AMENDED MEMORANDUM OPINION AND ORDER LIFTING STAY
Fоx 716 Realty LLC (“Landlord”), the landlord and a creditor of Sweet N Sour 7th Ave Corp. (“Debtor”), moves the Court for an order modifying the automatic stay to permit the Landlord to enforce the pre-petition warrant of eviction obtained against the Debtor. The warrant of eviction was issued but stayed on March 26, 2010, pursuant to a “so ordered” stipulation between the Landlord and the Debtor (the “Stipulation”) in a non-payment summary proceeding commenced in the Civil *66 Court of the City of New York, County of New York, entitled Fox 716 Realty LLC v. Sweet N Sour 7th Corp. d/b/a Tasti-D Lite, Index No. L & T 53115/10.
The Debtor operates a “Tasti D-Lite” frozen dessert store under a four year and nine month lease (the “Lease”) for commercial real property at 154-160 East 45th Street a/k/a 716 Third Avenue, New York, New York 10017 (the “Premises”). The Lease, dated January 31, 2007, expires on October 31, 2011, and provides for monthly rent of $8,000.00 for the period February 1, 2007 through January 31, 2008, $8,280.00 for the period February 1, 2008 through January 31, 2009, $8,570.00 for the period February 1, 2009 through January 31, 2010, $8,870.00 for the period February 1, 2010 through January 31, 2011, and $9,180.00 from February 1, 2011 through October 31, 2011. The Landlord also holds a security deposit in the amount of $27,540.00 (the “Deposit”) under the terms of the Lease. In addition to seeking to lift the stay to permit the Landlord to proceed with the Debtor’s eviction, the Landlord also seeks to apply the Deposit to past-due rent, arguing that it is entitled to exercise the right of recoupment with respect to the Deposit.
The Stipulation settling the summary eviction proceeding called for the issuance of a warrant of eviction against the Debtor but stayed the execution of the warrant of eviction on the condition that (i) the Debt- or make future rent payments pursuant to a schedule outlined in the Stipulation; and (ii) consent to a final judgment in the amount of $50,951.02. In the event of a default on the Stipulation the Landlord was required to provide the Debtor with three days written notice of the default, simultaneously with a notice to the marshal to execute the warrant of eviction. If the Debtor could not cure the default within three days, the marshal could then execute the warrant of eviction.
The Debtor did not make a payment due on May 7, 2010. The Landlord wrote the Debtor, informing it of the default and providing the required three days notice to cure. The Debtor did not cure or contest the default. The Debtor filed its chapter 11 petition on May 24, 2010, before the warrant of eviction was exеcuted.
The Landlord argues that cause exists to lift the stay under section 362(d)(1) of the Bankruptcy Code because the Lease terminated when the warrant of eviction was issued. Since the Lease terminated prepetition, the Landlord argues that the leasehold is not property of the estate. The Landlord further argues that cause exists to lift the automatic stay under section 362(d)(2) as the Debtor has no equity in the property.
The Debtor opposes thе Landlord’s motion, arguing that the Lease did not terminate prepetition and that the Premises are essential to Debtor’s reorganization. The Debtor also argues that it is entitled to assume the Lease. The Debtor’s objection does not address the Landlord’s argument that it is entitled to exercise the right of recoupment with respect to the Deposit.
For the reasons explained below, the Court concludes that neither the Debtor nor the Landlord acсurately states the law in these circumstances. Nevertheless, the stay will be lifted, on the conditions stated below, to permit the Debtor to promptly return to state court to seek to vacate the warrant of eviction. If the state court declines to vacate the warrant of eviction, or if the Debtor fails to comply with the conditions stated below, the Landlord may return to this Court on three (3) business-days’ notice to have the stay vacated and to complete the Debtor’s eviсtion.
