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Boston Market Corporation v. Myrus Hack, L.L.C.

A-5816-01T5 (N.J. Super. App. Div. 2004) (Unpublished)

LEASES; BANKRUPTCY—When a bankruptcy court approves a debtor’s lease assignment free and clear of all liens, claims, and interests, the assignee is not liable for the assignor’s pre-bankruptcy obligations to its landlord.

A landlord commenced an action against its tenant seeking specific performance of the lease. After suit was filed, the tenant filed for bankruptcy, resulting in an automatic stay of the action. The landlord moved before the bankruptcy court for relief from the stay, asserting that the lease was void as a result of the debtor’s default, and therefore that it was not subject to assignment by the tenant in the bankruptcy proceeding. Its motion was denied.

The debtor-tenant got approval from the bankruptcy court to assign the lease. The approval order provided that the assignment was made “free and clear of all [l]iens, [c]laims and [i]nterests.” Despite receiving notice of the assignment, the landlord did not file an objection. It then requested the assignee to pay the debts owed by the prior tenant. The assignee refused, and the landlord served a notice of termination of lease and a notice to quit and vacate. It claimed that the bankruptcy court’s approval order did not relieve the assignee of its obligation to assume the prior tenant’s obligations, and that the assignee took assignment of the lease with its existing defaults. The landlord also claimed that if the approval order insulated the assignee from the prior tenant’s defaults, then the order was invalid because a bankruptcy court does not have the authority to unilaterally modify the terms of a lease by excising the assumption obligation.

The Chancery Division ruled that the landlord should have raised its objection to the Bankruptcy Court’s rulings in that forum, and not in a state court. Furthermore, it found that the clear intent of the assignment was to make the assignee responsible only for post-assignment liability. The doctrine of claim preclusion applies not only to claims that are resolved, but also to claims that could have been resolved. Thus, the alleged defaults were precluded because they all arose prior to assignment of the lease.

The Appellate Division affirmed. To obtain the Bankruptcy Court’s permission to assign an unexpired lease, a debtor need only provide adequate assurance of future performance by the assignee, whether or not there has been a default in the lease. In addition, the pre-assignment claims of default were not brought to the attention of the Bankruptcy Court by the landlord as they should have been. The landlord neither appealed the approval order nor sought to raise the prior tenant’s defaults as administrative priority claims. Instead, it chose to raise the issue in a state court after the lease had already been assigned. This was unacceptable because the Bankruptcy Court had already dealt with the issue. Therefore, the assignment was valid and the assignee was not responsible for defaults that occurred prior to the assignment.


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