Lease Termination Before Bankruptcy May Be ‘Avoidable Transfer,' 7th Circuit Rules

A landlord who terminates a lease before the tenant's bankruptcy may later be found to have received a preferential or fraudulent transfer and held liable to the bankruptcy estate for the value of the lease, the U.S. Court of Appeals for the Seventh Circuit has ruled.

In light of the March 11 opinion by Judge Richard Posner in Official Comm. of Unsecured Creditors v. T.D. Invs. I, LLP (In re Great Lakes Quick Lube LP, landlords would be wise to think carefully before terminating a lease after their tenant defaults. If the tenant subsequently files for bankruptcy, the landlord might find itself subject to substantial liability as the recipient of an avoidable transfer.

The debtor in the case, Great Lakes Quick Lube LP (Great Lakes), had owned more than 100 oil change and auto maintenance stores throughout the Midwest. It typically bought a store, sold it to investors and then leased it from the new owners under a long-term contract. When its debts were mounting and