TENANT BANKRUPTCY

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TENANT BANKRUPTCY Presented by GARY S.
KESSLER KESSLER COLLINS, PC 5950 SHERRY LANE,
SUITE 222 DALLAS, TX 75225
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GOALS

• Obtain control of space
• Determine amount and type of claim whether to
  pursue or seek termination by Debtor
• Stay on top of the case and in front of the
  Debtor

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LANDLORD

• Creditor
• Provider of Services after Filing
• Holder of Unexpired Lease
• Special Claim Rules
• Storage Company

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TOP TEN THINGS TO REMEMBER TO MAKE A LANDLORDS
LIFE LESS STRESSFUL IN A TENANT BANKRUPTCY

• If the tenant/debtor can, it will ignore the
  landlord. The landlord must make itself visible
  at the earliest possible time and throughout the
  case.
• The goal of bankruptcy is to rehabilitate or
  liquidate a debtor and apportion its assets to
  creditors.
• A bankruptcy does not necessarily make a bad
  tenant a good tenant. It just puts a little
  more teeth into the remedies a landlord might
  have to encourage the tenant to perform the lease
  properly.
• A secured landlord is better off than an
  unsecured landlord. A subordinated landlord is
  still better off than an unsecured landlord.
• 6. Bankruptcy is like a multi-ringed circus.
  What happens in one ring affects the whole show.
  The landlord should be visible in as many rings
  as possible to be taken seriously.

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TOP TEN THINGS TO REMEMBER TO MAKE A LANDLORDS
LIFE LESS STRESSFUL IN A TENANT BANKRUPTCY

• The automatic stay means exactly what it says. A
  creditor cannot try to collect pre-petition debts
  or interfere with the property of the debtor.
• The tenant/debtors property includes anything
  having to do with the lease. The debtors
  property is also property of the estate. It
  must be preserved for the benefit of the
  tenant/debtor and the creditors.
• Notwithstanding the automatic stay, the landlord
  does have remedies as long as it files
  appropriate motions and/or the issue is handled
  through the attorneys.
• A proof of claim will only get a landlord in the
  front door. There still must be assets to fund
  payment of the claim and the landlord must prove
  damages.
• 1. Try to look at bankruptcy as an opportunity to
  turn a bad situation into a better one.

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SAFE LEASING CLAUSES FOR THE BANKRUPTCY
CONSCIOUS

• Security Deposits
• Lease Guaranties
• Letters of Credit

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SAFE LEASING CLAUSES FOR THE BANKRUPTCY
CONSCIOUS

• Recapture Provisions
• Assignment and Subletting
• Landlord Remedy for an Event of Default
• Event of Default/Bankruptcy Ipso Facto Clauses
• Notice Clauses
• Landlords Liens
• Subordination of Landlords Liens

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FIVE STEP PROGRAM

• How much rent is owed and what is our risk?
• What does the lease look like?
• How does the lease compare to market?
• What information is available to us?
• Make a business decision!!!

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EVALUATE LEASE

• Do we have a Landlords lien statutory or
  contractual?
• Do we have a letter of credit or guaranty?
• Does Tenant own the fixtures?
• Whose obligation to remove them?

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EVALUATE OPTIONS

• Tenant is in trouble what do we do?
• Renegotiate Lease?
• Obtain Recapture Clause
• Clean up fixture issues
• Eliminate notice provisions
• Obtain a release
• Obtain additional collateral
• Letter of credit
• Guaranty

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TERMINATE LEASE?