*67 DISCUSSION
A. The Warrant of Eviction Terminated the Debtor’s Lease But the Automatic Stay Remains in Place
State law is clear that the issuance of a warrant of eviction terminates the landlord-tenant relationship. Section 749(3) of the New York Real Property Actions & Proceedings Law provides as follows:
The issuing of a warrant for the removal of a tenant cancels the agreement under which the person removed held the premises, and annuls the relation of landlord and tenant, but nothing containеd herein shall deprive the court of the power to vacate such warrant for good cause shown prior to the execution thereof. Petitioner may recover by action any sum of money which was payable at the time when the special proceeding was commenced and the reasonable value of the use and occupation to the time when the warrant was issued, for any period of time with respect to which the agreement does not make any provision for payment of rent.
N.Y. Real Prop. Act. & Proo. L. § 749(3) (McKinney 2008 (“RPAPL”)).
See also Bell v. Alden Owners, Inc.,
The effect of this statute is clear: the Debtor’s leasehold rights were terminated upon the issuance of the warrant of eviction, subject to the power of the state court to vacate the warrant for good cause prior to execution of the warrant. Nevertheless, case law is also clear that if a debtor remains in possession after the issuance of the warrant, the debt- or retains an equitable possessory interest in the leasehold sufficient to trigger the protection of the bankruptcy automatic stay.
See 48th Street Steakhouse, Inc. v. Rockefeller Group, Inc. (In re 48th Street Steakhouse, Inc.),
This court addressed a similar dispute in
In re Mad Lo Lo LLC,
No. 09-11911,
Applying RPAPL § 749(3), the court observed that the issuance of the warrant of eviction severed the landlord-tenant relationship between the parties.
Id.
at *2. The court concluded, however, that the automatic stay applied to the debtor’s interest in its lease, but only with regаrds to
*68
the debtor’s possessory interest in the property.
Id.
(citing
In re Griggsby,
The
Mad Lo Lo
reasoning applies here too. A warrant of eviction was entered on March 26, 2010. Pursuant to RPAPL § 749(3), the issuance of the warrant severed the landlord-tenant relationship between the Landlord and the Debt- or. The parties, however, agreed — and the state court so-ordered — a stay of the execution of the warrant of eviction through the Stipulation. Other courts have likewise held that where a court issues a warrant of eviction but stays its application, a possessory interest remains that may be protected by the automatic stay.
See In re Eclair Bakery, Ltd.,
The Debtor, however, argues that the Lease is still in effect. The Dеbtor claims that this case is “on all fours” with
In re P.J. Clarke’s Rest. Corp.,
*69 B. Provided the Debtor Meets Its Current Rent Obligations and Becomes Current on Postpetition Arrears, Under the Conditions Set Forth Below, There Is No Cause Under § 362(d)(1) to Lift the Automatic Stay to Permit the Landlord to Complete Debtor’s Eviction
That thе automatic stay is currently in place, and may be lifted to permit the Debtor to return to state court to seek to vacate the warrant of eviction, does not completely resolve the issue whether the Court should lift the stay to permit the Debtor to do so, or whether, instead, the stay should be lifted to permit the Landlord to complete the Debtor’s eviction. Section 362(d)(1) provides that the court shall grant relief from the stay “for cause, including the lack of adequate protection of an interest in property of such party in interest....” 11 U.S.C. § 362(d)(1). “The failure to pay post-petition rent may also serve as grounds for lifting the automatic stay.”
In
re
Mad Lo Lo LLC,
Section 365(d)(3) provides, in pertinent part:
The trustee shall timely perform all the obligations of the debtor ... arising from and after the order for relief under any unexpired lease of nonresidential real property, until such lease is assumed or rejected.... The court may extend, for cause, the time for performance of any such obligation that arises within 60 days after the date of the order for relief, but the time for performance shall not be extended beyond such 60-day period.
11 U.S.C. § 365(d)(3). And,
In re P.J. Clarke’s,
The Landlord also argues, in the alternative, that the Court should lift the stay pursuant to section 362(d)(2). For relief to be granted under section 362(d)(2) the debtor must both (i) lack equity in the property, and (ii) the property must not be necessary to an effective reorganization.
*70
See
11 -U.S.C. § 362(d)(2). Here, it is clear that the Lease is necessary to the reorganization as the Debtor cannot operate its business without the Lease. Therefore, the Court denies the Landlord’s motion pursuant to section 362(d)(2).
