The Wasted Sacrifice of Lessors

Louisiana Law Review Volume 60 | Number 1 Fall 1999 The Wasted Sacrifice of Lessors' Lost Profit Claims in Bankruptcy Marie T. Reilly Repository Citation Marie T. Reilly, The Wasted Sacrifice of Lessors' Lost Profit Claims in Bankruptcy, 60 La. L. Rev. (1999) Available at: https://digitalcommons.law.lsu.edu/lalrev/vol60/iss1/9 This Article is brought to you for free and open access by the Law Reviews and Journals at LSU Law Digital Commons. It has been accepted for inclusion in Louisiana Law Review by an authorized editor of LSU Law Digital Commons. For more information, please contact . The Wasted Sacrifice of Lessors' Lost Profit Claims in Bankruptcy Marie T. Reilly" I. Introduction ............. .. .......... 233 II. An Explanation of Section 502(b)(6) ............................ 234 III. The History of Section 502(b)(6) ............................... 239 A. Anticipatory Repudiation and Lessors' Claims for Lost Profit ................................................. B. Lessors' Claims in Bankruptcy Cases ........................ C. The "Limited Sacrifice" ................................... IV. An Argument Against Disallowance of Lessors' Lost Profit C laims .................................................... V . Conclusion ................................................ 239 248 263 269 278 I. INTRODUCTION Bankruptcy Code section 502(b)(6) sets the maximum allowable amount of a real property lessor's claim for damages arising from breach of lease.' To the extent that a lessor's damages claim under nonbankruptcy law exceeds the maximum amount, it is disallowed in the tenant's bankruptcy case. The implicit premise for such disallowance is that real property lessors' damages claims are less worthy of respect in bankruptcy than other claims for damages against the debtor.' Real property leases are legally distinct from other contractual relationships that allocate property rights But, it does not obviously follow from the distinction that a Copyright 1999, by LOUISIANA LAW REVIEW. Associate Professor of Law, University of South Carolina School of Law. 1. II U.S.C. § 502(bX6) (1994). The section imposes a cap on the allowed amount of that portion of alessor's bankruptcy claim that "result(s] from the termination of a lease of real property." See infra note 14. Section 502(bX6) is one of several bankruptcy provisions that alter creditors' nonbankruptcy rights against adebtor as part of a bankruptcy case. See, e.g., 1IU.S.C. §§ 544, 547, 548, 550 (1994). 2. See Sen. Rep. No. 95-598, at 63, reprinted In 1978 U.S.C.C.A.N. 5787, 5849 ("(Section 502(bX6)] is designed to compensate the landlord for his loss while not permitting a claim so large (based on along term lease) as to prevent other general unsecured creditors from recovering a dividend from the estate."). See Nostas Assocs. v. Costich (In re Klein Sleep Products, Inc.), 78 F.3d 18, 28 (2d Cir. 1996) (purpose is to compensate alessor for the loss suffered but ensure that the lessor's potentially "monstrous" claim does not consume the entire estate.); In re Goldblatt Bros., Inc., 66 B.R. 337, 346 (Bankr. N.D. 111. 1986) ("[IJt ensures that non-lessor creditors recover more than the minimal portions of their clams they would recover if landlord claims resulting from termination of long term leases were allowed in full... (and] ensures that lessors obtain a reasonable portion of the damages they suffered as aresult of an abandonment of a lease by abankrupt."). 3. Under the Bankruptcy Code, the claims of non-debtor parties to unexpired leases are treated under Section 365. I I U.S.C. § 365 (1994). See generally Charles Tabb, The Law of Bankruptcy 57580(1997). * LOUISIANA LAW REVIEW [Vol. 60 damages claim for breach of a real property lease is inferior to other claims. Because it discriminates against real property lessors' lost profit claims, Section 502(b)(6) contravenes the bankruptcy slogan that like-situated creditors ought to be treated alike, or that "equality is equity."4 This article considers Section 502(b)(6) in light of the political, economic, and legal forces that shaped it. Part I explains how Section 502(b)(6) applies to a lessors' claim. Part III explores the history of real property lessors' claims for damages in bankruptcy cases from the beginning of the twentieth century. Part IV considers the stated justifications for disallowance of lessor's claims under Section 502(b)(6) and concludes that they are unconvincing. Disallowance of part of lessors' damages claims under Section 502(b)(6) reflects and perpetuates irrational bias against such claims. Moreover, such disallowance contradicts both contractual theory and modem bankruptcy policy. II. AN EXPLANATION OF SECTION 502(B)(6) Bankruptcy Code section 502 governs the extent to which creditors' rights against the debtor will be recognized against the bankruptcy estate. The process of claim recognition or "allowance" has two facets, liquidation and evaluation. Claim allowance refers in part to the process by which a court determines the present value of contingent rights. A creditor's rights against the debtor might be fully mature and liquidated; or they might be contingent on the debtor's default, the passage of time, or the occurrence of some other event. These contingent rights against the debtor, although not yet actionable under nonbankruptcy law, constitute bankruptcy "claims." 5 Once bankruptcy law transmogrifies contingent rights into present claims, it must also provide for the present valuation of such rights.6 Section 502 provides that, ifordinary resolution of a contingency or liquidation of a claim would "unduly delay the administration of the case," the bankruptcy court must estimate 4. See, e.g., Allied Artist Pictures Corp. v. Allied Artist Television Corp. (In re Allied Artists Indus., Inc.) 35 B.R. 737,740 (Bankr. S.D.N.Y. 1983) (stating Code purpose of equitable distribution). Professor Thomas Jackson described this principle as "perhaps the most common-and uncontroversial-ofbankruptcy's policies." Thomas Jackson, The Logic and Limits of Bankruptcy Law 29 (1986). Simonson v. Granquist, 369 U.S. 38, 82 S. Ct. 537 (1962); Kuchner v. Irving Trust Co., 299 U.S. 445, 57 S. Ct. 298 (1937); Canright v. General Fin. Corp., 35 F. Supp. 841, 844 (E.D. I1. 1940). 5. 11 U.S.C. § 101(5X1994). H.R. Rep. No. 95-595, at 309 (1978), reprinted in, 1978 U.S.C.C.A.N. 5963,6266; S.Rep. No. 95-989, at 21-22 (1978), reprinted In, 1978 U.S.C.C.A.N. 5787, 5807-08. "Claim" means a "right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured." Id. See In re Chateaugay Corp., 944 F.2d 997 (2d Cir. 1991) (CERCLA response costs are bankruptcy claims where release or threatened release occurs prior to the filing of the petition); Grady v. A. H. Robbins Co., 839 F.2d 198 (4th Cir. 1988). But see In re M. F (...truncated)