New Jersey Lawyer & Attorney : Stark & Stark Law Firm : New Jersey Law Blog

Collect Post-Petition Assessments from Chapter 13 Trustee in a Converted Chapter 7 Case

Bankruptcy filings around the country are up, due to among other things, the decline in the real estate market.  Previously, debtors used the equity in their home to fund a Chapter 13 bankruptcy plan and pay back condominium, homeowners, and cooperative associations (“Associations”).  Now, many debtors no longer have any equity in their homes. As such, this is leading some Chapter 13 cases to be converted to Chapter 7 liquidation cases. 
 

For Associations, such a scenario often means that the debtor stops paying their post-petition assessments.  But what happens to all the money that the debtor paid the Chapter 13 Trustee during the  bankruptcy? Does this money get distributed to creditors, the debtor or does the Chapter 13 Trustee keep it?  And importantly, can the Associations get any of those funds back?

 

Opportunity to Recoup Post-Petition Assessments
During the life of a Chapter 13 case, the Chapter 13 Trustee has a duty to hold onto all plan payments made by the debtor.  Upon conversion to a Chapter 7 case, the Chapter 13 Trustee is required to account for these funds and notice creditors that these funds will be returned to the debtor. When this occurs, Associations have one last chance to get some or all of this money back, rather than letting the debtor get a windfall.
 

Questions for Associations to Ask Bankruptcy Counsel
It is imperative that the Associations take quick action and file opposition to the Chapter 13 trustee’s notice so it can possibly recoup these funds. Sometimes there may be a few thousand dollars held by the Chapter 13 Trustee. The Associations should talk with their bankruptcy attorney immediately.  Following are some questions to ask:

1. How much is owed post-petition?  It is advisable for the Association to provide its attorney an account history for the post-petition fees due and owing.  For instance, if it will cost $500 to file an objection and make an appearance, but there is only $100 held by the Chapter 13 Trustee for a $200 post-petition claim, it may not be worth pursuing.                      
2. Is there a consent order providing for an administrative claim?  There may be a consent order with the debtor providing for an administrative claim.  Bankruptcy Code §1326(a), specifically provides that the Chapter 13 Trustee is to pay all allowed administrative claims by such a consent order. 
3.  Will an objection automatically mean allowance of the administrative claim?  The short answer is no.  The Associations still needs to prove the validity of the post-petition claim.  The debtor may assert a defense to the claim.  As such, sometimes the Associations may wish to negotiate with the debtor to avoid unnecessary litigation expenses.

These and many other issues should be addressed by your bankruptcy attorney as soon as possible.  Although the bankruptcy process is complex, thoughtful and sound legal advice throughout the bankruptcy case can help address many thorny issues that Associations regularly face as a creditor in a bankruptcy proceeding and, hopefully, not leave money on the table.

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Many commercial tenants are facing a severe downturn in revenue, which often equates to not paying their monthly rent.  Sometimes, commercial landlords can work with a delinquent tenant by offering more favorable terms or concessions.  Reduction in the cost per square foot or placing rental arrears on the backend of a lease can be solutions to keeping a store active by that tenant.  However, sometimes legal action is required to protect a commercial landlord's rights and value of the space.

 

Suing a tenant to retake possession of the premises is only half the battle.  In New Jersey, commercial landlords can evict a tenant through a summary dispossess action (aka "eviction") for non-payment of rent or other covenant defaults.  Once a judgment of possession is entered, the next step is to actually evict the tenant.  If the tenant will not peaceable move after entry of the judgment of possession, then a landlord can request a warrant for removal be issued by the sheriff. 

 

Once the warrant is issued, the commercial landlord needs to be prepared to fulfill the eviction process.  Often this means figuring out what to do with "stuff" left behind at the store.  Tenants sometimes leave everything from trash to copiers to inventory to personal items. But what exactly can the commercial landlord do with these items?  Can you simply toss out this "stuff"?  Can you sell these items? What if the tenant shows up and demands its items back a month or two after the tenant has been evicted?

