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practice regarding rent because of uneven distribution of income and expenses); In re Designer Doors, Inc., 389 B.R. 832 (Bk. D. Ariz. 2008) (under performance date approach, indemnity obligation arose during the postpetition/prejection period, but no administrative claim for fees incurred after rejection).
Many debtors with multiple properties covered by a single lease argue that the court should divide the agreement into separate leases and permit assumption of some but not law. In In re Buffets Holdings, Inc., 387 B.R. 115 (Bk. D. Del. 2008), the Court held that master leases of restaurants as part of a sale/leaseback were indivisible agreements under Illinois law which had to be assumed or rejected in their entirety. There, although rent under the master lease was allocated by location, the rent obligation was joint and several and applied even if one or more of the properties was condemned or destroyed. Also, the agreement had a specific provision for severance under specified circumstances, and the debtor previously had sought consent to substitute a lease.
What if a landlord seeks to mitigate rejection damages by releasing the premises, and the subsequent lessor becomes insolvent--can the landlord seek full rejection damages? In Giant Eagle, Inc. v. Phar-Mor, Inc., 528 F.3d 455 (6th Cir. 2008), the Court held that the lessor was not required to bear the losses from its attempted mitigation, and the debtor was liable for full damages even though damages would have been lessened had the new lessee not become insolvent.
There has been a steady stream of cases dealing with claims in solvent cases. In general, the cases involve claims that would probably be disallowed in an insolvent case but are valid under state law. The courts have generally allowed the claims saying, in effect, that state law governs unless section 502(b) specifically disallows, and that there is little or no place for equitable distribution doctrines to apply in solvent cases where creditors will be paid in full and that such doctrines have no application to creditor versus equity issues. See Gencarelli v. UPS Capital Business Credit, 501 F.3d 1 (1st Cir. 2007) (even if prepayment penalty is not allowable to secured creditor under 506(b) because unreasonable, it is allowed as an unsecured claim because it is valid under state law and there is no reason to put the secured creditor in a worse position than an unsecured creditor); In re Dow Coming Corp., 456 F.3d 668 (6th Cir. 2006) (in solvent case, creditors get default interest at the contract rate and attorneys fees absent compelling equitable circumstances; any other result would violate fair and equitable rule); Urban Communications PCS L.P. v. Gabriel Capital, L.P., 394 B.R. 325 (S.D.N.Y. 2008) (reversing district court; could not reduce interest rate from 38% to 28% on equitable grounds in insolvent case; no misconduct and debtor liquidating).
Courts continue to struggle with landlord cap issues. See In re El Toro Materials Co., 504 F. 3d 978 (9th Cir. 2007) (cap is not applicable to landlord's claim against tenant who dumped 1,000 tons of wet clay "goo," equipment and other materials after rejecting lease
©2009 Jonathan M. Landers
