In re Amicus Wind Down Corporation, No. 11-13167 (KG) (Bankr. D. Del. Feb. 24, 2012).
Whether the burden of evicting a bankrupt subtenant fell upon the debtor/tenant or landlord?
The Bankruptcy Court for the District of Delaware held that the burden of evicting the subtenant and delivering the premises to the landlord was on the debtor/tenant because of the lack of privity between the landlord and subtenant.
Tara Lattomus of Eckert Seamans prepared this summary.
On March 17, 2008, Friendly Ice Cream Corporation (“Friendly”) entered into a commercial real estate property lease with Park Tysen Associates LLC (“PTA”) for a restaurant located in Staten Island, New York. About ten days later, Friendly entered into a sublease for the premises with Rappan Restaurants, Inc. (“Rappan”).
Friendly filed for bankruptcy under chapter 11 of the Bankruptcy Code on October 5, 2011. One of Friendly’s first day motions sought approval of expedited procedures for the rejection of unexpired leases. The Bankruptcy Court entered an order approving the motion on October 25, 2011 (the “Lease Rejection Order”). The Lease Rejection Order provided that the effective date of rejection could not be before Friendly served a lease rejection notice (“Rejection Notice”) or before Friendly relinquished possession of the premises by delivering the keys and/or security codes to the landlord.
On December 30, 2011, Friendly served the Rejection Notice upon PTA and sent a letter to both PTA and Rappan asserting that possession of the premises was a matter to be determined between them. The proposed effective date of rejection was December 31, 2011. On January 3, 2012, Rappan filed for bankruptcy under chapter 7 of the Bankruptcy Code.
PTA filed an objection to the rejection of the lease asserting that Friendly had not delivered possession of the property pursuant to the Lease Rejection Order. Although Rappan had ceased operations, certain equipment and furniture remained on the premises and Friendly had not delivered the keys or security codes.
Summary of Court’s Reasoning
Judge Kevin Gross held that Friendly was best situated to evict Rappan and deliver the premises to PTA. Under New York law, there was no privity of contract between Rappan and PTA so if PTA attempted to evict Rappan, it would face significant legal hurdles. In addition, section 365(h)(l)(A)(ii) of the Bankruptcy Code provides that upon rejection of a sublease, the subtenant retains its rights under the lease creating more obstacles for PTA. The Court did not accept Friendly’s argument that rejection was effective because it had surrendered its “interests” in the premises via the Rejection Notice and related letter. The Lease Rejection Order required the delivery of possession, not merely the surrender of rights, and in the absence of an eviction proceeding, Friendly could not unilaterally surrender Rappan’s rights. Accordingly, the Court suggested that Friendly file pleadings in Rappan’s chapter 7 proceeding to commence eviction proceedings. Surrender of the premises to PTA would be upon delivery of the keys and/or security codes to PTA.