 

The New Jersey Abandoned Tenant Property Act (N.J.S.A. 2A:18-74) is a commercial landlord's solution for disposing, selling and/or returning items left by a tenant.  Under the New Jersey Abandoned Tenant Property Act, a commercial landlord is required to give written notice before disposing or selling a tenant's left over items.  

 

Following is a quick list of questions to ask your attorney about adherence to the New Jersey Abandoned Tenant Property Act, as well as some other issues to address.
 

1.  What Type of Notice Needs to be Provided?   The New Jersey Abandoned Tenant Property Act provides specific provisions for sending written notice to tenants before disposing or selling items.  Failure to adhere to these strict guidelines could leave the commercial landlord with liability to not only the tenant, but also third parties who may possess liens or have an interest in the abandoned property (i.e. equipment leases).  But, which address does notice need to be sent - the premises? the tenant's prior address? Further, is the landlord required to conduct a search for other addresses?
2. Does Notice Have to be Sent to Third Parties?  Beside the tenant's property left at the premises, there may be other entities with an interest in the property, including employees, creditors, financial institutions or leasing companies.  Has your attorney conducted a UCC search to determine if there are liens on these items?  If so, have you provided these entities appropriate notice?   Further, has the notice directed the tenant to inform third parties of the abandonment?
3. Can You Just Sell Valuable Abandoned Property? Although the New Jersey Abandoned Tenant Property Act provides for disposition of the tenant's property after appropriate notice, can the landlord collect any removal, storage, attorney fees, and/or other costs associated with the items?
4. What About Perishable Items or Trash?  Often upon re-entry, commercial landlords  find the premises with trash or perishable items.  Can the landlord simply throw these items away or does notice need to be sent first?
5. Do any Federal or State Statutes Preempt the Commercial Landlord's Actions?  Your attorney should be able to advise if any Federal or other State statutes effect your rights. For instance, are there any environmental issues that need to be addressed prior to disposal of the left over items?
6. What if the Tenant Shows Up During the Notice Period?  Often tenants will just leave the items left over for the commercial landlord to handle.  But what if the tenant shows up?  Can the commercial landlord charge them storage fees before the remove the items?  What about collecting all rents due and owing, including attorneys fees?

Prior to disposing, selling or giving the left over items back to the tenant or third parties, it is advisable that a commercial landlord review these and many more questions with a licenced New Jersey attorney.  Answering these questions beforehand can help you with the proper strategy to deal with troublesome tenants and keep your commercial property(s) profitable in these cautious economic times.

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With the downturn in the economy, many New Jersey residents are strapped for cash. A possible reprieve for some people is to file for bankruptcy protection. In the past, many unit owners with equity in their units would simply file for Chapter 13 bankruptcy protection.  Chapter 13 protection would allow the debtor to pay their secured debt in-full and their unsecured debt pro rata through a three to five year bankruptcy plan, while keeping current their monthly obligations.  For condominium, homeowners, and co-operative associations (“Associations”), a successful Chapter 13 proceeding would lead to payment in-full, overtime of their pre-petition secured condominium lien, a pro rata payment of any unsecured claim and being kept current with the Association’s monthly assessments.  

Many Debtors Now Filing for Chapter 7 Bankruptcy Protection
However, now many units are “underwater” - meaning that the value of the home is less than the mortgages and liens on the property.  Instead of filing for Chapter 13 protection and attempting to re-pay debts overtime, many debtors are beginning to file for a Chapter 7 bankruptcy liquidation.  In some cases, Chapter 7 debtors have simply ceased paying any post-petition monthly assessments.  When this happens, Associations are left asking:

• Who’s liable for the post-petition assessments?
• Will we be paid all secured pre-petition assessments?
• How does the debtor’s discharge effect the Association?
• Can we proceed with foreclosure efforts?

   
Following is a brief overview on the Associations’ rights and remedies when a unit owner files for Chapter 7 bankruptcy protection.

