WHEN THE TENANT FILES BANKRUPTCY

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1 WHEN THE TENANT FILES BANKRUPTCY Landlord-Tenant Law Sterling Education Services August 25, 2015 Houston, Texas H. Miles Cohn Crain, Caton & James, P.C McKinney St., 17 th Floor Houston, Texas Telephone 713/

2 TABLE OF CONTENTS I. The Automatic Stay A. The general rule: Bankruptcy Code 362(a) B. An exception for non-residential leases: Bankruptcy Code 362(b)(10) C. An exception for residential leases: Bankruptcy Code 362(b)(22) and 362(l) D. Obtaining relief from the automatic stay: Bankruptcy Code 362(d) II. Assumption, assignment and rejection of leases A. The general rule: Bankruptcy Code 365(a) and (f) B. Cure of defaults: Bankruptcy Code 365(b) C. Exceptions to the assumption and assignment of leases: Section 365(c)(1): assignments without the landlord s consent Section 365(c)(3): leases that were terminated prepetition D. The tenant s obligation pending assumption or rejection: Bankruptcy Code 365(d)(3) E. The time limits for assumption or rejection: Bankruptcy Code 365(d)(1) and (2) III. The landlord s claim in bankruptcy A. The amount of the landlord s claim B. The landlord s administrative priority C. The landlord s security interests

3 I. The Automatic Stay A. The general rule: Bankruptcy Code 362(a) The automatic stay is the first contact that a landlord or other creditor will have with a new bankruptcy case. This stay, which automatically comes into effect upon the filing of the case, operates to bar any eviction or other enforcement proceeding against the tenant. Specifically, Bankruptcy Code 362(a) provides that the filing of a bankruptcy petition operates as a stay of, among other things: (1) the commencement or continuation... of a judicial... proceeding against the debtor that was or could have been commenced before the commencement of the [bankruptcy] case; (2) the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the [bankruptcy] case; and (3) any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate. This language is broad enough to include any eviction or other enforcement proceeding against a tenant in bankruptcy. See, e.g., Robinson v. Chicago Housing Authority, 54 F.3d 316 (7 th Cir. 1995); In re Smith Corset Shops, Inc., 696 F.2d 971 (1 st Cir. 1982). B. An exception for non-residential leases: Bankruptcy Code 362(b)(10) Bankruptcy Code 362(b) lists various exceptions to the automatic stay, one of which is applicable to non-residential leases. Section 362(b)(10) provides that the automatic stay does not apply to any act by a lessor to the debtor under a lease of non-residential real property that has terminated by the expiration of the stated term of the lease before the commencement of [the bankruptcy]. Thus, the automatic stay will not bar an eviction 1

4 proceeding with respect to a non-residential lease that has terminated by its own terms before the commencement of the bankruptcy. 1 Section 362(d)(10) clearly applies when the stated term of a lease has expired before the bankruptcy. An open question is whether a lease can be terminated by its own terms, within the meaning of this provision, when it is terminated as a result of the tenant s default prior to bankruptcy. The distinction may turn on whether the termination requires the landlord to take action or instead takes effect on its own. C.f. In re Salzer, 180 B.R. 523, 528 (Bankr. N.D. Ind. 1993)(month-to-month tenancy held to have terminated by its own terms when the tenant failed to pay rent); and In re Adkins, 237 B.R. 816 (M.D. Fla. 1999)(tenant allowed opportunity to cure and reinstate lease despite judgment of eviction entered pre-petition). C. An exception for residential bankruptcies: Bankruptcy Code 362(b)(22) and 362(l). The so-called Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, commonly known as BAPCPA, added a limited exception to the automatic stay for residential leases as to which a judgment for possession has been issued prior to the filing of the bankruptcy petition. This exception is provided in Section 362(d)(22), but this must be read together with a safe harbor provision, Section 362(l). The latter section provides that the automatic stay will continue, notwithstanding the issuance of a judgment for possession, if the tenant (i) 1 Section 362(b)(1) should be read together with Bankruptcy Code 541(b)(2), which provides that a leasehold that has expired before commencement of the case is not property of the bankruptcy estate. 2

