Landlords Evicting Tenants: When Bankruptcy Interferes

All too often, a tenant’s failure to abide by the terms of a lease – whether commercial or residential – takes up a disproportionate amount of a landlord’s focus and efforts.  When a holdover or non-paying tenant files for bankruptcy, the landlord must overcome another obstacle if it wishes to evict the tenant – the automatic stay.

Fortunately, however, there are steps that landlords can take after a tenant’s bankruptcy filing that can promptly and efficiently resolve the obstacles resulting from the bankruptcy filing.

This article discusses common scenarios faced by New York landlords with bankrupt, non-paying tenants (both residential and commercial), and outlines how landlords can obtain possession of their leased property.

The Residential Tenant

When a residential tenant breaches his or her lease by failing to make required lease payments, a landlord typically may, absent a bankruptcy, commence a non-payment and/or eviction proceeding in Landlord-Tenant Court in an attempt to collect the outstanding rent arrears and obtain possession.  Often, to resolve that proceeding, the landlord and tenant will enter into a stipulated judgment of possession, so-ordered by the court (a “Judgment of Possession”), that sets forth the amount and payment terms of the rent arrears, provides for the immediate issuance of a warrant of eviction (which is stayed pending payment of the arrears), and provides that the warrant of eviction executes upon default.

If a tenant in this situation fails to remit payment as required by the Judgment of Possession, and the warrant of eviction issues, he or she may file a petition for relief (typically under Chapter 7 or Chapter 13 of the Bankruptcy Code) to obtain the benefit of the automatic stay under 11 USC § 362.  The automatic stay generally prohibits actions against a debtor and his or her property, and stays the landlord’s efforts to regain possession of its premises through an eviction proceeding.

The landlord can thereafter move to lift the automatic stay in Bankruptcy Court to permit it to pursue its right to the leased premises.   In this example, the Bankruptcy Court should grant the landlord’s motion, given that the lease was terminated by law once the warrant of eviction issued.  [i]  As discussed later in this article, a tenant’s simple possessory interest does not justify the further protection of the automatic stay where a warrant of eviction has issued (thereby terminating the lease)[ii].

Moreover, when a pre-petition (residential) eviction proceeding was commenced and a Judgment of Possession was entered, landlords should be aware of the additional, technical obligations that individual debtors must follow in order to enjoy the benefits of the automatic stay.

To start with, 11 USC § 362(b)(22) states the general rule that the automatic stay does not apply to:

the continuation of any eviction, unlawful detainer action, or similar proceeding by a lessor against a debtor involving residential property in which the debtor resides as a tenant under a lease or rental agreement and with respect to which the lessor has obtained before the date of the filing of the bankruptcy petition, a judgment for possession of such property against the debtor….

However, under 11 USC § 362(l)(1), the debtor may be entitled to a 30-day reprieve from § 362(b)(22) by, among other things, paying the first 30 days’ rent into the Bankruptcy Court, i.e.:

if the debtor files with the petition and serves upon the lessor a certification under penalty of perjury that—

(A) under nonbankruptcy law applicable in the jurisdiction, there are circumstances under which the debtor would be permitted to cure the entire monetary default that gave rise to the judgment for possession, after that judgment for possession was entered; and

(B) the debtor (or an adult dependent of the debtor) has deposited with the clerk of the court, any rent that would become due during the 30-day period after the filing of the bankruptcy petition.

The debtor, in order to enjoy the continued protections of the automatic stay, must also cure the entire monetary default which lead to the Judgment of Possession, in compliance with 11 USC § 362(l)(2), which states:

If, within the 30-day period after the filing of the bankruptcy petition, the debtor (or an adult dependent of the debtor) complies with [§ 362(l)] paragraph (1) and files with the court and serves upon the lessor a further certification under penalty of perjury that the debtor (or an adult dependent of the debtor) has cured, under nonbankruptcy law applicable in the jurisdiction, the entire monetary default that gave rise to the judgment under which possession is sought by the lessor, subsection (b)(22) shall not apply, unless ordered to apply by the court under paragraph (3).

If the debtor fails to comply with either § 362(l)(1) or (2), then under § 362(l)(4) he or she will forfeit the protections of the automatic stay:

If a debtor, in accordance with [§ 362(l)] paragraph (5), indicates on the petition that there was a judgment for possession of the residential rental property in which the debtor resides and does not file a certification under paragraph (1) or (2)—

(A) subsection (b)(22) shall apply immediately upon failure to file such certification, and relief from the stay provided under subsection (a)(3) shall not be required to enable the lessor to complete the process to recover full possession of the property; and

(B) the clerk of the court shall immediately serve upon the lessor and the debtor a certified copy of the docket indicating the absence of a filed certification and the applicability of the exception to the stay under subsection (b)(22).