The Chapter 7 Discharge
When a debtor files for Chapter 7 bankruptcy protection, they are seeking a discharge of all pre-petition obligations. Generally, the Chapter 7 discharge releases a debtor from personal liability for pre-petition debts and prevents the creditors from pursuit of those debts against the individual debtor. For Associations, this means that it cannot pursue the individual debtor for the any of its pre-petition claims.  Associations can, however, pursue claims secured by collateral, such as Association lien claims. Valid Association liens pass through bankruptcy unaffected, while unsecured pre-petition Association claims are discharged and only paid pro rata if the Trustee finds assets to sell.

Unit Is Property of the Estate at Beginning of Chapter 7 Proceeding
Like a Chapter 13 bankruptcy proceeding, all of the debtor’s property, including interest in the unit, is placed into the bankruptcy estate (the “Estate”). Bankruptcy Code Section 541 defines property (“Property”) very broadly as all legal and equitable interests of the debtor. Included as Property of the Estate is the unit. Acts against the Property of the Estate are prohibited by Section 362 of the Bankruptcy Code (the “Automatic Stay”) and sanctionable.  For Associations, just like in a Chapter 13 bankruptcy proceeding, this means all actions, including collection efforts, such as filing lien claims, foreclosure, seeking judgment and/or wage executions, must cease until otherwise allowed by the court.

 

Chapter 7 Trustee Determines Whether to Abandon or Sell the Unit 
Overseeing this Estate, in a Chapter 7 Bankruptcy, is a Chapter 7 trustee (the “Trustee”).  It is the Trustee’s job to liquidate the non-exempt Property of the Estate for the benefit of creditors, including the Association.  However, in this economy, many units have little or no equity because either the value of the unit fell or the debtors leveraged all the equity.

To determine if equity exists, the Trustee will perform an equity analysis of the unit. Generally, the Trustee takes the value of the unit and subtracts all mortgages, liens, exemptions and costs of sale.  As a rule of thumb, if there is less than $10,000 in equity remaining after the equity analysis, then the Trustee will abandon the unit.  If there is equity in the unit, the Trustee can sell it to pay secured creditors in-full and make a pro rata distribution to unsecured creditors.

More often, the Trustee will abandon the unit because little or no equity exists. When abandonment occurs, the unit is removed from the Estate and placed back in control of the debtor.  Any mortgages or liens, such as an Association lien, that were valid prior to the bankruptcy filing remain intact.  By abandoning the unit, the protections of the Bankruptcy Code cease and the unit may be pursued by the Association.

Mere Ownership in Unit Obligates Debtor to Pay Post-Petition Assessments
A statutory exception to discharge is the debtor’s obligations to pay post-petition assessments.  So long as the debtor has a mere ownership interest in the unit, the debtor is liable for post-petition assessments. The debtor’s liability was clarified by statute in October 2005 when Congress amended Bankruptcy Code Section 523(a)(16):  

(a)     A discharge under section 727,...does not discharge an individual debt for any debt -

(16)     for a fee or assessment that becomes due and payable after the order for relief to a membership association with respect to the debtor's interest in a unit that has condominium ownership, in a share of a cooperative corporation, or in a homeowners association, for as long as the debtor or the trustee has a legal, equitable or possessory ownership interest in such unit, such corporation or lot.
 

(See 11 USC 523(a)(16), Emph added).

Prior to the 2005 amendments, post-petition assessments due to an association were non-dischargeable, so long as the debtor physically occupied the unit or rented the unit. See prior 11 USC § 523(a)(16), pursuant to the Bankruptcy Reform Act of 1994.  See also, Matter of Mattera, 203 B.R. 565, 572 (Bankr.D.N.J. 1997) (chapter 13 debtor’s non-occupancy of an association unit permitted her to discharge post-petition obligations due to the association). The 2005 amendments eliminated these two provisions entirely and added language that mere ownership creates the non-dischargeability of the post-petition assessments.
 

Association’s Rights to Enforce its Obligations
Until the unit is either sold or abandoned, it remains under the protections of the Automatic Stay.  Bankruptcy Courts in New Jersey will permit an Association relief from the Automatic Stay to pursue its interest in the unit, only (i.e lien claim and or foreclosure), if the debtor has not paid approximately three months of post-petition assessments. 

