In re McSheridan, BAP No. WW-94-1676-OHMe. Bankruptcy No. 94-00331.
| Decision Date | 21 June 1995 |
| Docket Number | BAP No. WW-94-1676-OHMe. Bankruptcy No. 94-00331. |
| Citation | 184 BR 91 |
| Parties | In re Nolan E. McSHERIDAN and Jennifer K. McSheridan, Debtors. Robert KUSKE and Jackie Kuske, Appellants, v. Nolan E. McSHERIDAN and Jennifer K. McSheridan, Appellees. |
| Court | U.S. Bankruptcy Appellate Panel, Ninth Circuit |
COPYRIGHT MATERIAL OMITTED
COPYRIGHT MATERIAL OMITTED
Paul J. Cassel, Wenatchee, WA, for appellants.
Robert L. McAdams, Seattle, WA, for appellees.
Before OLLASON, HAGAN and MEYERS, Bankruptcy Judges.
OVERVIEW
Lessor's guarantors under a commercial real property lease appeal an order of the bankruptcy court allowing them an unsecured claim for damages due to termination of the lease. The court limited all damages by the provisions of § 502(b)(6)1 and did not include amounts under various nonrental covenants within the definition of "rent reserved" under the lease. § 502(b)(6)(A). We Remand.
In July of 1985, Nolan and Jennifer McSheridan ("Debtors") formed a Washington corporation to operate a restaurant in Bellingham, Washington. The restaurant was subject to a commercial lease. The Debtors' corporation ("Lessee") assumed the lessee's interest in the lease subject to personal guarantees by Debtors. At the time of these events, the lease had been assigned, and as a condition of the assignment, Robert Kuske and Jackie Kuske ("Appellants") executed a guarantee of the lease in favor of the former lessee. At some point in time, the F.S.B. Company, Inc. ("Lessor"), another Washington corporation, obtained all or some of the original lessor's interest in the lease.
The lease was originally entered into on October 16, 1972, for a period of 20 years, commencing one month after completion of construction of the commercial building, which occurred on August 1, 1973. The lease was modified on August 24, 1976, and the termination date was changed to September of 1996.
The lease was what is commonly called a triple-net lease. It obligated Lessee to pay taxes and assessments, maintenance and repairs, insurance premiums and utilities; each in accordance with specific lease provisions.2
Under a separate provision for "Repair and Care of Premises and Payment of Taxes," the lease provided:
The lease also had a separate section entitled "Utilities," whereby Lessee agreed to "pay all charges for heat, light, water and garbage" during the lease term.
Under the provision for "Rent," the lease provided for a monthly base rent of $1,400 together with a percentage of gross sales. The amount of base monthly rent was later modified to $2,229.
The "Default and Re-Entry" section provided that, upon default of rent payment or performance of any covenant, Lessor could sue for any deficiency upon reletting, or for the anticipated loss of reduced rentals, plus the cost of remodeling or renovation to relet the premises.
The restaurant business did not prosper and Lessee filed for reorganization under Chapter 11. The case was converted to Chapter 7; the Chapter 7 trustee rejected the unexpired lease effective September 1, 1992. Lessee abandoned the premises in August of 1992. At that time rents were current.
In October of 1993, Lessor presented a claim for expenses totaling $179,709.81. This included $70,488.81 in expenses incurred under the lease from August of 1992 through September of 1993. Some of these expenses were listed as follows:
In addition, Lessor calculated total rent owed of $109,221. This was broken down as follows: 1) the rent owed from September of 1992 through October of 1993 (14 months), in the sum of $31,206; and 2) additional rent through the termination date of the lease (35 months) in the amount of $78,015.
The parties entered into settlement negotiations. During this time, Debtors filed for relief under Chapter 13. Thereafter, the parties agreed to settle the claim for $74,000, and payment was made by Appellants to the Lessor.
Appellants then filed an amended claim in the Debtors' bankruptcy case in the amount of $74,000. In support of their claim, Appellants submitted the declaration of Robert Kuske, in which he referred to the payments of insurance, taxes, utilities, and repairs and maintenance as "additional rent" to "bring the rent up to a reasonable price." All of those items of "additional rent" were to "maintain the value of the premises," he stated.
