Atenant is delinquent in paying his rent or is in default under some other provision of his lease. The landlord notifies the tenant that he is in default under the terms of the lease, and then seeks to terminate the leasehold estate by notice of termination of lease and by eviction proceedings. The tenant, sometime prior to being physically dispossessed of the premises, files for relief under a chapter of the Bankruptcy Code. The landlord either files an adversary proceeding seeking a declaratory judgment that the automatic stay does not stop eviction proceedings because the lease was terminated pre-petition or files a motion for relief from the automatic stay provisions of §362. Who wins?

A review of the published opinions reveal that there is a division of authority on the applicability of the automatic stay to eviction proceedings. Some courts hold that the automatic stay of §362 stops the eviction, and some hold that the stay is inapplicable. This dichotomy can be partly explained by the different treatment accorded by §§362 and 541 of the Code to residential and non-residential tenancies. Some of this diversity can also be explained by the differences in state law regarding leasehold estates and eviction proceedings, but bankruptcy courts and U.S. district courts (there are few U.S. circuit court opinions in this area) have also interpreted §§362, 365 and 541 in various ways that have also led to conflicting results. This article catalogs some (but not all) of the varying opinions on matters involving eviction proceedings and the automatic stay of §362. It will also examine how the courts have differentiated between residential and non-residential tenancies under §§362 and 541.

This article will also examine whether a debtor-tenant under §365 can assume a lease that was terminated by the landlord prior to the end of the stated term of the lease and prior to bankruptcy. It will also examine whether a lease that was terminated pre-petition and before the end of the stated term of the lease is considered property of the estate.

Both the U.S. Senate and the House of Representatives have made significant but dissimilar proposed revisions to §362 of the Code that would limit the applicability of the automatic stay to eviction proceedings involving residential tenancies. The Senate version of the legislation amending the Code also contains new language concerning the assumption of leases of real property. The impact of these proposed changes will also be discussed below.

When a tenant stops an eviction by filing for protection under the Bankruptcy Code, the lease that the landlord has terminated pre-petition basically goes into overtime. The debtor's effort to assume such a lease may or may not result in sudden death in overtime.

Cases That Hold That the Automatic Stay Stops an Eviction

The facts in the Third Circuit's opinion in In re Atlantic Business and Community Corp., 901 F.2d 325 (3rd Cir. 1990), varies somewhat from the fact scenario that is the concern of this article. In Atlantic Business, the landlord attempted to dispossess a commercial tenant (a radio station) approximately two years after the tenant filed a chapter 11 petition. The bankruptcy court found that the landlord violated the automatic stay provisions of §362, held him in contempt, and assessed punitive and compensatory damages. The district court affirmed. On appeal, the landlord argued that the tenant was a mere tenant at sufferance and therefore §362 did not apply to his efforts to dispossess the tenant. The Third Circuit stated that the court had not previously addressed the issue of whether the automatic stay of §362 protected a tenant at sufferance, but noted that the Second Circuit had addressed this problem in In re 48th Street Steakhouse Inc., 835 F.2d 427, 430 (2nd Cir. 1987), which involved the lease of a restaurant. The Second Circuit in 48th Street Steakhouse held that "mere possessory interest in real property, without any accompanying legal interest, is sufficient to trigger protection of the automatic stay." 48th Street Steakhouse at 430. The Third Circuit in Atlantic Business joined the Second Circuit in holding that a mere possessory interest in real property is property of the estate under §541, and therefore protected by §362. Atlantic Business at 328. The Third Circuit's conclusion was not difficult in light of the fact that the tenant had been a chapter 11 debtor-in-possession (DIP) operating an ongoing business for two years before the landlord's effort at self-help eviction, but several courts reached the same conclusion, even though the landlord filed lawful eviction proceedings prior to the tenant seeking protection under the Bankruptcy Code.

