Real Estate Agent's Duplicity Doesn't Invalidate Bankruptcy Debtor's Lease Rejection

What Happened:    J.C. Penney (JCP) subleased commercial property to Klairmont at below-market rates. Later, it filed for Chapter 11 bankruptcy, giving it the right to assume or reject its commercial leases. Klairmont offered to pay higher rent if JCP assumed the sublease, but a third-party real estate agent brought in to negotiate with the parties provided Klairmont false information hoping to start a bidding war. JCP eventually rejected the sublease, and Klairmont sued, contending that the agent’s bad faith invalidated the rejection decision.

Ruling: The U.S. Fifth Circuit upheld the lower court’s ruling to nix Klairmont’s challenge and uphold the rejection.

Reasoning: Under the so-called “business judgment” rule, bankruptcy courts will approve a debtor’s decision to assume or reject a lease as long as the decision appears to enhance the debtor’s estate. But some courts will invalidate an assumption or rejection that’s “the product of bad faith, or whim, or caprice.” The real estate agent’s double-dealing was bad faith, Klairmont insisted. Fair point, the court acknowledged. “There is no dispute in this case that the real estate agent lied to Klairmont and impeded its dealings with the debtor.” But even if the bad faith test did apply, it was committed not by JCP but the agent. JCP’s rejection decision was made in good faith and deserved due deference under the business judgment rule, the court concluded.   

• In re J. C. Penney Direct Mktg. Servs., L.L.C., 2022 U.S. App. LEXIS 27991