Emory Bankruptcy Developments Journal


When it decided Matter of Spanish Peaks Holdings II, LLC, the Ninth Circuit exposed a major loophole in the Bankruptcy Code relating to landlords and tenants. This loophole may be exploited by shrewd real estate developers who create two corporate entities and place each into a landlord-tenant relationship, with the lease's terms heavily favoring the tenant corporate entity. Creating this artificial landlord-tenant relationship would permit the tenant entity to retain possession of the property should the landlord entity ever have to file for bankruptcy. This would permit the developer to receive a financial windfall either in the form of a buyout of the tenant entity's lease by a third-party purchaser, or by the continued operation of the tenant entity's business on the purchaser's land. The author analyzes the majority and minority approaches to this loophole, and ultimately argues that the minority approach is more pragmatic. The author then proposes a way for judges to fashion adequate protection to lessen the effect of an undeserving tenant's recovery.