Landlord Alert: Limitations on Strategic Bankruptcy Filings by “Healthy” Companies to Cap Long-Term Lease Obligations Authors: M. David Minnick, Craig A. Barbarosh, Karen B. Dine, Mark Houle
Under Section 502(b)(6) of the Bankruptcy Code, Chapter 11 debtors have a very powerful statutory tool to limit a landlord’s recovery under a long term real property lease when the lease is rejected in bankruptcy. Generally, under Bankruptcy Code Section 502(b)(6), a landlord’s claim for damages resulting from the termination of a real property lease will be limited to the obligations due under the lease for the greater of (i) one year or (ii) fifteen percent, not to exceed three years, of the remaining term of the lease, plus amounts due under the lease on the earlier of the bankruptcy filing date or the date the property was surrendered. However, two recent judicial decisions, one by the Third Circuit Court of Appeals and the other by a California bankruptcy court, clarify that a lessee may be denied the ability to remain a Chapter 11 debtor when it is solvent and files for bankruptcy relief as a strategic maneuver solely to reject a lease and limit a landlord’s lease recovery. Knowledge of this evolving caselaw may impact your ability to protect your rights in certain situations.