Commercial Property Herald

Capmark Bankruptcy to be in Better Shape?

Interesting article in Shopping Centers Today Week publication of October 30, 2009, Vol. 14 No. 43.  In that they discuss the possible overall effects of the bankruptcy on the overall market, suggesting that since the bankruptcy is intended to be a restructuring rather than a liquidation, the effect on the overall market is expected to be minimal. What the positive looking analysis overlooks however is that only about 5% of the chapter 11 reorganization bankruptcies make it to plan confirmation. However, those that are well planed before they file their bankruptcy petition have a much greater chance of emerging out of chapter 11 with a confirmed plan.  Capmark is led by a pretty heavy weight group of investors that you would have to believe have the best bankruptcy lawyers available; you would think.

How Safe is Your 1031 Exchange Accomodator?

I just got involved in LandAmerica 1031 Exchange Services bankruptcy.  Fortunately, I do not represent a creditor who is owed money.  As I was reading up on the case, I became aware of a currently unresolved issue that may have serious ramifications for anyone thinking of doing a 1031 exchange and using an accomodator.

A bankruptcy judge ruled on May 7th, LandAmerica 1031 Exchange Customers are now Creditors, that the customers who temporarily placed funds with LandAmerica 1031 Exchange Services to handle a 1031 exchange are now creditors of the bankruptcy estate and the funds they thought were temporarily placed are really funds owned by the estate.

Here is the rub.  People put their money with the accomodator to complete the 1031 exchange and believing their money is secure and placed in trust with the accomodator.  In the LandAmerica case, the language of the exchange agreement clearly stated that the money placed with LandAmerica could be used in any fashion or way that LandAmerica choose, in its complete discretion.  To the judge and me, this doesn't sound like a "trust," situation.  So these customers are treated as unsecured creditors and instead of getting all of their money back, they are being offered $.15 on the dollar.  This is a big hit and loss.  So who are you going to trust now when you want to do a 1031 exchange?

Retail Hit List

In what I would admit to overstating the obvious, I am providing my updated retail hit list of categories of retail business to be concerned about rent payments, evictions abandonment and overall survival over the next twelve months.  This list is not intended to be all inclusive but just the ones high on my list that I either seem to be dealing with a lot or expect to be:

1. Anything furniture related, both residential and commercial.  Anything surviving the next twelve months are likely to be in a good position after the shakeout. However, if experience serves me correctly, during the downturn of the early 90's, I was constantly evicting furniture tenants or representing landlords whose furniture tenants filed bankruptcy, constantly held going out of business sales and whose inventory mysteriously disappeared.
2. High End Restaurants
3. Electronics retailers.  Best Buy looks pretty good right now as long as it is not over leveraged and it can continue to provide a good shopper experience versus the internet and the big box stores such as the Walmarts and Costco's.
4. Tutoring and pre-schools
5. Specialty exercise like Curves;
6. Anything automobile except automated car washes and gas stations.  I am not sure about parts stores although my sense is that they should be doing alright.
7. Anything over leveraged.  Be wary of any tenant that needs to or within the last two years has spent a great deal of money on tenant improvements.
8. Jewelry and precious stones
9. Yogurt, at least in Orange County, California.  Actually, there is nothing wrong with this model, generally, it just seems way overbuilt and far to competitive in South Orange County.

Bankruptcy IPS Facto Clause is Unenforceable

So, what is IPSO Facto?  It is a Latin term that Lawyers use to mean, "automatic."  In commercial leases, it means that no notice or anything else must first occur before the terms of the provision take effect.

Commercial leases often contain Bankruptcy Ipso Facto clauses that state that upon the filing of bankruptcy or the appointment of a reciever by the tenant, the lease automatically terminates.  To be certain and for as long as I have practiced law, this provision is unenforceable against a bankruptcy trustee.  Always has been and will likely always be the case.

I once asked another attorney whey the provision is in the lease if it is unenforceable and his response was, "just in case the law changes," which is a pretty good response but lame at the same time.

The provision, while unenforceable in a bankruptcy context, usually contains language that gives the landlord the option to terminate the lease upon the appointment of a state receiver or if the tenant makes an assignment for the benefit of creditors.  In a bankruptcy context, bankruptcy law preempts all other law and the agreement.  The provision relating to a state trustee or receiver or an assignment for the benefit of creditors is not preempted by state or bankruptcy law and is effective in those rare instances in which a receiver is appointed and/or the tenant makes an assignment for the benefit of creditors.

From Ashes to Ashes, Dust to Dust

And the cycle of life continues.  The new owners of the intellectual property of Linen 'N Things, which I assume includes the name, "Linen 'N Things," are planning to re-open for business within other retail shops and on the web. With adequate financing and a good business plan, there are plenty of reasons why they might succeed.  There is still a market for linens, their overhead should be way down and the manufacturers should be very anxious to sell their wares to the new business.  Good luck.

Blockbuster May be "Round" the Corner

Kim Peterson reports in Money Blog, Top Stocks Bankruptcy for Blockbuster?, that Blockbuster may be on the rocks and about to file bankruptcy.  This is going to be another blow to many retail landlords and another credit tenant that may no longer be around.  I have seen this coming for quite some time now, noticing Blockbuster store closing in seemingly good locations and an apparent consolidation of its locations.  In any event, if Blockbuster is consulting bankruptcy lawyers and/or perpetuating this rumor, my clients are I are likely to get telephone calls to renegotiate some leases, either as a pre-bankruptcy workout or post-bankruptcy reorganization.  I hope that this will not be another Circuit City Liquidation.

