CASH OR CREDIT…LANDLORDS BEWARE!

Jordan Uditsky • May 18, 2013

INTRODUCTION Though it may seem that the economy is on the mend, a quick discussion with the leaders of many area businesses exposes an underlying unease as to whether the economy as a whole can sustain its recovery given the inability of bureaucrats in Washington to craft long-term solutions to our country’s financial crisis. Many […] The post CASH OR CREDIT…LANDLORDS BEWARE! appeared first on GGHH Law.



INTRODUCTION

Though it may seem that the economy is on the mend, a quick discussion with the leaders of many area businesses exposes an underlying unease as to whether the economy as a whole can sustain its recovery given the inability of bureaucrats in Washington to craft long-term solutions to our country’s financial crisis. Many of these businesses continue to struggle to remain profitable and avoid the financial pitfalls of the recent recession. These same struggles affect more than the businesses themselves, and when a business’ financial struggles involve a bankruptcy they can have devastating results for creditors, particularly commercial landlords. While commercial landlords either holding a cash security deposit or a letter of credit may think themselves isolated from a tenant’s bankruptcy, some have found that neither is actually immune from risk.


CASH PITFALLS

Cash security deposits have long been the traditional form of security for a commercial lease, typically in the amount of one to two month’s rent. However, the recent financial crisis exposed a weakness in what was otherwise thought to be ironclad security against a tenant’s default. When a tenant declares bankruptcy the landlord may find themselves enmeshed in a fight with the bankruptcy trustee to retain that security deposit. A cash security deposit is generally regarded as an asset of the bankruptcy estate under Section 541(a). Courts have held, however, that landlords may offset a portion of the security deposit against their allowable claims but that any surplus must be returned to the debtor ( Oldden v. Tonto Realty Corp. , 143 F.2d 916 (2 nd Cir. 1944)). They have gone further to provide that a landlord’s security deposit constitutes a perfected security interest or lien in the landlord’s favor ( In re Johnson , 215 B.R. 381, 384 (Bankr. N.D. Ill. 1997)). It would seem the landlord’s ability to retain the security deposit is an equitable remedy until one examines and understands what an “allowable claim” is under the Bankruptcy Code.


A debtor-tenant has the ability to reject certain leases pursuant to Section 365 of the Bankruptcy Code. Such a lease rejection is tantamount to a default under the terms of most leases giving the landlord a general unsecured claim against the bankruptcy estate for the resulting damages. Unfortunately, the landlord’s claim is limited by Section 502(b)(6) of the Bankruptcy Code to the amount of accrued but unpaid rent plus the amount of rent reserved under the lease for the greater of one year or 15% of the remaining term of the lease. To the extent the cash security deposit exceeds the amount of the Landlord’s claim, it must be returned to the debtor’s bankruptcy estate.


WHY IS A LETTER OF CREDIT BETTER THAN CASH

In order to provide some insulation from the risk of a security deposit being tied up in a tenant’s bankruptcy, many landlords prefer the issuance of a standby letter of credit. A standby letter of credit issued by the tenant’s bank or, preferably, a bank satisfactory to the landlord is an independent obligation of the issuing bank to the landlord. The letter of credit stands apart from the tenant’s obligation to reimburse the issuing bank and is therefore not generally a part of the bankruptcy estate. Less risk? It would seem that way until one considers the long list of bank failures over the past several years and the FDIC’s unwillingness to honor letters of credit issued to commercial landlords by failed banking institutions. With the economic recovery still uncertain, commercial landlords should take proactive measures in their leases requiring tenants to replace letters of credit issued by insolvent banks and permitting the landlord to make a periodic review of the letter of credit issuer. Landlords should also reserve the absolute right to approve the bank issuing the letter of credit or provide a list of acceptable financial institutions from whom they will accept a letter of credit. It should also be noted that the interaction between a landlord’s proposed draw on a letter of credit and the 502(b)(6) cap is unsettled. Landlord’s should anticipate that any drawdown on a letter of credit may have an impact on the amount of the landlord’s claim in a tenant’s bankruptcy.


Jordan Uditsky is a partner in the corporate practice of Garelli, Grogan, Hesse & Hauert. He brings a diverse legal and business background to the firm, with a particular emphasis on the representation of startups and emerging companies, commercial real estate transactions, tax and estate planning. He advises businesses in a broad range of general corporate and corporate transactional matters, including business organizations and choice of entity issues, financing and private equity, mergers, acquisitions and joint ventures as well as business restructurings. Mr. Uditsky also employs his experience as a business owner to advise companies on regulatory issues and compliance matters, employment policies and legal issues related to their general operations and business strategy.


