In re Iron-Oak Supply Corp.

• Decision Date: 17 June 1994
• Docket Number: Bankruptcy No. 91-20187-A-11. MC No. DWP-234.
• Citation: 169 BR 414
• Court: U.S. Bankruptcy Court — Eastern District of California
• Parties: In re IRON-OAK SUPPLY CORPORATION, a California corporation, dba Iron-Oak Supply, dba Tyler-Dawson Supply, Debtor.

169 B.R. 414 (1994)

In re IRON-OAK SUPPLY CORPORATION, a California corporation, dba Iron-Oak Supply, dba Tyler-Dawson Supply, Debtor.

Bankruptcy No. 91-20187-A-11. MC No. DWP-234.

United States Bankruptcy Court, E.D. California.

June 17, 1994.

Paul J. Pascuzzi, Diepenbrock, Wulff, Plant & Hannegan, Sacramento, CA, for Official Unsecured Creditors' Committee, Objecting Party in Interest.

John H. Sutter, in pro. per.

DECISION ON OBJECTION TO CLAIM OF JOHN H. SUTTER

CHRISTOPHER M. KLEIN, Bankruptcy Judge:

The primary question in this objection to a landlord's claim for damages on a terminated lease is whether the term "surrendered" in the limitation imposed by 11 U.S.C. § 502(b)(6)¹ applies when the landlord declines the return of the premises. The secondary question, which is compelled by conflicting computations of damages and a dearth of reported cases, requires the court to examine the interplay between rejection, contract damages, mitigation, and the damages cap imposed by section 502(b)(6) in order to clarify the mechanics of calculating a landlord's allowed prepetition claim when a debtor-tenant rejects its lease.

More than $130,000 is at stake, including some $50,000 in unpaid prepetition rent that accrued after the landlord rejected debtor's surrender of the premises, which the landlord claims qualifies as a supplement to the cap pursuant to 11 U.S.C. § 502(b)(6)(B). The remainder of the dispute is an $80,000 difference of opinion regarding the method of calculating the damages cap under 11 U.S.C. § 502(b)(6)(A).

I conclude that the term "surrendered" in section 502(b)(6) is governed by state law, which requires that, in order to be effective, a surrender be either expressly or implicitly accepted. Hence, the landlord's refusal to accept surrender means that he is entitled to unpaid prepetition rent in addition to the statutory cap.

I further conclude that the cap on the amount of a landlord's damages that may be allowed as a claim is properly determined by calculating the total rent that would accrue during the first 15 percent of the months remaining on the current term of the lease in the absence of any default, subject to the one-year minimum and the three-year maximum. A further condition is that the allowed claim may in no event exceed the actual damages that would be available under non-bankruptcy law.

FACTS

The landlord leased a warehouse to the debtor for 120 months on a so-called triple net lease, under which the debtor promised the landlord a fixed monthly sum plus property taxes, insurance, and other expenses related to the use of the premises.

The debtor moved out at the end of July 1990, when 100 months remained on the term of the lease, and informed the landlord that it would no longer pay rent. The landlord declined to accept surrender and promptly sued for the $9,450 due as the August rent. He thereafter did nothing inconsistent with his rejection of the surrender. Prepetition legal fees were $4,790.² Unpaid prepetition rent exceeded $47,250, but has not been precisely calculated because the adjustment scheduled for December 1, 1990, has not been determined.³

The debtor filed a chapter 11 case on January 8, 1991, at which time 94.75 months remained on the lease. The monthly rent then in effect was $9,450, plus whatever increase resulted from the December 1, 1990, escalation. Taxes ($13,415/yr) were not then delinquent. Annual insurance costs totaled $1,529. The debtor promptly rejected the lease. The premises remained vacant until November 1991. Unpaid rent during that period exceeded $105,000.

In November 1991, a new tenant took possession under a 64-month lease that provided for less rent ($7,650/mo), four months of free rent, and taxes and insurance to be paid by the landlord, who also paid a leasing commission of $12,444. Ignoring all of the scheduled annual escalations in the debtor's lease, the new tenant will pay at least $225,000 less than what the debtor would have paid.

The landlord filed a claim for damages resulting from termination seeking $381,110 without itemizing damages and without taking the statutory cap into account. Correcting these mistakes before trial on the objection, he reduced his claim by more than one-third based on his view of various possible readings of section 502(b)(6). In a nutshell, the landlord wants: (1) 15 percent of the rent reserved by the lease for its remaining term following the date of the filing of the petition; plus (2) five months of unpaid prepetition rent that accrued after the debtor vacated the premises.

