Opinion
Case No. 04-14354-SSM.
February 28, 2005
WD Insurance Services, Inc., Attn: Waheed Feda, President, Alexandria, VA, Debtor in possession.
Richard G. Hall, Esquire, Annandale, VA, Counsel for the debtor in possession.
Erik R. Quick, Esquire, Rubenstein, Cogan Quick, P.C., Gaithersburg, MD, Counsel for Equity Ford, LLC.
Frank Bove, Esquire, Senior Attorney Advisor, Alexandria, VA.
MEMORANDUM OPINION AND ORDER ON OBJECTION TO CLAIM NO. 3 OF EQUITY FORD, LLC
A hearing was held in open court on January 18, 2005, on the objection of the debtor in possession to Claim No. 3 (amending Claim No. 1) filed by the debtor's former landlord, Equity Ford, LLC ("Equity Ford"), in the amount of $100,991.08 as an unsecured claim and $4,604.40 as a priority claim. The debtor in possession and the creditor were each present by counsel. The issues are whether the landlord, which terminated the lease prior to the debtor's chapter 11 filing based on the debtor's failure to pay rent, is entitled to termination damages measured by the rents it would have received through the end of the lease term, and whether the money judgment for approximately $50,000 it obtained against the debtor prior to the filing of the petition is res judicata on the amount of its claim. For the reasons stated, the court concludes that the landlord's claim is not limited by the judgment and that the landlord is entitled to damages measured by the loss of its bargain. The court further concludes, however, that damages otherwise allowable are limited to $91,893.59 by the Bankruptcy Code's cap on lease termination damages.
Background
WD Insurance Services, Inc. ("the debtor") was originally an insurance agency but now operates as a mortgage broker. It filed a voluntary petition for reorganization under chapter 11 of the Bankruptcy Code in this court on October 19, 2004, and has continued to operate its business as a debtor in possession. A plan of reorganization has been filed but not yet confirmed.
The proposed treatment of Equity Ford's unsecured claim is a cash payment of $57,670.08.
Prior to the filing of the petition, the debtor occupied 1,788 square feet of office space in a building located at 4501 Ford Avenue, Alexandria, Virginia, under a five-year lease dated September 25, 2000. The original landlord was MONY Life Insurance Company, but the building was subsequently sold to Equity Ford, LLC. The monthly base rent under the lease was $3,725.00 in the first year and increased to $4,192.86 in the final year. The rent was further subject to adjustment for any increases in operating costs and taxes.
After the debtor fell behind in the rent, the landlord brought suit for possession and unpaid rent in the General District Court for the City of Alexandria, Virginia. On August 6, 2004, the landlord was granted judgment for possession as well as a money judgment in the amount of $40,084.58, with interest at 6% from the date of judgment, together with $10,000.00 in attorney's fees and costs of $85.00. Before the judgment for possession could be executed, the debtor, proceeding pro se by its president, filed a chapter 11 petition in this court. That petition was dismissed, and the present case was commenced approximately 3 weeks later. After Equity Ford obtained relief from the automatic stay, the debtor ultimately vacated the property on January 13, 2005.
The bar date for non-governmental entities to file a proof of claim was February 22, 2005. The landlord filed its original claim (Claim No. 1) on October 21, 2004, in the amount of $59,342.37. The debtor does not object to this claim. However, on December 10, 2004, the landlord filed an amended claim (Claim No. 3) in the amount of $105,595.48, of which $4,604.40 is asserted as an administrative priority claim for unpaid post-petition rent and the remainder as a general unsecured claim. The general unsecured claim is broken down as follows:
Judgment (unpaid rent through 8/31/04) $40,084.58 Attorney's fee award $10,000.00 Interest @ 6% 8/6/04-10/19/04 $532.91 Court costs $85.00 ____________ subtotal $50,702.49 Rent and late fees 9/1/04-10/19/04 $6,967.59 Termination damages $42,321.00 ____________ total non-priority unsecured claim $99,991.08
The "termination damages" consist of the rent that would have become due for the ten months from January 1, 2005, though the end of the lease, October 31, 2005.
