2 comments on “COMMERCIAL LANDLORDS – DON’T FEAR TENANT BANKRUPTCIES!”

COMMERCIAL LANDLORDS – DON’T FEAR TENANT BANKRUPTCIES!

Tenant Bankruptcy

By Leslie R. Horowitz, Esq.

The Problem

The term “bankruptcy” usually strikes fear in the hearts of Landlords, sometimes for good reason. Tenants who file for bankruptcy may stop paying rent, and prevent Landlords from regaining possession in order to re-let the premises. Most creditors hear the words “automatic stay” and are concerned they have no recourse. The automatic stay in bankruptcy does stop all proceedings against the Debtor and the Debtor’s property. However, with regard to commercial, non-residential leases, the Landlord is in a stronger position than one might think.

Assumption of Lease

In a Chapter 7 (liquidation), the Trustee, or in a Chapter 11 (reorganization), a Debtor has 120 days from the date of the bankruptcy petition (or a plan is confirmed whichever is earlier) to assume a non-residential lease. Prior to the expiration of the 120 days, the Trustee or Debtor or sometimes even the Lessor may request the court to extend this period an additional 90 days. If the lease is assumed, the Trustee or Debtor is required to cure any defaults and make current payments throughout the bankruptcy case.

Rejection of Lease

If not assumed within 120 days, the lease is deemed rejected.

During the time that a Debtor or Trustee occupies the premises, the Landlord is entitled to administrative rent which places the Landlord pari parsu with other administrative claimants, including the Trustee and the Trustee’s lawyer. Most judges require post-petition rent to be kept current as a condition to staying in Chapter 11.  However, if the Debtor or Trustee rejects the lease, the Landlord is not entitled to an administrative claim for any remaining balance due under the lease. The Landlord is entitled to an unsecured claim as if there was a pre-petition breach of the lease/contract. However, the Landlord’s damages are limited by the Bankruptcy Code to the following formula:

“The claim may not exceed the rent stated by such lease, without acceleration, for the greater of one year, or 15 percent, not to exceed three years, of the remaining term of such lease, following the earlier of the date of the filing of the petition and the date on which such lessor repossessed or the lessee surrendered the leased property, plus any unpaid rent due under such lease, on the earlier of such dates.”

In other words, the longer the lease, the less the Landlord will be able to recover in damages beyond three years. In theory, the Landlord would re-let the premises long before such damages would be realized. If the lease has less than three years left on the term, the Landlord has a greater chance of recovering close to the entire claim.

Under most circumstances, the Landlord is entitled to administrative rent even after rejection if the Trustee or Debtor continue to occupy and use the premises. The majority of Trustees do surrender the premises, but occasionally the Trustee wants to sell the Debtor’s personal property on the premises, which often takes a few months and may result an administrative claim for the Landlord.

Surrender Property

If rejection of the lease occurs, the Bankruptcy Code states that the Trustee or Debtor must immediately surrender the premises to the Landlord. If the Trustee or Debtor does not surrender the premises, the Landlord may file a motion in the Bankruptcy Court to compel surrender. Furthermore, the law provides that the Landlord may seek a writ of possession directly from the Bankruptcy Court. Thus, the Landlord is not required to return to state court, file a notice to pay or quit, file a complaint and litigate.

For Commercial Landlords, all is not lost when a Tenant files for bankruptcy.


Thank you for joining us on CIarkTalk! We look forward to seeing you again on this forum.  Please note that views expressed in the above blog post do not constitute legal advice and are not intended to substitute the need for an attorney to represent your interests relating to the subject matter covered by the blog.  If you have any questions about the article, please feel free to contact Les Horowitz at lhorowitz@ClarkTrev.com or telephonically at (213) 629-5700.

 

0 comments on “Dangerous Liaisons – Be Careful When Transferring Assets”

Dangerous Liaisons – Be Careful When Transferring Assets

By Leslie R. Horowitz |

Clients often ask how to protect their assets.  Some refer to this as “asset protection,” a term that connotes the hiding of assets. Sometimes the request is based on a genuine concern for preservation of assets for family and retirement purposes, and sometimes based on a genuine concern that creditors from business transactions will be unrelenting in attempting to recoup potential losses.  Either way, depending upon the purpose and timing of the transfer, any transfer of assets that is not well thought out and carefully planned may be undone by third party creditors, bankruptcy trustees, assignees for the benefit of creditors and State or Federal Court appointed receivers.

