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

Although the tenant-affiliate of the debtor-guarantor was not a Chapter 11 debtor, 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.