Recently, the Bankruptcy Appellate Panel ("B.A.P.") for the 9th Circuit addressed a number of issues in the case of Wall Street Plaza, LLC v. JSJF Corp.

One of the issues that was addressed was the "landlord's cap" under Section 502(b)(6) of the Bankruptcy Code.

In the matter before the court, landlord Wall Street Plaza ("Wall Street") was awarded a state court judgement for damages against the debtor JSJF Corporation ("JSJF" or "Debtor") for breach of lease. JSJF filed a Chapter11 petition shortly after the judgement was awarded. Wall Street filed three proofs of claim, to which JSJF objected. The bankruptcy court sustained the objections and disallowed all three claims. One of the claims was disallowed on the basis that it was not for "rent reserved." This claim is the topic of discussion of this article.

Under Sect. 502(b)(6) of the Bankruptcy Code, a claim of a lessor for damages resulting from the termination of a lease of real property is limited to the rent reserved by the lease, without acceleration, for the greater of one year, or 15 percent, not to exceed three years, of the remaining term of the lease, following the earlier of the petition date and the date on which the lessor repossessed, or the lessee surrendered, the property.

The Court stated that in an earlier opinion In re McSheridan, 184 B.R. 91 (9th Cir. B.A.P. 1995), they had construed Sect. 502(b)(6) as formulating a three part test for determining for what charges are "rent reserved". To be capped, the charge must be: (1) (a) designated as "rent" or "additional rent" in the lease; or (b) provided as the tenant's/lessee's obligation in the lease; (2) related to the value of the property or the lease thereon; and (3) properly classifiable as rent because it is a fixed, regular, or periodic charge.

The Court states that the "landlord's cap" may limit the amount of a lessor's claim, but it is not a criterion for its allowance: it becomes significant only if the claim otherwise allowable under non-bankruptcy law exceeds the cap calculated under the statute.

Therefore, the Court ruled that the bankruptcy court's ruling that the claim was not for rent was an error of law. The Court reversed and remanded for further proceedings for determination of whether the "landlord's cap" applies to some or all of the claim and if so, what that cap is.

Ray