In In re New Dragon Toy Wholesale, Inc., Chief Bankruptcy Judge Martin Glenn denied a debtor/tenant’s motion for a temporary restraining order to enjoin a landlord and the New York City marshal from evicting the debtor from a commercial property, holding that the eviction was excepted from the automatic stay since the commercial lease terminated pre-bankruptcy.

Background

Pre-bankruptcy, the landlord served a 30-day notice terminating the commercial lease. The tenant continued to occupy the premises on a month-to-month basis. Thereafter, the landlord commenced a holdover proceeding in New York state landlord-tenant court to evict the tenant. The state court entered judgment in favor of the landlord, finding that the lease had already expired, and ordered the tenant’s eviction from the property. 

Subsequently, the New York City marshal issued a warrant of eviction, which was scheduled for nearly a month later. In the interim, the tenant filed for bankruptcy, obtained the benefit of the bankruptcy automatic stay, and temporarily halted the eviction.

The same day that the tenant commenced bankruptcy proceedings, it filed a motion for a temporary injunction, seeking, among other things, to restrain the landlord or the marshal from evicting the tenant. 

The Tenant's Argument

The tenant argued that it retained an equitable residual, possessory interest in the lease premises until the execution of the warrant of eviction and that this interest was sufficient to trigger the protection of the bankruptcy automatic stay. 

The tenant principally relied on the 2019 amendment to NY RPAPL § 749(3). Pre-amendment the provision provided:

The issuing of a warrant for the removal of a tenant cancels the agreement under which the person removed held the premises, and annuls the relation of landlord and tenant, but nothing contained herein shall deprive the court of the power to vacate such warrant for good cause shown prior to the execution thereof.

However, following the amendment, the provision provides:

Nothing contained herein shall deprive the court of the power to stay or vacate such warrant for good cause shown prior to the execution thereof, or to restore the tenant to possession subsequent to execution of the warrant. In a judgment for nonpayment of rent, the court shall vacate a warrant upon tender or deposit with the court of the full rent due at any time prior to its execution, unless the petitioner establishes that the tenant withheld the rent due in bad faith.

Thus, the tenant argued that “[a]fter the amendment of RPAPL § 749(3), the issuance of the warrant of eviction no longer cancels the nonresidential lease and annuls the landlord-tenant relationship. So, upon the filing of the bankruptcy petition, the lease becomes property of the estate and the automatic stay prevents the landlord from regaining possession.”

The Landlord's Argument

The landlord argued that an exception to the automatic stay—under section 362(b)(10) of the Bankruptcy Code—applied because the tenant’s lease expired long before the bankruptcy. The landlord further argued that RPAPL § 749(3) did not protect the tenant because the lease was not terminated by judicial action (i.e., a warrant of eviction), but expired pre-petition on its own terms. Therefore, the tenant did not have an interest that the automatic stay protected and RPAPL § 749(3) did not apply. 

The Court's Conclusion

The Bankruptcy Court observed that section 362(b)(10) specifies that the voluntary filing of a petition in bankruptcy does not establish a stay “of any act by a lessor to the debtor under a lease of nonresidential real property that has terminated by the expiration of the stated term of the lease before the commencement of or during a case under [the Bankruptcy Code] to obtain possession of such property . . . .” 

The Bankruptcy Court further observed that the legislative history of this statute indicates that “Congress intended to allow landlords to promptly proceed in state courts and reclaim possession of nonresidential lease property where such lease had expired prepetition.” 

Indeed, section 541(b)(2) of the Bankruptcy Code clarifies that a debtor’s estate does not include “any interest of the debtor as a lessee under a lease of nonresidential real property that has terminated at the expiration of the stated term of such lease before commencement of the [bankruptcy case] . . .”

The Bankruptcy Court easily found that the tenant was not entitled to a temporary injunction, because it failed to show likelihood of success on the merits. The Bankruptcy Court reasoned that “[t]he State Court’s final judgment that the [tenant’s] lease terminated prepetition . . . is entitled preclusive effect in this bankruptcy case” and that this judgment “establishes that the lease is not property of the estate and is not protected by the automatic stay.”

The Bankruptcy Court found that RPAPL § 749(3) did not save the tenant or create a protectable interest because the statute only applied where: (1) a state court enters a judgment based on rental arrears; and (2) issues a warrant of eviction permitting the landlord to regain possession of the property. It does not apply, however, where a lease terminates by its own terms pre-bankruptcy.

Conclusion

New Dragon Toy helps clarify the interplay between the amended RPAPL § 749(3) and the bankruptcy automatic stay. This decision solidifies that RPAPL § 749(3) and the automatic stay will only apply if a lease is terminated pursuant to a judicial eviction. However, if a lease expires pre-bankruptcy according to its own terms, neither RPAPL § 749(3) nor the bankruptcy automatic stay apply. Rather, the exception to the automatic stay under section 362(b)(10) will apply and a landlord will not be enjoined from continuing eviction proceedings post-bankruptcy.