In re Smith

• Decision Date: 02 June 2000
• Docket Number: No. 99-11124.,99-11124.
• Citation: In re Smith, 249 B.R. 328 (Bankr. S.D. Ga. 2000)
• Parties: In re William R. SMITH, Debtor. William R. Smith, Debtor, v. Sprayberry Square Holdings, Inc. Creditor.
• Court: U.S. Bankruptcy Court — Southern District of Georgia

249 B.R. 328 (2000)

In re William R. SMITH, DebtorWilliam R. Smith, Debtor, v.Sprayberry Square Holdings, Inc.Creditor.

No. 99-11124.

United States Bankruptcy Court, S.D. Georgia, Augusta Division.

June 2, 2000.

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Mr. Todd Boudreaux, Attorney at Law, Augusta, GA, for Debtor.

Mr. Stephen V. Kern, Attorney at Law, Atlanta, GA, for Creditor.

ORDER

JOHN S. DALIS, Chief Judge.

William R. Smith("Debtor") objects to certain charges within the claim filed by Sprayberry Square Holdings, Inc.("Landlord").The claim is based on Debtor's pre-petition breach of a lease for commercial real estate in a shopping center.Parties agree that the claim is governed by 11 U.S.C. § 502(b)(6).The objection is sustained in part, reducing the amount of the allowed claim to $95,798.39.

The facts of this case are as follows.Landlord and Debtor executed a commercial shopping center lease agreement ("Lease") on August 8, 1994, for a term ending December 31, 1999.¹The Lease required Debtor to make monthly payment of "Fixed Minimum Rent" and "Additional Rent."Additional Rent included "Operating Costs" and "Taxes."Fixed Minimum Rent was fully abated for the first four months of the Lease and partially abated for the next four months, contingent on Debtor's avoiding default (these amounts were delineated "Excused Rent").At the outset of the Lease term, Landlord paid Debtor a "Building Allowance" of $38,250.00 for construction work to make the premises suitable for Debtor's business.In the event of default by the Debtor, the Lease provided for late charges or interest to be assessed, and if legal action became necessary, for Debtor to be liable for Landlord's attorney fees.

Payments due under the Lease remained current until approximately January, 1998.Debtor had a balance due for that month, and no payment was made on February 1, 1998 or thereafter.Landlord contends that Debtor was provided notice of default and demand for payment by correspondence dated March 10, 1998.In a letter dated May 6, 1998, and sent by certified mail (Sprayberry Exhibit 6), Landlord's attorney wrote,

We have been advised that you have closed for business and have vacated the Premises as of Saturday, May 2, 1998.Please understand that the Landlord does not accept your abandonment of the Premises.The Lease remains in full force and effect and the Landlord demands that you immediately reopen for business as is required by your Lease.

Exactly when Debtor abandoned the premises was undetermined at the hearing.The parties do not dispute that abandonment occurred before May 2, 1998.

Landlord filed a complaint in the state court system against Debtor on May 5, 1998.Landlord alleged that, in addition to defaulting on payments due under the Lease, Debtor had violated the Lease by setting up a similar business with a similar name at another shopping center less than five miles away.Trial was scheduled for May, 1999.

On May 7, 1999, the day before the trial was to take place, Debtor filed this chapter 13 case, which stayed the state court action.On that same day, Landlord notified Debtor in writing through his attorney that the Lease was terminated.Landlord subsequently filed a proof of claim in Debtor's bankruptcy case to which Debtor objected, resulting in this contested matter.

Meanwhile, Landlord contacted several other businesses, seeking to replace Debtor with another tenant.These efforts were unsuccessful for several months.Another tenant was eventually found, although at a lower rent.Landlord received payments from the replacement tenant beginning September, 1999, and has deducted these amounts from its claim against Debtor.

At hearing on the claim objection, Debtor contended that Landlord had failed to mitigate damages; that the premises had been surrendered prior to the date stated in the claim; and that specific charges in Landlord's claim should not be allowed.After presentation of evidence, I made a finding that Landlord had made reasonable efforts to re-let the premises.Debtor's remaining objections to Landlord's claim were taken under advisement.

At the end of the hearing, I asked both counsel if there was any additional evidence.There was not.Although the parties were permitted to submit and respond to briefs post-hearing, the record was not left open for additional evidence to be presented.The affidavit of Landlord's attorney and attached exhibits subsequently filed with this Court are not considered.

