Opinion
No. 3:03-1185, Bankruptcy Case No. 301-11305.
April 13, 2004
ORDER
This is an appeal (Bankr. Docket No. 2042) from the Bankruptcy Court's Order (Bankr. Docket No. 1890) and Memorandum Opinion (Bankr. Docket No. 1889) entered on March 24, 2003 denying Queensgate Associates, LLC's ("Appellant") motion for summary judgment (Bankr. Docket No. 1630) and granting Regal Cinemas, Inc.'s ("Appellee") motion for summary judgment (Bankr. Docket No. 1723). For the reasons state in the accompanying memorandum, the decision of the Bankruptcy Court is VACATED and the case is REMANDED for reconsideration and disposition not inconsistent with this opinion.
IT IS SO ORDERED.
MEMORANDUM
This is an appeal (Bankr. Docket No. 2042) from the Bankruptcy Court's Order (Bankr. Docket No. 1890) and Memorandum Opinion (Bankr. Docket No. 1889) entered on March 24, 2003 denying Queensgate Associates, LLC's ("Appellant") motion for summary judgment (Bankr. Docket No. 1630) and granting Regal Cinemas, Inc.'s ("Appellee") motion for summary judgment (Bankr. Docket No. 1723). For the reasons stated herein, the decision of the Bankruptcy Court is VACATED and the case is REMANDED for reconsideration and disposition not inconsistent with this opinion.
The fundamental issue on appeal is whether the Bankruptcy Court correctly determined that 11 U.S.C. § 502(b)(6) caps all claims arising under a breach of a lease, including all claims that are unrelated to the termination of the lease.
The standard of review is de novo for questions of law.Investors Credit Corp. v. Batey (In re: Batey), 995 F.2d 85, 88 (6th Cir. 1993). The findings of fact of the Bankruptcy Court are subject to a "clearly erroneous" standard of review. F.R.Bankr.P. 8013.
This case involves a dispute over amounts owed by Appellee to Appellant as a result of Appellee's rejection, pursuant to 11 U.S.C. § 365, of an unexpired movie theater lease, dated November 20, 1989, by and between Appellee, as lessee, and Appellant, as lessor, with respect to property located in Queensgate Shopping Center, York County, Pennsylvania (the "Lease") (Bankr. Docket No. 1889 at 17).
The record reveals that on October 11, 2001, Appellee filed a voluntary petition for protection under Chapter 11 of Title 11, United States Code in the United States Bankruptcy Court for the Middle District of Tennessee (the "Bankruptcy Court"), and filed a Motion Pursuant to 11 U.S.C. § 365(a) and 554 Authorizing the Debtors' Rejection of Certain Unexpired Nonresidential Real Property Leases and Abandonment of Certain Property (Bankr. Docket No. 23). An order was entered by the Bankruptcy Court rejecting the Lease as of November 30, 2001 (Bankr. Docket No. 256). Prior to entry of the order rejecting the Lease, Appellant filed a claim against Appellee in the amount of $1,811,811.42 (the "Claim") (Bankr. Docket No. 1889 at 17). The Claim represented fifteen percent (15%) of the rent reserved under the Lease ($587,236.80), pre-petition arrearage for CAM charges and taxes ($34,644.62), and damages to theater seats, built-in projection equipment, walls, and other equipment ($1,190,000.00) (Bankr. Docket No. 1889 at 17).
On February 26, 2002, Appellee objected to the Claim to the extent that it exceeded the § 502(b)(6) damage cap of $621,573.44 (Bankr. Docket No. 10). On April 3, 2002, Appellant responded to Appellee's objection, and subsequently cross motions for summary judgement were filed by the parties (Bankr. Docket No. 932 and 1889 at 17). On January 21, 2003, the Bankruptcy Court conducted a hearing on the cross-motions for summary judgment (Bankr. Docket No. 8 at Ex. A). Following the argument on the cross motions for summary judgment the parties entered into and filed with the Bankruptcy Court a stipulation for payment of the undisputed portion of the Claim (the "Stipulation") (Docket No. 8 at Ex. A). The Stipulation provided for the payment of $621,573.44 to Appellant, which the parties agreed Appellant was entitled to pursuant to 11 U.S.C. § 502(b)(6) (the "Undisputed Portion" of the Claim). The parties further agreed that the "Disputed Portion" of the Claim was $1,190,237.98, which amount Appellant claimed for work to the premises and not pursuant to 11 U.S.C. § 502(b)(6) (Bankr. Docket No. 8 at Ex. A).