The Sixth Circuit joined the Second and Third in In re Convenient Food Mart No. 114 Inc., 968 F.2d 592, 594 (6th Cir. 1992), which also involved a non-residential tenancy. The court found that the debtor-tenant's "undisputed possessory interest in the property is the legal interest creating jurisdiction in this case." Convenient Food Mart at 594. The Sixth Circuit cited In re 48th Street Steakhouse Inc., supra, and In re Atlantic Business and Community Corp., supra, as authority, and specifically stated: "We join the other circuits [Second and Third] in holding that a tenancy at sufferance is a possessory interest in real property within the scope of the estate in bankruptcy under §541." Convenient Food Mart at 594. In Convenient Food Mart, the tenant's lease expired by its own terms on Oct. 31, 1989, but under Kentucky law, the tenant had a one-year leasehold interest subsequent to the expiration of the lease. The tenant filed a chapter 11 petition in June 1990 before the expiration of the one-year holdover period on Jan. 7, 1991. The landlord attempted self-help eviction after the holdover provision ended in October 1990. The tenant refused to move, and the bankruptcy court ultimately imposed sanctions on the debtor and its attorney, requiring them to deliver the premises to the landlord. Since the Sixth Circuit found that possession of real property under an expired lease constitutes property of the estate, the court reversed the bankruptcy court's sanctions. Convenient Food Mart at 595.

However, the above holdings of the circuit courts in In re Atlantic Business and Community Corp., supra; In re 48th Street Steakhouse, supra; and In re Convenient Food Mart No. 144 Inc., supra, rest on an extremely weak, almost non-existent foundation. The district court in In re DiGiorgio, 200 B.R. 664, 673 (C.D. Cal. 1996), vacated, 134 F.3d 971 (9th Cir. 1998) [because the issue was moot], noted the argument of the amicus curiae that these cases have little value because they rest on cases that did not actually analyze the issue of whether possession equates to an equitable interest in property. The Second Circuit in 48th Street Steakhouse did not actually analyze the issue as to whether the tenant's naked possession of property constituted an equitable interest or property of the estate under §541. The Second Circuit relied on In re GSVC Restaurant Corp., 3 B.R. 491 (Bankr. S.D.N.Y. 1980), aff'd., 10 B.R. 300 (S.D.N.Y. 1980), which merely assumed arguendo that possession equated to an equitable interest in property. The Second Circuit also relied on In re Onio's Italian Restaurant Corp., 42 B.R. 319 (Bankr. S.D.N.Y. 1984), but the court in Onio's, in turn, relied on GSVC Restaurant as authority. The Third Circuit in In re Atlantic Business and Community Corp. relied on 48th Street Steakhouse and GSVC Restaurant Corp. The Sixth Circuit in turn relied on 48th Street Steakhouse and Atlantic Business as authority that a possessory interest in an expired lease is property within the scope of §541. In re DiGiorgio at 673. In short (and incredibly), three circuit court cases rest on the decision of the bankruptcy court in Matter of GSVC Restaurant Corp., and that the decision gives little or no basis for the holdings in the three circuit court's decisions.

The court in Matter of GSVC Restaurant Corp., supra, issued one of the earliest opinions that studied the impact of the then-new Bankruptcy Code on whether the automatic stay stops eviction proceedings when the lease is terminated pre-petition. In GSVC Restaurant, the landlord initiated summary eviction proceedings in New York Justice Court. The landlord obtained a judgment awarding him possession of the premises that the debtor had used to operate as a restaurant. He obtained both the judgment and the warrant of eviction on April 12, 1979. The tenant on appeal was able to stay the eviction proceedings for almost a year. The landlord ultimately prevailed in appellate court, and the eviction was scheduled for March 25, 1980. Two hours prior to the actual eviction, the tenant filed a chapter 11 petition. There was no doubt that the leasehold estate had been terminated under New York law prior to bankruptcy. GSVC Restaurant at 494.

The tenant argued, however, that its actual physical possession of the premises was an equitable interest protected by the automatic stay. The court agreed that an equitable interest in property is property of the estate under §541, but the court failed to examine whether naked possession of property or tenancy at sufferance was in fact an equitable interest in property. The court did not explicitly base its holding on whether the tenant's physical possession of property was property of the estate protected by the automatic stay. The court instead assumed that the tenant's de facto possession was a "sufficient nexus to invoke the protection of the automatic stay..." GSVC Restaurant at 494. Unfortunately, GSVC Restaurant is also cited in several bankruptcy court and district court opinions as the basis for holding that the tenant's possession of premises is an equitable interest in property.¹

