease is deemed rejected if it is not assumed within 120 days after the petition date (subject to certain extensions and adjustments).  According to the court, rejection constitutes a breach immediately prior to the bankruptcy, and the unexpired lease is removed from the bankruptcy estate.  In this case the debtor clearly did not assume the lease with Kani.  (Although the case stated as a chapter 11 reorganization, and was converted to a chapter 7 liquidation more than a year later, the conversion does not restart the clock.)

The amended proof of claim included only post-petition rent and late charges.  While acknowledging that if the debtor had been liable under the lease the landlord might have been entitled to a pre-petition claim based on unpaid rent for the remainder of the lease term, the landlord was not entitled recover post-petition rent or late charges based on the lease because the lease was not assumed.

The court made a qualifying comment that if the debtor had been obligated to perform under the lease, the rent obligation would have continued during the first 60 days of the case, and the landlord would have been entitled to an administrative expense claim for that period.  However, Kani did not timely file an administrative claim, so would not be entitled to assert a claim for this period in any event.

Thus, the court concluded that the claim should be disallowed for several reasons:  (1) by default, since the president could not respond on Kani's behalf to the trustee's objection to its proof of claim, (2) the debtor did not have an enforceable obligation to make lease payments to the landlord based on the lack of privity, and (3) even if the landlord could assert a claim against the debtor under the lease, claims for post-petition rent and late charges were improper absent assumption of the lease during the bankruptcy case.

This case suggests that (a) it may not be in a landlord's best interests to simply ignore a lease assignment that is not in compliance with the terms of the lease, and (b) a landlord may want to try to take affirmative action to protect its interests if an assignee files bankruptcy while in possession of the leased premises but without clear liability to the landlord for obligations under the lease.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Vicki Harding
Similar Articles
Relevancy Powered by MondaqAI
Reinhart Boerner Van Deuren s.c.
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Reinhart Boerner Van Deuren s.c.
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions