CURRENT MONTH (February 2023)
Bankruptcy
It Was Only a Matter of Time
For many years, landlords, debtors, and trustees have litigated the correct approach for calculating the statutory cap on damages for rejection of an unexpired lease of real property under section 502(b)(6) of the Bankruptcy Code. Many cases are easy, because they clearly are determined by the one-year or three-year limitations set forth under that subsection. It is those that fall between the one- and three-year markers that have suffered from the most uncertainty. As described by the court in the recent decision in In re Cortlandt Liquidating, LLC, 2023 WL 1483783 (Bankr. S.D.N.Y. Feb. 2, 2023), courts have taken two approaches in determining the correct calculation—the “Rent” approach and the “Time” approach. The question is what Congress intended when it limited the landlord’s claim to 15 percent “of the remaining term of such lease” in the context of section 502(b)(6). As the court noted in Cortlandt, the “Time Approach imposes a cap that is based on the rents that are specified for the first 15% of the remaining lease term; it thereby ignores rent escalations that would occur in later years. The Rent Approach, by contrast, imposes a cap that is based on 15% of all of the rents that are specified for the entire remaining least term.” The two approaches can yield significantly different results. In resolving the issue, the court examined precedent in the Southern District of New York, noting relatively recent holdings utilizing the Rent approach. However, the court noted that in recent years, other courts have strongly trended in favor of the Time approach. In construing the statute, the court turned first to its plain language and concluded that it required the Time approach because the entire phrase is worded in terms of periods of time. “If section 502(b)(6) were intended to impose a cap that is based on 15% of a dollar amount . . . , then the words ‘15 percent’ would not have been sandwiched between two other time periods, and they would not have been used as a modifier of the phrase ‘of the remaining term of such lease.’” The court also took comfort in the legislative history and leading treatises and authorities. Of course, other S.D.N.Y. bankruptcy judges may disagree, and judges in other districts may still favor the Rent approach, so the issue bears continued attention, but for now it appears that the trend in favor of the Time approach is standing the test of time.
