The Nonexistent Debtor and Indefinite Contract Terms: Better to Dot the I's and Spell Out the Agreed Upon Terms

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The Nonexistent Debtor and Indefinite Contract Terms: Better to Dot the I’s and Spell Out the Agreed Upon Terms

The Nonexistent Debtor and Indefinite Contract Terms: Better to Dot the I’s and Spell Out the Agreed Upon Terms

Bankruptcy RealEstate Insights –

In re Delaware Sports Complex, LLC, 573 B.R. 543 (Bankr. D. Del. 2017) –

The debtor, a limited liability company, purportedly entered into a ground lease before it was formed. The bankruptcy court considered the validity of the lease, whether the lease was properly terminated due to uncured defaults, and the effect of an agreement to subordinate the lessor’s interests to the interests of debtor’s lender.

The debtor was formed to develop a sports complex. To that end, a lease was executed naming the debtor as tenant and a local municipality (the Town) as landlord. However, the debtor was not formed until more than a year after execution of the lease.

The court raise the preliminary question of whether the lease was void ab initio because the debtor did not exist when it executed the lease. Although the court noted decisions recognizing de facto limited liability companies (analogous to de facto corporations) where there was a bona fide attempt to organize, these decisions did not seem to apply in this case since there was no attempt to file a certificate of formation until after the landlord issued a notice of default.

[Bankruptcy RealEstate Insights]

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