Tenants in Bankruptcy: A Primer for...

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Tenants in Bankruptcy: A Primer for Landlords

Garrett S. Ledgerwood


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DisclaimerThe information in this presentation has been prepared by Hershner Hunter LLP (Hershner Hunter) for general informational purposes only and should not be construed as legal advice or to answer specific legal problems you may have.While we try to ensure the accuracy of the information, we cannot guarantee that all of the information is accurate. The law is constantly changing and varies by circumstance. Therefore, information on a given law or legal issue may not be current or apply to your particular situation. You should not act or refrain from acting upon this information without seeking the advice of professional counsel in your jurisdiction. Viewing and use of any of the information on this site does not create an attorney‐client relationship between you and Hershner Hunter.Unless otherwise noted, Hershner Hunter attorneys are admitted to practice only in Oregon. This presentation addresses only the law of Oregon and may not be applicable in other jurisdictions.


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Bankruptcy Overview

• What is bankruptcy?• Origins.• Federal Statutory Scheme.• Fresh Start.

• Chapter 7 vs. 13 vs. 11• Chapter 7 = Liquidation• Chapter 13 = Reorganization for Individuals• Chapter 11 = Liquidation or Reorganization

• Businesses or Individuals


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Bankruptcy Overview—Chapter 7• Liquidation

• Means Testing.

• The Bankruptcy Estate• Prepetition assets to pay prepetition liabilities.

• Chapter 7 Trustee• Takes possession of debtor’s property, liquidates, and

distributes proceeds to creditors.• Exemptions.• Relatively quick process (typically 3 months).

• Discharge• Some exceptions (see below).


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Bankruptcy Overview—Chapter 13

• Consumer Reorganization• Debt limits.

• Pay Debts Over Time• Chapter 13 Trustee

• Debtor/Tenant pays future income to trustee and trustee pays off creditors.

• Also has exemptions.• Payments occur over 3 to 5 years.

• Discharge


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Bankruptcy Overview—Chapter 11

• Can be reorganization or liquidation.• Can be businesses or individual (usually high net

worth).• Debtor/Tenant serves as own trustee.• Creditors committee appointed in larger cases.• Process can take several years.


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Bankruptcy Overview—The Automatic Stay

• Automatic Stay (Bankruptcy Code Sec. 362)• Breathing room. • Bars any actions to:

• Collect a debt.• Obtain possession of property of the estate.

• Applies upon the filing of a case.• Even if you haven’t received notice.

• Multiple exceptions and can get relief from stay.• Damages for violations.• Terminates on entry of discharge (7 vs. 13).

• But Discharge Injunction.

• Co-Debtor stay also applies in chapter 13.


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Bankruptcy Overview—Discharge Injunction

• Discharge (Bankruptcy Code Sec. 524).• At the end of a case.• Creditors rarely paid in full.

• Injunction.• Any act to collect a debt against the debtor personally.• Does not apply to action against property.

• Multiple Exceptions.


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Evicting a Tenant in Bankruptcy-General

• Biggest issue for residential landlords with tenants in bankruptcy is the automatic stay.

• Automatic stay could bar eviction of Debtor/Tenant in bankruptcy because leased premises could be property of the estate.

• Two considerations:• Does the automatic stay even apply?• If it does, how do you get relief from the stay to

continue the eviction?


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Evictions—Does the Stay Apply?

• Whether the stay applies depends on where you are in the eviction process.

• Bankruptcy estate only consists of property that belongs to the Debtor/Tenant on the day it files.

• Whether leased premises are property of the estate depends on whether landlord obtained judgment for possession prior to the bankruptcy filing.

• (1) Default/Expiration > (2) Notice > (3) Termination > (4) FED > (5) Judgment for Restitution > (6) Removal


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Evictions-No Judgment for Possession

• If you have not obtained a judgment for possession (restitution) of the premises prior to the tenant filing for bankruptcy, the leased premises constitute property of the estate.

• Accordingly, if you would like to evict (or continue to evict), you must seek relief from the automatic stay to prior to taking action.

• This includes sending notices (non-payment and no-cause) and commencing FED.

