A Seattle commercial landlord serves a 3-day pay-or-vacate notice. The tenant ignores it. The landlord files in King County Superior Court. The unlawful detainer is set for hearing. Two days before the hearing, the tenant files Chapter 11 bankruptcy. The eviction stops.
The automatic stay under 11 U.S.C. § 362 halts all collection actions the moment a bankruptcy petition is filed. Every pending lawsuit pauses. Every collection call stops. Every eviction proceeding freezes. The landlord does not lose the right to recover possession or collect unpaid rent, but must now pursue those rights through the bankruptcy court rather than King County Superior Court.
K&S Canon represents commercial landlords and other business creditors in tenant and customer bankruptcies in Seattle and throughout King County and Western Washington. We file proofs of claim, move for relief from the automatic stay, protect creditors against preference clawback demands, and advise landlords on lease assumption and rejection. See our commercial real estate practice page.
The automatic stay: what it stops and what it does not
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SHORT ANSWER The automatic stay under 11 U.S.C. § 362 takes effect the moment a bankruptcy petition is filed. It immediately halts all collection actions, lawsuits, and enforcement proceedings against the debtor, including pending commercial evictions. The stay protects the debtor, not the creditor. A creditor who wants to continue an eviction or collect a debt must move for relief from the stay in the bankruptcy court and establish cause under 11 U.S.C. § 362(d). |
The automatic stay is not a permanent barrier. It is a pause that redirects proceedings from state court to federal bankruptcy court. For a Seattle landlord mid-eviction when a tenant files bankruptcy, the practical result is an immediate stop to the unlawful detainer proceeding. The path to possession runs through the bankruptcy court until the stay is lifted, the case is dismissed, or the lease is rejected.
What the automatic stay covers
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Action halted by the stay |
Practical effect for a Seattle commercial landlord |
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Continuation of a pending eviction (unlawful detainer) |
The King County Superior Court unlawful detainer proceeding stops. No writ of restitution can issue. |
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Filing a new lawsuit to collect unpaid rent |
Cannot sue the debtor in state court for pre-petition rent. Must file a proof of claim in the bankruptcy case. |
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Enforcing a money judgment |
A judgment already entered cannot be collected from the debtor’s assets. |
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Setoff of security deposit against unpaid rent |
Cannot apply the security deposit to unpaid pre-petition rent without bankruptcy court approval. |
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Sending demand letters, collection calls |
All direct collection contact with the debtor is stayed. |
What the automatic stay does NOT cover
The stay does not apply to leases that were already terminated under Washington state law before the bankruptcy petition was filed. Under 11 U.S.C. § 365(c)(3), if a commercial lease was terminated under applicable nonbankruptcy law prior to the bankruptcy filing, the debtor has no lease to assume. The landlord may recover possession without a lift-stay motion.
Post-petition rent also continues to accrue and is treated as an administrative expense entitled to priority payment under 11 U.S.C. § 503(b). A landlord with a Chapter 11 tenant is entitled to receive post-petition rent in the ordinary course, even while the stay is in effect.
Moving for relief from the automatic stay
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SHORT ANSWER A creditor who needs to take action against the debtor or the debtor’s property must file a motion for relief from the automatic stay in the bankruptcy court under 11 U.S.C. § 362(d). For commercial landlords, the standard grounds are: (1) cause, including the debtor’s failure to pay post-petition rent; or (2) the property is not necessary to an effective reorganization. Cases in Seattle are filed in the U.S. Bankruptcy Court for the Western District of Washington. |
Bankruptcy cases involving Seattle commercial tenants are handled by the U.S. Bankruptcy Court for the Western District of Washington, which sits in Seattle at 700 Stewart Street, Suite 6301. The court’s local rules govern the procedures for motions for relief from stay, proofs of claim, and other creditor actions.