5 files with the bankruptcy court, together with his or her petition, a sworn statement that the lease default may be cured and the judgment set aside under state law by a monetary payment to the landlord, and that the tenant has deposited with the state court one month s postpetition rent, and (ii) files a further sworn statement with the bankruptcy court, within thirty days, that the monetary payment necessary to cure the default has been paid. If the first statement is not filed with the petition, the safe harbor is inapplicable and eviction may proceed. Section 362(l) applies only if the judgment for possession can be set aside by the payment of a monetary sum, and hence it is only applicable with respect to monetary defaults. In re Griggsby, 404 B.R. 83 (Bankr. S.D.N.Y. 2009). Also, note that Section 362(b)(22) applies only to an existing judgment for possession. Thus this exception to the stay is inapplicable if the tenant has perfected a de novo appeal to county court prior to filing bankruptcy. In re Alberts, 381 B.R. 171 (Bankr. W.D. Pa. 2008). D. Obtaining relief from the automatic stay: Bankruptcy Code 362(d) Relief from the automatic stay, such as by terminating the stay or by conditioning the stay on monthly rental payments, can be obtained through Bankruptcy Code 362(d). Section 362(d) can be particularly effective because of the statutory timetable: Pursuant to section 362(e), the stay terminates thirty days after a motion is filed unless the court, after notice and hearing, orders the stay continued pending a decision. This rule has resulted in the usual practice of setting the hearing within thirty days after the motion for relief from stay 3

6 is filed. Grounds for relief from the stay are found in two statutory provisions. First, the landlord may seek relief from the stay under section 362(d)(1): for cause, including the lack of adequate protection of an interest in property. The primary cause for relief under this provision is the tenant s failure to pay post-petition rents, discussed below at pp The landlord also may seek relief under this provision, however, if the tenant fails to protect or maintain the leased premises. Second, the landlord may seek relief from the stay under section 362(d)(2), at least with respect to non-residential leases: by showing that the debtor has no equity in the property (i.e., there is no net value for which the lease could be assigned) and that the property is not necessary for an effective reorganization. However, it is relevant that the debtor has broad rights to cure defaults and assume the lease, as discussed below. One should not expect relief from the stay under section 362(d)(2) when the debtor has a reasonable chance of assuming the lease. II. Assumption, assignment and rejection of leases A. The general rule: Bankruptcy Code 365(a) and (f) Subject to the cure of defaults and the exceptions discussed below, a debtor in bankruptcy has broad latitude to assume or reject a lease under which it is the tenant. Bankruptcy Code 365(a) allows the debtor, subject to the court s approval, to assume or reject any unexpired lease. Deference is generally given to the debtor s decision under a broad business judgment test. See, e.g., Lubrizol Enterprises, Inc. v. Richmond Metal 4

7 Finishers, Inc., 756 F.2d 1043 (4 th Cir. 1985). Similarly, Bankruptcy Code 365(f) allows the debtor to assign a lease to another tenant, notwithstanding a provision in the lease or applicable law prohibiting such assignment, provided that (i) the debtor first assumes the lease and (ii) the new tenant gives adequate assurance of performance. B. Cure of defaults: Bankruptcy Code 365(b) There are no predicates for the debtor s rejection of a lease, but section 365(b) sets out important requirements for assumption of a lease in the event that there has been a default under the lease. 2 Specifically, section 365(b)(1) provides that if the tenant has defaulted under the lease, the tenant may not assume the lease unless, at the time of the assumption, the tenant: (A) (B) (C) cures, or provides adequate assurance that the [debtor or trustee] will promptly cure, such default; compensates, or provides adequate assurance that the [debtor or trustee] will promptly compensate, a party other than the debtor to such contract or lease, for any actual pecuniary loss to such party resulting from such default; and provides adequate assurance of future performance under such contract or lease. In the event that a lease is assumed, the landlord must therefore be paid all past-due rents, even if the landlord s claim is entirely unsecured. In addition, the debtor must provide adequate assurance of its ability to perform in the future. This does not require a guaranty 2 This provision does not require cure of defaults relating to the debtor s bankruptcy itself. Pursuant to section 365(b)(2), the debtor need not cure defaults arising from the debtor s insolvency, the filing of the bankruptcy case, the appointment of a trustee or custodian, or the failure to pay a penalty imposed as a result of a non-monetary default. 5

