Chapter 11 Bankruptcy: Can it Stop Eviction under a Commercial Lease?

(For other detailed discussions on chapter 11 procedure, common issues and more, be sure to read Wartchow Law’s Chapter 11 Blog.)

As for many issues in bankruptcy, whether filing bankruptcy can stop an eviction under a commercial lease depends on several factors, including the precise legal status of the lease as of the file date of the Chapter 11 bankruptcy case–has the lease been lawfully terminated or expired, or is it simply in default–and the legal steps taken by the landlord pursuant to the Minnesota eviction process before the bankruptcy is filed. The ideal chapter 11 scenario to stop a commercial eviction (or residential eviction for that matter) is to file a bankruptcy petition before the lease is terminated or expired either under the law or under the terms of the lease and also before a judgment of possession is ordered by district court. If these two factors are present, the lease can still be cured in a chapter 11 and, even if the debtor decides not to keep the lease, at least the debtor will have significantly more time to vacate the premise and relocate under a more favorable lease.

In Minnesota, the eviction process is typically an expedited proceeding, meaning that once a commercial landlord petitions the district court for eviction—usually for non-payment of rent or other default by the tenant—relief in the form of eviction can be ordered in a matter of weeks. The key to bankruptcy stalling an eviction proceeding is timing: ideally the bankruptcy should be filed before a judgment of possession is entered in a commercial eviction proceeding.

The very first matter that must be considered is the legal status of the lease, since this will greatly impact the debtor’s rights regarding the lease and, accordingly, also the length of time that the chapter 11 debtor can continue to use the premises. If the lease is expired or otherwise has terminated prior to the bankruptcy filing–or if the landlord has obtained a judgment for possession–eviction may only be stalled for a short period of time, perhaps as little as a week or two. Even though chapter 11 provides a new platform for potential lease re-negotiations, it cannot resurrect a lease that is no longer valid under the law without the cooperation of the lessor. Put another way, while eviction proceedings will be stayed by the filing of chapter 11 (or any form of bankruptcy for that matter), it will not breathe new life into a lease that was already dead (terminated or expired) before the bankruptcy was filed. Even if the lease is expired or terminated, a well-advised landlord will still first go through the bankruptcy court before continuing with the eviction, however even this initial procedure in bankruptcy court can be expedited to a matter of a week or two. in contrast if the lease is not yet terminated or expired, the landlord faces a longer process in the bankruptcy court because the debtor has an unequivocal right to cure and assume (i.e., “make good”) on the defaulted lease so long as the debtor can evidence its practical and financial ability to do so. Whether a particular lease has terminated or expired will depend on the terms of the lease and/or if the landlord has taken the requisite steps to terminate the lease prior to the filing of bankruptcy. Often this “lease termination” step is missed in the course of an eviction proceeding, thus a business on the doorstep of eviction may still have an opportunity to make good on their lease and, unlike many state laws, chapter 11 will affords the necessary time and legal process to cure a defaulted lease.

Assuming the lease is not terminated or expired and even though the tenant is in default, chapter 11 provides a temporary respite from eviction process during which time the tenant must have a plan to cure any defaults in order to continue under the lease. A qualified Chapter 11 attorney can advise a commercial tenant (i.e., the prospective debtor) of the cure period afforded in a Chapter 11 filing, their rights in bankruptcy to stop the eviction and reorganize debts as well as the timeline and costs expected regarding the options to either assume or reject the troubled lease.

For more detailed information about chapter 11 and commercial leases, see also Commercial Leases and Chapter 11 Reorganization: The Requirements and Timelines under the Bankruptcy Code.

For other issues typically involved with chapter 11, keep reading to Recognize the Circumstances that Often Lead to Chapter 11 including Sales Tax Obligations in Chapter 11.

Located in Edina, Minnesota, Wartchow Law Office is a Chapter 11 law firm providing Chapter 11 consultations to review the business lease and other liabilities affecting a Chapter 11 bankruptcy proceeding. Chapter 11 is also available to individual Chapter 11 debtors having unique circumstances. 