Grounds for reliefy
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Ground for relief |
Application to commercial landlords |
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Cause (11 U.S.C. § 362(d)(1)) |
Includes failure to pay post-petition rent, lack of insurance on the property, or other failure to maintain the leased premises. A landlord who is not receiving post-petition rent has cause to seek relief. |
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No equity / not necessary to reorganization (11 U.S.C. § 362(d)(2)) |
If the debtor has no reorganization prospect and the leased property serves no reorganization purpose, relief may be granted on this basis. |
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Single asset real estate (11 U.S.C. § 362(d)(3)) |
For debtors whose primary asset is a single commercial property, secured creditors have an expedited path to relief if the debtor fails to file a feasible reorganization plan or begin making interest payments within 90 days of the petition. |
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Timing matters for landlords A commercial landlord should act quickly after a tenant files bankruptcy. Post-petition rent continues to accrue as an administrative expense, but collection is still stayed. Filing a motion for relief from stay promptly preserves the landlord’s position and signals to the bankruptcy court that the landlord is monitoring the case. K&S Canon handles lift-stay motions for commercial landlords in the Western District of Washington. |
Chapter 7, Chapter 11, and Chapter 13: what each means for creditors
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SHORT ANSWER The chapter of bankruptcy determines what happens to the debtor’s assets and how creditors are paid. Chapter 7 is liquidation: a trustee sells assets and distributes proceeds to creditors in order of priority, then the debtor receives a discharge of remaining debts. Chapter 11 is reorganization: the debtor proposes a plan to restructure debts and remain in business. Chapter 13 is an individual repayment plan over three to five years. Business entities file under Chapter 7 or Chapter 11. |
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Chapter |
Who files |
What it means for a commercial creditor |
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Chapter 7 (Liquidation) |
Individuals, partnerships, corporations |
Trustee sells non-exempt assets. Creditors file proofs of claim and receive distributions based on priority. Unsecured creditors typically receive pennies on the dollar or nothing. The lease is rejected unless the trustee assumes it within 60 days. |
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Chapter 11 (Reorganization) |
Primarily businesses; individuals with debt above Chapter 13 limits |
Debtor proposes a reorganization plan. Creditors vote. The plan may reduce, restructure, or stretch out payments. The debtor has 120 days to assume or reject commercial leases (extendable one time for up to 90 days for cause, requiring landlord consent thereafter). |
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Chapter 13 (Repayment plan) |
Individuals with regular income only |
Debtor repays all or part of debts over 3-5 years. Businesses cannot file Chapter 13. A commercial tenant filing Chapter 13 is an individual or sole proprietor. Relevant for small operators with personal lease guaranties. |
The chapter affects not just how much a creditor recovers, but how quickly. A Chapter 7 case typically closes in a few months. A Chapter 11 reorganization can run for years. A commercial landlord whose tenant files Chapter 11 may be waiting on lease assumption or rejection decisions for months while post-petition rent continues to accrue.
Lease assumption and rejection in Chapter 11
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SHORT ANSWER In a Chapter 11 case, the debtor has 120 days from the order for relief to assume or reject unexpired commercial leases under 11 U.S.C. § 365(d)(4). The court may extend this period by up to 90 days for cause. Any further extension requires the landlord’s written consent. If the lease is not assumed within the deadline, it is deemed rejected by operation of law. Rejection is treated as a pre-petition breach, and the landlord’s damages claim is subject to a statutory cap. |
Assumption
If the debtor assumes the lease, it must cure all arrears, compensate the landlord for any actual monetary loss, and provide adequate assurance of future performance under the lease. For a commercial landlord, assumption means the lease continues and the debtor is obligated to pay going-forward rent under the original terms (or renegotiated terms). An assumed lease can also be assigned to a third party, which may allow the debtor to monetize a below-market lease even if the assignment is prohibited by the lease itself.
Rejection
Rejection is treated as a material breach of the lease occurring immediately before the petition date. The landlord’s claim for rejection damages is an unsecured pre-petition claim, subject to the statutory cap under 11 U.S.C. § 502(b)(6). The cap limits the landlord’s rejection damages claim to the greater of one year of rent or 15% of the remaining lease term (not to exceed three years of rent). Any amount above the cap is disallowed.