8 of future payments, but it does mean that the court may disapprove assumption even when defaults are cured if a poor payment history or other facts raise serious questions about the debtor s ability and intent to perform in the future and no sufficient assurance, such as a guaranty or deposit, is offered. See, e.g., In re Texas Health Enterprises, Inc., 246 B.R. 832 (Bankr. S.D. Tex. 2000). If the lease is in a shopping center, 3 moreover, the statute imposes additional requirements for assumption. Pursuant to section 365(b)(3), adequate assurance of performance must include, with respect to a lease of premises in a shopping center, adequate assurance: A) of the source of rent and other consideration due under such lease, and in the case of an assignment, that the financial condition and operating performance of the proposed assignee and its guarantors, if any, shall be similar to the financial condition and operating performance of the debtor and its guarantors, if any, as of the time the debtor became the lessee under the lease; (B) (C) (D) that any percentage rent due under such lease will not decline substantially; that assumption or assignment of such lease is subject to all the provisions thereof, including (but not limited to) provisions such as a radius, location, use, or exclusivity provision, and will not breach any such provision contained in any other lease, financing agreement, or master agreement relating to such shopping center; and that assumption or assignment of such lease will not disrupt any tenant mix or balance in such shopping center. 3 The statute does not define the term shopping center. Courts have held, however, that a shopping center need not consist of a single building or mall. Rather, the test is whether a series of stores or similar leased premises are operated together, as evidenced by such factors as common advertising, common hours, and common parking. See, e.g., In re Joshua Slocum, Ltd., 922 F.2d 1081 (3 rd Cir. 1990); Matter of Goldblatt Bros., Inc., 766 F.2d 1136 (7 th Cir. 1985). 6

9 C. Exceptions to the assumption and assignment of leases Section 365(c) creates several exceptions to the general rule allowing the debtor to assume and assign executory contracts or leases upon the cure of defaults. Two of the exceptions are most relevant to real property leases subsections (c)(1) and (c)(3). Section 365(c)(1): assignment without the landlord s consent assigned if: Bankruptcy Code 365(c)(1) provides that an executory contract or lease cannot be (1)(A) applicable law excuses a party, other than the debtor, to such contract or lease from accepting performance from or rendering performance to an entity other than the debtor or the debtor in possession, whether or not such contract or lease prohibits or restricts assignment of rights or delegation of duties; and (B) such party does not consent to such assumption or assignment; This provision was intended primarily to protect parties to personal service contracts (e.g, employment contracts), which typically are not assignable under state law. However, this provision is also relevant to assignments of leases in Texas, which has a statute that prohibits the tenant from subleasing or assigning a lease without the landlord s consent. See Tex. Prop. Code The term applicable law in section 365(c)(1), which can excuse a landlord from accepting a new tenant over its objection, has been interpreted in the Fifth Circuit to include statutory although not contractual 4 restrictions on assignments. See In re Braniff Airways, 4 A contractual provision prohibiting assignment or subleasing is not enforceable in bankruptcy. See Bankruptcy Code 365(f)(1). 7

10 Inc., 700 F.2d 935, 943 (5 th Cir. 1983); In re Lile, 103 B.R. 830, (Bankr. S.D. Tex. 1989). Unless the landlord has contractually consented to the tenant s assignment of the lease, a landlord in Texas may thus be able to assert a valid objection to any assignment of its lease in bankruptcy. However, note that this construction of Section 365(c)(1) has been criticized and that issues have been raised regarding the precise contours of the statute, including the question of whether any particular statute is an applicable law. See In re Mirant Corp., 440 F.3d 238, (5 th Cir. 2006); In re Hartec Enterprises, Inc., 117 B.R. 865 (Bankr. W.D. Tex. 1990). The cases should be carefully reviewed before relying on this exception. Section 365(c)(3): non-residential leases that were terminated prepetition Bankruptcy Code 365(c)(3) provides that a lease is not assumable if: (3) such lease is of nonresidential real property and has been terminated under applicable nonbankruptcy law prior to the order for relief. This provision should be read together with the exception to the automatic stay in section Bankruptcy Code 362(b)(10), discussed above at pp Section 362(b)(10) provides a limited exception to the automatic stay, for leases that have terminated by expiration of the stated term before the bankruptcy was filed. Section 365(c)(3), on the other hand, prohibits the assumption and assignment of a non-residential lease that has been terminated under applicable non-bankruptcy law prior to the bankruptcy case. 5 5 However, most courts have held that a residential tenant may not assume a lease that has been terminated whether or not the lease term has expired. See, e.g., Matter of DiCamillo, 206 B.R. 64, 69 (Bankr. D.N.J. 1997). 8