Circuit City May Be Staying Around Longer then Expected

Disappointment abounds for shoppers looking to pick up a bargain as liquidators take over the operations of Circuit City.  With advertised discounts of 10% to 30%, we ran to our local Circuit City store on Saturday, hoping to beat everyone else to the bargains further expecting that not much would be left.

By the time that we got there around noon, it was obvious that some of the inventory had been sold off.  But rather than finding bargains, we discovered meager discounts on prices that had been raised from the sale prices before Christmas.  I looked at at 40 inch Samsung LCD, 1080p and 120 hz selling at $1599.  Full retail is $1699 and Sears sells it, on sale at $1099 with 6 months, same as cash financing and an additional 10% off the purchase of an additional product, such as a Blue Ray player.

Later this week, my son and I again visited the store, hoping that prices would be lower after buyers stayed away. Actually, I expected that there were plenty of stupid buyers ready to spend top dollar, thinking they were getting a deal, but it appears that maybe I was wrong.  In conversation with one of the liquidator employees in the store, he indicated that most people who had come in were disappointed and walked away without purchasing anything.  He also indicated that he was told to expect to stay open, at least through March.  Apparently, at this rate, unless there are greater discounts, Circuit City may be open, well into the spring.

This bodes well for other retailers who may not be forced to discount their own products further to compete with Circuit City.  In my own, informal survey, I found Best Buy and Howard's TV being competitive with Circuit City on 40 inch LCD TV's with off name retailers and Sears offering deals in the stores as good, if not better than what you can get online.  This also bodes well for landlord's who will continue to collect administrative rents since the liquidators are obligated to continue paying rents while the stores remain open.  At some point, I expect the liquidators will start closing more stores and transfering inventory to the highest grossing stores.

One final note, I looked all over the store for items selling at a 30% discount and only found a small group of products, about 10 items hanging on the wall in the back of the store near the car stereo section.  Don't expect the Wii to go on sale, any time soon.

Bankruptcy Still Protects Tenant Even After Eviction Judgment

I've noticed some confusion among some of my clients and other attorneys over some of the changes of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, ("BAPCPA") as the changes relate to commercial tenant evictions.

It should be noted that bankruptcy law, in many respects treats residential tenancies different from commercial tenancies. It is the purpose of this article to highlight how the BAPCPA treats residential tenancies different from commercial tenancies and confirm that commercial landlords need to take care when taking action to possess real property after the tenant files a petition in bankruptcy.  Later articles will address other issues pertinent to commercial landlords, such as how to deal with tenant furniture & fixtures remaining in premises after the landlord has possession and the tenant has filed bankruptcy.

Upon the filing of a bankruptcy petition, an automatic order staying all action against debtor becomes effective.  This is often referred to as the "Automatic Stay Order," or "Order for Automatic Stay."  This order prevents any creditor of the debtor from taking any action against the debtor to recover the debt and typically stops all legal action, whether in federal or state court.  Typically, if a creditor, such as a landlord, is entitled to and wishes to continue any action against a debtor, including an action to recover possession of real property, the debtor must first file a motion in the bankruptcy court, requesting relief from the stay order.  This is typically referred to as a "Motion for Relief from Stay".

In 2005 as part of the BAPCPA, bankruptcy law was revised to allow landlords of residential real property to proceed with evictions and lockout of residential tenants, without the necessity of first obtaining an order for "relief from stay," in the bankruptcy court, in instances where the landlord had obtained a judgment for possession before the tenant filed its bankruptcy petition.  If the petition was filed before the judgment was obtained, the landlord would still need to seek relief from the stay in bankruptcy court. Note that the judgment must first be "entered".

This amendment does not apply to a lease of commercial real property.  In California, Landlords of commercial real property must first obtain an Order for Relief from Stay before they can proceed with a lockout of the tenant, even when the landlord had obtained a judgment for possession prior to the bankruptcy filing.  This has been the rule of law in California based upon the interpretation of what I refer to as the "Yogi Berra" statute, (the thing aint over till its over). 

California and other states have laws that allow a tenant, after the entry of a judgment against the tenant for eviction, to petition the state court for relief from the judgment and allow the tenant to remain in possession of the leased property, notwithstanding the entry of judgment for possession in favor of the landlord.  Bankruptcy courts have interpreted, that so long as the tenant still has the right to petition a state court for relief, in accordance with these Yogi Berra statutes, the tenant may still have a possessory right in the property, which is an asset of the estate and thus subject to the automatic stay order.

Later articles will address what rights and obligations the landlord and tenant have in bankruptcy, both while the tenant remains in possession of the premises after the filing of a bankruptcy petition and after the tenant may reject the lease in bankruptcy.  These are all very important issues as we begin to see more and more real estate related bankruptcies.

Bah Humbug - Toy Stores Close

Ouch!  KB Toys files bankruptcy to close its stores and liquidate its business, KB Toys Fully Liquidating Its 431 Stores; In Bankruptcy - Again.  I suppose that some may consider this part of the spirit of Christmas giving with the likely reduced prices for the toys.  But how do you tell your kids that this toy store will no longer be around.  Worse yet, how do you tell their landlord.  This is not just a re-organization but a liquidation sale.