Court Interprets Section 502(b)(6)(A); Holds “15%” A Measure of the Remaining Lease Term and Not a Measure of the Remaining Rent Due Under the Lease

In re Filene’s Basement, LLC, et al., No. 11-13511 (KJC) (Bankr. D. Del. Apr. 16, 2015)

In this Opinion, Delaware Bankruptcy Court Judge Kevin Carey ruled on a question that has evenly divided courts nationwide and remained unanswered by the Third Circuit Court Appeals – namely, whether the “15 percent” referenced in section 502(b)(6)(A) of the Bankruptcy Code refers to the remaining term of a lease or the remaining rent due under a lease.  Section 506(b)(6), which places a statutory cap on a landlord’s claim resulting from the termination of a debtor’s lease of real property, provides in relevant part that “a claim of a lessor for damages resulting from the termination of a lease of real property” cannot exceed “(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 . . . plus (B) any unpaid rent due under such lease . . . .”  (emphasis added).  Relying on a natural reading of the statute’s plain language, Judge Carey held that “15 percent” refers to “time” (i.e.the remaining term of the lease).  Because the first part of the statute’s calculation is temporal (rent “of one year”),  it naturally can only be compared to another time period (15% “of the remaining term of [a] lease”).  As noted by the Court, “in comparing the greater or lesser of two things, the measurement of those things must be parallel . . . .” Op. at 9 (quoting In re Heller Ehrman LLP, 2011 WL 635224, at *2-3 (N.D. Cal. Feb. 11, 2011)).  Moreover, a contrary interpretation, according to the Court, would render the phrase in section 506(b)(6)(A) “without acceleration” superfluous as “[t]aking 15 percent of all the rent for the remaining term, especially where escalation clauses are present, would be tantamount to effecting an acceleration.”  Op. at 10 (quoting Iron-Oak Supply Corp., 169 B.R. 414, 420 (Bankr. E.D. Cal. 1994)).

In addition to interpreting the language of section 502(b)(6)(A), the Court also addressed the general scope of section 502(b)(6).  The landlord in Filene’s asserted not only a claim under section 502(b)(6) for unpaid past due and future rent, but also separate claims for its costs to remove abandoned furniture and fixtures left by the debtors on the leased premises and for its costs to remove a mechanic’s lien on the property that arose as a result of the debtors’ failure to pay a contractor.  The landlord asserted that these claims were not subject to the statutory cap of section 502(b)(6) because they were not claims for rent.  While the Court ultimately agreed with the landlord in part and determined that the mechanic’s lien claim, unlike the abandonment claim, was not subject to section 502(b)(6), its reasoning did not align with that posited by the landlord.

Because non-rent damages can fall within the scope of section 502(b)(6), the Court asked an initial question to decide the matter at hand – whether the asserted claims resulted from the termination (not rejection) of the lease at issue.  After considering the facts presented, Judge Carey ruled that the mechanic’s lien claim existed independently of the lease termination and, thus, such claim could be separately raised, not subject to section 502(b)(6) and its limitations.  On the other hand, the facts presented in support of the abandonment claim led the Court to conclude that such claim arose from the lease termination and, accordingly, was subject to section 502(b)(6).

That did not end the Court’s analysis on the abandonment claim however.  To determine whether it could be properly included in the calculation of the landlord’s total allowed claim under section 502(b)(6), the Court considered whether the claim was “rent reserved”.  To answer this question, a three part test was applied:  “(1) the charge must: (a) be designated as rent or additional rent in a lease; or (b) be provided as the tenant’s/ lessee’s obligation in the lease; (2) the charge must be related to the value of the property or the lease thereon; and (3) the charge must be properly classifiable as rent because it is a fixed, regular or periodic charge.”  Op. at 20-21 (quoting Kuske v. McSheridan (In re McSheridan), 184 B.R. 91, 102 (9th Cir. B.A.P. 1995)).  According to the Court, while the lease at issue designated all payments due from the debtors to the landlord as “Additional Rent”, the abandonment claim did not assert damages that were fixed, regular, or periodic charges.  Accordingly, the abandonment claim fell subject to the limitations of section 502(b)(6) but could not be used to increase the landlord’s claim thereunder.