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What the rejection damages cap means A lease with 10 years remaining at $20,000 per month gives the landlord a rejection damages claim capped at the greater of: (1) One year of rent: $240,000 (2) 15% of the remaining term (18 months) = $360,000 The cap is $360,000. Any remaining lease obligation above that amount is disallowed. This is why lease terms and remaining rent exposure matter when underwriting credit risk on commercial leases. |
Filing a proof of claim
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SHORT ANSWER A creditor who wants to be paid from a bankruptcy estate must file a proof of claim with the bankruptcy court. The claim must describe the debt, its basis, and any security interest. In a Chapter 7 case, the deadline to file is generally 70 days after the petition date for voluntary cases. In a Chapter 11 case, the court sets a bar date by order. Missing the bar date can result in the claim being disallowed entirely. |
A proof of claim establishes a creditor’s right to receive a distribution from the bankruptcy estate. For a commercial landlord, the claim typically includes pre-petition unpaid rent, late charges, attorneys’ fees (if the lease provides for them), costs of re-tenanting, and other amounts owed under the lease. If the lease has been rejected, the claim should include rejection damages up to the statutory cap.
Claims are reviewed by the debtor, the trustee, and potentially other creditors. A claim can be objected to. Supporting the claim with calculations, lease documentation, and a clear accounting of amounts owed reduces the risk of a successful objection.
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What to include in a commercial landlord proof of claim |
Details |
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Pre-petition unpaid rent |
All rent, CAM, taxes, and other charges due under the lease before the petition date, with monthly breakdown |
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Security deposit credit |
The security deposit held by the landlord reduces the claim dollar-for-dollar |
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Post-petition rent (if lease rejected) |
Post-petition rent through the rejection date is an administrative expense entitled to priority; file separately from the general unsecured claim |
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Rejection damages |
If the lease was rejected, damages through the end of the lease term, subject to the 502(b)(6) cap |
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Attorneys’ fees |
If the lease provides for attorneys’ fees, include them if allowed under applicable law |
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Supporting documentation |
Attach the lease, any amendments, rent ledger, and demand letters |
Preference payment clawbacks
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SHORT ANSWER A bankruptcy trustee can demand the return of payments received by a creditor within 90 days before the bankruptcy filing under 11 U.S.C. § 547. The theory is that payments made while the debtor was insolvent gave the creditor a preference over other creditors. Defenses include the ordinary course of business defense and the new value defense. Commercial landlords who received large catch-up payments or prepayments from a tenant in the 90 days before bankruptcy are at risk of a preference demand. |
A preference action is one of the tools a bankruptcy trustee uses to recover payments made to creditors shortly before the filing. The goal is to equalize the distribution among creditors. A payment that let one creditor recover more than it would in a Chapter 7 liquidation is potentially avoidable.
For commercial landlords, the most common preference risk arises when a tenant is struggling and makes a large lump-sum payment to get current on back rent, or when a landlord pressures a tenant into catching up on arrears in the months before a bankruptcy filing. Regular monthly rent payments made on time, in the ordinary course, are generally defensible.
The ordinary course of business defense
Under 11 U.S.C. § 547(c)(2), a transfer is not avoidable if it was made in the ordinary course of business or financial affairs of both the debtor and the creditor, and made according to ordinary business terms. For a commercial landlord, regular monthly rent payments made on the dates they were due, at the amounts specified in the lease, and without unusual pressure or deviation from the parties’ prior course of dealing, should qualify for this defense.
The new value defense
Under 11 U.S.C. § 547(c)(4), a creditor who extended new value to the debtor after receiving an allegedly preferential payment can offset the preference claim by the amount of the new value. For a commercial landlord, allowing the tenant to remain in possession after a payment is new value. The defense is used to net down the preference claim rather than eliminate it entirely.
