A recent decision by the U.S. District Court for the
Southern District of New York concluded that a landlord
who obtains a judgment of possession and warrant of
eviction prepetition, yet is stayed from executing on the
warrant due to the debtor’s bankruptcy filing, may not be
entitled to post-petition rent as an administrative expense.
In In re Association of Graphic Communications, Inc., No. 07-
10278 (Bankr. S.D.N.Y. July 13, 2010), the court decided
that, under New York law, the prepetition warrant of
eviction terminated the lease and annulled the landlordtenant
relationship, freeing the debtor from its obligation
to pay post-petition rent pursuant to section 365(d)(3) of
the Bankruptcy Code. The bankruptcy court’s decision
was subsequently affirmed by the district court. See In
re Association of Graphic Communications, Inc
., No. 10-6413,
2011 WL 1226372 (S.D.N.Y. Mar. 31, 2011).


In Graphic Communications, the debtor was a lessee under a
lease of non-residential real property. In the summer of
2006, the debtor ceased its business operations and also
stopped paying its rent. The landlord served a demand
for rent and, when no rent was forthcoming, commenced
a nonpayment proceeding against the debtor in state
court. The state court entered a judgment of possession
and warrant of eviction. The debtor filed a voluntary
petition under Chapter 7 of the Bankruptcy Code one
day later – just prior to the landlord executing on the
warrant of eviction.


Approximately two months after the petition date, the
landlord moved for relief from the automatic stay, so
that it could conclude the eviction proceedings. The
unopposed motion was granted by the bankruptcy court
and a law enforcement officer executed on the warrant of
eviction. Nearly two years after obtaining stay relief, the
landlord filed a motion with the bankruptcy court seeking
payment for post-petition rent as an administrative
expense of the bankruptcy estate pursuant to section
365(d)(3) of the Bankruptcy Code. Section 365(d)(3)
provides, in relevant part, that a “trustee shall timely
perform all the obligations of the debtor … arising from
and after the order for relief under any unexpired lease of
nonresidential real property, until such lease is assumed
or rejected, notwithstanding section 503(b)(1) of this
title.” The bankruptcy court concluded that, by virtue of
the issuance of warrant of eviction prepetition, the lease
expired prior to the commencement of the bankruptcy.
Accordingly, the bankruptcy court denied the landlord’s
claim for administrative rent.


According to the bankruptcy court, New York law is
clear. The issuance of a warrant of eviction cancels a lease and terminates the landlord-tenant relationship.
Accordingly, to the extent a warrant of eviction has
been issued prepetition, there is no unexpired lease for
a debtor to assume or reject, and thus no obligation
to pay postpetition. The landlord, relying on opinions
issued in the P.J. Clarke’s Restaurant Corp. and Sweet N.
Sour 7th Avenue Corp
. cases, argued that the potential for
reinstatement under state law renders a lease unexpired
for purposes of section 365(d)(3) of the Bankruptcy
Code. See In re P.J. Clarke’s Restaurant Corp., 265 B.R. 392
(Bankr. S.D.N.Y. 2001); In re Sweet N Sour 7th Avenue Corp.,
431 B.R. 63 (Bankr. S.D.N.Y. 2010).


In In re P.J. Clarke’s, a state court issued a summary
judgment order granting the landlord possession of the
debtor’s leased premises. Unlike the debtor in Graphic
Communications
, the debtor in P.J Clarke’s filed a Chapter
11 petition before a judgment was entered and a warrant
of eviction issued. The bankruptcy court found that,
under New York law, the lease was not expired at the
time of the bankruptcy filing and therefore the landlord
was entitled to receive rent at the contract rate until the
lease was assumed or rejected. The Graphic Communications
court found P.J. Clarke’s to be easily distinguishable
because: (1) the warrant of eviction was not issued until
after the petition date; (2) the debtor took affirmative
steps to challenge the nonpayment proceeding; and (3)
the debtor was attempting to reorganize and continue
business operations on the leased premises.


In Sweet N Sour, as in Graphic Communications, a state court
issued a warrant of eviction immediately prior to the
debtor’s bankruptcy filing. However, the debtor sought to
assume the lease and opposed the landlord’s motion for
relief from the stay. The bankruptcy court conditioned
the continuation of the automatic stay and the debtor’s
commencement of a proceeding in state court to vacate
the warrant of eviction upon the debtor’s continued
payment of post-petition rent. The landlord in Graphic
Communications
directed the bankruptcy court’s attention
to the section of the decision in Sweet N Sour in which the
court stated that “a lease may be considered unexpired
for purposes of performing post-petition obligations
pursuant to 365(d)(3) if it was terminated prior to the
petition date but could be reinstated under state law.”
However, unlike the debtor in Sweet N Sour, the debtor in
Graphic Communications did not contest the issuance of a
prepetition warrant of eviction or the motion for relief
from the stay, nor was the debtor seeking to assume the
lease.


Both P.J. Clarke’s and Sweet N Sour involved Chapter 11
debtors who, as part of their attempts to reorganize,
sought to vacate the warrants of eviction and/or
challenge the adverse judgments in the nonpayment
proceedings. Moreover, the debtors in these cases
continued to operate their businesses on the leased
premises. In Graphic Communications, the debtor never
sought to assume the lease, nor challenge the landlord’s
motion to lift the stay in order to proceed with the
eviction. Therefore, while the bankruptcy court noted
that “in certain circumstances, like those in P.J. Clarke’s
and Sweet N Sour, a debtor’s obligations under section
365(d)(3) may remain in effect, despite a prepetition
termination of the lease,” the factual circumstances of
Graphic Communications did not support such a finding. As
the landlord-tenant relationship terminated prepetition
and the debtor showed no desire to reinstate it, the
landlord was not entitled to post-petition rent as an
administrative expense.


As the case law demonstrates, landlords might avoid
the harsh fate that befell the landlord in Graphic
Communications
if they act quickly at the commencement
of the bankruptcy case. By waiting nearly two months
from the petition date to move for relief from the
automatic stay, the Graphic Communications landlord
guaranteed that at least three months would pass before
the premises could be re-let. A landlord who has
obtained a warrant for eviction prior to the petition date
would be well-advised to move for stay relief as soon as
practically possible. Prompt action by a landlord may
result in the landlord obtaining the debtor or trustee’s
consent to modification of the stay or an agreement to
pay post-petition rent, while the trustee decides whether
to challenge the state court judgment.


Alternatively, if the debtor remains in possession of the
leased premises and desires to assume the lease, it appears
that, under P.J. Clarke’s and Sweet N Sour, a bankruptcy
court might allow the debtor to challenge the warrant of
eviction in exchange for the continued payment of rent.
However, if the debtor has ceased business operations
prior to filing for bankruptcy protection it is unlikely
that the debtor will later move to assume the lease and
the landlord should operate under the assumption that
it will receive no additional rent from the debtor. In this
situation, it is that important for a landlord to act quickly
in order to protect its rights and consult with bankruptcy
counsel.