Sales Tax Obligations and Chapter 11 Business Reorganization

Minnesota Department of Revenue levies sales tax on any number of transactions common to small businesses, most often being on sales of taxable goods and services. Sales tax is considered a “trust” tax, as it is collected by the retailer and must be held in trust for the State until remitted on the appropriate due date. Responsibility for paying sales tax falls not only on the business but also at times on the company’s principals.

Since the sales tax money collected never actually belongs to the business, use of the tax money for any purpose other than direct remittance to the State is expressly  disallowed. In practice, however, it is common for businesses to merge the sales taxes collected with its own operating funds, thus at times risking that some of the taxes may be used to cash flow general operating expenses rather than remittance to the State. When this happens and a business cannot timely remit the sales tax to the State, the domino effect happens quickly and can be synonymous with the end of business operations. For retailers, non-payment of sales tax obligations means their sales tax vendor permit may be quickly revoked. Once revoked, no more sales are allowed. For a business such as a restaurant or bar, their liquor license additionally can be posted and the business prevented from further purchases of liquor, wine and beer inventory.

When past due sales tax is the problem, Chapter 11 can leverage certain relief that  may not otherwise be available to the small business in a non-bankruptcy context.  Specifically in Chapter 11 business reorganization, past due sales taxes can be statutorily repaid over five years at low interest, and under some circumstances sales tax permits and liquor licenses can be reinstated while personal collection may also be stalled to allow time for the business to reemerge with a confirmed Chapter 11 plan.

While a multitude of factors should be considered before filing Chapter 11 business reorganization, the repayment of sales tax obligations over five years that is prescribed by the Bankruptcy Code can offer significant relief that may not otherwise be available without a bankruptcy filing. Sales tax is just one example of the various circumstances that often lead to Chapter 11 bankruptcy.

Contact Chapter 11 attorney Lynn Wartchow for an initial Chapter 11 consultation to review tax and other business liabilities affecting a Chapter 11 bankruptcy proceeding. Office located in Edina, Minnesota.

Recognize the Circumstances that Often Lead to Chapter 11

The factors commonly precipitating a Chapter 11 business proceeding are numerous: lawsuits filed by unsecured creditors, reluctance of secured lenders to extend or continue financing terms, attachment of business assets including bank account levies, foreclosure or repossession of key assets used in business, adverse administrative actions such as license posting by the state, aggressive tax collection, a commercial eviction proceeding and the list goes on.

Businesses are often cyclical in their financial condition, and experience financial highs and lows the same as individuals. Not every ailment justifies the time and expense of a Chapter 11 business proceeding, and an experienced and principled Chapter 11 attorney can advise if that is the case for your business. Sometimes, however, a situation that warrants Chapter 11 is a “one-off” of sorts: an unexpected lawsuit or judgment brought against the business, an isolated but escalating event such as an eviction proceeding or sales tax audit, or a recurring temporary circumstance that the business just  can’t get out from under.  In situations such as these, the expense of a Chapter 11 may be justified since it provides both immediate relief and a permanent solution.

Chapter 11 opens the door to new avenues of relief that are not available outside of the context of bankruptcy. As a simple yet common example to many small businesses, the nonpayment of sales tax can effectively put a business out of business in as little as a few months. The Minnesota Department of Revenue, charged with collecting revenue to offset the State’s huge deficit, is necessarily aggressive in the collection of sales tax and provides extremely little, if any, breathing room for businesses that cannot immediately pay delinquent tax obligations. Unpaid sales tax quickly threatens any business. Outside of bankruptcy, unpaid sales tax can result in license posting and a revocation of sales tax permit that is tantamount to the death of operations, as well as the pursuit of personal liability against principals of the business. Inside Chapter 11, by contrast, unpaid sales or withholding taxes can be statutorily repaid over five years at low interest, and often personal collection is put on hold while the business reemerges under a confirmed Chapter 11 plan.

Keep reading for more information about Sales Tax Obligations and Chapter 11 Reorganization and Commercial Leases and Chapter 11 Reorganization: The Requirements and Timelines under the Bankruptcy Code.

Read some of the recent Chapter 11 success stories handled by Wartchow Law Office.

