Written By Jeff Jinks
SUBJECT: LANDLORDS BEWARE
In, In Re Great Lakes Quick Lube LP v. T.D. Investments I, LLP, The US Court of Appeals for the Seventh Circuit ruled that a commercial tenant’s lease termination that happens before it has filed for bankruptcy could be considered an avoidable transfer under Chapter 11 of the Bankruptcy Code, on March 11, 2016.
The background is that in 2012, a company owned many stores named Great Lakes Quick Lube that filed for bankruptcy under Chapter 11 of the Bankruptcy Code. Two of these stores were being leased by TD Investments. 52 days before Great Lakes filed for bankruptcy, it terminated it leases even though the TD Investment stores were profitable.
The bankruptcy judge ruled in favor of TD Investments. Holding that the lease terminations were not transfers. The creditors’ committee appealed the court ruling.
The implications are that since it has departed from previous case law, holding that consensual lease terminations did not constitute transfers under the bankruptcy code. When making a determination on whether to voluntarily terminate a lease, commercial landlords and tenants must consider this holding and evaluate it.
This case has broad implications for other types of terminations of contracts conveying an interest in property in franchise or license agreements.
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