The December 2004 rent is included in the landlord's claim for administrative rent.
The lease sets forth in some detail the landlord's remedies in the event of a tenant default. Specifically, the lease provides that upon the occurrence of a default, "Landlord shall have the option to do and perform any one or more" of five enumerated remedies. Lease § 10(b). Relevant to the present controversy, the first is as follows:
Terminate this Lease, in which event Tenant shall immediately surrender the Premises to Landlord. . . . Upon any such termination, Tenant shall remain liable to Landlord for damages, due and payable monthly on the day Rent would have been payable hereunder, in an amount equal to the Rent and any other amounts which would have been owing by Tenant for the balance of the Term, had this Lease not been terminated, less the net proceeds, if any, of any reletting of the Premises by Landlord, plus the aggregate amount of all of Landlord's costs and expenses . . . incurred in connection with . . . the termination of this Lease, eviction of Tenant and such reletting[.]
Id. § 10(b)(i). Other options are to re-enter and re-let the premises, with the tenant being responsible for any expenses incurred and for any difference between the new rent and that provided for under the lease; or, as tenant's agent, to "do whatever Tenant is obligated to do" and to be reimbursed by the tenant for any expenses incurred. Id. § 10(b)(ii) (iv). Finally,
Landlord may declare the entire amount of Base Rent, Additional Rent and other sums which would have become due and payable during the remainder of the Term of this Lease to be due and payable immediately without notice to Tenant, and thereafter Landlord may terminate this Lease and recover from Tenant, as full liquidated damages, all damages Landlord may incur by reason of Tenant's default, which damages shall be limited to (a) the amounts due and owing prior to such termination, plus (b) the cost of recovering the Premises, plus (c) reasonable attorneys' fees and costs, plus (d) a sum which, at the date of such termination, equals the present value [discounted at ten percent (10%) per annum] of (i) the Base Rent, Additional Rent and all other sums which would have been due and payable by Tenant . . . for the remainder of the Term . . . less (ii) the aggregate reasonable rental value of the Premises for the same period, accounting for the cost, time and other factors necessary to relet the Premises, all of which amounts shall be immediately due and payable; provided, however, if Landlord elects to pursue this remedy, Landlord shall do so exclusively and shall not thereafter pursue any of the other remedies . . . to collect Base Rent and Additional Rent due from Tenant.
Id. § 10(b)(v).
Discussion A.
Upon objection to a timely filed proof of claim, the court is required to "determine the amount of such claim in lawful currency of the United States as of the date of the filing of the petition, and shall allow such claim in such amount." § 502(b), Bankruptcy Code. In general, the amount and validity of a claim is determined by state law, subject to certain statutory limitations. One such limitation is that the claim of a landlord for damages resulting from the termination of a lease of real property will be disallowed to the extent it exceeds
(A) the rent reserved by such lease, without acceleration, for the greater of one year, or 15 percent, not to exceed three years, of the remaining term of such lease, following the earlier of —
(i) the date of the filing of the petition; and
(ii) the date on which such lessor repossessed, or the lessee surrendered, the leased property; plus
(B) any unpaid rent due under such lease, without acceleration, on the earlier of such dates[.]
§ 502(b)(6), Bankruptcy Code. Thus, to the extent state law would permit a landlord to recover damages measured by future rents, the claim would be allowed in bankruptcy, but would be capped.
B.
