R&E February 2021 Newsletter

On Behalf of | Feb 1, 2021 | Newsletters

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Landlords Must Actively Protect Their Interests In A Tenant’s Bankruptcy To Maximize Recovery

R&E EXCLUSIVE FEATURE STORY by John D. Giampolo February 4, 2021

As a growing number of retailers and other commercial tenants become distressed, landlords need to evaluate how best to respond. One thing is clear, once the tenant files bankruptcy, the landlord must actively protect its interests in the bankruptcy proceeding in order to maximize recovery.

The need for landlords to actively protect their interests in a tenant’s bankruptcy was highlighted in a recent decision from Judge James Garrity, Jr. of the Bankruptcy Court for the Southern District of New York in the case of Flywheel Sports Parent, Inc., et al,1 a national fitness studio chain that filed for Chapter 7. In a case of first impression, a victory was secured but only for those landlords that actively protected their interests by prosecuting objections to the Chapter 7 Trustee’s request for leases be rejected retroactively.

On November 5, 2020, the Chapter 7 Trustee for Flywheel, Angela Tese-Milner, filed an application seeking an order authorizing rejection of leases for space that housed studios, offices as well as an apartment, and for the abandonment of remaining inventory and certain other personal property. The Trustee’s application requested that the lease rejection be effective retroactive to the filing of Flywheel’s bankruptcy petition on September 14, 2020.

While six landlords actively filed and prosecuted objections to the Trustee’s request, the remaining landlords did not. The objecting landlords contended that the lease rejection cannot be effective until the date when a bankruptcy trustee or debtor-in-possession surrenders possession of the leased premises. Objecting landlords further contended that until the leases are rejected under the Bankruptcy Code and the leased premises are surrendered, the landlords are entitled to post-bankruptcy rent, additional rent and other charges allowed under their leases which amounts are to be paid to the landlords as priority administrative expense claims under Bankruptcy Code section 365(d)(3), as opposed to the nonpriority status provided for rent arrears accrued before the bankruptcy.

The court granted the Trustee’s application to reject landlords’ leases and denied the request to reject the leases retroactively to the bankruptcy filing date – but the court limited this protection to only those landlords that filed and prosecuted objections to the Trustee’s request. Judge Garrity ruled that objecting landlords are permitted to file priority administrative expense claims “for rent accrued under the leases up to and including the date of the hearing on [the Trustee’s] motion which was December 1st, 2020.”

This decision in Flywheel shows the benefit of representation by counsel to actively protect landlords’ interests in a tenant’s bankruptcy proceeding and the pitfalls of failing to do so. Here, landlords who failed to file and prosecute objections to the Trustee’s request had their leases rejected retroactively with a significant loss of revenue.

Rosenberg & Estis, P.C. is now even more poised to provide such representation to clients in bankruptcy matters having expanded its Reorganization & Bankruptcy Department with the addition of new member John Giampolo to lead the practice. Members of the firm’s Reorganization & Bankruptcy Department are experienced in representing Chapter 11 debtors, committees, landlords and various other creditors and parties in interest in core bankruptcy proceedings under Chapter 11, Chapter 7 and Subchapter V as well as bankruptcy-related matters such as distressed real estate and other asset sales, in-court and out-of-court restructurings, assignments for the benefit of creditors, and receivership.

1. In re Flywheel Sports Parent, Inc., et al., Case No. 20-12157 (JLG), United States Bankruptcy Court for the Southern District of New York, December 7, 2020 Decision and Order Granting Trustee’s Application for an Order Authorizing Rejection of Leases and Abandonment of Leasehold Contents entered December 31, 2020 [Doc 90].