Brad Butkiewicz

St. John’s University School of Law 

American Bankruptcy Institute Law Review Staff

Section 502(b)(6) of title 11 of the United States Code (the “Bankruptcy Code”) provides that a landlord’s claim against a debtor tenant is capped to “rent reserved [], without acceleration, for the greater of one year, or 15 percent, not to exceed three years of the remaining term of the lease.”[1] Courts have adopted two approaches to calculate the cap.  Under the “Rent Approach,” the cap is calculated by taking 15% of the total remaining monetary value of the lease; in contrast, under the “Time Approach,” the cap is calculated by taking 15% of the total time that remains on the lease.[2] In In re Cortlandt Liquidating LLC, the United States District Court for the Southern District of New York (the “District Court ”) adopted the time approach and rejected the rent approach, which had been applied in New York for almost thirty years.[3]

Century 21 Department Stores LLC (“Century 21 Department Stores”) and its affiliate C21 1972 Broadway LLC (“C21”) (Century 21 Department Stores and C21 together, the “Debtors”) commenced voluntary cases under chapter 11 of the Bankruptcy Code.[4] Prior to the bankruptcy filings, C21 entered into a lease agreement with Lincoln Triangle Commercial Holding Co. LLC (“Lincon Triangle”), with Century 21 Department Stores as the Debtor-Guarantor.[5] In the bankruptcy cases, C21 and Century 21 Department Stores rejected the lease on the real estate located at 1972 Broadway in New York.  In response, Lincoln Triangle Commercial Holding Company, the landlord, filed a proof of claim for the amounts of the remainder of the lease, future real estate tax, operating expenses, utilities, repairs, and cleanup costs after deducting unpaid amounts from a security deposit.[6] The Debtors objected to the claim, arguing that the claim exceeded the cap under 502(b)(6) of the Bankruptcy Code.  According to the Debtors, the cap should be calculated using the time approach.  Moreover, according to the Debtors, damages resulting from the termination of the lease should be subject to the cap.  After oral argument, the bankruptcy court held that the cap should be calculated using the time approach and the store cleanup costs should be subject to the section 502(b)(6) cap.[7]

Lincoln Triangle appealed the bankruptcy court’s decision to the District Court, which affirmed the bankruptcy court’s decision.  According to the District Court, the time approach is the appropriate methodology to calculate a claim cap under section 502(b)(6) of the Bankruptcy Code.[8] The District Court reasoned that existing local precedent using the Rent Approach can be set aside in favor of using the time approach, agreeing with the analysis done by the bankruptcy court indicating that the time approach is the proper statutory approach.[9] The District Court relied on the bankruptcy court’s statutory interpretation which reasoned that “the entire phrase is worded in terms of periods of time[,]” thus if the statute intended the cap to be calculated under the Rent Approach the legislature would have worded the language more clearly to express that the 15% referred to an amount.[10] Thus, the District Court concluded that “the damages available to the lessor for termination of a lease are capped at the greater of either (1) one full year, or (2) 15% of the time remaining lease period up to three years.”[11]

Lastly, the District Court reasoned that any damages that result from the termination of a lease are subject to a calculation under section 506(b)(6) of the Bankruptcy Code.[12] The District Court examined the reasoning applied by the bankruptcy court: determining if the landlord would have the same claim against the tenant in the event that the tenant assumed the lease instead of rejecting it.[13] Under the lease agreement, the lease had a duty of cleaning the premises prior to surrendering the property to the landlord.  Thus if the lease had not been rejected, the Debtors would not have to pay for a clean-up, so the cleanup costs arose from the termination and are subject the section 502(b)(6) cap calculation.[14]

Section 502(b)(6) of the Bankruptcy Code states that a landlord’s claim against a debtor tenant is capped to “rent reserved [], without acceleration, for the greater of one year, or 15 percent, not to exceed three years of the remaining term of the lease.”[15] In In re Cortlandt Liquidating LLC, the Southern District of New York accepted the “Time Approach” as the proper interpretation of section 502(b)(6).[16] The District Court calculated the cap that the creditor could claim on the rejected lease by taking 15% of the remaining period of time left on the lease.[17] Also, the District Court held that cleanup costs that arise from the termination of a lease are subject to the section 502(b)(6) cap calculation.[18] After the ruling in In re Cortlandt Liquidating LLC, the Southern District of New York has officially adopted the “Time Approach” as its interpretation of section 502(b)(6) of the Bankruptcy Code.[19]