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Debtor Has Right to File Bankruptcy to Limit Landlord's Claims

By Adam C. Rogoff and Deborah Piazza

One of the fundamental policies of the Bankruptcy Code is to provide an equal distribution to all creditors of a debtor's estate. There are a variety of tools under the Bankruptcy Code to accomplish these goals. One such power is the statutory limitation of a landlord's rejection damage claim under section 502(b)(6). This “cap” is predicated on the desire to prevent excessive rejection damage claims from diluting the distribution to other unsecured creditors, as well as the recognition that landlords – by obtaining repossession of their property – stand in a better position than other creditors to mitigate their damages over time.

Although creditors have various protections throughout the bankruptcy process, they are vulnerable to the application of Bankruptcy Code provisions limiting their claim. As a result, companies with certain types of claims may file bankruptcy solely to take advantage of these claim-limiting provisions. Examples of such provisions include executive compensation claims limited under section 502(b)(7), certain tax liability claims limited under section 502(b)(3) and 502(b)(8), landlord rejection damage claims under section 502(b)(6), and claims resulting from securities litigation limited through subordination under section 510(b).

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