In a case of first impression, the U.S. Court of Appeals for the Seventh Circuit has ruled that the termination of two leases prior to a commercial tenant’s bankruptcy filing were transfers under the Bankruptcy Code and thus avoidable.
The case — In re Great Lakes Quick Lube LP — involved debtor Great Lakes, which operates oil change centers through lease-backs from investors. Great Lakes identifies and purchases the property, sells it to an investor, then leases it back.
A couple of months before filing bankruptcy, Great Lakes terminated several of its leases with an investment group, T.D. Investments. T.D. then leased two profitable Great Lakes locations to another oil change company.
Great Lakes’ creditors contended that the pre-petition termination of the two leases was avoidable as preferential or constructive fraudulent transfers. A bankruptcy court ruled that the lease terminations were not transfers. In addition, the court said even if they were transfers, they were not avoidable.
On appeal, the 7th Circuit reversed the bankruptcy court, holding that the termination of the two leases could be considered transfers under the Bankruptcy Code. In addition, the appeals court said that Great Lakes may not have received proper value for terminating the leases and remanded the matter to the bankruptcy court to determine the value of the transfers and whether T.D. could defend its fraudulent transfer claims.
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