Phillip Ashfield 2014-01-29 23:45:33
Equipment Lessors: Stay Alert When Your Lessee Files For Bankruptcy Phil is a member of the bankruptcy and creditors' rights group at Stinson Leonard Street LLP with a focus on bankruptcy, financial services, equipment letsing and general business disputes. Phii's primary goal is to provide exceptional service and value to his clients. As p trt of this goal, he strives to fully understand his clients' business objects and create tailed solutions to their specific issues. Phil ran be reached at Phillip.ashfieldtsotmsonleonard.com. Treatment of Equipment Leases in Bankruptcy Upon the filing of a bankruptcy petition, the bankruptcy estate is created and is comprised of, among other things, “all legal or equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C. § 541(a)(1). If the debtor leased equipment (i.e., personal property), and the equipment lease had not terminated prior to the date of the bankruptcy filing, the debtor’s rights under the equipment lease are considered property of the estate. An equipment lease will typically be considered an executory contract under bankruptcy law. See V. Countryman, “Executory Contracts in Bankruptcy,” 57 Minn. L. Rev. 439 (1973) (defining executory contract as “a contract under which the obligation of both the bankrupt and the other party to the contract are so far underperformed that the failure of either to complete performance would constitute a material breach excusing the performance of the other”). Assuming the existence of an executory contract for purposes of this article, section 365 of the bankruptcy code provides the framework for dealing with such a contract in bankruptcy. Important Items During the Bankruptcy 1. Assumption of the Lease: Under the bankruptcy code, the debtor has the ability to assume an equipment lease. In order to assume, however, the debtor must cure all defaults (monetary and non-monetary) existing under the lease or provide adequate assurance that it will promptly cure such defaults. 11 U.S.C. § 365(b)(1)(A). In practice, a debtor will typically file a motion to assume the lease. It is important for the lessor to check for its particular lease within motion documents as a debtor can attempt to assume more than one executory contract in a single motion. If the lease is identified in the motion, the lessor should, among other things, check to ensure that the debtor has provided for the cure (or prompt cure) of all defaults. In many situations, the debtor will propose a monetary cure amount within the motion. If the lessor fails to object timely to the proposed cure amount (or fails to get the debtor to agree to the proper amount), the lessor will be subject to the cure amount proposed by the debtor. 2. Timely Payments in a Chapter 11 Bankruptcy: If the equipment is being leased to a debtor in a Chapter 11 reorganization, section 365(d)(5) of the bankruptcy code requires the debtor to continue making lease payments and performing other obligations under the lease that first arise from and after the 60th day following commencement of the bankruptcy until the lease is assumed or rejected. Note that this provision does not apply to leases of personal property to an individual debtor for family, personal or household purposes. Assuming it wants the debtor to make the payments, the lessor can contact the debtor’s counsel prior to the 60th day to ensure that timely payments will be made. In the event that timely payments are not made after the first 60 days of the case, the lessor can compel the debtor to either make payments or make a decision on whether to assume or reject the lease. 3. Administrative Expense Claim: Part of an equipment lessor’s claim against the debtor’s bankruptcy estate may be entitled to priority as an administrative expense under sections 503(b) and 365(d)(5) of the bankruptcy code. Typically, in order to receive administrative expense status, the post-petition claim must have arisen out of an expense that was actual and necessary for the preservation of the debtor’s estate. This actual and necessary test, however, is eliminated by section 365(d)(5) with respect to commercial lease obligations first arising from or after 60 days after the bankruptcy filing. As such, unless the debtor is able to get the 60- day timeline extended, a lessor will be entitled to an administrative expense for rental payments after the initial 60-day period expires, without having to prove that the lease payments were actual and necessary for the preservation of the estate. While it is easier to obtain administrative expense status for the payments arising after the first 60 days of the bankruptcy case, lessors should not forget to assert an administrative expense for lease payments arising during the first 60 days of the bankruptcy case if the payments were actual and necessary expenses of the debtor’s estate. It is important for equipment lessors to understand their rights and to be attentive to filings in order to effectively protect their interests during the pendency of a bankruptcy case.
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