11 Termination under applicable non-bankruptcy law is obviously a broader phrase than termination by expiration of the stated term. Thus, a lease that was terminated prepetition by the landlord prior to the expiration of its stated term (e.g., as a result of the tenant s default) is covered by the automatic stay but nevertheless cannot be assumed or assigned. As a practical matter, the landlord in a lease that was terminated pre-petition, for some reason other than the expiration of the lease term, must seek relief from the stay to proceed with an eviction proceeding but would have a strong argument in support of such relief. See, e.g., In re Windmill Farms, Inc., 841 F.2d 1467, (9 th cir. 1988)(where lease was terminated pre-petition for non-payment of rent, the court held that it could be assumed in bankruptcy only if state law allowed for the cure and reinstatement of the lease); In re Huffman, 171 B.R. 870, 872 (Bankr. M.D. Fla. 1980)(since the debtor had a limited equitable interest in a lease that had been terminated pre-petition, the automatic stay applied, but the court stated this did not mean there was a viable executory contract that could be assumed). D. The tenant s obligation pending assumption or rejection: Bankruptcy Code 365(d)(3) Section 365(d)(3) provides an important protection for non-residential landlords who must allow a tenant to continue to occupy leased premises pending a court decision on assumption or rejection of the lease: the tenant must perform its obligations (including the payment of post-petition rent) from the initiation of the bankruptcy until the assumption or 9

12 rejection of the lease. 6 With respect to post-petition rents, therefore, the landlord need not wait for assumption to collect what is due. 7 There are several options to enforce the debtor s post-petition obligations. First, the landlord may file a motion for relief from stay, seeking relief from the stay in order to terminate the lease and evict the tenant. The debtor/tenant s failure to pay post-petition rents would be cause for relief from the stay, under section 362(d)(1). Second, the landlord may file a motion to compel payment of post-petition rents, asking the court to enter an order requiring such amounts to be paid. And third, the landlord may wait patiently for payment and, if post-petition rents are not voluntarily paid may, at a later time in the case, assert a claim to an administrative priority for post-petition rents. An important issue has arisen in determining the rents that must be paid within the first month after the filing of the bankruptcy. Many debtors have taken the position that they need only pay the rents that accrue after the filing of the petition. If rent accrues on the first of the month, for example, the debtor will file its bankruptcy on the second day of the month and take the position that no rent need be paid under section 365(d)(3) until the following 6 There is one limited exception in Section 365(d)(3): the court may for cause extend the time for payment of post-petition rents provided they are paid within sixty days of the bankruptcy filing. 7 A related protection is found in Bankruptcy Code 365(b)(4), which provides that pending assumption or rejection, the landlord is not required to provide services or supplies, e.g., cleaning of the leased premises, without receiving compensation in accordance with the lease. 10

13 month. Some courts have accepted this position, including bankruptcy courts in the Southern District of Texas. See In re Simbaki, Ltd., 2015 WL (Bankr. S.D. Tex. 2015, quoting In re Appletree Markets, Inc., 139 B.R. 417 (Bankr. S.D. Tex. 1992). Some courts, however, have taken a contrary position, holding that rents during the first month should be pro rated, with the debtor paying the landlord for that portion of the month following the bankruptcy filing. See In the Matter of Swanton Corp., 58 B.R. 474 (Bankr. S.D.N.Y. 1986); In re Galvan, 57 B.R. 732 (Bankr. S.D. Cal. 1986). Of course, there is a flip side to the proration dispute. If the accrual of the administrative claim under section 365(d)(3) arises when the rent accrues after filing the bankruptcy case, it follows that this administrative priority applies to all rents accrued in bankruptcy to the date on which the lease is rejected, without necessity to prove the value of the lease to the debtor as ordinarily required for an administrative claim under Bankruptcy Code 503(b)(1)(A) meaning that the landlord is entitled to an administrative claim for the full amount of post-petition rents to the date of lease rejection even if the premises are abandoned before then. Most courts have agreed with this proposition. See In re Amber s Stores, Inc., 193 B.R. 819, (Bankr. N.D. Tex. 1996). E. The time limits for assumption or rejection BAPCA adopted a strict rule with respect to the assumption of non-residential leases on which the debtor is the lessee. Pursuant to Bankruptcy Code 365(d)(4), such a lease will be deemed rejected if it is not assumed within 120 days after the filing of the bankruptcy petition (or on plan confirmation, if that occurs earlier). The court may extend this period, 11