The debtor's position, briefly stated, is that the landlord's judgment is res judicata as to the amount of its claim. Having reduced its claim for unpaid rent to judgment, the debtor argues, the landlord cannot now expand upon that judgment by seeking additional rent. In support of this argument, the debtor cites the decision of the Supreme Court of Virginia in Snyder v. Exum, 227 Va. 373, 315 S.E.2d 216 (1984). In that case, the tenant abandoned the premises six months into a two-year lease. The landlord then sued the tenant and obtained a judgment for five months' rent. The landlord then brought a second suit against the tenant for rent accrued since the first suit plus rent due for the balance of the lease term. Upon demurrer by the tenant, the trial court dismissed the second suit on the ground that it constituted an improper splitting of a single cause of action, and the Supreme Court of Virginia affirmed. The lease in that case provided, "In the event of any . . . default by Lessee, all of the rent for the then current term of this lease shall become due and payable." The Court held that under the plain language of the lease, acceleration of the rent payments was mandatory, not optional, upon default. Since the entire rent was due, the landlord's rent claim was a single cause of action, and "[i]f suit is brought for part of a claim, a judgment obtained in that action precludes the plaintiff from bringing a second action for the residue of the claim[.]" Id. at 377, 315 S.E.2d at 218.
A contrary result was reached, however, in a subsequent opinion by the same court involving somewhat different lease language. Aiglon Assocs., Ltd. v. Allan, 248 Va. 150, 445 S.E.2d 138 (1994). In that case, the tenant took possession of the premises and began making improvements but then notified the landlord that he had decided not to operate a store there. The landlord reentered the premises and ultimately leased the space to another party. The landlord sued the tenant and obtained a judgment for four months rent plus the costs of restoring the premises. After obtaining the judgment, the landlord then sued the tenant a second time to recover subsequent rent. The trial court dismissed the second suit on the grounds of res judicata, but the Supreme Court of Virginia reversed. The lease gave the landlord the right, in the event the tenant failed to pay rent, to reenter the premises and either to terminate the lease or, without terminating, to relet the premises. In the event the landlord terminated the lease, it was entitled to recover damages that included "the worth at the time of such termination of the excess, if any, of the amount of rent and charges equivalent to rent . . . for the remainder of the stated term over the then reasonable rental value of the leased premises for the remainder of the stated term[.]" Id. at 152, 445 S.E.2d at 139. It was undisputed that the landlord had not given written notice terminating the lease, and the Court held that filing suit for rent did not constitute a notice of termination. Accordingly, the Court agreed with the landlord that the acceleration of rent clause in the lease was not implicated and that the second suit was not barred by res judicata.
C.
The present case differs from Aiglon in that Equity Ford gave written notice terminating the lease prior to bringing the unlawful detainer action and obtaining judgment for unpaid rent and attorney's fees. Equity Ford concedes that at common law a landlord's election to reenter and terminate the lease based on the tenant's default entitled the landlord to recover only for the rent then due. Crowder v. Virginian Bank of Commerce, Inc., 127 Va. 299, 304, 103 S.E. 578, 579 (1920). Nevertheless, the parties are free to contract around the common-law rules and clearly did so in this case. Unlike the lease in Snyder, the lease here did not provide for automatic acceleration of rent upon the tenant's default. Far from it. Among the agreed remedies available to the landlord upon default was to terminate the lease, notwithstanding which the tenant would "remain liable to Landlord for damages, due and payable monthly on the day Rent would have been payable hereunder, in an amount equal to the Rent . . . for the balance of the Term . . . less the net proceeds, if any, of any reletting of the Premises." Lease § 10(b)(i). Since the lease not only did not mandate acceleration but expressly made termination damages "due and payable monthly," it follows that Equity Ford was under no legal compulsion, when it brought suit, to seek judgment for all damages that might accrue over the entire remaining term of the lease. Accordingly, the judgment it obtained for unpaid rent through August 2004 and for attorney's fees does not preclude it, on res judicata or claim splitting grounds, from claiming additional damages measured by the rent to which it would have been entitled for the remaining term of the lease, less the net proceeds, if any, from reletting the premises.
D.
