In the January 15, 2026 decision rendered in In re The Aspen Chapel, the United States Bankruptcy Court for the District of Colorado provided a significant reminder that bankruptcy, while a powerful tool for financial restructuring, cannot be weaponized to circumvent the statutory protections Congress extended to tenants occupying leased real property. The case serves as a sobering lesson for debtors—and a vindication for non-debtor lessees—about the immutable character of Section 365(h) protections and the judiciary’s willingness to police abusive plan proposals.

The Aspen Chapel is a non-profit organization that owned property subject to a real estate lease executed in 1989. The lease agreement was missing several provisions practitioners would ordinarily expect: terms addressing payment obligations, maintenance responsibilities, and permitted uses of the premises. This structural ambiguity would later become consequential.

What makes the case remarkable is that the property owner—a non-debtor landlord-debtor—filed for Chapter 11 bankruptcy protection. The debtor was not in financial distress. The record does not suggest insolvency or the existential financial crisis that typically motivates bankruptcy filings. Rather, the filing appears motivated by a desire to resolve disputes with its tenant through the leverage and procedures available within the bankruptcy system.

Background

Upon filing, the debtor elected to reject the lease under Section 365 of the Bankruptcy Code. When a debtor-lessor rejects a real property lease, the action constitutes a breach rather than a true termination. Critically, rejection triggers statutory election rights afforded to the tenant under Section 365(h). The non-debtor tenant is afforded a statutory choice: treat the rejection as a termination of the lease, extinguishing its lease rights, or elect to retain possession of the leased premises for the remainder of the lease term notwithstanding the rejection.

This statutory scheme reflects a deliberate policy judgment by Congress. While rejection itself constitutes a breach and does not force continued performance by the debtor-lessor, the tenant’s right to remain in possession operates independently of the debtor’s consent or cooperation. The statute is not infinitely flexible. Section 365(h) does not permit a debtor, through the bankruptcy process and plan confirmation, to unilaterally alter the fundamental terms of the rejected lease. A tenant who retains possession under Section 365(h) is entitled to occupy the premises on the terms existing at the time of rejection, absent voluntary agreement to modification.

The debtor then filed an initial reorganization plan, followed by an amended plan. Both proposed plans contained language purporting to rewrite the rejected lease by filling in the very terms that had been omitted: establishing payment terms, maintenance obligations, and use restrictions. The debtor was essentially proposing to use the plan confirmation process to accomplish what it could not accomplish through negotiation.

The Court’s Analysis

Judge Michael E. Romero held that the debtor’s proposed plans violated Section 365(h) protections and could not be confirmed. The court identified two independent grounds for refusal.

First, as a matter of statutory construction and policy, the court determined that the plans, as proposed, would have unlawfully circumscribed the tenant’s statutory rights. By rewriting the lease to impose new or different payment, maintenance, and use obligations, the plans would have effectively confined the tenant’s right to remain in possession within a substantially different contractual framework than that which existed at rejection. This represented an impermissible interference with the tenant’s election rights under the statute.

Second, and with evident concern about the debtor’s motivations, the court held that the plans were proposed in bad faith. The debtor-landlord, solvent and without genuine financial distress, had filed Chapter 11 not as a financial necessity but as a mechanism to gain access to the bankruptcy court’s plan confirmation process as a tool for contract reformation. The debtor’s true objective appeared to be the unilateral rewriting of lease terms to the tenant’s detriment—a use of bankruptcy that courts have long recognized as an abuse of the process.

A Chapter 11 filing motivated by genuine financial necessity, in which a debtor-lessor must reject a lease to manage financial obligations, presents a different equitable posture than a solvent debtor filing to leverage the bankruptcy system as a forum for renegotiating lease terms. The court’s bad faith analysis focused on this latter concern: that the bankruptcy system was being conscripted for a non-bankruptcy purpose.

The court’s remedy was appropriately measured but firm. It refused approval of the disclosure statement, denied confirmation of the amended plan, and directed the debtor to either file a materially revised plan consistent with Section 365(h) protections or seek dismissal of the case.

Key Takeaways

The Aspen Chapel decision carries important implications across several domains of bankruptcy practice. Practitioners advising tenants occupying leased real property should take comfort from the court’s reasoning. Section 365(h) is not merely aspirational; courts will enforce it against debtor-lessors who attempt to circumvent it through the plan confirmation process. A tenant who properly elects to retain possession under Section 365(h) obtains a right that cannot be unilaterally abrogated through a Chapter 11 plan.

The decision also demonstrates that courts maintain gatekeeping authority over plan proposals and will refuse confirmation when a debtor’s true objective is to use bankruptcy as a tool for unrelated, non-bankruptcy purposes. A solvent debtor filing Chapter 11 primarily to coerce a non-debtor counterparty into accepting revised contract terms is engaged in bad faith, regardless of the formal compliance of the plan with other confirmation requirements.

While Chapter 11 is a powerful tool for financial restructuring and may permit the modification of certain contract rights through plan confirmation, it is not a general-purpose contract reformation mechanism. A debtor cannot use Chapter 11 simply to rewrite contract terms that it wishes were different. For debtor’s counsel, the lesson is clear: a Chapter 11 filing must be grounded in genuine financial necessity or a restructuring purpose cognizable under the Bankruptcy Code. For creditors’ counsel and for practitioners representing non-debtor third parties, the decision provides significant reassurance that statutory protections—particularly those created by Congress for the benefit of specific classes of non-debtor parties—will be enforced.