Articles Tagged with New Jersey Chapter 7

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worried-30148__340-217x300In the case of In re Linear Electric Company, Inc., the Third Circuit was presented with whether construction liens filed by a supplier under New Jersey law were valid and enforceable against a contractor who filed a petition for Chapter 11 bankruptcy protection prior to when the construction liens were filed.

New Jersey’s Construction Lien Law, N.J.S.A. §2A:44A, et seq., provides contractors, subcontractors, and suppliers with the right of filing a lien for work, services, or materials provided pursuant to a written contract.   These protections are limited based on several factors including but not limited to whether the person or entity filing the construction lien is defined as a “claimant” under New Jersey’s Construction Lien law, what the unpaid portions of the contract price is, and compliance with strict time restrictions for filing the lien itself and a subsequent lawsuit based on the lien.

Under the Federal Bankruptcy Code, a debtor who files for bankruptcy is afforded the relief of an automatic stay that prevents most collection actions from continuing including acts to create, perfect, or enforce liens against property.  The protections of an automatic stay are broad and expansive but do include several expectations and limitations for certain debts.

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Our bankruptcy attorneys represent debtors and creditors in New Jersey in Chapter 7, 11, or 13 bankruptcies.   Recently, a Bankruptcy Court within the Third Circuit had the opportunity to clarify the cap placed on landlords’ bankruptcy claims under 11 U.S.C. 502(b)(6).

In the case of In re Filene’s Basement, LLC, the Bankruptcy Court reviewed the reach and application of 11 U.S.C. 502(b)(6) on a landlord’s potential claims.  The Code section provides a cap to a landlord’s claim for “rent reserved” as a result of a debtor’s termination of a lease.  The claim for “rent reserved” is capped at the greater amount of either one year of rent or fifteen percent of the remaining term of the lease – not to exceed three years.  The time to calculate this claim for damages is from the earlier date, either the date of the filing of the petition or the date on which the landlord repossesses the property and/or the tenant surrenders the property.  The landlord also retains a claim for unpaid rent prior to the earlier of those two dates.

This cap does not apply to all landlord claims as a result of a breach of a lease.  In fact, courts are typically faced with determining whether landlord claims should be subject to the cap.  The Bankruptcy Court in In re Filene’s Basement, LLC was faced with deciding whether the additional claims asserted by the landlord should be considered outside of the cap.  The claims were for: (1) the cost to remove furniture left by the tenant; and (2) the cost to remove a mechanic’s lien as a result of the tenant’s nonpayment to a contractor.  In reviewing these claims, the Court adopted the Ninth Circuit’s narrow interpretation of the 11 U.S.C. 506(b)(6) in In re El Toro Materials Co., Inc., which asked: “Assuming all other conditions remain constant, would the landlord have the same claim against the tenant if the tenant were to assume the lease rather than rejecting it?”