The prior chapter of Behind The Curtain can be found with the following link:
The rules are a little different for commercial lease agreements
Brettco has a game plan for its contracts, including those with Colvin, Sampson, and Einhorn. What about the lease for the warehouse with Macdade? The rules are a little different for leases of business real property.
Unlike contracts, where Brettco has until the end of the case to decide whether to assume or reject, there are strict timelines for leases. The decision has to be made within the first 120 days of the case. Brettco can ask for a one time, 90 day, extension, but has to show there is a reason for the extension. After 210 days, time’s up, and the lease is automatically deemed rejected unless the landlord specifically agrees to more time. If the lease is rejected, Brettco will have to vacate the warehouse and give the keys back to Macdade.
Brettco leased the warehouse from Macdade 10 years ago and it is for a term of 25 years. Brettco pays $10,000 a month to Macdade. Brettco also agreed to pay the real estate taxes (Brettco paid them just before it filed). Brett also had to personally guaranty the lease payments and had to give a second mortgage on his home. Brettco has been behind on its payments with Macdade for a number of months and owes $60,000. Macdade has been threatening to start an eviction case so it can take back the warehouse. The warehouse is crucial to Brettco’s business; since that is where all of the supplies and vehicles are kept (the office is also in that building). Since the lease seems so important, Brett asked Jeff whether Brettco should assume it at the beginning of the case. Jeff said there are two reasons to wait. First, Brettco would have to pay the $60,000 that is owed pre-petition. Second, the balance of the amount owed on the lease, $1,800,000, would become an administrative claim and, if Brettco cannot confirm a plan, Macdade, as an administrative creditor, would get virtually all of Brettco’s money.
There are a lot of issues to unpack. The Brettco filing stopped any possible eviction case (unless Macdade gets relief from the stay to start an eviction case). Under the Code, Brettco has to remain current with Macdade. That means it has to pay Macdade $10,000 every month. This is in the cash collateral budget.
Remember the automatic stay? It starts the moment the case is filed. However, it only applies to Brettco, not to Brett. So if Macdade wanted to, it could start a lawsuit against Brett on the personal guaranty. Even though Brett and Brettco are essentially one and the same (Brettco is a single-member LLC), it would be a conflict for Jeff to represent both. Brett considered having his cousin, Jennifer, represent him. However, since Jennifer is a divorce lawyer, Jeff suggested Brett hire someone who is familiar with this area and recommends Maureen.
Brett meets with Maureen and hires her to represent his personal interests. Before the case was filed, Jeff and Brett discussed the Brettco exit strategy. Since the problems arose when Brettco expanded beyond its home base, it was going to stop doing work out of the region and only focus on jobs where Brett could maintain control. While this would mean less revenue, it would also mean significantly lower expenses. Additionally, Brettco is a known business in its home state. Out of the area, not so much. Brett found that when he tried to expand there was much more competition and, as a result, he had to underbid some jobs. In essence, he wanted to go back to where his father had been so successful.
Since Brettco has the outline of its exit strategy, Maureen and Jeff both speak with Harry, who represents Macdade. Harry knows that he can’t evict Brettco without relief from the automatic stay and, as long as Brettco makes the monthly payments, cannot ask for relief. The personal guaranty is another matter. Harry knows that he can sue Brett and, if he wanted to, could start a foreclosure case against Brett’s house.
Maureen tells Harry that, while he can start a lawsuit on the personal guaranty, all that will do is increase the legal fees Macdade will have to pay and may force Brett into his own bankruptcy. Harry is not moved. He says he is going to sue on the guaranty. Maureen and Harry end up striking a deal, where Brett will pay $2,500 a month on the $60,000 that is owed. If a plan is confirmed, and if Brettco can pay the balance of the $60,000, Macdade won’t sue Brett.
Next—the heart of the case—the plan of reorganization.
Earlier chapters of Behind The Curtain can be found at the following links:
