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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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With the recent downturn in the market, a number of commercial tenants are experiencing financial difficulties. In turn, this can lead to problems for commercial landlords, most importantly, the tenant staying current with lease payments. This may then lead to the tenant filing for bankruptcy protection. If your commercial tenant files for bankruptcy, it is wise to have a strategy in place to not only minimize the time of non-payment, but also maximize the ability to receive rents and damages allowed under the Bankruptcy Code. 

 

Following are four (4) questions for commercial landlords to review with an attorney  whenever a commercial tenant files for bankruptcy protection:

 

1.    Have You Filed a Proof of Claim(s)?  As soon as the tenant/debtor files for bankruptcy protection, commercial landlords should ensure their rights to payment(s) by filing appropriate proofs of claim.  It is advisable to review with your attorney the current account history and lease to ensure all fees are being accounted. Landlords may be able to file upto three (3) different types of claims:

    a.    Pre-petition Claim. Section 502 of the Bankruptcy Code provides that creditors are permitted to file a proof of claim for all pre-petition charges and assessments owed.  If a tenant files for bankruptcy, the landlord is permitted to file a proof of claim for all fees and charges incurred prior to the filing date;

 

    b.    Post-Petition Administrative Claim.  Section 503(b)(1) of the Bankruptcy Code provides a creditor a priority claim for all “actual, necessary costs and expenses of preserving the estate”.  If the tenant remains in the premises after the bankruptcy and does not reject the lease, the commercial landlord may be allowed payment  ahead of other creditors for amounts incurred during this period; and

 

    c.    Post-Rejection Damage Claim. Section 503(b)(7) of the Bankruptcy Code provides a commercial landlord the right to be paid for “post bankruptcy rejection” damages. If the tenant rejects the lease, certain damages incurred and the remainder of the lease may be permitted priority before payment of certain claims.

 

2.    Is the Debtor/Tenant Assuming or Rejecting the Lease?  Landlords should inquire whether the debtor/tenant intends to assume or reject the lease.  Bankruptcy Code Section 365 provides that tenants are permitted to assume a commercial lease, as long as they cure all post-petition defaults. If they reject the lease, then the landlord may be able to proceed with an eviction action to remove the tenant. However, landlords should know that the Bankruptcy Code permits the debtor 120 days to decide whether to assume or reject the lease, with an additional 90 day extension.  All told, this can leave the landlord sitting around for more than 7 months without payment.  If your not being paid, it may be advisable to have the Bankruptcy Court allow you to proceed with an eviction action. 

 

3.    Should you File a Motion for Stay Relief to Proceed with an Eviction?   The debtor/tenant may not advise their intent to assume or reject the lease.  As noted, during this time, the debtor/tenant can use the premises without paying anything.  The landlord is permitted to file a motion for “Relief from the Automatic Stay”.  This Motion, if granted,  permits the landlord to resume or commence with a state court eviction action.

4.    What to Do with Items Left by a Tenant?  If the debtor/tenant leaves equipment, inventory or equipment at the premises, can you just throw it away? Does anyone have an interest in the left over items, like the debtor/tenants’ bank?   Can you recover storage fees? When a tenant/debtor files for bankruptcy, these left over items may be part of the bankruptcy estate. Gaining proper approval from the Bankruptcy Court, before disposing of the left over “junk” is essential to limiting liability.  For instance, the left over property may be secured by a bank, financial institution or creditor. You may want to have a UCC Search conducted to ascertain whether any security interest exists.  If security interests are discovered, it is advisable to give notice to those entities, possibly through a motion with the Bankruptcy Court.

 

These are just a few of the questions a landlord should ask when a debtor files for bankruptcy.  By asking these questions at the start of the bankruptcy, landlords can limit the loss or liability, as well ensure their right to payment through the Bankruptcy Code.

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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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When was the last time you reviewed the insurance provision of your tenant’s commercial lease?  Do you know if the lease prohibits a high deductible for the tenant?

It is probably a good time to take a look at the lease in light of the New Jersey Appellate Division’s decision on August 20, 2007 in Boston Market Corporation f/k/a Golden Restaurant Operations, Inc.  v. Myrus Hack, docket No. A-0182-05T20182-05T2 27-2-8272 (unpublished). The Appellate Court held that a commercial tenant was not in default under a lease because it’s maintained insurance with an extremely high deductible.

The Appellate Court characterized this issue as: “The simple question posed here is whether or not the insurance arrangements made by [plaintiff] comply with the lease provisions respecting the tenant’s insurance obligation.”  The lease did not expressly prohibit insurance with a high deductible.

The Appellate Court focused on whether the insurance obtained by plaintiff, with high deductibles of up to one million dollars, constituted self-insurance or no insurance at all. The tenant always maintained insurance coverage for the property.

The Appellate Court concluded that the tenant was not in default of provisions relating to insurance requirements in the lease between the parties.