From a strategic and cost standpoint, the Association must make the decision to either expend money and file a motion for relief from the Automatic Stay or wait for the Trustee to abandon the unit.  Although the motion will provide certainty and allow the Association to pursue the unit, the costs may be prohibitive and may not be collectible within the foreclosure action.  Further, Trustees rarely abandon the unit within 90 days of the filing.  Often, the Trustee must confirm the reasonableness of the value of the unit through an appraisal.  This could take six months or more.  With all these factors, it is vital to have effective communications between the Association’s bankruptcy attorney and the Trustee.  These communications can provide the Association information that needs to make the best decision to enforce its rights. 
 

With the increase in Chapter 7 filings, Associations must not only be vigilant to protect their interests, but also strategic in how to protect themselves. Although the bankruptcy process is complex, thoughtful and sound legal advice at the beginning of a bankruptcy case can help address many thorny issues that Associations regularly face as a creditor in a bankruptcy proceeding.  

For more information on an Association’s rights in bankruptcy, please contact Thomas Onder at Stark & Stark in the Creditor’ Rights Group at (609) 219-7458 or tonder@Stark-Stark.com.

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Commercial landlords need to be vigilant in protecting their interests in these uncertain economic times.  Getting and keeping paying commercial tenants is the name of the game.  However, its not always that simple.  Sometimes, landlords have to make the difficult decision of whether to evict and try to collect against a non-paying tenant. The commercial landlord could be left with the tough choice of evicting a tenant and have a "dark store" until a new tenant can be found or working with their tenant by offering more favorable terms or concessions. 

Whatever business decision a commercial landlord makes, its advisable to know what your rights are, and what steps you have to make, before you proceed with a litigation strategy.  A clear strategy for dealing with non-paying tenants can help determine the success of your commercial property with existing, new and potential tenants. 

Following is a quick primer of questions to ask your attorney about both the eviction and collection process in New Jersey before proceeding with litigation.  Asking these questions ahead of time can help you make a more informed decision on how to proceed with a non-paying tenant.

EVICTION
In New Jersey, commercial landlords have the right to have a tenant evicted through a summary dispossess action (aka "eviction") for non-payment of rent.  Before attempting to evict tenants, the landlord should confirm with their attorney a number of questions, including:

1. Has a New Jersey attorney reviewed the lease?  It is important to have an attorney licensed to practice law in the State of New Jersey review the lease to make sure that it complies with State and Federal law.
2. Do any Federal or State statutes preempt?  Your attorney should be able to advise if any Federal or State statutes specifically define rent, which would only allow a certain portion to be collected.  If so, then you may need to re-inform the tenant of the amount due and owing before commencing suit.
3. Does the lease provide for collection of attorney fees as additional rent? To collect attorney fees, generally there must be either a contractual arrangement or a statute that provides for such collection.  For eviction actions, to include attorneys fees as rent in the eviction complaint, it must be specifically defined as additional rent.  Just having a provision that allows the collection of attorneys fees, but not defined as additional rent, will not permit the landlord to call a default and institute an eviction.
4. Who will testify to the amount owed? If the matter is contested, you will need to submit proofs and testimony to show the amounts due and owing.  It's a good idea to have your attorney review the lease and accounting with whomever is to testify.  Further, its important that the person testifying have actual knowledge of the books and records, as well as authority to testify.
5. Have all notice provisions been complied with? Before your file the eviction action, make sure you've complied with all notice provisions.  Your attorney should advise of the specific notice provisions that need to be followed under the lease, as well as if the Fair Debt Collection Practices Act and New Jersey Anti- Eviction Act, may be applicable.

COLLECTION
Commencing the eviction action is only half the battle for commercial landlords.  Once a landlord has obtained an order for summary dispossession, the next step is to actually evict the tenant and then try and collect money.  Following are questions to ask your attorney about what to do after the summary dispossession order (eviction order) has been entered.

