Tenant Can't Use Bankruptcy Law Solely to Avoid Eviction

Facts: A tenant had been leasing property along Baltimore's waterfront for over 40 years. Negotiations for a lease renewal with the current owner broke down, and the tenant continued operating out of its space as a holdover tenant on a monthly basis. After further negotiations were unsuccessful, the owner sent the tenant a notice that terminated the monthly tenancy effective May 1. On April 29, the tenant filed a Chapter 11 bankruptcy petition in federal bankruptcy court.

The tenant invoked provisions of federal law that would prevent it from being evicted while the bankruptcy hearing was pending. The federal bankruptcy court and a federal district court in Maryland dismissed the tenant's petition, and the tenant appealed.

Decision: The 4th Circuit Court of Appeals agreed with the lower courts and refused to stop the tenant's eviction.

Reasoning: The court found that the tenant had filed for Chapter 11 protection in bad faith. Chapter 11 petitions are granted only when a party acts in good faith, the court said. This is because bankruptcy courts can prevent tenants from being evicted while a hearing is pending. The court noted that tenants act in good faith only when there is a realistic possibility of effective reorganization and the tenant honestly intends to reorganize.

In this case, the court determined that the tenant's sole purpose for filing the petition was to avoid eviction. Since the tenant acted in bad faith, it was not entitled to protection from eviction once the lease expired. The court concluded that the only real issue in this case was a contractual dispute between an owner and a tenant, which should not have been framed in bankruptcy terms.

• In re Premiere Automotive Services, Inc., June 2007.

Lesson Learned: Most lease disputes will be governed by a state's contract law. As this case demonstrates, parties can get into trouble when they try to frame certain issues improperly. If you have a dispute with a tenant, talk with your attorney about how to settle that dispute before it becomes trouble. That way, you won't have to come up with creative legal strategies to try to avoid potential problems. And if a tenant tries to use a bankruptcy proceeding to avoid eviction, or to keep from paying you money it owes, make sure the tenant actually wants to reorganize.