Appellate Court Provides Practical Guide to Commercial Landlord's Bankruptcy Damage Claims

The Southern District of New York affirmed a bankruptcy court's holding that the statutory cap on a landlord's damage claim [i.e., Bankruptcy Code § 502(b)(6)] "applies to [its] claim against a [Chapter 11] debtor-guarantor." In re Cortlandt Liquidating LLC, 2024 WL 1301429, *3 (S.D.N.Y. Mar. 26, 2024) (emphasis added). Although the tenant-affiliate of the debtor-guarantor was not a Chapter 11debtor, it had vacated the leased premises and delivered the keys to the lessor one month after its affiliates (including the guarantor) filed their Chapter 11 petitions. The court also held that the non-debtor tenant had "terminated" the lease "for purposes of" the statutory damages cap; the cap should also be calculated in accordance with the "time approach", not the "rent approach"; the proceeds of a letter of credit security deposit taken from the debtor-guarantor's "assets" had been properly applied to reduce the lessor's capped claim; and that "cleanup costs" related to the non-debtor tenant's premises were "subject to" the statutory damages cap. The court's decision, supported by a well-reasoned bankruptcy court decision, 648 B.R. 137 (Bankr. S.D.N.Y. 2023) (Wiles, B.J.), provides a helpful overview of the most recent law governing landlords' damage claims in bankruptcy cases.

Relevance

Code §502(b)(6) caps (i.e., limits) a landlord-lessor's claim for "damages resulting from the termination of a lease of real property." 11 U.S.C. §502(b)(6) (emphasis added). After the court "determine[s] the amount of such claim," it may be allowed "except to the extent" that it exceeds "the rent reserved by such lease, without acceleration, for the greater of one year, or 15 percent, not to exceed three years, of the remaining term of such lease." Id. The Code does not address whether it applies to a claim against a guarantor/debtor, "as opposed to a tenant/debtor … [It] does not distinguish among types of debtors." And the Second Circuit has not "addressed the question." 2024 WL 1301429, at *4.

Debtor-Guarantor Liability

The court rejected the appellant lessor's argument that the statutory cap on damages did not apply to its claim against a lease guarantor. As the bankruptcy court noted, other courts have repeatedly "held that section 502(b)(6) applies to limit claims of a lessor for damages for the termination of a lease whether the debtor is the lessee itself or is a guarantor of the lease." Id., citing In re Ancona, 2016 WL 828099, at *5 (Bankr. S.D.N.Y. 2016) (collecting cases and noting that most courts have held that the cap applies to claims against a debtor-guarantor of a lease). "…[T]he goal behind the statutory damages cap is to compensate a lessor for his damages, while at the same time insuring that the landlord's claim is not permitted to be so large that other general unsecured creditors are unable to get recovery from the estate." Id., citing Ancona, 2016 WL 828099, at *1. See also, In re Arden, 176 F.3d 1226, 1229 (9^th Cir. 1999) ("a plain reading of the section underscores that it is the claim of the lessor, not the status of the lessee — or its agent or guarantor — that triggers application of the Cap.").