The Commercial Tenant

Landlords who have obtained a pre-petition warrant of eviction with respect to commercial property are not without their remedies and protections, although commercial debtor-tenants do not need to comply with the same obligations (discussed above) that residential debtor-tenants do.

Suppose, for instance, that a landlord leases commercial property to a tenant, but that the tenant is in default of the lease by holding over.  The landlord will typically commence a holdover proceeding in Landlord-Tenant Court.  It is not uncommon for the parties to resolve that proceeding by entering into a stipulation of settlement, so-ordered by the Court, that provides, among other things, that:

• The tenant admits all of the allegations in the holdover petition and waives any and all defenses;

• The tenant consents to the entry of a final judgment of possession in favor of the landlord that provides for a warrant of eviction to issue, with execution stayed subject to the tenant curing all monetary defaults;

• Execution of the warrant of eviction is stayed to permit the tenant to remain, conditioned upon the tenant’s full and timely compliance with the court order; and

• In the event that the tenant violates the stipulation and fails to cure the default, then the stay of execution of the warrant of eviction is vacated and the landlord may execute upon it and evict the tenant.

If, after the entry of the Order approving the typical stipulation of settlement outlined above, the tenant violates the Order and then files for bankruptcy before the landlord can evict the tenant, the landlord can attempt to challenge the bankruptcy filing as one not made in good faith.  To do so, the landlord would need to show that the tenant’s bankruptcy case is essentially a two-party dispute between the tenant and the landlord (especially if there are essentially no other creditors), and that the tenant filed the bankruptcy petition in a bad faith attempt to frustrate the state court’s Order.

The landlord need not take that course of action, however, given that there is no question that in the scenario described above, under the state court Order, the lease has been terminated and the tenant has no further legal rights under the lease.

The landlord could therefore move to lift the automatic stay so it could evict the debtor-tenant.  Cause would exist because the tenant would not have any interest in the leased property or the lease, with the exception of a possible equitable possessory interest.  However, as mentioned above, a simple possessory interest does not warrant the continued protection of the automatic stay where the underlying lease expired or was terminated prior to the bankruptcy filing and a warrant of eviction has issued.  In In re Liggett, the Bankruptcy Court held that:

Even if bare occupancy were deemed to be an equitable interest in the [premises], and thus property within the meaning of [Bankruptcy] Code § 541, it would not assist the Debtor because that interest is so tenuous as to represent merely a scintilla of an interest insufficient to warrant the protection of the automatic stay.  The bankruptcy courts are consistent in holding that where a lease has been terminated, either by its own terms, by reason of default, or by judicial determination, prior to the filing of the petition, there is no further property interest of the debtor in the premises other than a de facto or technical possessory right, which is insufficient to warrant the continued protection of the automatic stay.[iii]

Similarly, in Bell v. Alden Owners, the District Court stated that issuance of the warrant of eviction by the State Court terminated the Appellant’s Lease and the landlord-tenant relationship.”[iv] Furthermore, the “Chapter 13 filing neither resurrected the Lease nor empowered the Bankruptcy Court to reconsider the propriety of the determinations of the State Court or Appellate Term.”[v] In fact, the debtor-tenant “forfeited any legal right to possess the Apartment upon the issuance of the warrant of eviction.”[vi]

Conclusion

There are many valuable protections available to landlords who have obtained a Judgment of Possession and have caused a warrant of eviction to issue prior to a tenant’s bankruptcy filing – whether that tenant is a commercial or residential tenant.  Those landlords that are cognizant of their tenants’ obligations under the Bankruptcy Code will be best positioned to enforce those rights.

[i] See CLS RPAPL § 749 (issuance of warrant of eviction “cancels the agreement under which the person removed held the premises, and annuls the relation of landlord and tenant.”);see also Bell v. Alden Owners, 199 B.R. 451, 458-59 (S.D.N.Y. 1996) (issuance of warrant of eviction by state court terminated lease and landlord-tenant relationship between landlord and Chapter 13 debtor); and In re GSVC Rest. Corp., 3 Bankr. 491, 494 (Bankr. S.D.N.Y. 1980), aff’d., 10 Bankr. 300 (S.D.N.Y. 1980) (issuance of warrant of eviction by state courtextinguishes debtor’s right to possession, and thereby stay would be subject to modification).
[ii] A mere possessory interest should likewise not warrant the continued protection of the automatic stay where the underlying lease simply expired by its terms prior to the bankruptcy filing.
[iii] 118 B.R. 213, 218 (Bankr. S.D.N.Y. 1990).
[iv] 199 B.R. 451, 458 (S.D.N.Y. 1996).
[v] Id. at 458.
[vi] Id. at 459.

Reprinted with permission from the Nassau County Bar Association. All rights reserved.