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Vigilance and Planning Are Necessary in Bankruptcy Matters

By Raymond J. Werner
February 09, 2004

Two recent decisions by the U.S. Court of Appeals for the Seventh Circuit have attracted the attention of leasing lawyers. Both of those cases demonstrate that landlords and tenants alike may be taken by surprise by the operation of the Bankruptcy Code.

The first decision that created quite a stir involved a landlord's bankruptcy. While at first reading the facts and outcome of the case seem devastating to tenants, further analysis proves that the true lesson of the case may simply be that the tenant must vigilantly protect its rights if its landlord is in bankruptcy.

In Precision Industries, Inc. v. Qualitech Steel SBQ, LLC, 327 F.3d 537 (7th Cir. 2003) the court held that the sale of the debtor's assets, including property that was subject to a ground lease, was a sale free and clear of the tenant's interest, thereby extinguishing the tenant's leasehold interest. In this case, Qualitech Steel, the debtor, ground leased land at its steel mill facility to Precision. The tenant then proceeded to construct a warehouse on the leased land as part of an integrated, on-site, supply and services arrangement with Qualitech. The ground lease had a term of 10 years and called for the payment by Precision to Qualitech of an annual rent of $1.

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