14 for cause, for up to an additional 90 days. However, any further extension may be granted only upon written consent of the lessor. Unlike prior law, even with the court s consent the time for assumption or rejection of a non-residential lease may not be indefinitely postponed without the consent of the lessor. 8 The time limit with respect residential leases is more generous. Pursuant to Bankruptcy Code 365(d)(2), a residential tenant in Chapter 11 or 13 may move to assume or reject the lease at any time before confirmation of a plan but the court may, on motion, set a shorter time limit. Pursuant to section 365(d)(1), in a Chapter 7 case a residential lease must be assumed by the trustee within 60 days after the filing of the case, or within such additional time as the court, for cause, within such 60-day period, fixes. 9 The language of these provisions raises an interesting question on which the courts are split: whether the order extending the time for assumption or rejection must be signed by the court within the applicable period, as the language of the statutes literally suggests, or whether the court has the power to extend the time allowed for assumption so long as the motion is filed within the applicable period. Some courts have followed the clear language of the statute and have held that leases are rejected as a matter of law if they are not assumed, or the deadline to assume is not extended, by an order signed within the sixty-day period 8 Curiously, the statute does not include a time limit for non-residential leases in which the debtor is the lessor. 9 Not surprisingly, in Chapter 7 cases residential leases are almost always rejected, as there would rarely be any value to the Chapter 7 trustee. The Chapter 7 debtor, as opposed to the trustee, has no authority to assume a lease. In re Stoltz, 315 F.3d 80, 95 n. 1 (2 nd Cir. 2002). 12

15 allowed for those purposes. Most courts, including a recent decision in the Southern District of Texas, require only that the debtor or trustee file a motion to assume the lease within the statutory period. See In re Simbaki, Ltd., 520 B.R. 241, (Bankr. S.D. Tex. 2014). Nevertheless, the debtor takes a risk in not seeking to have the lease assumed by order signed within the applicable period or else obtaining a signed order extending the time allowed before the expiration of that period. III. The landlord s claim in bankruptcy A. The amount of the landlord s claim As noted above, the debtor must cure all defaults, including the payment in full of all unpaid rents, in order to assume a lease in which it is the tenant. Thus the landlord need only file a proof of claim in the event its lease is rejected. 10 The landlord s claim consists of two portions upon rejection of its lease: first, the amounts owed for unpaid rents and other charges as of the filing of the case; and second, the damages caused by rejection of the lease. Pursuant to Bankruptcy Code 365(g), rejection is treated as a breach of the lease as of the day before the filing of the bankruptcy case. Rejection damages are thus the same amount to which the landlord would be entitled if the tenant had vacated the premises on the day before bankruptcy. The amount of damages for such a breach is determined by the terms of the lease and applicable non-bankruptcy law. 10 Of course, in many cases the landlord will not know for some time whether its lease is to be assumed or rejected. In such situations, the landlord should file a preliminary claim, covering the amounts owed pre-petition, and later amend the claim to add any rejection damages in the event that the lease is rejected. 13

16 Thus the landlord may claim future rents if the lease allows for such a remedy, but the tenant may assert state-law defenses, including any alleged failure by the landlord to mitigate its damages. See Texas Property Code (Landlord s Duty to Mitigate Damages). But while the amount of the landlord s rejection damages is calculated under state law, the bankruptcy statute imposes a limit on the amount of such damages that may be claimed in a bankruptcy case. Specifically, Bankruptcy Code 502(b)(6) provides that the landlord s claim may not exceed: (A) (B) the rent reserved by such lease, without acceleration, for the greater of one year, or 15 percent, not to exceed three years, of the remaining term of such lease, following the earlier of (i) (ii) the date of the filing of the petition; and the date on which such lessor repossessed, or the lessee surrendered, the leased property; plus any unpaid rent due under such lease, without acceleration, on the earlier of such dates. The calculation of this limit is separate and apart from the calculation of the landlord s damages, which is made under state law. Per subparagraph (B), this formula does not limit the recovery of pre-petition unpaid rents, but under subparagraph (A), it does impose a strict limit on the amount of the landlord s rejection damages. Also note that in calculating this limit, the landlord need not deduct any post-petition rents that are paid by the debtor. Those payments would of course be relevant to the landlord s total loss, but they do not affect the mathematical calculation of the limit on rejection damages under section 502(b)(6). See In re First Alliance Corp., 140 B.R. 531 (9 th Cir. B.A.P. 1992); In re All for a Dollar, Inc., 191 B.R. 262 (Bankr. D. Mass. 1996). 14

