Seventh Circuit: Termination of Lease Constitutes “Transfer” under 11 U.S.C. §§ 547 and 548
Counsel for commercial landlords should be aware of the Seventh Circuit’s recent opinion in Great Lakes Quick Lube LP v. T.D. Investments I LLP (In re Great Lakes Quick Lube LP). The Seventh Circuit held that a pre-bankruptcy termination of a lease was a “transfer” to the landlord for purposes of the preferential and fraudulent transfer provisions of the Bankruptcy Code, 11 U.S.C. §§ 547 and 548. Accordingly, the unsecured creditors’ committee could recover the “value” of the leases from the landlord for the benefit of the bankruptcy estate.
The opinion creates significant potential liability for commercial landlords with distressed tenants. When negotiating the termination of a lease, a landlord should be careful to assess the whether the “transfer” fits within any of the defenses to §§ 547 and 548 of the Bankruptcy Code.
In Quick Lube, the debtor (Quick Lube) operated over 100 stores that provided “oil changes and other automotive maintenance services.” Quick Lube typically leased each store location under a long-term lease. Just 52 days before filing bankruptcy, Quick Lube negotiated a termination of two leases with T.D. Investments I LLP (the “landlord”), who was a creditor of Quick Lube.