How and When a Landlord’s Claims are Capped Under the Bankruptcy Code

Our bankruptcy attorneys represent debtors and creditors in New Jersey in Chapter 7, 11, or 13 bankruptcies.   Recently, a Bankruptcy Court within the Third Circuit had the opportunity to clarify the cap placed on landlords’ bankruptcy claims under 11 U.S.C. 502(b)(6).

In the case of In re Filene’s Basement, LLC, the Bankruptcy Court reviewed the reach and application of 11 U.S.C. 502(b)(6) on a landlord’s potential claims.  The Code section provides a cap to a landlord’s claim for “rent reserved” as a result of a debtor’s termination of a lease.  The claim for “rent reserved” is capped at the greater amount of either one year of rent or fifteen percent of the remaining term of the lease – not to exceed three years.  The time to calculate this claim for damages is from the earlier date, either the date of the filing of the petition or the date on which the landlord repossesses the property and/or the tenant surrenders the property.  The landlord also retains a claim for unpaid rent prior to the earlier of those two dates.

This cap does not apply to all landlord claims as a result of a breach of a lease.  In fact, courts are typically faced with determining whether landlord claims should be subject to the cap.  The Bankruptcy Court in In re Filene’s Basement, LLC was faced with deciding whether the additional claims asserted by the landlord should be considered outside of the cap.  The claims were for: (1) the cost to remove furniture left by the tenant; and (2) the cost to remove a mechanic’s lien as a result of the tenant’s nonpayment to a contractor.  In reviewing these claims, the Court adopted the Ninth Circuit’s narrow interpretation of the 11 U.S.C. 506(b)(6) in In re El Toro Materials Co., Inc., which asked: “Assuming all other conditions remain constant, would the landlord have the same claim against the tenant if the tenant were to assume the lease rather than rejecting it?”

In analyzing the landlord’s claims, the Court went through a two part analysis.  First, it determined whether the claim resulted from the termination of the lease.  Second, it determined whether the claim consisted of “rent reserved” under 11 U.S.C. 506(b)(6)(a).  Rent reserved is determined by looking to see whether: (1) the charge is designated as rent or additional rent in the lease; (2) The charge is related to the value of the property; and (3) The charge is fixed, regular, or periodic.

Based on this analysis, the Court determined that the landlord’s costs to remove the furniture did not fall within the capped damages and was its own separate claim because it was not fixed, regular or periodic even though it was defined as rent under the lease.  Further, the Court determined that the costs related to releasing the mechanic’s lease did not fall within the cap because the mechanic’s lien was not the result of the termination of the lease.

There are a few takeaways from the case of In re Filene’s Basement, LLC.  First, a landlord’s claim for rent reserved is capped.  Second, the determination of what may consist of “rent reserved” is not neatly defined and is determined on a case by case basis.

Our bankruptcy attorneys can help determine the application of the cap provided under 11 U.S.C. 502(b)(6), and all other questions that you may have regarding a Chapter 7, 11, and 13 bankruptcy.  To set up an appointment to speak with one of our bankruptcy lawyers, call (973) 890-0004 or e-mail us.  We can help.