Daily Development for

Friday, June 4, 1999

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

Another important and provocative case from Jim Stillman:

BANKRUPTCY; JURISDICTION; FORECLOSURE OF NON DEBTOR; LEASEE DEBTOR: Although a mere tenant of the mortgaged premises, the debtor had such a stake in the outcome of the foreclosure action that it was properly considered a "core proceeding." The Bankruptcy Court did not err in refusing to remand or abstain, and the circumstances did not warrant granting the landlord leave to appeal the interlocutory order denying remand or abstention.

In re Jackson Brook Institute, Inc., 227 B.R. 569 (D. Maine 1998).

The landlord pointed out that the debtor was not the borrower, not the owner of the mortgaged premises, and was protected by a non-disturbance agreement from the mortgagee regardless of the outcome in foreclosure. Hence, the removed foreclosure action was noncore, and the bankruptcy court should have abstained under section 1334(c), the landlord argued. But by keeping the foreclosure action in the bankruptcy court, the debtor's right to cure, assume and assign the valuable lease would be protected, the court concluded, a right that has no analog under state law. On the basis of its practical impact on the liquidation of the assets of the estate, the proceeding should be considered "core" under section 157(b)(2)(O).

Reporter's Comment: Cases, such as In re Comcoach Corp., 698 F.2d 571, hold that the automatic stay in a tenant's case operates to restrain foreclosure against a landlord for the purpose of preserving the leasehold. Then the reverse should be true, the landlord argued here: the bankruptcy court should exercise no jurisdiction, where the tenant was "protected" by a non-disturbance agreement from the mortgagee. Of course, the landlord's argument was disingenuous, because it was the landlord who wanted to boot out the defaulted tenant and needed a state law forum in which to do so. On the other hand lies the rule that jurisdiction cannot be founded on the attractiveness of a remedy. There is also the chance that the "landlord" was not what he appeared: without overtly ascribing mortgage-law significance to its observation, the District Court notes twice that the debtor's lease contained a "mandatory offer to purchase" the premises at the end of the term. This is a common feature of financing leases, sale lease-backs, and hidden secured transactions generally. If the landlord was in economic effect a third-party financier, and not a true owner, then everyone got what he deserved.

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