Although the Appellate Court may have placed form over substance in its lease interpretation, the decision highlights the value for commercial landlords to review and understand their lease language regarding their tenant’s responsibility to obtain insurance. Specifically, commercial landlords should review their leases for the following points:

1) Type of Insurance.  Ensure that the lease describes the particular type of insurance to be maintained;

2) Maximum Deductible.  Provide a provision within the lease for a maximum deductible.  This can help eliminate a tenant obtaining insurance with a higher deductible than any potential loss that could be sustained if the property were destroyed.  For instance, if the property is worth $1 million dollars, but the deductible is $1 million dollars, the tenant is the one responsible for the $1 million dollar loss.  A tenant’s bankruptcy could wipe out their liability;

3) “First Dollar Coverage.”  Check that the lease contains a statement that the insurance policy must furnish “first dollar coverage.”  This allows the insurance carrier to pay the claim on a first dollar basis, then require the tenant reimburse the carrier up to their deductible amount.
 

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Recently, the Appellate Division of the State of New Jersey in Hodges v. Feinstein, Raiss, Kelin & Booker, LLC declared that law firms that regularly file summary dispossess action (aka “evictions”) for non-payment of rent are subject to the Fair Debt Collection Practices Act (“FDCPA”). Additionally, the Appellate Division held residential evictions for failure to pay rent must now be made by verified complaint. 

This decision is very important for landlords and their attorneys since failure to comply with the FDCPA’s collection procedures could subject the landlord and the law firm to attorneys fees, costs and damages.

Hodges involved two sisters, Renita Hodges and Rochelle Hodges. The sisters resided in separate apartments in Newark’s Sotnas Garden Apartments operated by the Sasil Corporation. The rent was subsidized by the United States Department of Housing and Urban Development, (“HUD”). The HUD regulations define rental obligations as a percentage of the adjusted monthly household income. However, the landlord’s lease defined additional rent as late charges, reasonable attorneys fees and court costs.

Due to the Hodges sisters regular arrearages, the landlord directed the law firm to file an eviction action. In the complaint, the firm listed non-payment of rent, which encompassed the lease’s defined arrears for all rent, including late charges, attorneys fees and costs. 

The sisters counterclaimed for, among other things, violating the FDCPA. They claimed that the lease requirement did not circumvent the federal HUD definitions of rent. Further, the landlord did not inform the Hodges that they were required to pay “only” the statutory defined rent as provided under HUD to avoid eviction. The trial court granted the landlord’s eviction action and dismissed all counts by the Hodges. The Hodges then filed a motion for leave to appeal. 

The Appellate Division held that the law firm was a debt collector under the FDCPA, citing:

Whether the available remedy in a summary dispossess action is possession, damages, both, or some other result, is of little consequence. The nature of the threat employed to garner payment does not alter the fundamental fact–the reality–that debt collection is attempted, held that in practice eviction proceedings are a powerful debt collection mechanism.

The Appellate Division then referred the matter to the Special Civil Part Practices Committee to draft for the court’s consideration proposed rules to harmonize the FDCPA with the state’s eviction proceedings. In the interim, the Appellate Division has required that all summary dispossess complaint to be verified and expressly state that creditor’s identify and the amount of the rent that must be paid to the landlord or the clerk before 4:30 p.m. on the day of trial.

This opinion is important to both residential and commercial landlords. Before attempting to evict tenants, the landlord should confirm with their attorney the correct amounts owed. As in Hodges, a contractual obligation in a lease for additional rent will not simply override the Federal law that limits the rent.   Although this case is directed to residential landlords, commercial landlords should take heed as well in reviewing their leases and accountings. 

Following are some questions to consider before proceeding with an eviction:

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, it must be specifically defined as additional rent;
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; and
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 the Fair Debt Collection Practices Act and New Jersey Anti- Eviction Act, if applicable.

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This week's New Jersey Legal Update podcast will discuss the new bankruptcy code and how it affects creditors and franchisors. This podcast will address the creditor's treatment under the debtor's plan, the creditor's rights for reclamation of goods, and the debtor's assignment or rejection of the franchise agreement.

This week's New Jersey Legal Update is presented by Thomas Onder, a member of Stark & Stark’s Franchise and Creditor's Rights Groups.

You can download the New Jersey Legal Update Podcast # 49 here. (7.8 MB)

Technorati Tags: New Jersey : Podcast : Franchise : Creditor's Rights

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This week's New Jersey Legal Update podcast will discuss the important local bankruptcy rule amendments for condominium associations and secured creditors.

This week's New Jersey Legal Update is presented by Thomas Onder a member of the Firm's Bankruptcy & Creditor's Rights group.

You can download the New Jersey Legal Update Podcast # 40 here. (8 MB)

Technorati Tags: New Jersey : Podcast : Bankruptcy

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