Commercial Landlords With Tenants In Bankruptcy? Increase Your Right To Payment

Petition to File for Bankrptcy

By Stephen E. Hyam, Esq.

Recently, Clark & Trevithick addressed some of the issues that commercial landlords face when a tenant files for bankruptcy. This week, we will talk about how a commercial landlord may strengthen its right to payment out of the bankruptcy.

Know where you are on the list of priorities

In bankruptcy cases, creditors are paid pursuant to a schedule of priority that is set forth in the Bankruptcy Code. Generally, creditors are paid in the following order:

First, unpaid United States Bankruptcy Court fees are paid.

Second, secured creditors, such the debtor’s mortgage holder are paid.

Third, priority unsecured creditors, such as child support or alimony, taxes, and administrative claims are paid.

Fourth, unsecured creditors, which is everyone else are paid.

Unpaid rent due and owing before the bankruptcy filing is an unsecured claim. Being an unsecured creditor is an unenviable position because not only are there higher priority claims that are paid first, but there is typically a large pool of unsecured creditors who are paid only their pro-rata share of whatever cash is left in the bankruptcy estate. However, if the debtor in bankruptcy remains in possession of the nonresidential leased premises, there are two potential ways for a commercial landlord to claim an administrative claim for unpaid rent incurred after the tenant’s bankruptcy case is filed.

While waiting for the lease to be assumed or rejected, your claim is an administrative claim

As discussed in the prior clarktalkblog article Commercial Landlords – Don’t Fear Tenant Bankruptcies!, leases of nonresidential real property must be assumed or rejected. Until the lease is assumed or rejected, the tenant’s obligations under the lease must be performed. As a result, if the debtor fails to pay rent on nonresidential real property that is incurred after the bankruptcy case is filed, the landlord can claim that the unpaid rent is an administrative claim until the lease is rejected. The lease does not need to provide a benefit to the bankruptcy estate. However, if the lease is rejected, the landlord has an unsecured claim dating back to the date the bankruptcy case was filed. The security deposit can be an offset to rent that was unpaid prior to the bankruptcy case, but is not an offset for administrative claims.

A creditor who provides a benefit to the bankruptcy estate has an administrative claim

A creditor has the right to assert an administrative claim for the actual and necessary costs and expenses in preserving bankruptcy estate assets. Although this alternative path is not specific to rent, there is an argument that the debtor’s post-bankruptcy use of leased nonresidential property forms the basis for a claim that the rent is an allowable administrative expense, so long as the debtor’s use of the leased property confers a benefit to the estate. For example, if the debtor remains in possession of a warehouse that contains estate assets, a landlord may argue that the unpaid rent confers a benefit to the estate by preserving estate assets, justifying an administrative claim for the post-bankruptcy rent.

Facts matter and so does prompt action

While no landlord wants a bankrupt tenant, commercial landlords may have arguments to strengthen their claim. Upon being given notice of a tenant’s bankruptcy filing, the landlord should act promptly to evaluate the facts and identify options for strengthening its position in the case.

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 how a commercial landlord may strengthen its right to payment out of the bankruptcy, please feel free to contact Stephen Hyam at or telephonically at (213) 629-5700.

When Is An Arbitration Agreement Not An Agreement to Arbitrate?

Abitration agreements

By Stephen E. Hyam, Esq.

This year, the California Court of Appeal issued a published decision in Rice v. Downs concluding that a contract requiring arbitration of claims “arising out of” the agreement did not include tort claims that were based on a duty that is separate from the contractual relationship. This holding signaled a shift (some may call it a clarification) in the interpretation of arbitration clauses.

Rice and Downs were members of a limited liability company. The company’s Operating Agreement stated: “…any controversy between the parties arising out of this Agreement shall be submitted to the American Arbitration Association for arbitration in Los Angeles, California or San Francisco, California.” Years after entering into the Operating Agreement, Rice sued Downs in Superior Court alleging that Downs committed torts based on a purported relationship that pre-existed the Operating Agreement. Relying on language in the Operating Agreement, Downs successfully compelled those claims into binding arbitration. The parties then engaged in a lengthy and expensive arbitration proceeding and the arbitrator ruled in Downs’ favor. When Downs entered judgment based on the arbitrator’s decision, Rice appealed the Court’s order compelling certain of the tort claims into arbitration. The Court of Appeal partially reversed the judgment, concluding that some of Rice’s tort claims fell outside of the operating agreement’s arbitration provision.