17 B. The landlord s administrative priority As noted above, Bankruptcy Code 365(d)(3) requires the tenant in bankruptcy to timely pay all sums accruing post-petition under the lease--i.e., rents and other charges accruing from the day the bankruptcy is filed to the date on which the lease is assumed or rejected. This provision creates an administrative priority for these post-petition debts to the landlord they must be paid before general unsecured creditors receive anything. Ordinarily, an administrative claim must be allowed under Bankruptcy Code 503(b). This means that the claimant must file a motion or application seeking allowance of the claim, with notice to creditors and a hearing on the claim. Moreover, administrative claims under section 503(b) are limited to the actual, necessary costs and expenses of preserving the estate, a phrase that has been interpreted to limit administrative claims to the value received by the estate notwithstanding the compensation to which the creditor would be entitled under its lease or other contract with the debtor. See In re Fisher & Fisher, Inc., 51 B.R. 680 (Bankr. S.D. Ohio 1985)(holding, before the enactment of section 365(d)(3), that the landlord was entitled to an administrative priority only for the fair value of the trustee s occupancy ). However, section 365(d)(3) provides that the debtor shall perform all of its postpetition obligations under a lease that has not been rejected notwithstanding section 503(b)(1) of this title. Courts have interpreted this language to mean that the priority claim under section 365(d)(3) is not limited in the manner of other administrative claims. That is, the landlord is not required to file a motion for allowance of its claim under section 503(b) 15

18 and is entitled to the full amount of rents and other charges accruing post-petition whether or not the debtor used the leased premises or otherwise benefitted from the lease. See In re Twigland Fashions, Inc., 198 B.R. 199 (Bankr. W.D. Tex. 1996); In re Amber s Stores, Inc., 193 B.R. 819 (Bankr. N.D. Tex. 1996). A special situation arises if the lease is first assumed in bankruptcy but is later rejected for example, where a reorganization fails and the business must then be liquidated. Pursuant to Bankruptcy Code 502(b)(6), the landlord is entitled to an administrative claim for all rents and other sums accrued under the lease for the period of 2 years following the later of the rejection date or the date of actual turnover of the premises. 11 As a result, an improvident assumption of a lease can be quite costly to the bankruptcy estate. B. The landlord s security interests A claim in bankruptcy may be either secured or unsecured. But if the claim is secured by collateral that is not sufficient to cover the entire claim, as is typically the case with landlord claims, it is divided into two separate claims for the purpose of determining distributions in bankruptcy. Pursuant to Bankruptcy Code 506(a), the partially secured creditor will have an allowed secured claim in the amount equal to the value of its collateral and an allowed unsecured claim for the remaining deficiency This administrative claim is in addition to the landlord s unsecured claim for the balance of the lease term under Section 502(b)(6). 12 Ordinarily, a claim may include post-petition interest and attorney s fees only to the extent that the value of the creditor s collateral is sufficient to cover them. Bankruptcy Code 502, 506(b). A landlord would rarely have such collateral. 16

19 Landlords often have security in the form of a security deposit, and landlords also may claim liens on property in their tenants possession. However, landlord s liens on their tenants property are subject to severe limitations. To begin with, statutory landlord s liens may be set aside in bankruptcy. Pursuant to Bankruptcy Code 545(3), the trustee or debtor in bankruptcy may avoid any statutory lien for rent. Of course, many landlords retain a contractual security interest, in the lease itself, and thus are not dependent on the statutory lien. Such security interests are governed by the Uniform Commercial Code and are enforceable in bankruptcy. However, many landlords do not take the necessary steps to perfect their contractual security interest in their tenant s property, namely, by filing a UCC-1 financing statement. A trustee or debtor in bankruptcy is given various strong-arm powers under Bankruptcy Code 544(a), including the rights of a hypothetical creditor obtaining a judgment lien as of the filing of the bankruptcy case. Utilizing those powers, the trustee or debtor may avoid an unperfected contractual landlord s lien. Landlords who intend to rely on a lien in their tenants property therefore should be careful both to include a contractual lien in their leases and to take the required steps to perfect that lien, that is, to obtain and file the required UCC-1 financing statement when the lease is signed. 17

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