• More on obtaining relief from stay below.


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Evictions--Judgment of Possession Obtained Prior to Bankruptcy Filing—Sec. 362(b)(22) & (l)

• If you have obtained judgment of possession prior to Debtor/Tenant filing bankruptcy, automatic stay generally does not prevent you from obtaining possession of the premises.

• HOWEVER, the stay will apply if the Debtor/Tenant meets certain requirements:

• On bankruptcy petition (Appx. 1) Debtor/Tenant must certify that there are circumstances in which Debtor/Tenant is permitted to cure entire monetary default; and

• The Debtor/Tenant must deposit with Bankruptcy Court any rent that would become due in next 30 days.


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Judgment of Possession—Sec. 362(b)(22) & (l)

• If Debtor/Tenant checks the box on the petition and deposits a month’s rent, automatic stay is in effect for 30 days.

• Automatic stay can then be extended beyond 30 days if:

• Debtor/Tenant cures (and is permitted to cure) entire monetary default; and

• Files certification with the Bankruptcy Court under penalty of perjury that default is cured.

• If Debtor/Tenant fails to check the boxes on the petition, deposit rent, or fails to cure the default, automatic stay terminates and landlord can obtain possession of the property.


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Judgment of Possession—Sec. 362(b)(22) & (l)

• Landlord can contest certification—362(l)(3)• File an objection to the certification with the court and

serve the objection on the Debtor/Tenant (first class mail).• Is not entitled to cure default under state law.

• Traditional state law defenses (habitability, repair and deduct, improper notice).

• Did not cure default in the 30 days.

• Court will hold hearing within 10 days of objection.• Note: Property Managers and LLC owners cannot

represent the landlord in bankruptcy court.• Note: Contest if the default was non-monetary.


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Evictions--Standards for Relief from Stay

• If the landlord has not obtained a judgment for possession of the premises prior to the Debtor/Tenant’s bankruptcy filing, the landlord must seek relief from stay prior to evicting.

• Under Bankruptcy Code 362(d), a landlord is entitled to relief from the stay to continue an eviction if:

• (1) For cause, including lack of adequate protection;• (2) if (A) the debtor has no equity in the property and

(B) the property is not necessary for an effective reorganization; or

• (4) part of a scheme to hinder, delay and defraud (multiple bankruptcy filings, e.g.).


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Evictions—Chapter 7

• In a Chapter 7 Case, residential landlords are likely to receive relief from stay to continue evictions.

• Typically move for relief under Sec. 362(d)(2) for no equity/not necessary for reorganization.

• Because Chapter 7 is a liquidation, no reorganization in process, so relief is generally granted.

• For commercial landlords, more difficult, especially if below-market, long-term lease because considered equity in property.


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Evictions—Chapter 13

• In Chapter 13, obtaining relief from stay to continue eviction is more difficult.

• Generally, there are two avenues:• Cause under Sec. 362(d)(1); or• No equity/not necessary for effective reorganization

under Sec. 362(d)(2).• If the Debtor wants to keep the property, most courts will find

that rented property is necessary for an effective reorganization, both residential or commercial. So, Sec. 362(d)(2) relief is hard to obtain.


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Evictions—Chapter 13--Cause• Under Sec. 362(d)(1) a landlord can obtain relief from

stay to continue/commence an eviction for cause.

• Generally, for landlord tenant cause, you need to have something along the lines of:

• Tenant failing to make post-petition rent payments;

• E.g., Oct. 4 filing, rent due first of month.

• Endangerment to property;

• Illegal substance use; or

• Something under ORS 90.396 warranting 24-hour termination.

• There is an expedited procedure for endangerment or drug use discussed later.


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Evictions—Chapter 13—No Equity

• Alternatively, a landlord can also seek relief from stay to continue/commence an eviction under Sec. 362(d)(2) for lack of equity/not necessary for an effective reorganization.

• Whether you will receive relief will depend on whether the Debtor/Tenant desires to remain in the property.

• If Debtor/Tenant desires to remain, the court will likely find the property is necessary for an effective reorganization even though no equity.


