On August 11, 2015, the Bankruptcy Court for the Northern District of California ruled on an issue “of apparent first impression” that claims for unpaid rent brought by landlords for office space leased to the former law firm of Howrey LLP should be given priority status under the Bankruptcy Code. The case is styled as In re Howrey LLP, C.A. No. 11-31376 (Bankr. N.D. Ca. Aug. 11, 2015), and is an important read for all landlords providing ongoing services to involuntary debtors.
The Court found that consistent with Congress’s intent to protect parties that deal with involuntary creditors, priority status must be provided to so-called “gap claims”.
The Court also rejected the arguments of the Creditors Committee, which opposed priority status, ruling that “[g]ap priority provides an inducement and a protection for parties who deal with involuntary debtors”, and that “there is no hint that Congress meant to exclude landlords (or others who have ongoing contractual relationships with debtors when involuntary petitions in bankruptcy are filed against them).”
Carl D. Neff is a partner with the law firm of Fox Rothschild LLP. Carl is admitted in Delaware and regularly practices before the United States Bankruptcy Court for the District of Delaware. You can reach Carl at (302) 622-4272 or at email@example.com.