In evaluating whether the claims were subject to arbitration, the Court of Appeal focused on the scope of the arbitration provision, in particular, the “arising out of” language. The Court of Appeal analyzed broad and narrow arbitration provisions, holding that broad arbitration provisions use language such as “any claim arising from or related to the agreement” or arising in connection with the agreement. These broad provisions were found to encompass tort claims that “have their roots in the relationship between the parties which was created by the contract” and are included in the arbitration provision. The Court of Appeal found that narrow arbitration provisions, including those that use “arising from” or “arising out of” language only encompass disputes that relate to the interpretation and performance of the agreement. Since contract and tort claims may both be subject to arbitration, any dispute about the arbitrability of claims requires a specific evaluation to determine if they “arise out of” the agreement (and, thus, would be arbitrable).

Acknowledging that Rice’s tort claims fall within the “any controversy” language, the Court evaluated the particular claims asserted to determine if they were properly compelled into arbitration. Although the Court found that the particular phrase in the operating agreement (“any controversy…arising out of the Agreement”) was a more narrow arbitration provision, the Court of Appeal concluded that Rice’s tort claims, which were based on violations of “an independent duty or right originating outside of the agreement,” were not subject to arbitration. This analysis led to the Court vacating the judgment of certain of Rice’s claims that pre-dated and were independent of the Operating Agreement. Those claims that fell outside of the arbitration provision were ordered to be tried in Superior Court, even though they had already been litigated during the arbitration proceeding.

Rice v. Downs stands as a reminder that the terms of agreements you read, understood, and entered into years ago may be interpreted differently than you originally expected. This emphasizes the importance of a periodic review of your agreements to identify areas that may need to be revised.

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. If you have any questions about arbitration agreements, please feel free to contact Stephen E. Hyam at by email or telephonically at (213) 629-5700.

After the Judgment – What Happens Now? Part 2

By Stephen E. Hyam, Esq.

I recently discussed the judgment debtor examination process in a Clarktalk post.  In this article, we address other post-judgment enforcement options available to creditors that will help increase the chances of satisfying  their judgments.

Options for Asset Investigation

In addition to judgment debtor examinations, there are other methods to investigate a judgment debtor’s assets. Similar to pre-judgment litigation, a judgment creditor may require that the judgment debtor answer a series of questions, called written interrogatories, and produce documents, called requests for production.  When served with interrogatories and requests for production, the receiving party must respond within 30 days.  If the debtor fails to respond, the judgment creditor may seek a Court order compelling the response and production.  Such order is obtained by filing a motion with the Court.  Bringing a motion will cause delays because, absent exigent circumstances, there is at least a 16 court day delay between filing the motion and hearing the motion.  Additionally, since the hearing must be set when the Court has availability, there can be a delay even greater than 16 court days.  While interrogatories and requests for production are initially less expensive than a judgment debtor examination, they may be less effective.

Once you have information related to the judgment debtor’s assets, the creditor can take a number of different steps to enforce the judgment.

Liens on Personal and Real Property

If a judgment debtor owns real property in California, a judgment creditor may record an Abstract of Judgment with the county recorder where the property is located. Recording the abstract provides a blanket lien on all real property in that county owned by the judgment debtor – even if the judgment creditor is unaware of the judgment debtor’s ownership of the property.  The lien generally lasts 10 years from the date of the judgment.  The lien gives the judgment creditor the right to foreclose upon the property.  The lien will also give notice to the public that the creditor has right to payment if the property is sold, creating a cloud on title.

A personal property lien can be asserted against certain business personal property by filing the appropriate form with the California Secretary of State. The lien gives notice of the judgment creditor’s priority over later lienholders.

Wage Garnishments

Wage garnishment orders compel the judgment debtor’s employer to withhold a portion of the judgment debtor’s earnings. Wages, in this case, include salary, bonuses, commissions, and the like.  Wage garnishments do not take every dollar that is paid to the employee.  Generally, at least 75% of take home/after tax earnings (after deductions for social security, federal and state taxes, state disability insurance, etc.) are automatically exempt from garnishment.  The judgment debtor may also seek a Court order to have even more of the take-home income exempted from the enforcement.  Conversely, on a motion to the Court, a judgment debtor may seek an equitable division of the judgment debtor’s earnings, but such order must factor in the needs of the judgment debtor and anyone who the judgment debtor is required to support.

