re: Wigley v. Lariat Cos. (In re Wigley), No. 20-3132 (8th Cir. Oct. 18, 2021).
The Bankruptcy Code provides for a statutory cap on a landlord’s claims against a tenant arising from a lease rejection in bankruptcy. But subject to certain exceptions, that only applies to claims that result directly from the lease termination. 11 U.S.C. § 502(b)(6). The cap does not apply to collateral claims. In other words, it does not apply to claims that could be asserted outside the lease. Moreover, in instances of fraud or some other bad actions taken by a debtor, these claims may be non-dischargeable.
The Statutory Cap in Bankruptcy Code Section 502(b)(6)
Bankruptcy Code Section 502(b)(6) caps a landlord’s claim for damages for a lease terminated before or during the tenant’s bankruptcy to
(a) the greater of
(i) one year’s worth of rent or
(ii) 15% of the remaining lease term, not to exceed three years; plus
(b) any unpaid rent due under the lease as of the earlier of (x) the date the bankruptcy case was initiated (commonly called the “petition date”) or (y) the date the landlord repossessed the property or the tenant surrendered it. The cap is designed to prevent landlords from pursuing large claims arising from terminated long-term leases, when in reality the landlord will likely be able to re-let the space at some point in the future.
Many courts have considered how broadly the statute should be construed and what type of damages are subject to the cap. Typically, the cap applies to a landlord claim directly resulting from the lease termination – including attorney’s fees and costs awards to the extent they are attributable to lease terminations. Thus, a landlord’s claim is not limited if its damages would have existed regardless of a tenant’s lease terminations, such as damages to the property or other torts committed by the Debtor.
Discharge of the Claim Not Barred
In addition, per the Eighth Circuit Court of Appeals, the cap does not prevent the court from barring discharge of the claim under Section 523(a)(2)(A), even if the reduced claim was paid in an individual’s chapter 11 plan. Presumably this would apply to any non-dischargeable claim under Section 523 of the Bankruptcy Code, but the three most typical would be: (a) Section 523(a)(2) claims dealing with fraud type claims(oral or those pertaining to the debtor’s written financial conditions); (b) Section 523(a)(4) dealing with fraud or defalcation acting in a fiduciary capacity or a debt arising from embezzlement or larceny; or (c) Section 523(a)(6) dealing with willful and malicious injury by the debtor to another entity or to the property of another entity.
Wigley v. Lariat Cos. (In re Wigley), No. 20-3132 (8th Cir. Oct. 18, 2021)
The facts in Wigley include the husband guaranteeing a corporate lease that was breached. Ultimately, the landlord obtained a $2 million judgment against the husband on his guaranty which included future rent. The landlord then discovered certain transfers between the husband and his wife and ended up suing the husband and wife on a fraudulent transfer. In this regard, the landlord obtained an approximate $800,000 judgment.
The husband ended up filing bankruptcy under Chapter 11. He was able to confirm a plan and obtained a discharge. Per the plan, he paid the full amount of the landlord’s claim in the amount of $550,000, as capped by Section 502(b)(6).
After paying off the claim, the wife then sought to vacate the state court judgment against her arguing that the claim had been paid per the husband’s plan. The state court denied the motion finding that the bankruptcy had not discharged the fraudulent transfer claim against the wife. She then filed her own Chapter 11 case.
The landlord in turn filed a proof of claim in her case for $1 million representing principal and interest on the fraudulent transfer judgment. The landlord also filed an adversary proceeding against the wife seeking to hold the debt non-dischargeable under Section 523(a)(2)(A) based on the fraudulent transfer constituting “actual fraud.”
The bankruptcy court ruled that the husband’s bankruptcy had not discharged the debt and found that the claim had been capped by Section 502(b)(6). The Eighth Circuit affirmed and found the wife remained liable for about $330,000.
As for the non-dischargeable issue, the bankruptcy court found the fraudulent transfer debt non-dischargeable. The Eight Circuit held that that “the landlord cap does not foreclose [the landlord’s] argument that the claim should be excepted from discharge under § 523(a)(2)(A).” The landlord cap only applies to the amount required to be paid by the estate, not from whether or not the debt was dischargeable based on a fraud claim under Section 523(a)(2)(A). It then upheld the bankruptcy court’s finding that the wife had participated in the fraudulent transfer with the required wrongful intent and thus the debt was not dischargeable.
The lesson to be learned is that the Bankruptcy Code may allow a debtor to cap a landlord’s claim, but capping the claim does not preclude the landlord from seeking a declaration that the debt is not dischargeable based on improper actions taken by the debtor outside the lease. Moreover, whether you are related to the debtor or not, be careful that you don’t make the debtor’s problems your problems. It may come back and bite you.