In re Mitrany,
No. 08-40034,
C. The Debtor May Not Assume the Lease Unless the State Court First Vacates the Warrant of Eviction
The Debtor also erroneously argues that the Lease is part of the estate and may be assumed pursuant to section 365(d)(3) of the Bankruptcy Code without having the state court vacate the warrant of eviction. Only if the state court first reinstates the landlord-tenant relationship by vacating the warrant of eviction may the Debtor assume the Lease under section 365(d)(3). Judge Brozman addressed this precise issue in
In re W.A.S. Food Service Corp.,
The facts here are almost exactly the same as those in
W.AS. Food Service Corp.
The Debtor here maintains that it is entitled to assume a lease that was terminated by the issuance of a warrant of eviction. But, as in
W.AS. Food Service Corp.,
the possibility that the Debtor
may
convince a state court to vacate the warrant of eviction is not a sufficient to allow the Debtor to assume a terminated lease. The Debtor cites no law to the contrary. This Court, however, in similar circumstances, has lifted the automatic stay to permit the debtor to seek to vacаte a warrant of eviction in state court before it could seek to assume the lease under section 365(d)(3).
See In re Mad Lo Lo LLC,
D. The Rent Deposit is Subject to Setoff, But Not to Recoupment
As already indicated, the Landlord also seeks to apply the $27,540.00 Deposit to past-due rent, arguing that it is entitled to exercise the right of recoupment with respect to the Deposit. While not defined in the Bankruptcy Code, the Code contemplates and accepts the equitable doctrine of recoupment. 5 Collier on Bankruptcy ¶ 553.10. Recoupment is essentially a right to reduce the amount
*71
of a claim. It “does not involve establishing the existence of independent obligations” and “may arise only out of the same transaction or occurrence that gives rise to the liability sought to be reduced.”
Id.
In this Circuit, the right of recoupment only arises when the debts “arise out of a
single integrated transaction
such that it would be
inequitable
for the debtor to enjoy the benefits of that transactiоn without also meeting its obligations.”
Westinghouse Credit Corp. v. D’Urso,
The parties have not cited and the Court has not found any cases that employ recoupment to lease security deрosits. Cases typically apply setoff principles under section 553 of the Bankruptcy Code, and not recoupment, when analyzing lease security deposits. Recoupment has been applied in cases concerning utility security deposits, but the deposits in those cases were paid in accordance with state utility statutes. The distinction between recoupment and setoff is important because the automatic stay applies to any setoff effort, but not to a creditor’s recoupment.
Compare
11 U.S.C. § 362(a)(7) (stating that the automatic stay applies to “the setoff of any debt owing to the debtor that arose before the commencement of the case”)
with Ferguson v. Lion Holdings, Inc.,
Bankruptcy courts have applied section 553 (setoff) to rent security deposits.
Schwartz v. C.M.C., Inc. (In re Communicall Cen., Inc.),
Courts interpret lease security deposits as creating “a debt of the landlord to the tenant contingent on the tenant’s performance.”
In re Scionti,
The Landlord cites
New York State Elec. & Gas Corp. v. McMahon (In re McMahon),
CONCLUSION
For the reasons explained above, the Landlord’s motion to lift the automatic stay is DENIED, except to the extent that the stay is lifted on the conditions set forth above to permit the Debtor to commence appropriate proceedings in the state court seeking to vacate the warrant of eviction. If the Debtor fails to satisfy any of the conditions set forth herein, the Landlord may return to this Court on three (3) business-days’ notice seeking to vacate the stay to permit the Landlord to proceed with the Debtor’s eviction.
Additionally, the Landlord’s motion to apply the Deposit on the basis of recoupment is DENIED, without prejudice to the Landlord filing a motion to lift the automatic stay to permit the Landlоrd to exercise the right of setoff.
IT IS SO ORDERED.
Notes
. In
PJ. Clarke,
no warrant of eviction had been issued by the state court. Judge Grop-per concluded, however, that since the state court had rendered a judgment determining that the lease was terminated, the bankruptcy court could not review the state court judgment, and relief was only available by direct appeal in the state court.
See P.J. Clarke,