Assignment Orders

If the judgment debtor has a right to payments due in the future that are not wages, a judgment creditor may apply to the Court for an assignment order. Assignment orders compel a third party to pay the judgment creditor instead of the judgment debtor.  Assignment orders may be useful for capturing payment streams from royalty agreements, rents, accounts receivable, and general intangibles, such as promissory notes.  A judgment creditor must file a motion with the Court for the assignment order.  The assignment order, if issued, must then be served on the third party.  Should the third party ignore the order and pay the judgment debtor, the third party is liable to the judgment creditor for the payment.

Charging Orders

Assets of a partnership or a limited liability company are not subject to enforcement of the judgment debtor partner’s/member’s liability. However, the judgment debtor’s partnership or membership interest is subject to enforcement.  A charging order charges the judgment debtor’s share of partnership or limited liability company profits and any other monies due, or to become due, to the debtor.  If a creditor wants to pursue those interests, the judgment creditor must file a motion with the Court.  Service of the motion creates a lien on the judgment debtor’s interests that lasts until the judgment becomes unenforceable.  Naturally, if the motion is denied, the lien is extinguished.  If the motion for a charging order is granted, the creditor may foreclose on the judgment debtor’s interest, applying the proceeds from the foreclosure to the amount of the judgment.


These are only a few of the options that judgment creditors have to enforce their judgment. With many options available, it is important that you and your counsel carefully consider which enforcement procedures are worthwhile.  Clark & Trevithick’s attorneys are skilled in enforcement procedures and can help you fashion a plan that will help you efficiently and effectively satisfy your judgment.

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. If you have any questions about judgment enforcement options , please feel free to contact Stephen E. Hyam at by email or telephonically at (213) 629-5700.

Judgment Debtor Examinations – After the Judgment – What Happens Now?

By Stephen E. Hyam, Esq.

You filed the lawsuit, litigated zealously, and now the judgment is in your favor. Once there is a final judgment in litigation, you are the judgment creditor and you going to be paid, right?  Not necessarily.  Often, the judgment debtor, the person who has been found to owe the money, will simply not make the payment.  This is when the next phase of the case must begin – enforcing the judgment.

Judgment Enforcement Seeks Assets

The purpose of judgment enforcement is to receive payment. First you need to find out if the judgment debtor has assets.  There are many different statutory rights that a judgment creditor can use to discover and execute against a judgment debtor’s assets.  One such right is a judgment debtor examination.  A judgment debtor examination compels a judgment debtor to testify about his or her assets.

Examination Is Under Oath

The judgment debtor examination is taken pursuant to a court order.  It is taken at the courthouse, after the witness has been sworn to tell the truth.  The witness can be the judgment debtor or a third party who has information about the judgment debtor’s assets or owes money to the judgment debtor.  Often, a court reporter is hired to take an accurate transcript of the examination.  The judgment debtor examination can be accompanied by a subpoena that orders the witness to produce documents.

Since the purpose of the examination is to obtain information concerning the judgment debtor’s assets, the party taking the examination is given a wide scope of inquiry. There are few restrictions on the subject matter of judgment debtor examinations if the inquiry could reveal the existence and location of a judgement debtor’s assets.  The purpose of a judgment debtor examination is “to leave no stone unturned in the search for assets which might be used to satisfy the judgment.”  Topics for examination include bank accounts; present employment; future employment prospects; questions about future or contingent interests such as inheritances; and payments due from third parties to the judgment debtor.  The judgment debtor can also be required to explain why real and personal property was transferred to third parties.

During litigation, there is a statutory privilege that one spouse/domestic partner cannot be compelled to testify against the other. However, this restriction is not applicable to judgment debtor examinations.  While the privilege applies to confidential communications between spouses/registered domestic partners, a judgment creditor may ask about property in which the debtor has an interest that is in the possession or control of the spouse/domestic partner, or any debt over $250 owed to the debtor by his or her spouse/domestic partner, because the existence of assets is not considered a confidential communication.

Disputes about the scope of the inquiry are often handled by the Court on the same day as the examination, so the investigation is not unduly delayed.