The facts in Matter of Mimi's of Atlanta Inc., 5 B.R. 623 (Bankr. N.D. Ga. 1980), aff'd., 11 B.R. 710 (N.D. Ga. 1981), were similar to the facts in GSVC Restaurant. The premises in Mimi's also involved premises used as a restaurant. In Mimi's, the landlord terminated the lease before bankruptcy by a letter dated Feb. 6, 1980, as provided by the lease agreement. The landlord instituted eviction proceedings. Before the state court could issue a writ, the tenants filed a chapter 11 petition. The landlord filed a motion to modify the stay and in the alternative requested possession of the premises. The court found that the tenant-debtors had a "scintilla of equitable interest in the landlord's premises." Mimi's at 627. The court stated that even though the debtor's estate in the premises "is nothing more than a tenancy at sufferance, such a conclusion does not preclude a finding that an equitable interest exists for the purposes of §541(a)-§362(a)(3)." Mimi's of Atlanta at 627. The court cites for authority an old case, In re Lane Foods Inc., 213 F. Supp. 133 (S.D.N.Y. 1963), which held that bankruptcy courts have jurisdiction over disputes involving real property even when the debtor does not have title to the property and only has possession of the property. Lane Foods at 136. The district court did not hold that possession equated to an equitable interest in property that made it property of the estate. The court's holding turns on the jurisdiction of bankruptcy courts over such matters. The district court in In re Lane Foods Inc. lifts a quote from an old U.S. Supreme Court case, Thompson v. Magnolia Petroleum Co., 309 U.S. 478, 481, 60 S. Ct. 628, 630, 84 L. Ed. 876 (1940), as the basis of its holding. The quote is at page 136 of the opinion in In re Lane Foods Inc.:

Bankruptcy courts have summary jurisdiction to adjudicate controversies relating to property over which they have actual or constructive possession. And the test of this jurisdiction is not title in but possession by the bankrupt at the time of the filing of bankruptcy.

Mimi's of Atlanta is often cited along with GSVC Restaurants to support the conclusion that a terminated leasehold estate is an equitable interest and is property of the estate under §541 as long as the tenant retains possession at the time of bankruptcy.² The bankruptcy court in Mimi's, however, relied on In re Lane Foods Inc., a 1963 district court case, which in turn relied on a 1940 U.S. Supreme Court decision that based its holding upon the jurisdiction of the bankruptcy court to enjoin ongoing state court proceedings.

Recent cases have carried forward the concept that naked possession of property under a lease that was terminated prior to bankruptcy is an interest that is property of the debtor's estate and protected by the automatic stay of §362. In re Eclair Bakery Ltd., 255 B.R. 121, 133 (Bankr. S.D.N.Y. 2000), citing In re 48th Street Steakhouse, supra; In re Nasir, 217 B.R. 995, 997 (Bankr. E.D. Va. 1997), citing, inter alia, In re Atlantic Business and Community Corp.; In re Caldwell, 174 B.R. 650, 652 (Bankr. N.D. Ga. 1994), citing In re Mimi's of Atlanta Inc., supra; In re 3220 Erie Blvd. East Inc., 121 B.R. 684, 687 (Bankr. N.D.N.Y. 1990), citing, inter alia, In re 48th Street Steakhouse Inc., supra; In re McMahon Books Inc., 173 B.R. 868, 876 (Bankr. D. Del. 1994); and In re Coates, 108 B.R. 823, 825-826 (Bankr. M.D. Ga. 1989).

The U.S. Senate and the House of Representatives have both added subsections to §362 in the legislation pending before Congress that would amend the Code. The House version and the Senate version of a new §362 are very different. It is important to keep in mind, however, that both versions deal only with residential tenancies, and do not necessarily undo the circuit court holdings in In re Convenient Food Mart 114 Inc., supra; In re 48th Street Steakhouse Inc., supra; or In re Atlantic Business and Community Corp, supra, which involved commercial tenancies. The foundation of many decisions in this area, Matter of GSVC Restaurant Corp, supra, and Matter of Mimi's of Atlanta Inc, supra, also may be unaffected because those two decisions also involved leases of commercial properties.

