The Treatment of Debtor Leases Under the United States Bankruptcy Code

This article discusses the treatment of leases in bankruptcy, including lease rejection, lease assumption, and lease assignment.

By Austin McMullen
Toys R Use Going Out of Business

Toys R Use Going Out of Business

The primary rules governing the treatment of leases in bankruptcy are found in Title 11, Section 365 of the United States Code (the Bankruptcy Code). After filing a case under the Bankruptcy Code, tenant debtors can either “assume” or “reject” a lease, subject to court approval. See 11 U.S.C. § 365(a). The Bankruptcy Code gives the debtor significant control over this process. For example, the automatic stay prevents creditors (including landlords) from taking action against a bankrupt debtor without first obtaining relief through a bankruptcy court order. 11 U.S.C. § 362. And, in deciding whether to approve a debtor’s decision to assume or reject, courts apply the very lenient business judgment rule. See In re Penn Traffic Co., 524 F.3d 373, 383 (2d Cir. 2008).

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