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Can a tenant LLC file for bankruptcy if it can't pay rent?

Can a tenant LLC file for bankruptcy if it can't pay rent?

Full question:

If you are in a triple net lease and the same LLC is in both the landlord and tenant entities, can the tenant entity file for bankruptcy, if it cannot pay rent?

Category: Bankruptcy
Date: 04/07/2025
State: California

Answer:

Yes, a tenant LLC can file for bankruptcy even if the landlord is a related entity. Under the Bankruptcy Code, a debtor can file for bankruptcy regardless of having a related creditor. However, a right of setoff may apply. Setoff, governed by section 553 of the Bankruptcy Code, allows a creditor to offset mutual debts owed to and from the same entity before the bankruptcy case begins.

To establish a valid right to setoff, the following must be proven: (i) a debt owed to the debtor that arose before the bankruptcy case; (ii) a claim against the debtor that arose before the bankruptcy case; and (iii) that the debt and claim are mutual obligations.

This content is for informational purposes only and is not legal advice. Legal statutes mentioned reflect the law at the time the content was written and may no longer be current. Always verify the latest version of the law before relying on it.

FAQs

What happens to a tenant LLC's lease if it files for bankruptcy?

When a tenant LLC files for bankruptcy, it may have the option to reject or assume its lease. If the lease is rejected, the landlord may have a claim for damages, but the lease will be terminated. If the lease is assumed, the tenant must continue to pay rent and comply with lease terms. The decision will depend on the bankruptcy type and the LLC's financial situation.

Can a landlord evict a tenant LLC that filed for bankruptcy?

Generally, a landlord cannot evict a tenant LLC that has filed for bankruptcy without court approval. The automatic stay provision under the Bankruptcy Code prevents most eviction actions during the bankruptcy process. However, if the landlord can prove that the eviction is based on a pre-bankruptcy violation, they may be able to proceed with eviction.

What is the role of a bankruptcy trustee in a tenant LLC's bankruptcy?

In a tenant LLC's bankruptcy, a bankruptcy trustee may be appointed to oversee the case. The trustee's role includes reviewing the LLC's financial affairs, managing assets, and ensuring compliance with bankruptcy laws. They may also evaluate the lease agreements and determine whether to assume or reject them based on the best interests of creditors.

Are there any benefits for a tenant LLC to file for bankruptcy?

Yes, there are potential benefits for a tenant LLC to file for bankruptcy. It can provide a temporary reprieve from creditors through the automatic stay, allowing the LLC to reorganize its debts. Additionally, it can help the LLC negotiate better lease terms or eliminate unmanageable contracts, ultimately aiming for a fresh start.

How does a right of setoff work in bankruptcy for a tenant LLC?

A right of setoff allows a creditor to offset mutual debts owed to and from the same entity before bankruptcy. For a tenant LLC, this means if the landlord owes the LLC money, they can potentially reduce their claim against the LLC by that amount. To establish this right, the debts must be mutual and arise before the bankruptcy filing.