The House version of amended §362 would add proposed Paragraphs 22 and 23. The language of these two paragraphs is as follows:

(22) under subsection (a)(3), of the continuation of any eviction, unlawful detainer action or similar proceeding by a lessor against a debtor involving residential real property in which the debtor resides as a tenant under a rental agreement;
(23) under subsection (a)(3), of the commencement of any eviction, unlawful detainer action or similar proceeding by a lessor against a debtor involving residential real property in which the debtor resides as a tenant under a rental agreement that has terminated under the lease agreement or applicable state law...

Proposed Paragraph 22 gives a blanket exemption from the automatic stay to a lessor prosecuting an eviction action against a debtor occupying residential property when the eviction proceedings were initiated before bankruptcy. Proposed Paragraph 23 allows a landlord to commence an eviction of a residential tenant after the filing of a bankruptcy petition, but only when the lease has been terminated pre-petition.

The Senate version of the new legislation adds Paragraphs 23, 24 and 25 to §362 as follows:

(23) under subsection (a)(3), of the commencement or continuation of any eviction, unlawful detainer action or similar proceeding by a lessor against a debtor seeking possession of residential property—

I. on which the debtor resides as a tenant, and
II. with respect to which—

A. the debtor fails to make a rental payment that first becomes due under the unexpired specific term of a rental agreement or lease or under a tenancy under applicable state or local rent control law, after the date of filing of the petition or during the 10-day period preceding the date of filing of the petition, if the lessor files with the court a certification that the debtor has not made a payment for rent and serves a copy of the certification upon the debtor, or
B. the debtor has a month-to-month tenancy (or one of shorter term) other than under applicable state or local rent control law where timely payments are made pursuant to clause (i) if the lessor files with the court a certification that the requirements of this clause have been met and serves a copy of the certification upon the debtor.

(24) under subsection (a)(3), of the commencement or continuation of any eviction, unlawful detainer action or similar proceeding by a lessor against a debtor seeking possession of residential property, if during the two-year period preceding the date of filing of the petition the debtor or another occupant of the leases premises—

III. commenced another case under this title, and
IV. failed to make any rental payment that first became due under applicable non-bankruptcy law after the date of filing of the petition for that other case.

(25) under subsection (a)(3), of an eviction action, to the extent that it seeks possession based on endangerment of property or the illegal use of controlled substances on the property, if the lessor files with the court a certification that such an eviction has been filed or the debtor has endangered property or illegally used or allowed to be used a controlled substance on the property during the 30-day period preceding the date of filing of the certification, and serves a copy of the certification upon the debtor.

The Senate version of a revised §362 therefore would allow a landlord to proceed with the eviction of a tenant of residential premises only when the specific exceptions set out in Paragraphs 23, 24 and 25 above occur. The Senate version is much more restrictive than the House version of proposed §362.

---

Footnotes

¹ See Matter of R.R.S. Inc., 7B.R. 870, 872 (Bankr. M.D. Fla. 1980); Matter of Ruby's Florida Inc., 11 B.R. 171, 175 (Bankr. M.D. Fla. 1981); In re Clifton Steel Corp., 35 B.R. 732, 735 (Bankr. N.D.N.Y. 1983); In re Onio's Italian Restaurant Corp., 42 B.R. 319, 320 (Bankr. S.D.N.Y. 1984). Return to article

² See In re Lewis, 15 B.R. 643, 644 (Bankr. E.D. Pa. 1981); In re Fidelity American Mortg. Co., 19 B.R. 568, 573 fn. 44 (Bankr. E.D. Pa. 1982); In re Babco Inc., 25 B.R. 325, 328 (W.D. Pa. 1982); In re Pagoda Intern. Inc., 26 B.R. 18, 20 (Bankr. D. Md. 1982); Matter of Marcott, 30 B.R. 633 (Bankr. W.D. Wis. 1983); In re Trang, 58 B.R. 183, 188 (Bankr. S.D. Tex. 1985); Matter of Terramar Min. Corp., 70 B.R. 35, 37 (Bankr. M.D. Fla. 1987); In re Caldwell, 174 B.R. 650, 652 (Bankr. N.D. Ga. 1994). Return to article

---

Journal Date:  Thursday, November 1, 2001 © American Bankruptcy Institute. All rights reserved. ABI is a (501)(c)(3) non-profit business (52-1295453)