How are breached lease damages calculated in bankruptcy? Does a state court judgment preempt this?

Posted by Benjamin R.. Heston | Sep 10, 2017 | 0 Comments

In re Thompson, 116 B.R. 610 (S.D. Ohio 1990)

In Thompson, the debtor breached a lease agreement with One Columbus by defaulting on payments without ever having taken possession of the premises. The State Court entered a default judgment against the debtor in the amount of $113k.

The debtor filed for a Chapter 13 and One Columbus objected to Confirmation on the basis that the judgment obtained in State Court would put the debtor over the Chapter 13 unsecured debt limit of Bankruptcy Code §109(e). The debtor asserted that pursuant to Code §502(b)(6), damages for breach of the lease agreement were capped at the greater of one year's rent or 15% not to exceed three years.

One Columbus argued that the State Court judgment is not reviewable by the Bankruptcy Court, citing Heiser v. Woodruff, 327 U.S. 726 (1946). In Heiser, the Supreme Court held that a State Court judgment may be challenged on one of two grounds: 1) lack of jurisdiction of the court rendering the previous judgment; and 2) procurement of the judgment by fraud. One Columbus argued that since neither of these factors were present, the judgment was non-reviewable.

The Court found this argument unconvincing noting that application of §502(b)(6) is necessary to preserve the estate for the benefit of all creditors. Not only does the landlord have an opportunity to mitigate their damages by reletting the property, but they also reacquire their assets upon the filing of the bankruptcy petition. Allowance in full of a landlord's claim is not appropriate because all other creditors who suffered a proportionate loss would have claims that were disproportionate in amount to any actual damage suffered.

Additionally, One Columbus argued that the equities of the case do not require application of § 502(b)(6). The Court found this argument unconvincing as a literal reading of § 502(b)(6) makes it clear that the section is mandatory.

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