Contributed by Danielle Donovan
Today we’ll begin with a two-part question: When do you suppose you could (i) hold a debtor’s property hostage without running afoul of the automatic stay and (ii) also collect on an administrative expense for postpetition rent for leased space used to store such property?
If you don’t already know the answers to the above questions, perhaps an overview of a recent decision from the Bankruptcy Court for the District of New Jersey will provide some insight.
Before the court in In re Sussex SkyDive, LLC were a motion for payment of postpetition rent by the debtor’s landlord, When Pigs Fly, LLC (what a name!), and an objection and counterclaim of the debtor for damages for the landlord’s violation of the automatic stay.
The debtor operated a skydive school from hangar premises at the Sussex Airport in Wantage, New Jersey. Prepetition, the debtor and its landlord entered into a lease for a hangar, which the debtor used to store its King Air airplane. After two months of the debtor’s failure to pay rent, the landlord initiated an action in New Jersey state court for possession of the hangar premises due to the debtor’s nonpayment. After a warrant of removal was obtained and executed, the landlord changed the locks on the hangar. The landlord testified that the locks were changed to prevent the debtor’s managing member from accessing the hangar and removing the plane. Additionally, the landlord claimed that, under state law, it was only required to retain the airplane for 30 days, as the debtor had been evicted. After 30 days had passed, and without notifying the debtor, the landlord removed many of the airplane parts to locations outside the hangar. The landlord never confirmed with the debtor that the debtor intended to abandon the airplane.
A few months later, the debtor filed for bankruptcy. The landlord was notified that the airplane was collateral securing certain of the debtor’s debt and was protected by the automatic stay under section 362 of the Bankruptcy Code. The landlord nevertheless denied the debtor access to the hangar for fear of the debtor reestablishing tenancy or stealing the airplane. Curiously, the landlord still filed a motion for payment as an administrative expense for postpetition rent under section 503(b)(1)(A) of the Bankruptcy Code.
Section 503(b)(1)(A) provides for the allowance of administrative expenses for “the actual, necessary costs and expenses of preserving the estate.” It is well settled that payment of rent for postpetition use and occupancy of real estate ordinarily constitutes an “actual, necessary” cost to which a landlord is entitled. Further, the Third Circuit has ruled that a landlord also is entitled to an administrative expense where a lease has terminated prepetition, but the debtor continues to occupy the premises postpetition.
In Sussex, the landlord changed the locks to the hangar and made it clear that the debtor’s managing member was not allowed on the premises. Rejecting the landlord’s argument that its actions nevertheless benefitted the debtor’s estate by sheltering the plane, the court found that denying the debtor access to the premises could not have resulted in any benefit to the estate. Neither did the court buy the landlord’s argument that the airplane had been abandoned prepetition. The landlord had failed to comply with applicable New Jersey law, which provides, among other things, that a landlord must give written notice to a former tenant that property left on the premises must be removed within 30 days of receipt of such notice. The record also contained considerable evidence that the debtor did not intend to abandon the airplane at any point either prepetition or postpetition. Accordingly, the landlord’s administrative expense wasn’t gonna fly with this court (pun definitely intended).
As mentioned, the debtor counterclaimed that by refusing its managing member access to the airplane, the landlord had violated the automatic stay under section 362(a)(3) of the Bankruptcy Code. The landlord countered that it was left in an unfair pickle possessing property of the debtor’s estate inside of a hangar that was not property of the debtor’s estate. To address this argument, the court circled back to its earlier finding that the landlord had an adequate remedy under state law and had failed to exercise it properly. Further, once the landlord was notified that it was in possession of property of the debtor’s estate, the landlord had an affirmative duty under section 542 of the Bankruptcy Code to turn the airplane over to the debtor. The landlord could have taken steps to resolve its dilemma by requesting that the court require the debtor to provide adequate protection of the landlord’s interest in the airplane, but the landlord neglected to do so. In failing to turn over the airplane, the landlord exercised control over property of the debtor’s estate and violated the automatic stay.
So, as it turns out, Sussex doesn’t really answer the questions of when a landlord can hold a debtor’s property hostage without running afoul of the automatic stay and still recover postpetition rent as an administrative expense, but, what we do know is that it’s not When Pigs Fly.
Danielle Donovan is an Associate at Weil Gotshal & Manges, LLP in New York.
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