In Re: Cortlandt Liquidating LLC

Background

Lincoln Triangle Commercial Holding Co. LLC was the landlord under a lease with C21 1972 Broadway LLC. Century 21 Department Stores LLC guaranteed the tenant’s lease obligations. The lease obligations were also secured by a letter of credit issued by JPMorgan Chase Bank, N.A.; the tenant was identified as the applicant, Century 21 Department Stores LLC as the obligor, and Lincoln Triangle as the beneficiary.

On September 10, 2020, Century 21 Department Stores LLC and affiliated debtors filed Chapter 11 bankruptcy cases. On October 9, 2020, the tenant vacated the property and returned the keys while the lease was still in effect. The tenant did not pay additional rent. Lincoln Triangle stated that it did not accept termination of the lease, drew approximately $7.6 million under the letter of credit, and used the proceeds as security for lease obligations.

Lincoln Triangle filed Claim 1066 seeking $44,378,698.04 for estimated damages, including future rent, future real-estate taxes and operating expenses, utilities and repairs, cleanup costs, mechanic’s liens, and window repairs. Alan D. Halperin, acting as Plan Administrator, objected to the claim under Section 502(b)(6) of the Bankruptcy Code. That provision limits a lessor’s claim for damages resulting from termination of a real-property lease to the rent reserved for the greater of one year or 15 percent of the remaining lease term, with the 15-percent period capped at three years.

Bankruptcy Court proceedings

The Bankruptcy Court ruled that Section 502(b)(6) applied to Lincoln Triangle’s claim against the debtor-guarantor. It also ruled that the tenant’s abandonment and return of the keys made the lease “functionally dead” and therefore terminated for purposes of the statutory cap, even though Lincoln Triangle had refused to accept termination under state-law principles.

The Bankruptcy Court later ruled that the cap had to be calculated using the “Time Approach.” Under that approach, the cap is based on the rent reserved for the applicable period—one year or 15 percent of the remaining lease term, subject to the three-year limit. The court rejected the “Rent Approach,” which would have based the cap on 15 percent of the total rent payable over the remaining lease term.

The Bankruptcy Court also ruled that the letter-of-credit proceeds had to be deducted after calculating the capped claim because the letter of credit had been satisfied with bankruptcy-estate assets. Finally, it ruled that the store-cleanup costs resulted from termination of the lease and therefore were subject to the Section 502(b)(6) cap. The Bankruptcy Court sustained the objection to Claim 1066.

District Court’s analysis

Judge Vyskocil affirmed the Bankruptcy Court’s rulings. The District Court held that Section 502(b)(6) applies to a lessor’s claim against a debtor-guarantor, even when the debtor-guarantor was not the tenant. The court reasoned that the statute focuses on the lessor’s claim and the amount recoverable from the bankruptcy estate, rather than on whether the debtor was the tenant or a guarantor.

The District Court also held that the lease was terminated for purposes of Section 502(b)(6) when the tenant abandoned the property and returned the keys after breaching the lease. The court concluded that allowing a landlord to avoid the cap simply by refusing to accept the tenant’s surrender would undermine the purpose of limiting large future-rent claims in bankruptcy.

The court agreed with the Time Approach because the statute’s wording refers to periods of time. It held that allowable damages are capped at the greater of one full year or 15 percent of the remaining lease period, with the latter period limited to three years.

The court further held that the letter-of-credit proceeds had to reduce the claim after the statutory cap was calculated. It found no clear error in the Bankruptcy Court’s finding that the letter of credit had been satisfied with estate assets and noted that failing to apply the proceeds could result in duplicate claims against the estate or circumvent the damages cap.

Finally, the District Court upheld application of the cap to the cleanup costs. Applying a test asking whether the landlord would have had the same claim if the tenant had assumed rather than rejected the lease, the court relied on the lease’s requirement that the tenant surrender the premises vacant, broom clean, and in good condition upon termination. Because Lincoln Triangle would not have had a cleanup-cost claim if the lease had continued, the court held that those costs resulted from termination and were subject to the cap.

Disposition

The District Court affirmed the Bankruptcy Court’s order sustaining the objection to Claim 1066 in its entirety and directed the Clerk of Court to close the case.