1. Is settlement possible?  At this point it may be worth attempting to speaking with the tenant one more time before the actual eviction takes place. Sometimes just getting the order for possession will bring the tenant to the bargaining table.
2. Has the warrant been posted?  It is essential to go through with the entire eviction. This means not only obtaining the order for possession, but also enforcing it through a warrant of removal and actual eviction.  Its advisable to confirm your attorney has followed-up with the Sheriff to make appropriate arrangements.
3. What to do with left over items?  When the eviction takes place, you may want to check with your attorney on what to do with items left in the premises. For instance, if a copy machine has been left in the premises, do you know who owns it?  If not, how do you find out?  Further what rights do you have in that equipment?  These issues should be thoroughly discussed with your attorney.
4. How do you get paid? After the landlord has gotten possession, the next steps is getting paid.  In New Jersey, landlords usually have to commence a separate action to collect all sums due and owing.  However, before you authorize a collection action you may want to ask your attorneys about what steps you've done or have to do to mitigate damages.  For instance, if the lease term was 10 years and you evicted the tenant after three years, how much can you collect?  Are your attorneys fees provided to be collected in the lease?  What about improvements?
5. Are there guarantors on the lease?  Besides suing the tenant, you and your attorney should thoroughly review the lease to see if there are other parties that you can try and collect for arrears and damages owed.

Prior to making that decision to evict a non-paying tenant, it is advisable that a commercial landlord reviews these and many more questions with a licensed New Jersey attorney.  Answering these questions beforehand can help you with the proper strategy to keep your commercial property(s) profitable in these cautious economic times.

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The bankruptcy filing today of Boscovs Department Stores further demonstrates how consumers have been hurt by the housing downturn, job losses and higher costs for food and fuel. Following on the heels of Linens N Things and The Sharper Image, Boscov's cited decreased consumer spending and will immediately close 10 of its 49 stores, most of which are in New Jersey and Pennsylvania.

Suppliers to these and other similarly situated retail outlets have substantial rights to reclaim merchandise shipped to a debtor prior to their bankruptcy filing. Today's podcast on Boscov's Bankruptcy will explain those rights.

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Three Critical Issues for Suppliers
On May 2, 2008, Linens-N-Things and its affiliated entities filed for Chapter 11 bankruptcy protection in the District of Delaware. Linens-N-Things has a number of different suppliers that are effected by this bankruptcy filing. Following are three (3) very important issues that suppliers should know about to ensure their rights in the bankruptcy proceeding.


RECLAMATION
Certain suppliers have the right to reclaim goods that they have shipped a bankrupt debtor. A creditor may attempt reclamation of their goods sold in the ordinary course under Bankruptcy Code § 546 (c). However a supplier must move quickly on their right to reclaim any of these goods that are lost. The supplier must make a demand in writing for reclamation of the goods no later than 45 days after delivery. If the 45 day period has not expired as of the date of the filing of the bankruptcy petition, the supplier will be provided an additional 20 days to demand reclamation of the goods sold.


ADMINISTRATIVE EXPENSE
In addition to reclamation, suppliers also have the ability to seek a priority administrative expense under Bankruptcy Code §503 (b). This claim is for the “value of any goods” received in the ordinary course of business by a debtor within 20 days prior to the bankruptcy filing. To obtain this expense, the supplier must make a request, often by motion. A supplier who exercises their rights, can be in a better position than unsecured creditors since the Chapter 11 Plan of Reorganization cannot be confirmed unless all administrative expense claims are paid in cash on the effective date of the bankruptcy plan.


PROOF OF CLAIM
In addition to the other rights mentioned, suppliers should also file a Proof of Claim for any amounts due and owing prior to the petition date. The Bankruptcy Code allows creditors to be paid with other similar situated creditors through the Bankruptcy Plan. The Proof of Claim deadline is usually provided at the beginning of the case and will allow creditors to exercise these rights. It is important to file a Proof of Claim properly and prior to the deadline.


For my information on supplier’s rights in the Linens-N-Things bankruptcy case or any other bankruptcy matters, please feel free to contact either Tom Onder or Jeff Posta in the Bankruptcy &  Creditor’s Rights Group at (609) 219-7458 or tonder@stark-stark.com, and (609) 791-7021 or jposta@stark-stark.com.

