By: Donald L Swanson
On April 23, 2024, the American Bankruptcy Institute’s Subchapter V Task Force issued its Final Report.
This article is the second in a series summarizing and condensing the Task Force’s Final Report into “a nutshell.” The subject of this article is:
- whether future rents should be included in the debt cap calculation for Subchapter V eligibility.[Fn. 1]
Recommendation
A statutory change is needed to exclude future rent payments from the debt cap calculation for Subchapter V eligibility.
Analysis
Sec. 1182(1) excludes contingent and unliquidated debts from the debt cap calculation for Subchapter V eligibility.
A debtor may have a lease with future rents so large that, if included in the debt cap calculation, would make the debtor ineligible for Subchapter V.
Case law disagrees on whether such future rent payments are contingent and unliquidated at bankruptcy filing. Two opinions illustrating the disagreement are:
- In re Parking Management—the court held that rejection damages were, (i) contingent on the petition date because rejection requires post-petition court approval, and (ii) therefore, excluded from the debt cap calculation; but
- In re Macedon Consulting—the court held that future rent payments must be included in the debt cap calculation, rejecting debtor’s argument that future rent payments totaling $14.4 million must be capped by § 502(b)(6).
Then, In re Zhang Medical P.C. expressly rejected In re Macedon because future rent payments are contingent and unliquidated until debtor assumes or rejects:
- if assumed, debtor will be responsible for all future rents; but
- if rejected, debtor’s future rent obligations are capped by § 502(b)(6).
The Task Force agrees with In re Parking and In re Zhang. Additionally:
- including future rent payments does not help distinguish between smaller cases with less complexity from larger cases; and
- the petition date separates a debtor’s pre- and post-petition obligations — the debt cap focuses on the pre-petition side, at which time the amount of debtor’s liability on future rent payments cannot known with certainty (e.g., there are post-default mitigation duties) and is not yet due.
Proposed Statutory Amendment
The Task Force proposes amending § 1182(1)—by adding a new subparagraph “(C)” to clarify, for debt cap calculation purposes, that lease liabilities are limited to the amount due and payable on the petition date.
Here is the proposed amendment language for 11 U.S.C. § 1182(1)(C) [proposed new language is in italics]:
1) DEBTOR. —The term “debtor”— . . . (C) For the purposes of this section, any amounts payable under the terms of a lease after the date the petition is filed shall be considered contingent and unliquidated, without regard to any acceleration of the due date for any such payment.
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Footnote 1. Discussion of this subject is on pages 17 to 20 of the Final Report.
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