In re Ornagevale LLC, No. 23-10687 (Bankr. D. Del. Aug. 8, 2023)
Typically when a bankruptcy is filed, with few exceptions, creditors are prevented or ”stayed” (per Section 362 of the Bankruptcy Code) from pursuing claims against the debtor until the creditors seek and obtain permission from the bankruptcy court to lift/modify the automatic stay. When the court is presented with a motion to modify or lift the automatic stay allowing a creditor to proceed in an action against a debtor after the debtor has filed bankruptcy, the bankruptcy court must consider whether cause exists to lift/modify the stay.
Was the Lease Terminated?
In In re Ornagevale LLC, No. 23-10687 (Bankr. D. Del. Aug. 8, 2023), the debtor was the tenant under a commercial real estate lease. The landlord had filed the equivalent of an eviction hearing in California arguing that the lease had terminated. The debtor on the other hand, opposed eviction arguing that the lease had been extended.
On the eve of the trial on the eviction proceeding, the debtor filed bankruptcy under Chapter 11. Immediately thereafter, the landlord sought to lift/modify the stay to proceed to trial in the state court to evict the debtor. Meanwhile, the debtor sought approval in the bankruptcy court to assume the lease, arguing that the lease had not been terminated and that the lease was essential for a successful reorganization.
The issues presented to the bankruptcy court were whether the lease had terminated, and which court should decide this issue. After all, a lease that has been terminated cannot be assumed — and the success of the bankruptcy case hinged on the lease being assumed and not being terminated.
Whether Cause Exists to Lift the Stay
In a proceeding to lift/modify the automatic stay involving real estate, the bankruptcy courts examine whether cause exists to lift/modify the automatic stay. Cause exists if (a) the debtor does not have any equity in the property and the property is not needed for an effective reorganization or (b) the creditor is adquately protected. In Ornagevale, the court examined whether cause existed. In doing so, the court reviewed various tests employed by bankruptcy courts in Delaware and the Second Circuit Court of Appeals and concluded that a common-sense approach was better suited to determine if the litigation should proceed in the state court where the eviction was pending or in the bankruptcy court.
In its analysis, the court recognized that the automatic stay does not apply if the debtor (not the creditor) is a plaintiff seeking relief. Here, the debtor was seeking the same relief in the bankruptcy court as it was in the state court, i.e., the lease had not been terminated. For these reasons, it appeared the debtor was merely seeking what it perceived to be a more favorable forum.
From there, the bankruptcy court went on to note that the debtor filed Chapter 11 on the eve of the trial setting. As such it stated,
[w]hen the debtor files a bankruptcy case immediately on the eve of trial in a dispute over ownership of the debtor’s critical assets, these circumstances (and the risk of misuse of the bankruptcy process) make it incumbent on the debtor to provide good reasons why stay relief should not be granted.
Id. at 22-23.
Having found that the debtor failed to provide good reason why the stay relief should not be granted and having found that (a) the bankruptcy case was filed on the eve of trial, (b) the state court was more familiar with the facts and issues, (c) the issues had been extensively briefed in the state court, and (d) the state court was better suited to resolve lease disputes, the court modified the stay to permit the matter to proceed in the state court..
Of note, however, the bankruptcy court stated that it might not have modified the stay if the matter was not ready for trial. So, the takeaway from this matter is that the debtor ought not wait to file bankruptcy until the eve of a trial setting.