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Lease Analysis Gives Win for Commercial Landlord In Bankruptcy Case
Bankruptcy Code “[§]365(d)(4) does not apply to the [purported lease] because it is not a ‘true lease,’” held the Second Circuit in In re Sears Holdings Corporation, 2024 WL 5113165, *3 (2d Cir. Dec. 16, 2024). In the seventh reported decision covering the purported lease assignment in this case — one from the Supreme Court, three from the Second Circuit, and three from the district court — the Second Circuit apparently ended a multi-year litigation by affirming the district court’s decision that the landlord’s appeal was “moot for lack of a remedy because, although [that] court [had properly] vacated the assignment and assumption of the lease …, the lease would not revert to [the landlord under Code] §365(d)(4), and that [the landlord] had no alternative remedy.” Id. at *1, citing In re Sears Holding Corp., 661 B.R. 298 (S.D.N.Y. 2024) (Sears VI). According to the Second Circuit, the debtor “neither waived nor forfeited the argument that [§]365(d)(4) did not apply here and … [the district court had properly] return[ed] the lease to the [debtor’s estate] outside of the assumption procedures set forth in [Code §]365.” Id. at **1, 6.
The principal substantive holding in the complex case ultimately turned on the district court’s analysis of the purported lease itself, something never considered in the prior three years of the litigation. First, held the Second Circuit, Code §365(d)(4) applies “only to a ‘true’ or ‘bona fide’ lease.” Id. at *3, quoting Int’l Trade Admin. v. Rensselaer Polytechnic Inst., 936 F.2d 744, 748 (2d Cir. 1991) (RPI). Focusing “on ‘the economic substance of the transaction and not its form,’” the court asked “whether the parties intended to impose obligations and confer rights significantly different from those arising from the ordinary landlord/tenant relationship.” Id. Because the lessee, the debtor here, may have “assume[d] and discharge[d] many of the risks and obligations ordinarily attributed to the outright ownership of property [e.g., payment of property taxes],” the landlord would gain “an inequitable windfall” if it were able to recover the “leased” property. Id. In other words, if the debtor effectively owned the property, no “true lease” relationship existed.
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