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Court Caps Landlord's Bankruptcy Claim Against Lease Guarantor
A big issue in real estate and retail bankruptcies, among others, involves the disposition of commercial real estate leases, given the potential magnitude of landlord damage claims under state law resulting from a tenant's default under a long-term lease. Given these claims could overwhelm other creditor claims in a tenant's bankruptcy case, the Bankruptcy Code includes a provision that limits a landlord's claim, which presents challenges for landlords as creditors in bankruptcy cases. In In re Cortlandt Liquidating, Case No. 23-cv-03262-MKV, the U.S. District Court for the Southern District of New York, sitting as an appellate court, reviewed a Bankruptcy Court decision that addressed a number of issues involving a commercial landlord's claims in bankruptcy.
Landlord Asserted a $44M Claim in the Debtor's Bankruptcy Case
The opinion began by noting the bankruptcy case involved "the iconic New York City institution, Century 21 Department Store, and its affiliates," located on the Upper West Side of Manhattan in New York City. According to the opinion, C21 1972 Broadway LLC (tenant) and Lincoln Triangle Commercial Holding Co. (landlord) entered into a lease agreement for nonresidential real property located at 1972 Broadway in New York (the lease). In lieu of a cash security deposit, an affiliated entity, Century 21 Department Stores LLC (debtor-guarantor), guaranteed the tenant's performance under the Lease. In addition, the tenant's obligations under the lease were secured by a letter of credit issued by JPMorgan Chase Bank, and funded by the debtor-guarantor.
The debtor-guarantor and several of its affiliates filed Chapter 11 bankruptcy cases on Sept. 10, 2020, but the tenant entity did not file for bankruptcy. The debtor-guarantor nevertheless included the lease on its schedule of executory contracts filed with the Bankruptcy Court, and attempted to reject the lease. The landlord objected on the grounds that the guarantor, not the tenant, had filed for bankruptcy. The debtor-guarantor responded by acknowledging it was not the tenant, deleting the lease from the executory contract schedule, vacating the property, and delivering the keys to the landlord, thereby breaching the lease. The landlord refused to accept the keys as termination of the lease. Instead, the landlord drew down the full balance of the letter of credit (approximately $7.6 million) and applied the letter of credit proceeds to ongoing lease obligations as they came due for the vacated property. The debtor-guarantor's obligations to JPMorgan to reimburse amounts paid under the letter of credit were satisfied with assets of the debtor-guarantor's bankruptcy estate.
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