Subtenant’s Security Deposit Treated as Unsecured Loan in Bankruptcy

Faegre Drinker co-chair Andrew Kassner and finance and restructuring counsel Joseph Argentina coauthored an article for The Legal Intelligencer titled “Subtenant’s Security Deposit Treated as Unsecured Loan in Bankruptcy,” which discusses what rights a tenant has regarding a security deposit delivered by the tenant to the landlord to secure the tenant’s performance under the lease, specifically when the landlord files for bankruptcy and rejects the lease. This issue was recently considered in a case by the U.S. District Court for the Southern District of New York.

Kassner and Argentina outline how the master tenant’s secured lenders swept the subtenant’s security deposit just prior to bankruptcy. They discuss why the Court ruled the security deposit was not held in trust and the subtenant was merely an unsecured creditor. The authors also explain why one should not assume security is secure.