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Pre-Bankruptcy Lease Terminations May Constitute Avoidable Transfers

The United States Court of Appeals for the Seventh Circuit recently held that a debtor’s termination of two commercial leases constituted transfers subject to avoidance and recovery. In Official Committee of Unsecured Creditors of Great Lakes Quick Lube, LP v. T.D. Investments I, LLP (In re Great Lakes Quick Lube LP), No. 15-2093, 2016 U.S. App. LEXIS 4560 (7th Cir. Mar. 11, 2016), Great Lakes Quick Lube LP (“Great Lakes”) leased numerous oil change stores from entities throughout the Midwest. Fifty-two days before filing for bankruptcy, Great Lakes negotiated the termination of two of its leases with T.D. Investments I, LLP (“T.D.”). After filing for bankruptcy, Great Lakes’ unsecured creditors committee (“Committee”) filed an adversary proceeding against T.D. seeking to avoid and recover the value of the cancelled leases as preferential and fraudulent transfers. The bankruptcy court denied the Committee’s request, holding that the terminations were not “transfers” subject to avoidance and recovery. The Seventh Circuit reversed the bankruptcy court’s ruling on a direct appeal, holding that a transfer, as defined by the Bankruptcy Code, includes “each mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with—(i) property; or (ii) an interest in property.” When Great Lakes terminated the leases, the Seventh Circuit ruled, it transferred an interest in property—the leases—to T.D., thus making the terminations “transfers” subject to avoidance and recovery. The Seventh Circuit also noted that 11 U.S.C. 365(c)(3), which prohibits a trustee from assuming a commercial lease that is terminated before the order for relief is entered, was inapplicable because the Committee was seeking to recover only the value of the leases, not the leases themselves. Accordingly, the Seventh Circuit remanded the case to the bankruptcy court to determine the value of the transfers to T.D.

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