Rights of Tenant to Security Deposit When Landlord Files for Bankruptcy

As we debate whether there will be a “soft” or “hard” landing of the economy and the resulting effect of different landings on the volume of bankruptcy filings, it is helpful to review how a bankruptcy filing affects not only rights between a creditor and the debtor, but also the respective rights of creditors against property held by the debtor. These rights may be determined by in what capacity the debtor is holding the property. For example, Section 365 of the Bankruptcy Code, which governs the disposition of executory contracts, has specific provisions regarding the disposition of commercial real estate leases in bankruptcy. These provisions address, among other things, the rights of a tenant to remain in possession of the leased premises when the landlord files a bankruptcy case and rejects the lease. But what rights does a tenant have with regard to the security deposit delivered by the tenant to the landlord to secure the tenant’s performance under the lease when the landlord files for bankruptcy and rejects the lease?