Overview of the Bankruptcy Process for Landlords

Bankruptcy law is federal and bankruptcies are filed and litigated in federal court. Texas landlords who are accustomed to waltzing down to their local justice of the peace court to evict their tenants can be shocked and intimidated by the complexity and difficulty of dealing with a tenant who files for federal bankruptcy protection. As soon as that federal bankruptcy petition is filed, the Texas state courts no longer have jurisdiction to hear an eviction suit until either the bankruptcy stay is lifted or the bankruptcy case is dismissed. Many landlords handle simple evictions in Texas without an attorney, but generally no landlord should try to handle a bankruptcy case, or perform any collections activities against a tenant in bankruptcy, without an attorney.

Generally No Automatic Stay if Eviction Judgment Obtained Before Bankruptcy Filing Date. Generally, if the landlord obtains the eviction judgment, on residential property, before the bankruptcy filing date, then the eviction can proceed. 11 U.S.C. 362(b)(22) and (l). In Texas, the tenant cannot file a non-bankruptcy cure certificate under 11 U.S.C. 632(l), and so, the bankruptcy stay should not apply if the eviction judgment occurred before the filing of the bankruptcy petition.

Property endangerment or illegal use of controlled substances. Under 11 U.S.C. 362(b)(23), the landlord can file a certification that the tenant has endangered the property or used controlled substances on the property and the stay does not apply fifteen (15) days after the date that the certification is filed. 11 U.S.C. 362(b)(23), (m). If the debtor files an objection to the certification, then the stay does apply, but the Court must set the objection for hearing within ten (10) days from the tenant’s objection. 11 U.S.C. 362(m)(2)(B).

My Tenant Filed Bankruptcy, Now What? If none of the above rules apply, then the landlord needs to find out whether the tenant will assume or reject the lease. Outside of Chapter 7 (liquidation bankruptcy), the tenant can choose to assume or reject the lease up till the plan confirmation date. 11 U.S.C. § 365(d)(2). In Chapter 7, residential leases are deemed rejected after sixty (60) days of the filing of the bankruptcy petition. 11 U.S.C. § 365(d)(1). For nonresidential property, the deadline is the earlier of the confirmation date or 120 days from the bankruptcy filing date. 11 U.S.C. § 365(d)(4). If the tenant wants to assume the lease, then the tenant can do so regardless of ipso facto clauses, which attempt to draft around the bankruptcy rules. 11 U.S.C. § 365(b)(2). The tenant who wants to assume the lease must cure any default, other than unenforceable ipso facto defaults. 11 U.S.C. 365(b). The tenant may also need to compensate the landlord for any losses due to the default and provide adequate assurance that the lease will be performed in the future. Id. The tenant’s cure must be “prompt.” 11 U.S.C. § 365(b)(1)(A). The landlord’s idea of “prompt” and the bankruptcy court’s idea of “prompt” are probably different since bankruptcy courts have been known to allow tenants to cure pre-petition arrearages over six months.

Post-Petition Rent. The tenant is required to pay post-petition rent under 11 U.S.C. § 365(d)(3). If the tenant fails to pay post-petition rent, then the landlord should file a motion to lift stay or a motion to compel rejection of the lease. Section 365(d)(2) of the Bankruptcy Code allows the court, on the request of any party to the lease, to request that the lease be assumed or rejected within a “specified period of time,” probably ten (10) days from the date of the court’s order on the motion. On a motion to compel rejection of lease, the landlord should show breach (either pre-petition or post-petition, preferably both), undue delay by debtor in deciding to assume or reject, and prejudice to landlord caused by the delay. In re Physician Health Corp., 262 B.R. 290, 295 (Bankr. D. Del. 2001).

Automatic Stay Lifts Upon Rejection of Contract. If a lease is rejected or not timely assumed, then “the leased property is no longer property of the estate and the stay under section 362(a) is automatically terminated.” 11 U.S.C. § 365(p)(1).

Copyright 2017, Ian Ghrist, All Rights Reserved.

Disclaimer: This blog is for informational purposes only. Do not rely on any part of this blog as legal advice. Instead, seek out the advice of a licensed attorney. Also, this information may be out-of-date.