There is no dispute that Equity Ford has not yet relet the premises. Equity Ford does not contest that it has a duty to mitigate its damages by looking for another tenant and to credit the debtor with rents received from the new tenant, less the costs of reletting. To the extent the success of the re-leasing efforts cannot be known prior to confirmation, the court, if necessary to avoid undue delay, may estimate Equity Ford's claim for the purpose of distribution. § 502(c), Bankruptcy Code. But even assuming that Equity Ford, despite diligent efforts, were unable to put a new tenant in the office space prior to October 31, 2005, its claim for rent through the balance of the lease term would not exceed the § 502(b)(6) damage cap. That cap is measured by a period beginning with the earlier of the date the bankruptcy petition was filed or the date the landlord recovered possession of the property. Since the landlord recovered possession after the filing of the petition, the petition date is the starting point. The remaining term of the lease at that point was 12 months and 12 days. Twelve months is greater than 15% of 12 months, 12 days. The amount of the cap is therefore 12 times the monthly rent plus any unpaid rent due on the petition date. The debtor does not dispute that the monthly rent (including operating expenses) is $4,232.10. Twelve times that amount would be $50,785.20. To this is added any unpaid rent due on the petition date. Attorney's fees and late charges, though they may be proper components of the landlord's damage claim, are not considered "rent" for the purpose of computing the § 502(b)(6) cap. In re PPI Enters. (U.S.), Inc., 228 B.R. 339, 349-50 (Bankr. D. Del. 1998), aff'd, 324 F.3d 197 (3rd Cir. 2003). However, the operating expenses, because they are both characterized in the lease as additional rent and are recurring, are treated as "rent" for the purpose of the cap. Based on the exhibit attached to the amended proof of claim, the court calculates the unpaid prepetition rent as $41,108.39. Thus the total cap applicable to Equity Ford's claim is $41,108.39 plus $50,785.20, or $91,893.59.
E.
The court stresses that § 502(b)(6) is a cap on the landlord's claim and not a measure of its damages. The amount of the landlord's claim is determined by non-bankruptcy law, and the cap simply limits the bankruptcy estate's exposure to what might otherwise be a very large damage claim arising from the termination of a lease. It should also be noted that the cap does not apply to a landlord's administrative expense claim arising from a trustee's or debtor's post-petition occupancy of the property.
The debtor, aside from its res judicata argument, presented no evidence to rebut the prima facie effect of the filed proof of claim. The various elements of Equity Ford's claim are sufficiently established by the judgment it obtained and by the plain language of the lease. However, the total unsecured claim otherwise allowable — $100,991.08 — exceeds the § 506(b)(6) cap. For that reason, Equity Ford's unsecured claim will be allowed in the amount of $91,893.59, and the excess will be disallowed.
F.
Only brief discussion is necessary concerning the priority claim for administrative rent. Administrative expense claims are not asserted by filing a proof of claim, but by making a "request" for allowance and payment of the expense. § 503(a), Bankruptcy Code. The "request" takes the form of a motion, Fed.R.Bankr.P 9013, and in a chapter 11 case must be served, at a minimum, on the debtor in possession, the official committee of unsecured creditors, if one has been appointed, and the United States Trustee. Since the administrative rent claim is not properly before the court at this time, it will be disallowed without prejudice to Equity Ford's right to file and serve a motion for its allowance and payment.
ORDER
For the foregoing reasons, it is
ORDERED:
1. Claim No. 3 (amending Claim No. 1) filed by Equity Ford, LLC, in the amount of $105,595.48 is allowed as a general unsecured claim in the amount of $91,893.59, subject to any credit to which the debtor may be entitled from the reletting of the property. The court reserves the right to estimate the amount of such credit in order to fix the final amount of the claim for purposes of distribution.
2. This order is without prejudice to the right of the creditor to file a motion for allowance and payment of an administrative expense claim.
3. The clerk shall mail a copy of this order, or give electronic notice of its entry, to the parties listed below.