October 06, 2015 Articles

Delaware Bankruptcy Court Adopts the "Time" Approach to Lease Rejection Damages

Judge Kevin Carey provides significant guidance to debtors and landlords calculating rejection damages claims.

By Curtis S. Miller and William M. Alleman Jr.

Recently, Judge Kevin Carey of the United States Bankruptcy Court for the District of Delaware issued the first written opinion in the District of Delaware resolving the “time versus rent” debate and interpreting section 502(b)(6) of the Bankruptcy Code in Delaware, an issue that is important to both debtors and commercial landlords. In In re Filene’s Basement, LLC, 2015 Bankr. LEXIS 1350 (Bankr. D. Del. Apr. 16, 2015), Judge Carey held that section 502(b)(6) of the Bankruptcy Code unambiguously caps a landlord’s rejection damages claim at the rent reserved for the greater of one year or 15 percent “of the remaining term of the lease,” not to exceed three years. Id. at *2. Because the landlord in Filene’s followed the common practice of calculating its rejection damages claim with reference to 15 percent of the total remaining rent under the lease, the court reduced the rejection damages claim accordingly. Judge Carey joins a growing number of courts that interpret section 502(b)(6) according to its plain meaning, and his decision provides significant guidance to debtors and landlords calculating rejection damages claims under section 502(b)(6) of the Bankruptcy Code.

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