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- Title
CLOSING THE LOOPHOLE IN COMMERCIAL LANDLORD BANKRUPTCIES: WHY THE NINTH CIRCUIT MADE THE RIGHT DECISION IN MATTER OF SPANISH PEAKS HOLDINGS II, LLC.
- Authors
BARNHARDT, BRADFORD N.
- Abstract
The Ninth Circuit's recent decision in Matter of Spanish Peaks Holdings II, LLC exposes a major loophole in the Bankruptcy Code in the landlord-tenant context. To exploit this loophole, real estate developers can establish two entities and have them enter into a lease as landlord and tenant, with the lease's terms heavily favoring the tenant. Then, should the landlord have to file for bankruptcy relief and liquidate its encumbered property, most lower courts will let the tenant retain possession for the duration of the lease. In this way, the developer will receive a financial windfall in the form of either a buyout or the opportunity to continue running the tenant's business on the purchaser's land. This windfall will come at the expense of the landlord's creditors, since encumbered land sells for less at auction. The majority approach therefore fails to balance the Bankruptcy Code's competing goals of maximizing creditor recovery and protecting tenants. To prevent such an abuse of the bankruptcy system, the Ninth Circuit adopted a rule that requires tenants to request adequate protection prior to the bankruptcy auction to receive continued possession or compensation. Because the tenants in Spanish Peaks failed to make such a request, the Ninth Circuit held that it was appropriate to terminate their leases without compensation. The court left open the more difficult question of what it would have done had the tenants requested adequate protection. This Comment explores that remaining issue. It first argues that Spanish Peaks was a result-oriented opinion aimed at depriving two tenant entities of continued possession or compensation. It next proposes a way for judges to fashion adequate protection so as to minimize the impact of an undeserving tenant's recovery on the landlord-debtor's legitimate creditors. Since the Ninth Circuit's holding allows judges to minimize tenant recovery and thereby deter developers from exploiting the loophole in the Bankruptcy Code, this Comment concludes that the minority approach of fashioning adequate protection is more pragmatic than the majority approach of always granting continued possession.
- Subjects
BANKRUPTCY; HOUSING courts; REAL property; LIQUIDATION; LANDLORDS
- Publication
Emory Bankruptcy Developments Journal, 2019, Vol 35, Issue 1, p191
- ISSN
0890-7862
- Publication type
Article