Daily Development for Thursday, November 18, 2000

By: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
randolphp@umkc.edu

BANKRUPTCY; LEASES; DEFINITION OF "LEASE"; ADMINISTRATIVE EXPENSE FOR RENT: The tenant is not obligated to make monthly rent payments at the contract rate while it occupies the premises post petition, where the subject agreement that governs the debtor's use and occupancy of the dry cleaners was a "license" not a "lease."

In re Greenfield Dry Cleaning & Laundry, Inc., 249 B.R. 634 (Bankr. E.D. Pa. 2000).

The landlord had drafted the temporary occupancy agreement in question, and had chosen to denominate it a "license." The landlord's choice would be respected, even though the agreement "resembled a lease in that it granted exclusive possession of the Premises to the Debtor for a certain period" (p. 640) The landlord was still entitled to compensation for the use and value of the premises by the debtor, but not on a "superpriority basis" and only at such time as the Bankruptcy Court is satisfied that all the administrative claimants in the case will be paid in full. (pp. 644645)

Reporter's Comment: I think courts look for cases in which to apply "poetic justice," usually to the disadvantage of a party, often a creditor, sometimes a landlord, who exercised dominant bargaining power to obtain some kind of oddly worded agreement from the debtor. You were too clever, the court says.

Editor's Comment: Virtually uniformly, courts outside the bankruptcy context place form over substance in the determination of whether an agreement is a "license" or a "lease." American Jewish Theater, Inc. v. Roundabout Theater Co., Inc., 610 N.Y.S.2d 256 (App. Div. 1994). (Parties' characterization in a written agreement that agreement is a license is not dispositive when possession is granted for an identified period agreement is a lease.) In the DD for 4/10/95 (on the DIRT website), however, the author discusses two common lay cases that also tend to keep an eye on the result in making their characterization decision. Again, however, these courts did not accept the parties' characterization choice per se.

For other recent cases on this issue, see: Quantum Corp. v. State of New Mexico Taxation and Revenue Dep't, 956 P.2d 848 (N.M. App. 1998). (Contracts permitting nonprofit organizations repetitive, short term, exclusive use of space for evening bingo games constitute "leases," not "licenses," for taxation purposes. (Result consistent with parties' characterization)); Mandia v. Applegate, A343396T2, 1998WL187388 (App. Div. 1998) (When a landlord allows its tenant to use adjacent space for display and sale of merchandise, only a revocable license is created; no easement has been granted.) In re Davis, 613 N.Y.S.2d 933 (App. Div. 1994). (A contract by which a city agrees to pay a hotel to shelter homeless persons if the hotel elects to do so is not a lease.)

Editor's Comment 2: The editor feels to see why bankruptcy courts should decide cases like this on any different standards than those applied by common law courts. Bankruptcy judges often take the view that they're not bound by common law precedent, but only by the objectives of the bankruptcy proceeding. This is, in a word, wrong. Bankruptcy does not operate in a world outside of the world in which parties normally operate, and Congress did not grant bankruptcy courts total preemptive authority to construct such a world. The relationships that the parties created in the "real world" can and should characterize their relative rights and responsibilities in bankruptcy to the extent that discrete bankruptcy provisions to not require otherwise.

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

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