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Evictions—Chapter 13—No Equity• To determine whether the Debtor is intending to keep

the property, you must look at the plan filed in the case. (Appx. 2, Para. 3).

• If your lease is not listed, you can likely obtain relief from stay because the property is not necessary for an effective reorganization.

• If your lease is listed, relief is unlikely. Nevertheless:• Confirm that the amount of default is correct and look at

whether the “Cure Provision” is appropriate.• Under the Bankruptcy Code, to assume, the Debtor must

promptly cure any default (think a month or two).• If the default amount is incorrect or the cure provision is

not prompt, you must object to the plan to preserve your rights.

• If the tenant fails to cure after confirmation, can seek relief from stay to continue eviction for default under the plan.


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Evictions- Expedited Relief for Endangerment and Illegal

Substances—362(b)(23) & (m)

• A landlord can obtain expedited relief from the automatic stay to evict if eviction is based on:

• Endangerment of the property; or• Illegal use of controlled substances on the property.

• Do not need to rely on cause procedure, which can take more than a month.

• To use expedited procedure, prior to commencing/continuing with FED, you must:

• File and serve on the Debtor/Tenant a certification that:• Such an FED has already been filed (if filed prior to bankruptcy);

or• In the 30 days prior to filing the certification the Debtor/Tenant

has endangered the property or used or allowed to be used illegal substances on the property.


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Endangerment and Illegal Substances—362(b)(23) & (m)

• Debtor/Tenant can contest certification with Bankruptcy Court within 15 days after service.

• Can contest on basis that situation did not exist or has been remedied.

• If does not contest, can provide termination notices and commence/continue FED without further order of Bankruptcy Court.

• If Debtor/Tenant contests, Bankruptcy Court will hold an evidentiary hearing within 10 days after Debtor/Tenant files objection to certification.

• If landlord prevails, will get relief from stay.• Must then file or continue FED to obtain possession of

premises.• Think about collateral estoppel.


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Motion for Relief Basics• Forms available on the Court’s website:

www.orb.uscourts.gov• Form 720.50 Instructions - (Appx. 3)• Form 720 Notice of Motion (Appx. 4)• Form 720.80 Motion (Appx. 5)

• Serve on tenant and tenant’s attorney by first class mail.• File with court.• 17 days to respond.• $176 filing fee.• Hearing within 30 days of filing

• If responds, initial hearing will be telephonic; final hearing in person and evidentiary.

• Must use attorney if property held by LLC and no property managers.


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Relief from Stay—Other Options

• Chapter 7• Wait for rejection (60 days after filing).• Wait for the discharge (appx 90 days after filing).

• Chapter 13• Object to confirmation

• Lease must be assumed at confirmation.• Must provide for cure of prepetition default.• See if there is non-monetary default that cannot be cured.

• Wait for surrender (if not assumed). (See OCP, Appx. 6, Para. 10).

• Wait for post-confirmation default (file motion for relief from stay).


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Other Relief from Stay Issues

• Automatic stay remains in effect throughout case, even after confirmation in a Chapter 13 Case.

• Trustee can also assume in chapter 7.• Very rare for residential tenants.• Must assume within 60 days of petition filing,

otherwise rejected.• Must cure any defaults prior to assumption.• Even if assumes, can still seek relief from stay.

• Must show no equity, which usually means above-market lease.


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Proofs of Claim• In order to recover any amounts you are owed from a

Debtor/Tenant in bankruptcy, you generally must file a proof of claim.

• A proof of claim is a simple form where you detailed what you are owed by the Debtor/Tenant (see Appx. 7).

• This could include rent deficiencies and money owed for damages to premises.

• Would also include attorney fees, prevailing party fees, and costs.

• Also includes future rents! (limited to greater of 1 year or 15% of 3 years of rent) Bankruptcy Code 502.

• Attach any evidence of amounts owed to proof of claim (lease, account statement, judgment).

• Make sure to redact personal information (SSN, DOB)!


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Proofs of Claim—Two Types for LLs• General—for prepetition claims.

• Lost rent; damages from former tenant that files for bankruptcy.

