Believe it or not, the cap on liability for breach of lease under Section 502(b)(6) can also cap liability for receipt of a fraudulent transfer, according to the Eighth Circuit.
The appeals court, however, was not altogether pro-debtor because the circuit wouldn’t allow the debtor to escape liability entirely.
The Lease and the Fraudulent Transfer
The owner had guaranteed his corporation’s lease of real property. The company breached the lease, and the landlord won a $2.2 million judgment against the owner on his guaranty in Minnesota state court. The judgment included future rent.
Two years later, the state court held the owner and his wife jointly and severally liable to the landlord in the amount of some $800,000 for a fraudulent transfer the owner had made to his wife with actual intent to hinder, delay or defraud creditors.
The next year, the owner filed bankruptcy, confirmed a chapter 11 plan and received a discharge. In the chapter 11 case, he paid the full amount of the landlord’s allowed claim, about $550,000, as capped by Section 502(b)(6).
The wife then asked the state court to vacate the judgment against her, on the theory that the claim had been paid. However, the state court decided that the owner’s bankruptcy had not discharged the judgment against the wife. The wife then filed her own bankruptcy.
The landlord filed a $1 million claim against the wife. Bankruptcy Judge William J. Fisher of St. Paul, Minn., ruled that the owner’s bankruptcy had not discharged the debt. However, Judge Fisher concluded that the claim was capped by Section 502(b)(6). The parties stipulated that the capped claim was almost $310,000.
The Eighth Circuit Bankruptcy Appellate Panel reversed and disallowed the claim. The BAP believed that the “predicate claim” had been satisfied, leaving the wife with no liability.
In an opinion on March 9, Eighth Circuit Judge Duane Benton reversed the BAP and reinstated the judgment of the bankruptcy court. He held that the wife remained liable, but he capped the claim under Section 502(b)(6).
Fraudulent Transfer Liability Wasn’t Extinguished
The wife argued in her bankruptcy that the landlord’s acceptance of the owner’s plan extinguished her fraudulent transfer judgment. Judge Benton noted, however, that the state court had ruled that liability for the judgment persisted. He also noted that property interests are determined by state law, citing Butner v. U.S., 440 U.S. 48 (1979).
However, Judge Benton did not rest the decision on state law. Rather, he relied on Section 524(e), which provides that the “discharge of a debt of the debtor does not affect the liability of any other entity on . . . such debt.”
The owner’s “discharge discharged his liability, not” the wife’s, Judge Benton said. He also cited the Supreme Court for saying in 1913 that discharge extinguishes the remedy, not the debt. Zavelo v. Reeves, 227 U.S. 625, 629 (1913).
The Fraud Claim Was Capped by Section 502(b)(6)
Next, Judge Benton grappled with the question of whether the fraudulent transfer judgment against the wife was capped by the limit on claims for breach of lease under Section 502(b)(6). The landlord harped on the notion that the judgment against the wife was based on receipt of a fraudulent transfer, not for being a guarantor of the lease like the owner.
Judge Benton cited the Eighth Circuit BAP for having held in a prior case that Section 502(b)(6) caps liability for guarantors and garnishees of leases. He went on to say that guarantors and garnishees are “analogous to fraudulent transferees because their liability is one step removed from the breach of lease.”
Judge Benton quoted the Collier treatise for saying that the cap is designed to prevent landlords from receiving windfalls on long-term leases at the expense of other creditors. He said the landlord in the case on appeal would receive a windfall if the cap were not applied.
Invoking the cap to limit the claim against the wife, Judge Benton did not base his decision only on policy. He said that applying the cap “complies with the statute’s text, which focuses on the ‘claim of a lessor’ – not claim against a lessee.”
To ice the cake, Judge Benton said that the wife’s “liability results from the breach of the lease, so the cap applies.”
Judge Benton reversed and remanded with instructions to allow the claim against the wife for $310,000.
Believe it or not, the cap on liability for breach of lease under Section 502(b)(6) can also cap liability for receipt of a fraudulent transfer, according to the Eighth Circuit.
The appeals court, however, was not altogether pro-debtor because the circuit wouldn’t allow the debtor to escape liability entirely.
The Lease and the Fraudulent Transfer
The owner had guaranteed his corporation’s lease of real property. The company breached the lease, and the landlord won a $2.2 million judgment against the owner on his guaranty in Minnesota state court. The judgment included future rent.
Two years later, the state court held the owner and his wife jointly and severally liable to the landlord in the amount of some $800,000 for a fraudulent transfer the owner had made to his wife with actual intent to hinder, delay or defraud creditors.
The next year, the owner filed bankruptcy, confirmed a chapter 11 plan and received a discharge. In the chapter 11 case, he paid the full amount of the landlord’s allowed claim, about $550,000, as capped by Section 502(b)(6).