Phillip Chapman

St. John's University School of Law

American Bankruptcy Institute Law Review Staff

In In re JLM Couture, Inc., the U.S. Bankruptcy Court for the District of Delaware (the “Court”) held that a landlord’s claim for treble damages, under a lease, is an unenforceable penalty and not an appropriate liquidated damage provision for purposes of asserting an administrative claim.[1] The Court reasoned that despite a contractual provision providing for liquidated damages, the treble damage provision was a penalty because treble damages far outweighed the landlord’s actual damages. [2]

Here, JLJ Bricken LLC (the “Landlord”), leased space in Midtown New York to the debtor, JLM Couture, Inc. (the “Debtor”).[3] The monthly base rent under the lease was $25,335.50.[4] The lease expired in January 2022.[5]Despite the expiration of the lease, the Debtor remained on the premises.[6] The Debtor defaulted on the rent in December 2022.^[7] In July 2023, the Landlord filed a Business Notice of Petition/Holdover action to evict the Debtor and have the Debtor pay all outstanding rent due during its holdover tenancy, in the amount of $840,072.37.^[8] In October 2023, the Debtor filed for bankruptcy.^[9] At the time of the Debtor-commenced bankruptcy action, it had failed to pay eleven months of rent. Thereafter, the Debtor filed a voluntary petition for relief under chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”), resulting in a stay of the eviction.[10] During the bankruptcy case, the Debtor vacated the premise.[11] Thereafter, the Landlord filed a motion for payment of administrative expenses for rent due during the pendency of the Debtor’s bankruptcy case.[12]

In determining the appropriate amount of damages the holdover tenant would have to pay, the Court first had to determine whether the lease should be considered unexpired or expired.[13] The Landlord asserted that the lease is an “unexpired” lease in which the Debtor retained a property interest for purposes of establishing a claim under section 365 of the Bankruptcy Code.[14] Section 365 of the Bankruptcy Code grants trustees the right to assume or reject unexpired leases.[15] The Debtor, on the other hand, argued the lease expired in January 2022 and any potential claim should be calculated under section 503 of the Bankruptcy Code.[16] Section 503 of the Bankruptcy Code controls what are allowed as administrative expenses in bankruptcy.[17] If the Court found that the lease was “unexpired” as the Landlord asserted the Debtor would owe the Landlord obligations, which include any pecuniary loss that the lessee sustained from non-payment by the Debtor.[18] On the other hand, if the Court found that the lease was “expired” the Debtor would still owe the Landlord, but this time compensation would fall under section 503, where it states, “with respect to a nonresidential real property lease previously assumed under section 365, and subsequently rejected, a sum equal to all monetary obligations due.”[19] Hence, the Court found that whether the lease was expired or unexpired is a distinction without a difference to the outcome.[20] This is because the Debtor had to pay either compensation which amounted to a sum equal to all monetary obligations due or obligations which included any pecuniary loss that the lessor sustained from non-payment, two amounts which each would equal at least the full value that should have been realized on the lease had the Debtor paid throughout the course of the lease.[21] What remained was to determine whether and in what amount additional damages could be exacted via administrative claims on top of the obligations that the Debtor already owed from the pre-petition period.[22]

In addition to the outstanding base rent, the Landlord sought treble damages per month (per a condition in the lease), which before lawyers’ fees amounted to $91,704.91 a month.^[23] The Debtor vacated the premises in February 2024.[24] Thus, the period between December 2022 and February 2024 represents that time in which the Debtor/tenant stayed in the building but did not pay on the lease, a total of 15 months.^[25] But the Landlord is seeking to recover on an administrative claim, which includes treble stub rent, treble post-petition rent, and lawyer’s fees all occurring after the filing of the bankruptcy action in October 2023.[26]  

The Landlord claimed that the $90,000 per month treble damages were liquid damages, which were agreed to in the lease, triggered in the holdover, and thus were enforceable in the action.^[27] Liquidated  damages are an estimate, made in advance by the parties, of the amount of damages that would incur if there were to be a breach of the agreement.^[28] Normally in such an arm’s length agreement between sophisticated parties, freedom of contract will prevail and such provisions will be deemed allowable.^[29] But here, the Court held that the provisions would not be enforceable.[30] The Court explained its rationale that liquidated damages must function as an anticipation of loss and must be proportionate with actual suffered damages, damages which can be shown with evidence.[31] In order to arrive at this rationale, the Court cited precedents including In re T.R. Acquisition Corp. which found that a provision calling for double the rent in a holdover tenant action was unenforceable unless evidence could be brought forward to show that the landlord’s double rate was not grossly disproportionate to the landlord’s actual suffered damages.^[32] No such evidence was brought forward in that action and the lease rate was found to be the damages amount.^[33] As a matter of public policy, liquidated damages which function not as an anticipation of loss, but rather as a penalty disproportionate to actual damages will not be enforceable under New York law.^[34]   

In the end, the Court used the Debtor’s evidence concerning fair market value to rebut the monthly treble damages claim asserted by the landlord.[35] The Court found that the treble damages were a penalty and thus were unenforceable because they were unconscionable in such a proceeding.^[36] Instead of having to pay approximately $90,000 a month, the tenant was ordered to pay approximately $25,000 a month and attorneys’ fees.^[37]