In re MDC Sys., Inc.

• Decision Date: 17 January 2013
• Docket Number: No. 08–14669 ELF.,08–14669 ELF.
• Citation: 488 B.R. 74
• Parties: In re MDC SYSTEMS, INC., Debtor.
• Court: U.S. Bankruptcy Court — Eastern District of Pennsylvania

488 B.R. 74

In re MDC SYSTEMS, INC., Debtor.

No. 08–14669 ELF.

United States Bankruptcy Court, E.D. Pennsylvania.

Jan. 17, 2013.

Bayard Hemphill Graf, Graf & Graf P.C., Wayne, PA, for Debtor.

Peter A. Lesser, Sirlin Gallogly & Lesser, P.C., Philadelphia, PA, for Michael H. Kaliner, Trustee.

George M. Conway, United States Trustee, Philadelphia, PA, for U.S. Trustee.

OPINION

ERIC L. FRANK, Bankruptcy Judge.

I. INTRODUCTION

Graf & Graf, P.C., an unsecured creditor of Debtor MDC Systems, Inc. (“the Debtor”), has filed an objection (“the Objection”) to Proof of Claim No. 4 (“the Claim”) of Brandywine Operating Partnership, L.P. (“Brandywine”). The Claim, filed in the amount of $1,071,024.53, is based on the Debtor's pre-petition breach of a ten-year lease of commercial real property. Graf maintains that the Claim should be disallowed in its entirety. Alternatively, Graf asserts that if the Claim is not totally disallowed, it should be allowed only in the amount of $196,510.32 pursuant to the statutory “rent cap” provision, 11 U.S.C. § 502(b)(6). Brandywine agrees that the “rent cap” applies, but calculates that the Claim should be allowed in the amount of $562,703.72.

For the reasons that follow, Graf's objection will be sustained, but only in part. I reject Graf's argument that Brandywine's Claim should be disallowed in its entirety. In applying the rent cap, I conclude that the allowed Claim should be reduced from $1,071,024.53 to $400,171.94.

II. FACTUAL BACKGROUND AND PROCEDURAL HISTORY

A. The Parties and their Lease

On or about July 31, 2002, Brandywine and the Debtor entered into a lease (“the Lease”), pursuant to which Brandywine leased to the Debtor, for a term of ten (10) years, 7,063 rentable square feet on the first floor of the building located at 300 Berwyn Corporate Park in Berwyn, Pennsylvania. ( See Ex. C–5). Upon the commencement of the Lease term,¹ the Debtor was required to pay “Fixed Rent” of $12,507.00 per month, plus electric, for the first year. The Lease provided for the Fixed Rent to increase each year. ( See Ex. C–5, ¶ 1(e)).

The Lease also provided for the Debtor to lease approximately 2,000 square feet of unfinished basement space for storage (“the Storage Space”). The Fixed Rent for the Storage Space was $7.00 per square foot or $1,166.67 per month ($14,000.00 annually). ( Id. at 29).

On June 24, 2004, approximately two (2) years after the Lease was executed, the parties executed the “First Amendment to Lease” (“the First Amendment”) whereby the Debtor relinquished 1,300 rentable square feet from the 2,000 square feet of Storage Space previously rented under the Lease (the remaining leased areas hereafter referred to as “the Premises”). ( See First Amendment to Lease, Ex. C–5). In accordance with the First Amendment, the Debtor's Fixed Rent for the Storage Space remained at $7.00 per square foot, but the monthly cost was reduced to $400.33 per month ($4,900.00 annually). Id.

At some point in either 2004 or 2005, the Debtor relinquished possession in favor of a related business entity, MDC Systems Corp. LLC (“the LLC”),² purportedly pursuant to an assignment of the Lease, an assignment that was not approved by Brandywine.

In or around July 2005, Brandywine notified the Debtor that it was in default for failing to pay rent and proper charges. Soon thereafter, Brandywine commenced a lawsuit against the Debtor (“the State Court Case”) in the Pennsylvania Court of Common Pleas, Chester County (“the State Court”). The matter was tried on August 6, 2007.

On November 19, 2007, the State Court entered judgment in favor of Brandywine and against the Debtor in the amount of $1,071,024.53 (“the State Court Judgment”). In its accompanying opinion, the State Court found that:

• as of July 2004, there were eight (8) years remaining of the Lease;

• the nonpayment of rent from April–June 2005 was a material breach of the Lease;

• the failure to pay certain expenses was an ongoing breach; and

• Brandywine did not agree to an assignment of the Lease to the LLC, as required by the Lease.

( See Ex. C–2).