The objection was filed by the official unsecured creditors' committee as permitted by the confirmed liquidating plan of reorganization. The committee argues that the correct amount of the claim is rent for the one-year period following August 1, 1990, the date of the putative prepetition surrender. It calculates the total rent as $129,431 by adding $115,668 for monthly rent,⁴ plus $12,234 for taxes and $1,529 for insurance, both of which items are "additional rent" under the lease. A central premise of the objection is that the debtor "surrendered" the property for purposes of section 502(b)(6)(A) when it moved out and stopped paying rent.

DISCUSSION

This objection to claim necessitates interpretation of: (1) the meaning of "surrendered"; and (2) the mechanics of calculating the cap in the following limitation on allowance of claims:

(6) 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;

11 U.S.C. § 502(b)(6) (emphasis added).

I

First, the question of surrender. The landlord contends that his rejection of a prepetition surrender entitles him to the unpaid rent due for the period between the rejected surrender and the date of the filing of the petition under subsection (B) in addition to the 15-percent cap imposed by subsection (A).

The creditors' committee objects to the claim and argues that the debtor's prepetition abandonment of the premises triggered the period subject to the 15-percent cap, thereby precluding any additional sum under subsection (B).

A

The choice of law question arises because surrender can be a term of art. Plain language is useless in interpreting a word like "surrender" that has multifarious meanings. See 83 C.J.S. Surrender (1953) (cataloging meanings). Thus, whether "surrendered" in section 502(b)(6) means that the landlord must first have accepted the surrender calls for interpretation of a federal statute.

State landlord-tenant law, as discussed below, ordinarily views the landlord's acceptance as essential to a surrender. If, however, the usual landlord-tenant rule applies, then surrender might have contradictory meanings within the Bankruptcy Code itself. Section 365 mandates that the trustee surrender nonresidential real property held under a lease deemed rejected, and the lessor is implicitly stripped of the power to reject surrender. 11 U.S.C. § 365(d)(4).⁵ This possibility of different meanings for the same word within the same statute warrants circumspection.

It is axiomatic that the meaning of a word in a federal statute is a question of federal law. This precept does not, however, end the inquiry because it does not compel the conclusion that the federal rule is at variance with state law. Rather, it may be that the federal rule provides that state law governs.

B

The substantive question here, whether a leasehold was surrendered five months before bankruptcy, is one of property rights. As a general rule, bankruptcy law leaves the allocation of property rights in the assets of a bankruptcy estate to the state laws that create and define those property rights. Butner v. United States, 440 U.S. 48, 54-55, 99 S.Ct. 914, 917-18, 59 L.Ed.2d 136 (1979). State laws are suspended in bankruptcy only to the extent that they actually conflict with the Bankruptcy Code. Id. at 54 n. 9, 99 S.Ct. at 918 n. 9.

Section 502(b)(6) is not plainly in conflict with, and is perhaps only ambiguous relative to, state law. The better view is that the recognition, at subsection 506(b)(2)(B), of unpaid prepetition rent as an item to be awarded independent of the cap in the absence of surrender or repossession indicates an attempt to harmonize the statute with state law.

Federal interests do not necessitate a specialized meaning of "surrendered" in connection with prepetition actions by landlords and tenants. The status of a lease at the time of filing bankruptcy is ordinarily a question of state law. Thus, for example, whether a state's law permits an equity of redemption on a terminated lease as of the date of bankruptcy affects the trustee's power to assume a lease. Vanderpark Properties, Inc. v. Buchbinder (In re Windmill Farms), 841 F.2d 1467, 1471-72 (9th Cir.1988).

If the premises are not surrendered under state law, then the lease remains in effect. Ordinarily, the landlord is entitled to monthly rent on an unexpired lease, regardless of whether the lessee uses the premises. And, in principle, the tenant can cure the default. As of the filing of a bankruptcy petition, the unpaid rent is a prepetition claim of the same dignity as any other prepetition claim. Upon bankruptcy, the debtor-lessee may reject the lease under bankruptcy law, at which point the lessor becomes entitled to the lease termination damages specified by section 502(b)(6).

If the premises are surrendered under state law, the situation is different. The lessor consents to the return of the leasehold estate...