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Recently, the Appellate Division of the State of New Jersey in Patel v. 323 Central Avenue Corp., et. al., declared that a tenant’s exercise of his option to purchase certain commercial property was barred.  The court found that the contract was never signed, no enforceable oral agreement was ever intended, the tenant did not make a valid election to exercise his option under lease, and the tenant did not extend his option under the lease.  See Patel v. 323 Central Ave. Corp., et al. A-3724-06T2 (App. Div. 2008).


This decision is very helpful to commercial landlords as it supports basic contract law maxims, which requires commercial tenants who wish to exercise certain options to exercise those options with particularity and pursuant to the terms of the contract.


Background
The tenant was a physician who entered into a lease agreement for commercial property in Orange, New Jersey.  The landlord was wholly owned by Ocean Mountain Healthcare Incorporated.  In addition, Cathedral Healthcare Systems (the “Affiliate”) had an affiliation agreement with the hospital.  The tenant’s lease for the commercial space was to terminate on March 19, 2005.  The lease provided the tenant with an opportunity to extend the term of the lease and the right to purchase the commercial property.  The tenant sent a letter to the Chairman of the Affiliate (not the landlord)  in February 2004 expressing a desire to exercise the option - almost a year prior to the expiration of the contract.  Although not specifically noticed by the tenant, the landlord sent back an unsigned  written contract to sell the property.  The tenant then forwarded a deposit check to the landlord with the signed contract.  After the lease term ended, the landlord forwarded to the tenant a letter advising that it was no longer in the position to sell the commercial space, later returning the tenant’s deposit check.


The tenant filed suit claiming specific performance, breach of contract, breach of implied covenant of good faith and fair dealings, fraud, consumer fraud, successor liability.  The lower court dismissed all counts of his complaint.  The Appellate Division affirmed that ruling.  


Appellate Division Upholds Landlord’s Rights
The Appellate Division, upon review of the case, noted that the tenant failed to present clear and convincing proof of the contract.  Noting in the record, that although that the landlord had forwarded a contract to the tenant to sign and the tenant had executed the contract, as well as provided the deposit, at no point had the landlord actually signed the contract.  Further, the Court noted that when the tenant exercised its option to purchase the lease term failed to request an extension of the term.  As such, when the landlord advised the tenant that it no longer wanted to sell the building, the tenant was outside his contractual period.  The Court also noted that the tenant had failed to strictly comply with the terms of exercising his option.  For instance, the contract provided that the tenant was to provide notice to the landlord via certified mail, return receipt.  Rather than sending to the landlord, the tenant sent this option to the Affiliate.



Practical Implications for Commercial Landlords
This opinion is very beneficial to commercial landlords providing a tenant the option to purchase the commercial property.  The contractual obligations of both parties will not be over ridden simply by one party’s assumption that it has complied with specific provisions of the contract.
    
Following are some issues that commercial landlords should review with their attorney before providing an option to purchase.  

1. Review the notice provisions of the option.  For an option to be exercised correctly, it should be noticed pursuant to the terms of the contract.  If the notice requires for certified mail, return receipt then the notice should be sent via that method. .
2. Be sure to correctly exercise the option.  When an option is exercised, it is important for the party exercising that option to ensure that all portions are exercised.  In this case, the tenant only attempting to exercise his option to purchase the property.  He did not exercise any option to extend the lease term.  Due to the tenants failure to exercise his option to extend the lease period, when the landlord rejected his offer to purchase the property, the tenant had no recourse.
3. Is this the final version of the lease?  In this case, the landlord’s counsel was acute to note to send a “draft” contract without any signatures.  The landlord did not agree to these terms but rather put a “draft” contract out for the tenant’s review.  As such, when the tenant signed it, the contract was still in flux at this point.

For more information on exercising options under a contract or enforcing rights of specific performance under a commercial lease,  please feel free to contact Tom Onder of Stark & Stark’s Commercial Litigation and Creditor’s Rights Group at (609) 219-7458 or via email a tonder@Stark-Stark.com.

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For more information on landlord tenant issues, for residential or commercial leases, please feel free to contact Tom Onder, Stark & Stark’s Commercial Litigation and Creditor’s Rights Group at (609) 219-7458 or via email a tonder@Stark-Stark.com.

