Lease Claims: You Snooze, You Lose

In re Sky Ventures, LLC, 523 B.R. 163 (Bankr. D. Minn. 2014) –

After a debtor obtained court approval to retroactively reject a lease as of the bankruptcy filing date, the landlord moved to reset the rejection date and for allowance of an administrative expense priority claim for post-petition rent.

All parties agreed that the lease was still in effect on the date the bankruptcy petition was filed.  Under Section 365 of the Bankruptcy Code a debtor has a right to reject an unexpired lease with the approval of the bankruptcy court.  If the debtor did not previously assume the lease in the bankruptcy, rejection is treated as a breach of the lease immediately before the date the petition was filed.  Normally this means that the landlord’s rejection claim will be a general unsecured claim for contractual damages.

However, Section 365(d)(3) also provides that there should be timely performance of all obligations under a lease from the date the petition is filed until the lease is assumed or rejected.  To the extent that a debtor defaults during this period, the landlord’s claim will generally have administrative expense priority.

In this case the debtor was delinquent in its rent payments.  A little more than a month after the bankruptcy was filed, the debtor filed a motion seeking court approval of (1) rejection of the lease, (2) allowing retroactive rejection as of the commencement of the case, and (3) setting a bar date for the landlord’s claims relating to the lease at 30 days after entry of the order.

Since there were no objections to the debtor’s motion, the court entered an order about two months after the petition was filed approving rejection as of the date of the filing.  The order allowed the landlord to take immediate possession of the leased premises without seeking any relief from the automatic stay, waived the 14‑day temporary stay of the order, and required the landlord to file any claims “relating to the Lease” within 30 days of the order.

A couple of days before the 30 day deadline expired, the landlord filed a motion to reset the effective date of the rejection of the lease and for allowance of an administrative claim for post-petition rent and assessments.  The debtor objected that the landlord was not entitled to an administrative claim, and further that it was barred from filing any claim since it did not do so within 30 days of the order.  A month later the landlord filed a proof of claim for unpaid rent, taxes and utilities.

The court addressed the landlord’s motion by analyzing the interplay between various sections of the Bankruptcy Code.  Since the obligation to perform under the lease post-petition runs from the date of the petition to the date of rejection, that date determines the potential period for an administrative claim.

In this case the court order provided that rejection was as of the petition date – which meant that there was no period where performance was required and thus no basis for an administrative priority claim.  The court repeatedly noted that the landlord had notice of the debtor’s motion and “did nothing. It did not file a response; nor did it appeal.” So, it “cannot now be heard to complain.”

The landlord attempted to circumvent its procedural difficulties by characterizing its request as a motion for reconsideration of an order allowing or disallowing a claim.  However, that request itself suffered procedural deficiencies, and on the merits the landlord failed to establish any “mistake, inadvertence, surprise, or excusable neglect” that would justify reconsideration.  It also did not show that the debtor engaged in fraud or misrepresentation that prevented the landlord from presenting its case.

On the issue of whether the landlord’s administrative expense claim was barred, although the landlord filed its proof of claim before the general bar date, the court had set a special bar date for the landlord which it missed with no justification.  The landlord argued that its motion to reset the date and allow an administrative claim constituted an informal proof of claim – which would have been timely since it was filed two days before the deadline.  However, to qualify an informal claim must include “the nature and amount of the claim as well as indicate the claimant’s intent to hold the debtor liable and pursue the claim.”  The motion did not mention rejection damages, and did not include any calculations showing the computation of pre-rejection damages (which are subject to a cap under Section 502(b)(6)(A)).

Consequently, the court confirmed that the lease was rejected as of the petition date and found that the landlord was not entitled to an administrative claim for either post-petition rent or pre-petition contract damages.  (It did not address whether a general unsecured claim was also barred since that issue was not before the court.)

It helps to pay attention to what a debtor is doing.  By failing to respond in a timely fashion the landlord lost the ability to make an administrative claim for post-petition rent, and it is not clear that it will even be able to submit an unsecured claim for pre-petition damages.

Vicki R. Harding, Esq.

About BankruptcyRealEstateInsights

Vicki R. Harding was a partner in the Detroit office of Pepper Hamilton LLP who moved to Arizona seeking warmer weather. Ms. Harding continues to handle commercial transactions with an emphasis on real estate and bankruptcy issues (but no longer owns a snow shovel).
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