Third Parties May Be Ordered To Appear

Third parties often have information related to the judgment debtor’s assets. As a result, the post-judgment examination procedure may also be used with persons or entities who are not subject to the judgment, but may have information regarding the judgment debtor’s assets.  With a declaration establishing good cause, a judgment creditor may obtain a court order compelling a third party to attend an examination and (pursuant to a subpoena) bring documents.  The scope of the examination of a third party is essentially the same – to identify and locate a debtor’s assets.

Judgment Debtor Examinations Create An Automatic Lien on All Personal Property Assets

Judgment debtor examinations create an automatic lien on the debtor’s personal property, giving the creditor an advantage over unsecured creditors as long as the debtor does not file for bankruptcy or conduct an assignment for the benefit of creditors within 90 days of the examination.

Are Judgment Debtor Examinations The Best Choice?

The debtor examination gives the creditor the opportunity to ask questions and review documents. Bank records, for example, give clues about the sources of funds received by the judgment debtor and to whom the judgment debtor makes payments.  In certain situations, a judgment debtor examination may not be the best option.  Every case has unique facts and you should consult with legal counsel to determine the best way to collect on your judgment.

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. If you have any questions about judgment debtor examinations, please feel free to contact Stephen E. Hyam at by email or telephonically at (213) 629-5700.


Data Breach – It’s Not Just For Big Companies

By Stephen E. Hyam |

During the last several years, large businesses and government agencies have fallen victim to electronic data breaches.  The names are well-known:  Target, Home Depot, Anthem, and the Social Security Administration.  While data breaches in big businesses and government agencies garner headlines, small businesses also should determine if their data must be secured.  There are a number of different federal and state laws that apply to data privacy and security.  This article provides a general overview of one of the major California laws.

Your Business Must Protect Personal Information

Companies conducting business in California are required to disclose a breach to California residents whose unencrypted personal information has actually been or is reasonably believed to have been subject to unauthorized access.  Civil Code section 1798.82.  Personal information includes either an individual’s first name or first initial and last name in combination with any one or more of the following:

  1. a) Social security number;
  2. b) Driver’s license number or California identification card number;
  3. c) Account number; credit or debit card number in conjunction with any required security code, access code, or password that would permit access to an individual’s financial account;
  4. d) Medical information;
  5. e) Health insurance information;
  6. f) Information or data collected through the use or operation of an automated license plate recognition system; or
  7. g) A user name or email address, and a password or security question and answer that would permit access to an online account.

Civil Code section 1798.82(h).

This broad definition of “personal information” subjects many businesses to the reporting requirement in the event of a data breach.  If the breach affects more than 500 California residents, the reporting requirement includes not only notifying the affected (or believed to be affected) individuals, but also the California Attorney General.

Depending on the data that your business stores, there may be different requirements for privacy, security, reporting, and liability.  For example, businesses subject to the Health Insurance Portability and Availability Act of 1996 (HIPPA), have different requirements, which will be the subject of future articles.

Penalties for Data Breach Hit The Bottom Line

Companies that suffer a data breach can incur legal and non-legal damages.  On the legal side, the company is exposed to damages from a civil action as well as a potential court order requiring the company to take corrective action.  On the non-legal side, business affected by data breaches typically incur costs for investigation and forensic examination of their systems to identify the problem, consultants to help make recommendations to decrease the risk of future breaches, and data monitoring services for those affected.  Studies show that business also lose customers.

How To Strengthen Your Data Security

If your business stores protected personal information, there are steps you can take to decrease your risk of data breach:

  1. The data should be encrypted. Since the California statutory disclosure obligation relates to unencrypted personal information, encryption is an important step in strengthening data security and decreasing liability.  California law defines encryption as “rendering the data unusable, unreadable, or indecipherable” to anyone without authorization.  Encryption is achieved through security measures that are generally accepted by information security professionals.
  1. Access to the personal information should be restricted through, for example, company policy and isolating the electronic data. Limiting access to personal information helps lessen the potential for accidental or malicious breaches by employees.
  1. Implement a document retention policy – and follow it. Consider how long you keep personal information, review the legal standards for retaining that information, and the business reasons to retain records that contain personal information.  For example, California law requires that certain employment records be retained for three years, however, the statute of limitations for wage and hour violations can be four years.  As a result, we recommend employment records be maintained for at least five years.
  1. Consider cybersecurity insurance.

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 if you have data breach issues.  If you wish to consult with the author of this post or another attorney at Clark & Trevithick, please contact Stephen E. Hyam by email at or telephonically by calling the author at (213) 629-5700.

%d bloggers like this: