Restructuring

Contributed by Cristine Pirro
In In re McCants, the bankruptcy court for the Southern District of New York considered whether section 362(b)(22) of the Bankruptcy Code exempts from the automatic stay a landlord’s enforcement of a judgment of possession against a debtor tenant residing on residential real property pursuant to a stipulation (rather than a lease or rental agreement).
After the landlord in McCants brought an eviction proceeding against the tenant in possession (whether that tenant was legally in possession of the property was disputed by the parties), the landlord and the tenant entered into a stipulation so-ordered by the civil court.  The parties stipulated that the tenant would occupy the premises for seven months in exchange for consenting to the entry of a final judgment of possession in favor of the landlord and an accompanying warrant of eviction (which was stayed until the end of the seven month period).  As additional consideration under the stipulation, the landlord agreed to make certain payments to the tenant each month and at the end of the occupancy period.  These payments were to be returnable to the landlord if the tenant failed to vacate the premises.  Just before the expiration of the seven month period, the tenant appealed the judgment of possession and requested an injunction of the warrant of eviction.  That appeal was denied. 
Two days after the tenant was to vacate the premises under the stipulation, the tenant filed for bankruptcy.  The landlord moved for an order confirming that the automatic stay did not apply to any action taken by the landlord to enforce the prepetition judgment of possession.  The debtor objected to the lift-stay motion on the basis that a possessory interest in real property, even without any accompanying legal interest, is sufficient to trigger protection of the automatic stay.  The debtor also argued (presumably to keep the stay in effect long enough to vacate the state court judgment) that he was not represented by counsel in the state court proceedings and had been unable to explain to the court that he was the victim of a scheme whereby the landlord fraudulently divested him of his interest in the property.  In response, the landlord argued that (i) section 362(b)(22) of the Bankruptcy Code applies regardless of whether the tenancy is pursuant to a lease or rental agreement, and, in the alternative, (ii) the automatic stay does not apply to squatters on residential real property under applicable New York law.
The bankruptcy court began by affirming that the issuance of a warrant of eviction terminates a landlord/tenant relationship under New York law.  Nevertheless, a commercial tenant’s possessory interest may be protected by the automatic stay to enable the debtor to seek to vacate the warrant in state court.  With respect to a residential tenant, section 362(b)(22) of the Bankruptcy Code applies and provides that the filing of bankruptcy petition does not operate as a stay of the continuation of an eviction or other proceeding by a lessor against a debtor involving residential real property in which the debtor resides as a tenant under a lease or rental agreement and with respect to which the lessor has obtained a judgment for possession prepetition.  Section 362(b)(22) is subject to section 362(l) of the Bankruptcy Code, which sets forth a series of requirements for the application of the automatic stay, including payment of postpetition rent and evidence that the debtor could cure the monetary default that gave rise to the judgment for possession.  Although the bankruptcy court confirmed that sections 362(b)(22) and 362(l) of the Bankruptcy Code apply generally in residential cases, the court questioned whether section 362(b)(22) applied to the specific facts before it. 
By its plain terms, section 362(b)(22) of the Bankruptcy Code applies to debtor residing as a tenant under “a lease or rental agreement.”  A lease under New York law is a conveyance of an interest in land for a fixed period of time in exchange for the fulfillment of certain obligations during the lease.  The landlord conceded that here there was no lease.  A rental agreement, on the other hand, is a short-term agreement for the use of premises in exchange for the payment of rent.  The landlord argued the stipulation was in effect a rental agreement because the parties had agreed the debtor would occupy the property in exchange for consideration.  The bankruptcy court found that the payments made under the stipulation were not rent because they were not payments for the use and occupation of land; therefore, there was no rental agreement and section 362(b)(22) of the Bankruptcy Code did not apply as an exception to the automatic stay.
The bankruptcy court also denied without prejudice to renew in 30 days the landlord’s alternative request to lift the automatic stay for cause.  Because the tenant was not represented by counsel in the state court proceedings and because the debtor’s current counsel alleged facts specifying that the debtor was a victim of fraud, the bankruptcy court determined that the tenant should be allowed additional time to present his case before the state court with the assistance of counsel.
McCants emphasizes the importance of pleading with specificity that a debtor tenant’s occupancy is or was under a lease or rental agreement when seeking an exception from the automatic stay under section 362(b)(22) of the Bankruptcy Code.  It also serves as a reminder that even where a landlord/tenant relationship is severed under state law, the automatic stay may still apply.