Garelli Grogan Hesse & Hauert offers sophisticated yet cost effective, practical solutions to our clients’ legal challenges. We strive to understand not only the legal issue but our clients’ business goals as well and craft tailored solutions to help them succeed. Our attorneys represent businesses and individuals throughout the Midwest in matters that include commercial litigation, securities, business counseling and transactions, commercial real estate, estate planning and family law. For more information contact Jordan Uditsky at (630)833-5533 x12 or juditsky@gghhlaw.com.


The post CASH OR CREDIT…LANDLORDS BEWARE! appeared first on GGHH Law.

Options for Addressing Title Encumbrances in Loan Transactions

By Jordan Uditsky • January 4, 2022
An amendment to the Mechanics Lien Act (the "Act') permits the bonding over of mechanic's liens in the State of Illinois. The bill was signed into law ( 770 ILCS 60/38.1 ) on July 28, 2015, and went into effect on January 1, 2016. This statute is significant because it allows parties to "clear title" to real property that would otherwise be subject to a mechanic's lien. An eligible applicant will be permitted to substitute a bond for the real property subject to the underlying mechanic's lien so that the lien attaches to the bond instead of the real property. Who is Eligible? To take advantage of 770 ILCS 60/38.1 , the party desiring to bond over the lien must be an eligible applicant. The statute defines applicant relatively broadly to include the following parties: An owner; Other lien claimant; A party that has an interest in the property subject to the lien claim; An association representing owners organized under any statute or to which the Common Interest Community Association Act applies; or Any person who may be liable for the payment of the lien claim, including an owner, former owner, association representing owners organized under any statute or to which the Common Interest Community Association Act applies, or the contractor or subcontractor. Process for Filing a Petition To effectively substitute the bond for the real property, the applicant must file a petition with the clerk of the circuit court in the county where the property subject to the underlying lien claim is located. The petition must include the following: The name and address of the applicant and the applicant's attorney, if any; The name and address of the lien claimant; If there is a pending action to enforce the claim, the name of the attorney of record, or if there is no pending claim, but the claim has been recorded, the name of the preparer of the lien claim; The name and address of the owner of record of any real estate subject to the claim or the name and address of the homeowners association or the condominium association; A legal description of the property; A copy of the lien claim; A copy of the proposed eligible surety bond; A certified copy of the surety's certificate of authority from the Department of Insurance or the state agency charged with the duty to issue the certificate; and An undertaking by the applicant to replace the bond with another eligible surety bond in the event that the proposed eligible surety bond ceases to be an eligible bond. After filing a proper petition, the applicant must provide notice and a copy of the petition, either by personal service or certified mail, to every party whose name and address is stated in the petition and the lien party's attorney of record. Jordan Uditsky, an accomplished businessman and seasoned attorney, combines his experience as a legal counselor and successful entrepreneur to advise business owners in the Chicago area.

On the Move: Legal Issues Affecting Motor Vehicle Manufacturer and Dealer Law

By Lou Chronowski • November 10, 2021
“Pandemic Impact? - New York Federal Court Allows Termination Dispute to Proceed” 

On the Move: The Future is Now!

By Lou Chronowski • October 19, 2021
Welcome to GHU’s newest blog – On the Move: The Future is Now! This blog focuses on legal and policy issues facing the vehicle industry. The future is now for the vehicle industry. Some states (CA and MA) have issued mandates requiring that vehicle manufacturers stop selling new ICE (internal combustion engine) vehicles by 2035. Most legacy vehicle manufacturers have made various announcements stating that their respective product portfolios will move from ICE to zero emission vehicles (EVs) over the next 10-14 years. Another significant issue facing the issue relates to how vehicles are purchased. Over the past several years, Tesla has charted a distribution model that rejects traditional dealerships and uses direct sales and service. Other EV manufacturers like Rivian and Lucid appear to be headed in a similar direction. It is well known that Apple and Amazon have plans to enter the vehicle space as well. Consumers will have a large role in determining how they want to purchase vehicles and vehicle services (much the same as they did with respect to on-demand transportation with the likes of Uber and Lyft). The question is whether traditional manufacturers will be kept on an uneven playing field with these newer market entrants. Finally, autonomous vehicles (AVs) are right around the corner as well. In addition to consumer adoption and acceptance of EVs, it is still unknown how consumers will react to AVs and whether AVs have a large role in America. The future is now. The changes in the industry are happening now and happening at fast pace. This blog will continue to explore issues facing the vehicle industry. For 20 years, Lou Chronowski has represented motor vehicle manufacturers helping them navigate complex laws and regulations and litigating disputes against dealers. If you have any questions, please contact Lou at lchronowski@ghulaw.com .
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