Uniform Voidable Transactions Act

The area of law which governs asset transfers is known as the Uniform Voidable Transactions Act (“UVTA”), which was adopted into law by California commencing January 1, 2016.  Previously, the law governing voidable transfers was referred to as the Uniform Fraudulent Transfer Act and, before that, the Uniform Fraudulent Conveyance Act. The name change is relevant, because of the frequent misconception that common law fraud was being committed with regard to the transfer of assets.  Indeed, the elements of fraud are not required under the UVTA or its predecessors to recover transferred assets.

Transfer to Hinder, Delay or Defraud

The UVTA states that a transaction is voidable under two sets of circumstances.  The first circumstance is when the purpose of the transfer is to hinder, delay or defraud creditors.  This is called “actual fraud” and is judged by a subjective standard.  There are eleven “badges of fraud” that determine actual intent which are set forth in the statute as follows:  (1) Whether the transfer or obligation was to an insider; (2) Whether the debtor retained possession or control of the property transferred after the transfer; (3) Whether the transfer or obligation was disclosed or concealed; (4) Whether before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit; (5) Whether the transfer was of substantially all of the debtor’s assets; (6) Whether the debtor absconded; (7) Whether the debtor removed or concealed assets; (8) Whether the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred; (9) Whether the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred; (10) Whether the transfer occurred shortly before or shortly after a substantial debt was incurred; and (11) Whether the debtor transferred the essential assets of the business to a lienor that transferred the assets to an insider of the debtor.  The more “badges” that a court finds applicable to a transaction, the more likely it is to be determined to be voidable.

If the purpose of the transfer is to hinder, delay or defraud creditors, such a transfer tends to occur in situations such as when a party has a lawsuit against him/her, sets up a new legal entity, such as a corporation or limited liability company and transfers personal or real property into the new legal entity, thus attempting to transfer legal ownership to another party. Some parties attempt to transfer assets directly to their children for similar purposes.  Some parties attempt to transfer assets into a trust, seemingly for estate planning purposes, however many such circumstance may be interpreted to fall within the definition of hinder, delay or defraud creditors. The statute of limitations is generally four years.

Transfer for Less than Reasonable Value

The second kind of voidable transfer occurs when a party makes a transfer without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor either (1) was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction, or (2) intended to incur, or believed or reasonably should have believed that the debtor would incur, debts beyond the debtor’s ability to pay as they became due.  This is generally called “constructive fraud” and is judged on an objective standard.  Similar to “actual fraud,” parties may sell personal or real property to a friend or family member for less than the value of the asset (intending to recover it later), thus preserving value for him or herself.  The statute of limitations is generally four years from the date of the transfer.

Protections are Available

There are methods available to protect a person’s assets.  For business purposes, corporations or limited liability companies may be formed to own assets, such as income producing real property.  If such a legal entity holds assets, generally, neither the shareholder of a corporation nor a member of a limited liability company is liable for the debts of the entity.  If a shareholder or member owns interests in other legal entities, the legal entities are not liable for the debts of the other legal entities.  So, if a bankruptcy is needed for one, it will not affect the assets of the other.

Trusts are a useful and valuable tool for family estate planning purposes, but, in California, a trust does not protect the settlors from their own creditors.  Some trusts may protect assets of from future creditors.

Keep in mind, the new entity, either a trust or a corporation/limited liability company, may be set up to protect assets as long as the “purpose” is not to hinder, delay or defraud creditors and does not render the transferor insolvent at the time of the transfer.  The same rules under the UTVA apply. Again, the statute of limitations is four years, but may be seven years from the transfer if actual fraud can be proven. Should the applicable statute of limitations expire, otherwise voidable transfers of assets may be protected from future creditors.

There are no sure fire ways to protect assets, but consulting with a lawyer for business and family estate planning in advance could avoid future problems.

Thank you for joining us on ClarkTalk!  We look forward to seeing you again on this forum.  Please note that the views expressed in the above blog post do not constitute legal advice and are not intended to substitute the need for an attorney to represent your interests relating to the subject matter covered by the blog.  You should certainly consult legal counsel of your choice when considering this or any other asset protection issue.  If you wish to consult with the author of this post or another attorney at Clark & Trevithick, please contact Leslie R. Horowitz by email  lhorowitz@clarktrev.comat or telephonically by calling the author at (213) 629-5700.