On March 24, 2003, the Bankruptcy Court awarded partial summary judgment to Appellee on the Disputed Portion of the Claim (Bankr. Docket No. 1890 and 1889). On October 15, 2003, the Bankruptcy Court entered a Claims Resolution Order (Bankr. Docket No. 2035). The Bankruptcy Court found that the statutory cap set forth in 11 U.S.C. § 502(b)(6) applies to all claims a lessor may have for any breach of a lease or covenant of a lease, including claims unrelated to the termination of the Lease, such as for building repair and maintenance (Bankr. Docket No. 1889 at 9). On October 22, 2003, Appellant filed its Notice of Appeal (Bankr. Docket No. 2042).
11 U.S.C. § 502(b)(6) provides in relevant part:
[I]f 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.11 U.S.C. § 502(b)(6).
In reaching its decision, the Bankruptcy Court adopted the holding of the Bankruptcy Appellate panel for the Ninth Circuit Court of Appeals in Kuske v. McSheridan (In re McSheridan), 184 B.R. 91 (B.A.P. 9th Cir. 1995) and the Bankruptcy Court for the Western District of Texas' holding in In re Mr. Gatti's, Inc., 162 B.R. 1004 (Bankr. W.D. Tex. 1994). In In re McSheridan, the court found that:
[R]ejection of the lease results in the breach of each and every provision of the lease, including covenants, and § 502(b)(6) is intended to limit the lessor's damages resulting from that rejection. The damages are those resulting from nonperformance of the debtor's obligation under the lease . . . The distinction between past obligations under the lease and damages caused by the termination is incorrect because all damages due to nonperformance are encompassed by the statute.In re McSheridan, 184 B.R. at 102. Similarly, in In re Mr. Gatti's, Inc., the Court found that:
When a debtor rejects a lease, the debtor is rejecting its future performance of all of the covenants contained within the lease. This rejection includes its obligation to pay rent, common area maintenance, expenses, taxes, utility charges or to perform service such as maintenance and repair obligations.In re Mr. Gatti's, Inc., 162 B.R. at 1012.
Numerous courts have addressed the issue of whether claims arising out of the breach of a lease for maintenance and repairs result from the termination of the lease and are, therefore, subject to the cap of § 502(b)(6)(A). See, e.g., In re Best Products Co., Inc., 229 B.R. 673, 679 (Bankr. E.D. Va. 1998) (Damages claimed by landlord for debtor's breach of maintenance provision of commercial lease did not result from debtor's termination of the lease, and were not subject to statutory cap of 11 U.S.C. § 502(b)(6)(A)); In re Farley, Inc., 146 B.R. 739, 746 (Bankr. N.D. Ill. 1992) (statutory cap of 11 U.S.C. § 502(b)(6)(A) does not apply to damages resulting from debtor's conversion of property or pretermination tax assessments.); In re Bob's Sea Ray Boats, Inc., 143 B.R. 229, 231 (Bankr. D.N.D. 1992) (alleged damages to premises by debtor were not limited by statutory cap of 11 U.S.C. § 502(b)(6)); In re Q-Masters, Inc., 135 B.R. 157, 161 (Bankr. S.D. Fla. 1991) (lessor had allowed claim for damages against debtor for unpaid rent, taxes, insurance, utility bills, and damages to the leased premises);In re Atlantic Container Corp., 133 B.R. 980, 987 (Bankr. N.D. Ill. 1991) (Damages caused to premises by a debtor's failure to fulfill its repair and maintenance obligations under a lease are unrelated to the lease termination and are not subject to the cap of 11 U.S.C. § 502(b)(6)).
This Court agrees with the weight of authority that recognizes that the statutory cap of 11 U.S.C. § 502(b)(6) does not apply to a landlord's claim for damages unrelated to the lease termination, and finds the reasoning of In re McSheridan andIn re Mr. Gatti's, Inc. unpersuasive.
For the reasons described above, the Order (Bankr. Ct. Docket No. 1890) is VACATED and the case is REMANDED for reconsideration and disposition not inconsistent with this opinion.
IT IS SO ORDERED.