Debtors objected to allowance of the claim as exceeding the amount allowed by the Bankruptcy Code. Nevertheless, the declaration of Debtor Nolan McSheridan stated that the lease "was in `triple net' form, requiring the Lessee to pay taxes, insurance, utilities and maintenance."
The bankruptcy court held a hearing on the matter; the parties stipulated that the issues at hearing would be limited to a determination of law as to what was or was not included in the term "rent reserved by such lease" as used in 11 U.S.C. § 502(b)(6)(A). The bankruptcy court issued its Order on Debtors' Amended Objection to Claim on May 23, 1994. The order provided that "the maximum amount of any claim based upon the lessor's damages resulting from termination of the lease" was $26,748, calculated as one year's rent at $2,229 per month pursuant to § 502(b)(6)(A). The order allowed Appellants an unsecured claim for $26,748. Thus, the bankruptcy court's order excluded any expenses not designated as "rent" in the lease in the calculation of "rent reserved."4 Appellants timely appealed the court's order.
1) Whether, in a triple-net lease, the phrase "rent reserved by such lease" of § 502(b)(6)(A) includes other expenses not designated as "rent" or "additional rent."
2) Whether damages resulting from breach of covenants in a real property lease following rejection of the lease in bankruptcy are lease termination damages subject to the limiting provisions of § 502(b)(6)(A).5
Proper interpretation of statutory language is a question of law, subject to de novo review. In re First Alliance Corp., 140 B.R. 531, 532 (9th Cir. BAP 1992).
Appellants contend that under a triple-net lease the "rent reserved" under § 502(b)(6)(A) includes 12 months of base rent plus necessary repairs, maintenance, taxes, insurance and utilities and other necessary costs that accrued during the 12 months following abandonment of the leased premises. Thus, their maximum allowable claim for damages, calculable upon "rent reserved," should be greater than that allowed by the bankruptcy court, they contend. If the various expenses are not determined to be "rent reserved," then Appellants alternatively contend that damages arising from nonrental covenants are not subject to the statutory cap contained in § 502(b)(6)(A).
The Debtors disagree, and contend that only expenses designated as "additional rents" under the lease terms may be included in "rent reserved" for purposes of the calculation in § 502(b)(6)(A). They further contend that damages resulting from termination of a lease of real property encompass all aspects of the lessee's nonperformance of obligations under the lease.
"Rent Reserved" Under § 502(b)(6)(A)
It is well settled that a lessor is entitled to assert a general unsecured claim for damages resulting from a debtor's rejection of a lease. §§ 365(g)(1), 502(g). Rejection of a lease in bankruptcy constitutes a breach of the lease. § 365(g). This claim is equally effective against a debtor as lessee or as guarantor of the lessee, as in this case. In re Interco, Inc., 149 B.R. 934, 940 (Bankr. E.D.Mo.1993); In re Farley, Inc., 146 B.R. 739, 745 (Bankr.N.D.Ill.1992).
Section 502(b)(6) limits the landlord's claim for damages, which is determined by state law, In re Iron-Oak Supply Corp., 169 B.R. 414, 417 (Bankr.E.D.Cal.1994) (citing Butner v. United States, 440 U.S. 48, 54-55, 99 S.Ct. 914, (1979)), as well as by the terms of the lease or contract between the parties. In re Financial News Network, Inc., 149 B.R. 348, 350 (Bankr.S.D.N.Y.1993).
Section 502(b)(6) provides, in pertinent part:
This provision is "grounded in principles of ratable distribution"; it balances the interests of landlords against those of other creditors by preventing landlords from receiving a windfall as a result of the filing of the bankruptcy petition. In re Leslie Fay Companies, Inc., 166 B.R. 802, 808 (Bankr. S.D.N.Y.1994). Section 502(b)(6) is designed to compensate a landlord for the loss...
To continue reading
Request your trial
-
In re Nicholes
... ... BAP No. ID-94-1188-RuMeJ. Bankruptcy No. 93-02824 ... United States Bankruptcy Appellate Panel of the Ninth ... ...