Has falling behind on your lease obligation caused your landlord to initiate eviction proceedings against you? If so, has the landlord also obtained a judgment of possession for the premises? This blog will explore your options if you are currently facing this scenario through a bankruptcy proceeding.
The Judgment of Possession in a Commercial Lease
If you are a tenant in a commercial lease, the judgment of possession will terminate your right to assume the lease in a bankruptcy setting. Bankruptcy courts have held that “[t]he bright-line rule for bankruptcy courts applying New Jersey law is that the judgment for possession terminates nonresidential lease, not the issuance of the warrant for removal.” In re Seven Hills, Inc., 403 B.R. 327, 331 (Bankr. D.N.J. 2009). The In re Seven Hills, Inc. Court went out to find that “[i]n cases where the underlying contract or lease has been “validly terminated prior to the institution of the bankruptcy proceedings, [such contract or lease] is not resurrected by the filing of the petition in bankruptcy and cannot therefore be included among the [debtor in possession’s] assets.” Id at 334 quoting In re Robertson, 147 B.R. 358, 361 (Bankr. D.N.J. 1992). Therefore, if you are a commercial tenant, you must file the bankruptcy proceeding prior to the entry of a judgment of possession to be able to assume the lease in a bankruptcy proceeding. However, Section 365 of the Bankruptcy Code states that you must be able to promptly cure the default under your lease agreement amongst other statutory obligations.
The Judgment of Possession in a Residential Lease
Courts throughout the country are not in agreement as to whether a debtor can assume a lease that is unexpired yet validly terminated under state law. Matter of DiCamillo, 206 B.R. 64, 67-8 (Bankr. D.N.J. 1997). The New Jersey Bankruptcy Court in Matter of DiCamillo distinguished expiration and termination by “recognizing that a residential debtor may assume an unexpired lease even after the lease has been terminated under state law.” Id at 69. Section 365 of the Bankruptcy Code also governs lease assumption of a residential lease in a bankruptcy proceeding.
However, there are implications with the automatic stay under Section 362 of the Bankruptcy Code that are triggered upon a judgment of possession for a residential lease being entered by the Court. The automatic stay is the provision within the bankruptcy code that prevents all creditor actions from going forward once a bankruptcy case is filed. However, Section 362(b)(22) of the Bankruptcy Code provides that the automatic stay does not provide a stay for the continuation of any eviction, unlawful detainer action, or similar proceeding by a lessor against a debtor involving residential property in which the debtor resides as a tenant under a lease or rental agreement and with respect to which the lessor has obtained before the date of the filing of the bankruptcy petition, a judgment for possession of such property against the debtor.
This section of the Bankruptcy Code is explicitly subject to Section 362(l) which states as follows:
Except as otherwise provided in this subsection, subsection (b) (22) shall apply on the date that is 30 days after the date on which the bankruptcy petition is filed, if the debtor files with the petition and serves upon the lessor a certification under penalty of perjury that--(A) under nonbankruptcy law applicable in the jurisdiction, there are circumstances under which the debtor would be permitted to cure the entire monetary default that gave rise to the judgment for possession, after that judgment for possession was entered; and (B) the debtor (or an adult dependent of the debtor) has deposited with the clerk of the court, any rent that would become due during the 30-day period after the filing of the bankruptcy petition.
Put into laymen’s terms, there is no automatic stay when an underlying judgment of possession for a residential lease is based on a non-monetary default. In re Harris, 424 B.R. 44, 52 (Bankr. E.D. NY 2010). If the underlying judgment for possession is based on a monetary default, then you must file a certification on the date you file your petition. This certification must state that you have the right to cure the entire monetary default under state law and that you have deposited the rent that would be due in the 30 day period with the clerk of the Court to obtain an automatic stay for the premises for 30 days following your bankruptcy filing. If you do not cure your pre-petition arrears on the lease within that 30 day period, then automatic stay will expire and you will no longer be protected by Section 362(l) of the Bankruptcy Code.
If you are considering filing for bankruptcy, it is important to contact an experienced New Jersey bankruptcy attorney to guide you through your options and present you with the potential pitfalls. For questions regarding a potential bankruptcy, call the law firm of Scura, Wigfield, Heyer, Stevens & Cammarota, LLP for a free consultation.