No Bankruptcy Protection for Tenant of Terminated Lease

What Happened: A landlord terminated the month-to-month lease of a toy wholesaler. When the tenant refused to leave, the landlord filed a holdover lawsuit. After several failed attempts by the tenant to get the action dismissed or stayed, the case went to court, which ruled in the landlord’s favor and issued an eviction warrant. The tenant filed for Chapter 11 bankruptcy a week before the warrant was scheduled to be executed. The landlord argued that bankruptcy protection didn’t apply because the lease had already been terminated before the tenant filed for Chapter 11.

Ruling: The bankruptcy court ruled in the landlord’s favor.

Reasoning: Federal bankruptcy law imposes what’s called an “automatic stay” barring landlords and other creditors from bringing legal actions to obtain possession of property from the debtor’s estate. But Section 541(a)(1) of the statute makes it clear that the estate does not include “any interest of the debtor as a lessee under a lease of nonresidential real property that has terminated at the expiration of the stated term of such lease before commencement of the case under [Chapter 11].” Under New York law, the tenant’s possessory interest in the property ended when the landlord lawfully terminated the lease. And it didn’t accept or receive a penny of rent after that, leaving the tenant with a mere “naked possessory interest” that the bankruptcy law doesn’t protect.   

• In re New Dragon Toy Wholesale, Inc., 2024 Bankr. LEXIS 1006, 659 B.R. 261