On September 14, 2007, Brandywine initiated an ejectment action against the LLC, in which it alleged that the LLC was an illegal occupant/sub-tenant of the Premise. On December 29, 2007, the LLC returned the keys to the Premises to Brandywine and vacated the Premises.³

After regaining possession of the Premises, Brandywine permitted two (2) new tenants to take possession. Brandywine incurred “fit-up” costs for both new tenants. The new tenants paid rent through July 2009.⁴

On July 23, 2008, MDC filed the present bankruptcy case under chapter 7 of the Bankruptcy Code. On November 17, 2008, Brandywine filed the Claim at issue, in the amount of $1,071,024.53.

On May 1, 2009, Graf & Graf, P.C. (“Graf”) an unsecured creditor of the Debtor, filed an objection to the POC. (Doc. # 105). Initially, by order dated July 7, 2009, I dismissed the Objection without prejudice in deference to the primacy of the chapter 7 trustee in the claims allowance and objection process. ( See Doc. # 120). This decision was based on the principles set forth in Fred Reuping Leather Co. v. Fort Greene Nat. Bank, 102 F.2d 372, 372–73 (3d Cir.1939) (general creditor of debtor has no right to contest another creditor's claim unless the trustee has refused to do so and creditor receives court permission); see also In re Morrison, 69 B.R. 586, 589 (Bankr.E.D.Pa.1987) (creditor seeking to exercise trustee's authority to object to a claim must establish that the trustee's failure to act is an abuse of discretion).⁵ More than a year later, on November 16, 2010, Graf renewed its request for authority to press the Objection. After conducting several hearings, and based on circumstances that had changed since July 2009, I granted Graf's request by order dated May 23, 2011. ( See Doc. # 162).

A hearing on the Objection was held and concluded on December 16, 2011. Thereafter, the parties filed post-trial submissions, the last of which was filed on February 8, 2012.

III. GENERALLY APPLICABLE LEGAL PRINCIPLES

A. The Parties' Respective Burdens of Proof

Pursuant to 11 U.S.C. § 502(a), a proof of claim is deemed allowed unless a party-in-interest objects. Previously, I have explained the competing burdens of the parties in a contested matter based on an objection to a proof of claim as follows:

if a proof of claim complies with the Rules of Court and is self-sustaining (i.e., it sets forth the facts necessary to state a claim and is not self-contradictory), it is prima facie valid and the objecting party has the burden of producing evidence to refute the claim. That evidence, if believed, [must] refute at least one of the allegations that is essential to the claim's legal sufficiency. If the objector meets that burden of production, the claimant must produce evidence to prove the validity of the claim, because the ultimate burden of persuasion is always on the claimant.

In re Wells, 463 B.R. 320, 326 (Bankr.E.D.Pa.2011) (internal quotations and citations omitted); see alsoFed. R. Bankr.P. 3001; In re Sacko, 394 B.R. 90, 98 (Bankr.E.D.Pa.2008).

In this case, the State Court Judgment that is the basis for the Claim was attached to Brandywine's proof of claim and Graf does not dispute that the Claim is prima facie valid pursuant to Rule 3001(f). As a result, as the objector, Graf has the burden of production of evidence that would establish that the claim should be disallowed or reduced. Graf has attempted to meet that burden primarily by offering evidence that the Claim is subject to reduction under 11 U.S.C. § 502(b)(6), a position that Brandywine has not contested.⁶

The question still remains, however, as to which party has the burden of proof under § 502(b)(6). One court has suggested that a § 502(b)(6) claims objection is in the nature of an affirmative defense and that the objector has the burden of proving that § 502(b)(6) applies to reduce the claim. See In re Dronebarger, 2011 WL 350479, at *6–7 (Bankr.W.D.Tex. Jan. 31, 2011). I agree with the analysis in Dronebarger. Therefore, I hold that Graf has the burden of proof with respect to all issues under § 502(b)(6) in this contested matter.

B. 11 U.S.C. § 502(b)(6)—Generally

11 U.S.C. § 502(b)(6) provides:

(b) Except as provided in subsections (e)(2), (f), (g), (h) and (i) of this section, if such objection to a claim is made, the court, after notice and a hearing, shall determine the amount of such claim in lawful currency of the United States as of the date of the filing of the petition, and shall allow such claim in such amount, except to the extent that—

...

(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....

Section 502(b)(6) imposes a ceiling or “cap” on the allowance of a landlord claim for damages resulting from the termination of a lease of real property. Section 502(b)(6) does not impact the amount of the landlord's claim; it determines only the allowed amount of the claim. The claim, independent of the allowance process under § 502(b)(6), must be determined first under applicable non-bankruptcy law and then compared with and, if necessary, reduced to the statutory maximum provided in § 502(b)(6). See, e.g., In re Peters, 2004 WL 1291125, at *2 (Bankr.E.D.Pa. May 7, 2004).

The purpose of the rent cap is to balance the interests of landlords and unsecured creditors by allowing a landlord “to receive compensation for losses suffered from a lease termination while...