• Below Market Lease
• Worried about assumption and assignment
• Not caught up in the bankruptcy proceeding
• If space is essential, you can get some leverage

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FIRST 60 DAYS

• First Day Motions
• Motion for Approval of DIP financing
• Motion to use cash collateral
• Motion to extend time to assume or reject lease
• Notice from Court
• Date filed
• Date of Section 341 hearing
• Bar Date

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341 Creditors Meeting

• Short meeting (15 minutes to one hour)
• Presiding officer is Trustee
• 2004 Examination
• Meeting may be continued
• Tapes are available

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PREVENTS ANYONE FROM INTERFERING WITH DEBTORS
PROPERTY OR EFFORTS TO REORGANIZE

• Includes
• Commencement or continuation of lawsuit
• Enforcement of judgments (monetary or otherwise)
• Obtaining possession of property of estate
• Collection efforts
• Set off of debts

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STAYS EFFECT ON LANDLORD/TENANT RELATIONYou
cannot

• Hinder operation of debtors business
• Change locks
• Give eviction notice
• Terminate lease
• Declare a default
• Threaten tenant
• Move property of a tenant that has vacated

• Evict tenant
• Lockout tenant
• Seize tenants property
• Shut off utilities
• Show property to prospective tenant
• Apply security deposit

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STAYS EFFECT ON LANDLORD/TENANT RELATION

• You Can
• Collect rent and other charges which have accrued
  since bankruptcy filing
• Draw down letter of credit
• Take action to continue a security interest in
  property
• Take action to remove tenant whose lease has
  expired by its own terms prior to or during the
  bankruptcy case (this should be done carefully)

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ASSUMPTION OF A LEASE

• Test is business judgment
• Priority claim if rejected after assumption
• Three part test
• Cure or provide adequate assurance of prompt cure
• Compensate or provide adequate assurance of
  compensation for pecuniary loss
• Provide adequate assurance of future performance

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SHOPPING CENTER AMENDMENTS

• Must provide adequate assurance of source of rent
  and show that financial condition and operating
  performance of assignee shall be similar to
  financial condition of operating performance of
  debtor at time of lease
• Percentage rent will not decline substantially
• Assumption or assignment is subject to all
  provisions in the lease including radius, use,
  location and exclusivity and will not breach any
  other lease agreement
• Not disrupt tenant mix

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HOT ISSUE REGARDING ASSIGNMENT

• Designation Rights

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IMPORTANT EXCEPTIONS TO ASSUMPTION AND ASSIGNMENT

• Cannot assign
• If applicable law excuses Landlord from accepting
  performance from any entity other than Debtor
• If Landlord extended financial accommodation to
  Debtor
• If lease terminated prior to bankruptcy

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WHY FILE A CLAIM?

• Only way to get paid
• Previous suits, judgments, awards, etc. Make no
  difference

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LANDLORD CLAIMS

• Secured Extent defined by lease.
• Unsecured Most common
• Administrative Post-petition expense. Highest
  priority
• Prior to rejection
• After rejection
• STUB RENT Issue
• Property Tax / Expenses Pro-rated
• Environmental Did claim arise pre-petition or
  post-petition?

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THE LANDLORD CLAIM CONTINUUM
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CALCULATION OF REJECTION DAMAGES

• Calculate whatever damages are for breach under
  the lease
• Cap the damages at equivalent of one years rent
  reserved in lease
• Or
• Cap the damages at the rent reserved for 15 of
  the remaining time under the lease not to exceed
  three years
• i.e., (10 years x 15 rent for 1.5 years)
• (7 years x 15 rent for 1.05 years)
• All amounts are subject to mitigation if new
  tenant takes possession

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CHAPTER 11 PLAN

• Disclosure Statement
• Voting
• Confirmation
• Cram Down

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SOURCES OF PAYMENT

• Post confirmation operations of debtor
• Sale of property
• Recoveries from lawsuits filed on behalf of
  estate
• Fraudulent conveyances
• Preferences
• Turnover suits
• Business tort and related suits

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EXCEPTIONS TO PREFERENCE

• Intended to be a contemporaneous exchange for new
  value and was a substantially contemporaneous
  exchange
• Debt incurred in the ordinary course of business
  of the debtor and the transferee, made in the
  ordinary course of business and made according to
  ordinary business terms

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EXCEPTIONS TO PREFERENCE

• If a security interest, it
• Secures new value that was given to the debtor to
  acquire the property and
• Was used to acquire the property and
• Was perfected within 20 days after the date the
  debtor received the property