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The New Jersey Appellate Division in an unpublished decision, Cesar S. Arredondo v. Nersy Pujols, Docket No. A-5459-05T25459-05T2, ruled that breaches of both of a lease provision and a New Jersey statute for failing to obtain municipal permits before commencing construction work were NOT grounds for evicting a commercial tenant.  Although very fact specific to a landlord with apparently “unclean hands”, this decision highlights pitfalls that can beset a landlord in the New Jersey eviction process.


Background - Landlord Tries to Evict on 3 Non-Payment Grounds
In Cesar S. Arredondo v. Nersy Pujols, the tenant operated a bodega in Jersey City pursuant to a written lease with a 15 year term.  The landlord, who purchased the property from a prior owner, claimed not to have known of the tenant’s lease.  Subsequently, the landlord filed an eviction complaint based on three (3) non-payment defaults, failure to: 1) provide insurance; 2) obtain municipal electrical permits for the relocation of refrigeration compressors and an exhaust fan (the “Electrical Work”); and 3) get the landlord’s written approval on the Electrical Work.


At trial, testimony included the landlord, the tenant, and the tenant’s two witnesses, an electrical inspector of the City of Jersey City and a close friend of the defendant.  The inspector testified that a physical inspection did not disclose any dangerous conditions and the work appeared to be in a workman-like manner.  More importantly, the inspector advised that the permits could be obtained post-completion to correct deficiencies.


The trial court concluded the failure to obtain permits for the Electrical Work breached the lease, but denied the landlord’s judgment on the other two allegations.  Essentially, finding the landlord’s testimony inconsistent on the approvals and because the defendant provided insurance prior to the trial (no harm no foul). The tenant appealed the judge’s ruling that failure to obtain an electrical permit was a “material” breach of the lease.


Cannot Evict for “Minor” Breaches (No Permits, No Insurance, Sidewalk Sales, Etc.)
The Appellate Division agreed with the trial court on the insurance issue and the landlord’s inconsistent testimony.  However, the Appellate Division held that the breach was “not material” to warrant the tenant’s forfeiture of his leasehold interest. The Appellate Division noted that the New Jersey statute specifically provides grounds for an eviction where there is a “...violation of such covenants or agreements” of the lease. See N.J.S.A. 2A:18-53.  However, before a judgment may be entered, the landlord must establish the breach. 


Citing New Jersey case law, the Appellate Division held an eviction based on a “forfeiture” is deemed a penalty for failing to do a particular thing.  In New Jersey, the law does not favor forfeitures and requires a trial court to strictly review the provisions of the lease that a landlord seeks to forfeit the tenant’s interest, resolving any ambiguous language in favor of the tenant.


Based on the testimony and review of the lease, the Appellate Division held the breach was a minor deviation of the lease terms.  The court held that the work was undertaken under the direct order of the plaintiff and done by an independent contractor.  Further, all work was done in a workman-like fashion and that pursuant to the Jersey City inspector, the defendant could retroactively cure any of the code violations by obtaining a permit. 


In discussing such minor violations, the court noted that other actions that could be deemed minor violations of a lease that would not be grounds for an eviction could include sidewalk sales, citing the prior Appellate Division case of Johnson v. City of Hackensack, 200 N.J. Super. 185 (App. Div. 1985).


Concerns When Instituting Eviction Action for Non-Payment Defaults
This unpublished decision raises a number of pitfalls for commercial landlords when deciding to institute an eviction based on non-payment issues. In this case, the landlord clearly failed to submit the proper proofs that there really was a “material” non-payment ground to evict.  Before instituting an action to evict a tenant, landlords should consider a number is issues including:


1)     What proofs do I have?  In this case, the landlord had serious inconsistent statement, whereas the tenant’s testimony was not questioned.  Further, the tenant had two additional witnesses to prove his case, one being a city electrical inspector; and


2)     Is the Breach “Material”?  Here, failure to obtain permits was not “material”.  However, would that have changed if what the landlord was cited for resulted in a fine or penalty from the municipality?


