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Judge Carey Holds that the Cap on Rejection Damages is Calculated by 15% of Term Remaining on Lease

By Charlene D. Davis

On April 21, 2015, Judge Kevin Carey of the United States Bankruptcy Court for the District of Delaware issued a memorandum opinion and order disallowing in part a landlord’s claim for rejection damages under 502(b)(6) of the Bankruptcy Code, disallowing a separate claim for clean up costs and allowing a separate unsecured claim for costs of removing a mechanic’s lien arising from the debtors’ failure to pay a contractor. In re Filene’s Basement, Case No. 11-13511 (KJC).

On November 2, 2011, Filene’s Basement filed a case under chapter 11 of the Bankruptcy Code. On August 20, 2012, the Court confirmed a plan that classified general unsecured creditors and lease rejection creditors separately, providing a 100% recovery to the former and a 75% recovery to the latter.  Connecticut/DeSales LLC, a landlord (the “Landlord”) whose lease had been rejected by the debtors filed a proof of claim that asserted a claim for rejection damages capped by Section 502(b)(6) of the Bankruptcy Code and additional general, unsecured claims for costs to clean the premises and to remove a mechanics’ lien asserted against the premises by virtue of  the debtors’ failure to pay an elevator maintenance contractor for its work.  In calculating the claim capped by 502(b)(6), the Landlord used a figure representing 15% of the rent due on the lease following the rejection date.  The debtors objected to the 502(b)(6) claim, arguing that the 15% cap on the damages applies to the remaining term of the lease not the remaining rent.  The debtors also objected to the allowance of additional unsecured claims, maintaining that the Landlord was only entitled to the statutorily capped claim.

Following the submission of briefs by the parties and oral argument, the Court issued its decision.  The Court noted a split in the precedent on whether the 15% cap in section 502(b)(6) refers to the time remaining under the lease or the rent remaining under the lease, but concluded that the plain language of the statute, its legislative history and the policy behind it indicate that the 15% cap applies to the time remaining under the lease. As a result, the Landlord’s section 502(b)(6)claim was disallowed in part.  The Court also noted a split of authority on whether a landlord can assert claims in addition to rejection damage claims capped by 502(b)(6), but concluded that they can.  The Court examined the Landlord’s additional claim for clean up costs, finding that they arose from rejection of the lease and thus were rejection damages subject to the cap, but could not be included in the calculation because did not they satisfy the definition of rent.  With respect to the mechanics’ lien costs, the Court found that they did not arise as a result of the rejection and could be asserted separately from the 502(b)(6) claims.

A copy of the Court’s opinion is available here.

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