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Bankruptcy as a Business Planning Tool

BANKRUPTCY AS A BUSINESS PLANNING TOOL or SURVIVING BANKRUPTCY

Part 11

COURT CARVES OUT AN EXCEPTION TO THE LEASE REJECTION DAMAGE CAP, BUT LEAVES THE LANDLORD STANDING IN THE SAME LINE AS THE OTHER UNSECURED CREDITORS WITH RESPECT THERETO

One of the uses of bankruptcy, as a business planning tool, is to enable a debtor to attempt (a) to get out of, i.e. reject, pending leases and contracts [11 U.S.C. Sections 365(a)]; and (b) with respect to rejected real property leases, even to leave some extra money for the unsecured trade creditors, with whom the debtor may want to do business after the case is over, by capping the amount of the damages a landlord can claim by reason of such a rejection of a lease [11 U.S.C. 502(b)(6)]. As to post-petition or post-repossession or post-surrender rent under a real property lease in a tenant bankruptcy, 11 U.S.C. 502(b)(6) limits the landlord’s claim (and it is only a claim) to “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”. However, in the recent case of In re El Toro Materials Company, Inc., 2007 U.S. App. LEXIS 22991 (October 1, 2007), the Court carved out an exception to that lease rejection cap. In that case, the debtor/tenant had rejected the lease and left behind, on the leased premises, “one million tons of its wet clay ‘goo,’ mining equipment and other materials”. The landlord claimed $23 million in damages for the costs of removing those items. The Court held that such removal costs are not subject to that lease rejection cap, i.e. that that cap applies only to rent and rent-like items, not to clean-up or repair costs. However, as with other non-priority rent, the landlord must stand in the same line, as all of the other unsecured creditors, with respect to its claims for such non-monetary defaults.

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