Lynn Wartchow is a Chapter 11 attorney located in Edina, MN. Contact Wartchow Law Office for an initial Chapter 11 consultation to review business liabilities and other circumstances affecting a Chapter 11 bankruptcy proceeding, and for guidance on options and solutions that Chapter 11 can provide to keep a business operating and improve future prospects. 

Intro to Chapter 11 Business Reorganization: The Process, Time and Fees Involved

Many initial calls regarding a potential Chapter 11 business reorganization seek just the basic information: Does my business have to go out of business if it files bankruptcy? Can reorganization help my business resolve a particular debt or situation (i.e., unpaid withholding or sales taxes, judgments, collection efforts, commercial eviction, lawsuits)?  What is Chapter 11 anyway? How much does Chapter 11 cost? How long does it take for a plan to be confirmed?

At its most basic principle, Chapter 11 reorganization is a way that a financially distressed business can obtain immediate and lasting relief so that it can keep operating and stay in business. As the name “reorganization” suggests, that financial relief comes in the form of reorganizing and restructuring debts and other liabilities. A confirmed Chapter 11 plan of reorganization can accomplish this in any number of ways, from restructuring financing terms to extend the payback period, reduce interest rate and bifurcate secured claims (i.e., principal reduction), to discharging or significantly reducing unsecured claims, to providing a five-year payback period for most tax liabilities, to halting lawsuits and administrative actions, to reinstating a suspended license and more. The favorable results that can be attained in a confirmed Chapter 11 plan of reorganization are open ended and limited only by the parties involved.

The Chapter 11 process starts by consulting an attorney as soon as the business
finds itself in financial dire straits. Time is of the essence and non-bankruptcy options such as bank/creditor workouts or other out-of-court arrangements may be explored if time permits. However, Chapter 11s are often filed after such efforts fail or reach a standstill. At that point, the business can file Chapter 11 to obtain immediate relief in the form of the automatic stay prescribed under the Bankruptcy Code.  At the moment of filing, the automatic stay puts an immediate moratorium on debt collection efforts, including the suspension of pending lawsuits, judgments, foreclosure, levies, etc. While the automatic stay will not permanently deprive all creditors from pursuing their legal remedies, it often is the curveball that has that result. The automatic stay provides the debtor with breathing room and time to consider new routes to improve business prospects. Moreover, Chapter 11 offers a new platform upon which to leverage legal possibilities that may not be available outside of Chapter 11 bankruptcy.

Once filed, multiple parties become necessarily involved in a Chapter 11 proceeding. Of course there is the Chapter 11 debtor and its attorney, and also the Office of the US Trustee—which is a federal office organized under the U.S. Department of Justice—which has the duty to monitor and participate in Chapter 11 proceedings as necessary to ensure the procedural process and certain mandatory reporting requirements are properly followed. It is also possible that a committee of the business’s creditors may be formed however this is somewhat less likely to happen in smaller cases. Additionally, a bankruptcy judge is assigned to the case who serves as the ultimate arbitrator over the Chapter 11 proceeding and all disputes, if any, that may arise between the debtor and other parties in interest.

During the course of a Chapter 11 proceeding, the debtor can expect to make several appearances before the judge and with the attorney for the Office of the US Trustee assigned to the case. The debtor can also expect to prepare and file detailed monthly financial reports of the business’s operations, and to participate in negotiations with key creditors. Chapter 11 requires the business to be an “open book” for the duration of the proceeding, and transparency in most areas of the business is critical to a successful Chapter 11.

The duration of a Chapter 11 proceeding can vary widely, with a simple uncontested
case lasting a few months or more while a large business in an embattled case having multiple secured creditors and contested actions taking years to complete. An experienced Chapter 11 attorney can review the business’s circumstances, advise of the potential pitfalls that could arise to complicate a Chapter 11 proceeding, and provide an estimated range of attorney fees and other costs involved in Chapter 11 proceedings.

Lynn Wartchow provides initial Chapter 11 consultations to review the business
liabilities and other circumstances affecting a possible Chapter 11 bankruptcy proceeding, and to advise on possible options and solutions that Chapter 11 can provide to keep a business operating and improve future prospects.