Lease Claims: Once Again, You Snooze You Lose

Bell v. Brothers Properties Smyrna, LLC (In Re Bell)

A landlord filed claims for prepetition rent and lease rejection damages after the general claims bar date. The chapter 13 trustee objected. The bankruptcy court considered whether it could use its equitable powers to allow a late claim and whether it was required to set a separate bar date for lease rejection damage claims.

An individual debtor was the tenant under a commercial lease. He fell behind on rent payments and abandoned the leased premises. The landlord filed a lawsuit in state court seeking to collect rent without terminating the lease. A little over a month later the tenant filed a chapter 13 bankruptcy on July 22.

As provided under local bankruptcy procedures, a notice of the bankruptcy case, meeting of creditors and deadlines was served on all parties, including the landlord. The notice set December 1 as the deadline for filing proofs of claim for all creditors (except a governmental unit) as a condition of participating in any distribution in the case.

The debtor filed his chapter 13 plan at the same time he filed his petition. It was a standard form used in that jurisdiction. It included a section dealing with leases: If a debtor wants to assume a lease, it must be identified. If a lease is not identified, the plan specifically states that it will be rejected at the conclusion of the confirmation hearing. Since the debtor did not identify the lease in question, the landlord knew or should have known by July 25 that the lease was being rejected. Although the plan was subsequently amended a couple of times, treatment of the lease remained the same. The plan was eventually confirmed on November 13.

The debtor’s bankruptcy schedules listed an unsecured claim of ~$5,000 for the landlord. On December 5 (4 days after the bar date) the landlord filed a proof of claim for ~$8,500 for prepetition “back rent,” and on February 13 (more than 2 months after the bar date) the landlord filed a lease rejection damage claim for ~$22,800 (one year’s rent).

The chapter 13 trustee objected to both claims as untimely. The landlord acknowledged that the first claim for prepetition rent was late, but asked the court to allow the late filing using its broad equitable powers under Section 105 of the Bankruptcy Code to issue an order that is “necessary or appropriate.”

With respect to the lease rejection damage claim, the landlord asserted that it was not late because Federal Rule of Bankruptcy Procedure 3002(c)(4) provides: “A claim arising from the rejection of an executory contract or unexpired lease of the debtor may be filed within such time as the court may direct.” It contended that the court had not yet set a bar date for the lease rejection claims. In response, the trustee argued that the general bar date applied to “all” claims, and thus was the date set by the court.

In this case the debtor’s plan provided for full payment of unsecured creditors with monthly payments of $400. He did not have sufficient cash flow to pay $22,000-$30,000 in lease claims in addition to the other obligations covered by the plan. “Although the Court does not find that situation to be relevant in determining what the law is on these issues, the stakes are clear: either (a) [the landlord] gets paid and the Debtor loses his home or (b) [the landlord] gets nothing and the Debtor keeps his home.”

The landlord did not give any explanation for the late filing, and its only argument was that disallowance of the claim would be a windfall to the debtor since he did not dispute that he owed the rent and he had equity in his assets sufficient to pay all creditors. Given this context, the court found no reason to allow the late filed prepetition rent claim. (As an aside, the court noted a distinction between a chapter 13 case and a chapter 7 liquidation case where a distribution may be made on an untimely claim on a subordinated basis if funds are available. See Section 726(a)(3).)

As for setting a separate bar date for the lease rejection claims, the landlord emphasized that it had only 18 days between the date that the lease was rejected to the bar date. The court did not find this persuasive under the circumstances.

  • First, based on the plan filed by the debtor the landlord should have known that the lease would be rejected more than 4 months before the bar date. Further, the debtor had abandoned the leased premises prior to filing bankruptcy. There was no reason to believe that he would want to assume the lease.
  • Second, the landlord gave no reason why 18 days was insufficient time given that it had plenty of notice and the calculations were not complicated.
  • Finally, unlike a chapter 11 case, in a chapter 13 case a bar date is set at the very beginning of the case, and the court found no basis for concluding that a separate bar date was required for rejection claims. The court acknowledged that the amendment to Section 365 increasing the time to assume or reject a nonresidential real property lease from 60 to 120 days complicated matters since a lease could be rejected after the bar date, but concluded this simply meant that a court might need to exercise its discretion to fix a later date more frequently.

Accordingly, the court sustained the objection and disallowed the landlord’s claims.

It is never a good thing to blow a deadline. And without a good explanation, a court is very unlikely to be sympathetic.

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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