3)     Can the Breach be Remedied before Trial?  Here, the lack of insurance became a non-issue because it was remedied prior to trial. What other breaches can be remedied?


Strategic Use of Eviction Proceedings
This and other recent decisions by the Appellate Division raise pitfalls for commercial landlords in eviction proceedings. Landlords may think to strategically use the eviction process as a way in which to make the tenants become compliant with the lease.  To lessen the legal costs, landlords should take care to place in their lease that the tenant is required to pay the landlord’s attorney fees. 


In the case discussed, although an eviction did not occur, the act of taking the case to trial precipitated the tenant to obtain the proper permits and get insurance.  However, if a landlord wishes to actually evict the tenant due to a non-payment issue, it is extremely important to sit down with your attorney ascertain “minor” or technical breaches.


For more information on evictions or other commercial lease issues, please feel free to contact Tomas S. Onder or Vincent J. Mangini in Stark & Stark’s Commercial Real Estate Litigation Group.  Mr. Onder can be reached at (609) 219-7458 or via email a tonder@stark-stark.com and Mr. Mangini can be reached at (609) 219-7437 or vmangini@stark-stark.com.

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Many businesses are receiving “preference” demand letters directing the return of money received from bankrupt debtors. Among the more notable bankruptcy cases in New Jersey from where such preference demands may arise include: Best Manufacturing Group, New Jersey Affordable Homes, Rockaway Bedding, Marcal Paper Mills, Kara Homes, Elliot Building Group and Ash Holdings. Although this may seem an odd demand - return money for perfectly delivered goods or services -  the practice of recovering “preferences” in bankruptcy is allowed under the Bankruptcy Code.  However, before you go writing a check to return hard earned money, you should consult with a bankruptcy attorney to find out if the transaction qualifies for defenses, as well as your best possible negotiating position.
   

What is Preference?
A potential preference is a payment received from a debtor, made within 90 days of the bankruptcy filing.  Bankruptcy Code section 547(b) allows a bankruptcy trustee or debtor-in-possession to avoid this payment, if the transfer was to or for the benefit of a creditor on account of an antecedent debt while the debtor was insolvent.  When Congress enacted the Bankruptcy Code, the policy behind preferences was to level the playing field for all creditors by not allowing a creditor to receive more than it would have within the debtor’s bankruptcy case. 


Proper Response to the Preference Demand Letter Critical
Although the Bankruptcy Code gives the power to recover these transfers, your business may have certain defenses to eliminate, or at least lessen, your exposure. These defenses include: payments made within the ordinary course of business; contemporaneous exchange for new value; payments made outside of the 90 day preference period; settlements during the bankruptcy case; and/or payments made via C.O.D.  To determine if your transaction qualifies for one of these defenses and make the proper response, it is imperative review the account information.


Information Needed to Determine Defenses
Prior to contacting your attorney, you should gather the full payment history at least a year before the bankruptcy filing.  This information includes:
1.    all correspondence, contracts, emails and the like with the debtor;
2.    a copy of all invoices, showing invoice date, terms, and amount of each invoice;
3.    a copy of the payments received (i.e. checks, wires, cash deposit slip) and date posted to your bank account;
4.    number of days elapsed between date of invoice and date payment was received; and
5.    personnel involved with the debtor’s account, so they can advise how payments were made, applied and any unique issues with the debtor. 


Once your attorney has this information, it will raise a number of questions  For instance, are some of the payments alleged as preferential outside the 90 day period?  Or, are the payments made within the ordinary course of your industry?  However, how do you determine your industry compared to a similar industry? Do you need an expert witness?  These and many more questions should be addressed with your bankruptcy attorney prior to sending any response.   


Stay tuned for future posts within the coming weeks dealing with a more detailed discussion on specific preference defenses, including ordinary course of dealings, contemporaneous exchange for new value and industry specific issues for the building and construction, REITs and commercial developers, and other service providers.


In the interim, for more information on defending a preference action, or other bankruptcy issues, please feel free to contact Tom Onder, Stark & Stark’s Bankruptcy & Creditor’s Rights Group at (609) 219-7458 or via email a tonder@Stark-Stark.com.

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