In Re MDC Systems, Inc.: 502(b)(6) 'Surrendered' To Common Sense

Section 502(b)(6) of the Bankruptcy Code caps the amount of a lessor's claim against a debtor-lessee for damages arising from the termination of a real property lease. The statutory cap is calculated according to a formula that considers, among other things, the date on which the lessor "repossessed" or the debtor-lessee "surrendered" the leased property. Because those terms are not defined in the Bankruptcy Code, however, courts disagree as to whether state or federal law should determine their meanings for the purpose of calculating the allowed amount of the lessor's claims.

A Pennsylvania bankruptcy court recently weighed in on this issue in In re MDC Systems, Inc., 488 B.R. 74 (Bankr. E.D. Pa. 2013). The court rejected the majority view, ruling that state-law definitions of "surrender" and "repossession" should not determine the amount of a lessor's claim for future rent under section 502(b)(6).

Statutory Cap on Landlord Claims in Bankruptcy

Section 502(b)(6) provides that, upon the filing of a timely objection, a claim filed in a bankruptcy case shall be disallowed to the extent that:

if such claim is the claim of a lessor for damages resulting from the termination of a lease of real property, such claim exceeds—

(A) 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, following the earlier of—

(i) the date of the filing of the petition; and

(ii) the date on which such lessor repossessed, or the lessee surrendered, the leased property; plus

(B) any unpaid rent due under such lease, without acceleration, on the earlier of such dates . . . .

Section 502(b)(6) thus imposes a ceiling, or "cap," on the allowed amount of a landlord's claim for damages resulting from the termination of a lease of real property. The purpose of the rent cap is to balance the interests of landlords and other unsecured creditors by allowing a landlord "to receive compensation for losses suffered from a lease termination while not permitting a claim so large as to prevent general unsecured creditors from recovering from the estate." See Solow v. PPI Enterprises, Inc. (In re PPI Enterprises (U.S.), Inc.), 324 F.3d 197 (3d Cir. 2003).

Section 502(b)(6) mandates that a lessor's claim for damages resulting from the termination of a lease must be compared to the sum of two amounts: (i) an amount based on "rent reserved" plus (ii) "unpaid rent." If the claim that otherwise would be allowable under applicable nonbankruptcy law exceeds these two amounts, the allowed claim is reduced accordingly.

The "rent reserved" means the amount of future rent under the lease, calculated from the earlier of the date of filing of the bankruptcy petition or the date on which the lessor "repossessed" or the lessee "surrendered" the leased property (such earlier date being referred to as the "Rent Cap Date"). Once the Rent Cap Date is determined, the rent-reserved component of the cap...