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Preference risk management If a commercial tenant is showing signs of financial distress, a landlord should document all communications, maintain a consistent payment demand schedule, and avoid negotiating lump-sum catch-up payments that deviate from the lease terms. Payments received in an unusual manner or on an atypical schedule within 90 days before a bankruptcy filing are most vulnerable to a preference challenge. K&S Canon advises commercial landlords facing preference demands from bankruptcy trustees. |
Frequently asked questions: bankruptcy and creditor rights in Seattle
The automatic stay under 11 U.S.C. § 362 stops the eviction proceeding immediately. The King County Superior Court unlawful detainer case is stayed and cannot proceed without a bankruptcy court order lifting the stay. To continue the eviction, you must file a motion for relief from the automatic stay in the U.S. Bankruptcy Court for the Western District of Washington. The standard grounds for relief are cause (including failure to pay post-petition rent) or that the lease is not necessary to the debtor’s reorganization.
Bankruptcy does not eliminate a landlord’s right to be paid. Pre-petition unpaid rent is an unsecured claim against the bankruptcy estate. The landlord must file a proof of claim to participate in any distribution. How much the landlord recovers depends on the assets available in the estate and the landlord’s priority relative to other creditors. Post-petition rent (after the filing date) is an administrative expense and is entitled to priority payment. If the lease is rejected, the landlord’s rejection damages claim is subject to the cap under 11 U.S.C. § 502(b)(6).
In a Chapter 11 case, the debtor chooses whether to assume or reject each unexpired commercial lease within 120 days of filing (extendable once by 90 days for cause, with landlord consent required for any further extension). Assumption means the lease continues and the debtor must cure all arrears and provide adequate assurance of future performance. Rejection treats the lease as breached immediately before the petition date. The landlord’s rejection damages claim is capped at the greater of one year’s rent or 15% of the remaining lease term (not to exceed three years).
A preference payment is a transfer a debtor made to a creditor within 90 days before filing bankruptcy while insolvent, that allowed the creditor to receive more than it would have in a Chapter 7 liquidation. Under 11 U.S.C. § 547, the bankruptcy trustee can demand the return of such payments. Commercial landlords who received large catch-up payments or lump-sum rent payments in the 90 days before a tenant’s bankruptcy filing are at risk. Defenses include the ordinary course of business defense and the new value defense.
Yes. Under 11 U.S.C. § 365(e), a clause in a commercial lease that terminates the lease, or allows the landlord to terminate, based on the debtor’s insolvency or bankruptcy filing is unenforceable. The debtor retains the right to assume or reject the lease despite the bankruptcy clause. This does not prevent the landlord from seeking relief from the automatic stay on other grounds, such as failure to pay post-petition rent.
A proof of claim must be filed on Official Form 410 with the bankruptcy court handling the case. In a Chapter 7 case, the general deadline for voluntary cases is 70 days after the petition date. In a Chapter 11 case, the court sets a bar date by order, which is sent to all creditors. Claims for Seattle commercial tenants are filed with the U.S. Bankruptcy Court for the Western District of Washington, 700 Stewart Street, Suite 6301, Seattle, WA 98101. K&S Canon files proofs of claim for commercial landlords and prepares supporting documentation to defend against objections.
Document all payment history, demand letters, and communications. Maintain a consistent rent demand schedule and avoid deviating from the lease terms. A large lump-sum catch-up payment accepted within 90 days before a bankruptcy filing is the most common source of preference risk for commercial landlords. If the tenant is delinquent and you are considering an eviction, see our commercial eviction page for the procedural steps under Washington law.
This page provides general information about bankruptcy and creditor rights in commercial real estate matters in Washington State and Seattle. It is not legal advice and does not create an attorney-client relationship. Every situation is different. Contact K&S Canon PLLC at (206) 507-4009 to discuss your specific situation. Kim Sandher is licensed in Washington State (Bar #42630) and admitted to the U.S. District Court for the Western District of Washington.