The objection to claim filed by Debtor on October 4, 1999, included only general statements: that Landlord had filed a claim; and that, "The Debtor denies that he is indebted to the Creditor in the amount claimed, and requests a hearing to determine the amount, if any, owed."At hearing, Debtor objected to the following specific charges in Landlord's claim: attorneys fees; late charges; interest; post-petition rent; unamortized building allowance; and excused rent.In post-hearing briefs, Debtor raised new grounds for objection, i.e. Landlord's charges for common area maintenance ("CAM") and taxes.

A proof of claim is prima facie evidence of the claim's validity and amount.Fed.R.Bankr.P. 3001(f).Such claim is deemed allowed unless a party in interest objects.11 U.S.C. § 502(a).The party objecting to the claim bears the initial burden of presenting sufficient evidence to overcome the presumed validity and amount of the claim.In re Pacific Arts Publishing, Inc.,198 B.R. 319, 321(Bankr.C.D.Cal.1996)(citations omitted);In re Challa,186 B.R. 750, 754(Bankr. M.D.Fla.1995);In re Clements,185 B.R. 895, 898-99(Bankr.M.D.Fla.1995).Although that burden is easily satisfied, affirmative proof must be offered to overcome the presumed validity of the claim.Id.If the objecting party overcomes the prima facie validity of the claim, then the burden shifts to the claimant to prove its claim by a preponderance of the evidence.Id.

In objecting to the claim, Debtor bore the burden of going forward with sufficient evidence to place the claim at issue.Id.This burden includes placing the creditor on notice as to what aspects of the claim a debtor finds objectionable.By failing to raise objections to CAM or taxes either in pre-hearing documents or at the hearing, Debtor failed to place those charges in issue.Late raised objections to CAM and taxes are not considered here.

Landlord claims damages of $152,059.85.²The charges are divided pre- and post-petition as follows:

Pre-Petition3
                Total Rent, Common Area
                  Maintenance and Taxes           $ 71,999.45
                Excused Rent                        19,125.00
                Unamortized Allowance               14,662.50
                Late Charges of $10.00/day           4,600.00
                                                  ___________
                Total through 5/6/99              $110,386.95
                Interest                             6,191.15
                Attorney's Fees                     11,682.81
                                                  ___________
                    Total Pre-Petition                           $128,260.91
                Post-Petition
                Rent, Common Area Maintenance
                  and Taxes                       $ 30,993.41
                Credit for Rent from New
                  Tenant                            -7,194.47
                                                  ___________
                    Total Post-Petition                          $ 23,798.94
                                                                 ___________
                    Total Claim                                  $152,059.85
                

Debtor's objections to the claim are based on 11 U.S.C. § 502(b)(6).Debtor contends that § 502(b)(6) disallows charges accrued more than one year after Debtor vacated the premises.Debtor further contends that under § 502(b)(6) all charges except fixed minimum rent must be disallowed.The two issues to be resolved are whether the § 502(b)(6) calculation turns on the date the premises were abandoned or on the date the bankruptcy petition was filed, and whether that subsection allows the itemized charges of Landlord's claim.The Court has jurisdiction to hear this matter as a core bankruptcy proceeding under 28 U.S.C. § 157(b)(2)(A), (B) and (O)and28U.S.C. § 1334(1994).

Allowance of Landlord's claim is governed by § 502(b)(6).

§ 502.Allowance of claims or interests in pertinent part

(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;

11 U.S.C. § 502(b)(6).

"Section 502(b)(6) is designed to compensate a landlord for the loss suffered upon termination of a lease, while not permitting large claims for breaches of long-term leases, which would prevent other general unsecured creditors from recovering from the estate."Kuske v. McSheridan(In re McSheridan),184 B.R. 91, 97(9th Cir. BAP1995)(citingIn re Atlantic Container Corp.,133 B.R. 980, 985(Bankr. N.D.Ill.1991));accordVause v. Capital Poly Bag, Inc.(In re Vause), 886 F.2d 794, 801-02(6th Cir.1989); 4 Lawrence P. King, ed., Collier on Bankruptcy ¶ 502.037a(15th ed. rev.)(citingH.R.Rep. No. 595, 95th Cong., 1st Sess. 353(1977), U.S.CodeCong. & Admin.News, pp. 5963, 6308)."Although Congress sought to limit the amount of damages that a landlord could recover from a...