• Unpaid prepetition rent.• Plus future rent up to greater of 1 year or 15% of the

remaining term of the lease, not to exceed 3 years. Sec. 502(b)(6).

• 15% provision only comes into play if you have a lease 7 years or longer.

• Administrative (Sec. 503(b)(1))—for damages or claims arising after the petition date.

• Missed rental payments; damage to property after tenant files for bankruptcy.

• Administrative expense, which must be paid on confirmation.


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Time to File Proof of Claim• Chapter 7—Will receive a notice of deadline from

trustee.• Only if there are sufficient non-exempt assets to provide a

distribution to creditors.

• Chapter 13—Depends on status of lease.• For tenant with lease that has already been terminated and

removed from premises, 90 days after meeting of creditors (or 100-115 days after files for bankruptcy).

• For lease that is to be assumed, must file proof of claim 90 days after meeting of creditors.

• For lease that is to be rejected, should file promptly after confirmation, but no later by any deadline set by court.


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Objection to Proof of Claim

• Debtor/Tenant can object to a proof of claim.

• If objection filed, then Bankruptcy Court will hold evidentiary hearing.

• If have judgment from state court, res judicata.


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Payment on Proofs of Claim

• In Chapter 7, will receive payment based on non-exempt assets available.

• Pro rata with other creditors, but typically nothing.

• In Chapter 13, will receive pro rata payment based on debtor’s disposal income.

• Can range from cents on the dollar to payment in full.• Make sure you review the debtor’s plan to see what

you are getting paid. Appx. 2.• If have post-petition damages, make sure and file a

separate proof of claim for these damages.


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Non-Dischargeable Debts

• Section 523(a) certain debts are excepted from discharge.

• Range from taxes, student loans, domestic support obligations, restitution, condo fees, and securities fraud.

• As relevant to landlords, includes fraud (regarding financial condition) and willful and malicious injury to property. 523(a)(2) & (6). If you think this applies to you, consult an attorney.


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Practice Emphasis‐Bankruptcy‐Creditors’ Rights‐Licensed to practice in Oregon and New YorkEducation‐Washington and Lee University School of Law, J.D. (2009)(summa cum laude)(Order of the Coif)‐Texas Tech University, BBA (2001)(cum laude)

Garrett is an attorney in Hershner Hunter’s Bankruptcy and Creditors’ Rights groups. He joined the firm in 2014 and is licensed to practice in Oregon and New York.

Garrett has a broad range of experience advising clients in bankruptcy, restructuring, and finance matters. His practice involves all aspects of in‐court and out‐of‐court restructurings of financially distressed businesses. Garrett’s practice focuses primarily on representation of creditors in foreclosure and distressed debt situations. Garrett also has extensive experience representing creditor committees, lenders, and third‐party purchasers in chapter 11 cases, including in connection with bankruptcy sales, debtor‐in‐possession and exit financing, and plan negotiation and formulation.

Prior to joining Hershner Hunter, Garrett was an attorney with Fried, Frank, Harris, Shriver & Jacobson, as a member of Fried Frank’s New York Bankruptcy and Restructuring group. Prior to joining Fried Frank, Garrett was a law clerk to the Hon. S. Martin Teel, Jr., United States Bankruptcy Judge for the United States Bankruptcy Court of the District of Columbia.

Garrett attended the Washington and Lee University School of Law, where he graduated summa cum laude in 2009. At Washington and Lee, Garrett was the Editor‐in‐Chief of the Washington and Lee Law Review, was elected to the Order of the Coif, and was awarded the American Bankruptcy Institute’s Medal of Excellence in Bankruptcy. Garrett received his undergraduate degree in Economics from Texas Tech University in 2001, where he graduated cum laude.

Garrett grew up in southern New Mexico and is pleased to be returning west. Outside of the office, Garrett enjoys participating in sports, including running, tennis, and golf, and working in his woodshop.

Garrett’s full biography can be found at:http://www.hershnerhunter.com/our‐people/garrett‐s‐ledgerwood

Biography


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Garrett S. LedgerwoodHershner Hunter LLP180 East 11th Ave.

Eugene, Oregon 97401541-686-8511

[email protected]

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