Not uncommonly, the timing of a commercial tenant’s bankruptcy filing will correspond with a landlord seeking to evict the tenant or institute foreclosure proceedings. What is the effect of a dismissal requested by a commercial debtor after the landlord has successfully prevailed in the underlying bankruptcy case? The recent decision of Scarborough-St. James Corporation, case no. 15-10625 (LSS) considered the effect of a debtor’s motion to dismiss its own chapter 11 case after a landlord has gained tactical advantages in the scope of the bankruptcy proceeding.
The bankruptcy case has been dictated by a dispute between Scarborough-St. James Corporation (“Debtor”), and the debtor’s landlord. Previously in the case, the Court entered an order (the “Rejection/Surrender Order”) directing the surrender of a shopping center owned by Debtor in Richmond, Michigan, as a result of Debtor’s failure to assume or reject the lease pertaining to such shopping center. The Rejection/Surrender Order is subject to appeal.
The Debtor’s present motion to dismiss was filed because, as a result of the entry of the Rejection/Surrender Order, there was no further purpose served for the Debtor to remain in bankruptcy. Landlord opposed the motion given it gained various rights during the case, and that Debtor filed bankruptcy on the eve of eviction proceedings.
Cause Found to Dismiss the Case Under Section 1112(b)(1)
The Court found that “cause” existed to dismiss the case under 11 U.S.C. Section 1112(b)(1). The Court found that this matter is truly a two party dispute, and the sole asset of the Debtor are the rents from the shopping center.
Cause Existed Under Section 349 to Condition Dismissal of the Case
However, the Court ruled that Debtor may not file for bankruptcy again for a period of four months from the entry of an order dismissing the case, finding that “cause” likewise exists to condition the dismissal of the case under Section 349(a).
Of note, the Court found that the relief granted by the Court in the Rejection/Surrender Order will be unaffected by dismissal of the case, for three reasons. First, that order was not entered under one of the enumerated provisions of Section 349(b)(2), and thus will not be vacated upon dismissal. Second, the “property of the estate” that will revest in the Debtor will be that determined by the Court’s prior orders. Finally, the Court found that Landlord would be prejudiced by dismissal. Accordingly, the Court found that “cause” existed to condition dismissal of the case under Section 349(b).
The Scarborough-St. James Corporation opinion is a good illustration of the interplay between Sections 349 and 1112 of the Bankruptcy Code, namely in the context of a commercial landlord/tenant dispute.
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 firstname.lastname@example.org.