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Keywords

damagesprecedentappealleasebankruptcysustained
damagestrustleasebankruptcy

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In re Highland Superstores, Inc., 154 F.3d 573, 40 Collier Bankr.Cas.2d 1038, 33 Bankr.Ct.Dec. 157, Bankr. L. Rep. P 77,785, 1998 Fed.App. 0265P

Facts

Strobeck leased commercial real estate to Highland Superstores, Inc. in Hoffman Estates, Illinois. As of the Petition Date, Highland was in default under the lease, with significant arrears and over 14 years remaining on the lease term. After announcing its intention to cease operations in Illinois, Highland rejected the lease, leading Strobeck to file a proof of claim for damages. The Bankruptcy Court found that Strobeck sustained actual damages of $923,446.98, which was contested by the Unsecured Creditors' Committee.

The relevant facts are not in dispute. Strobeck leased to Highland Superstores, Inc. ('Debtor') certain commercial real estate in a shopping center located in Hoffman Estates, Illinois. On August 24, 1992 (the 'Petition Date'), the Debtor filed a petition for relief under Chapter 11 of the Bankruptcy Code, 11 U.S.C. §§ 101 et seq.

Issue

The main legal issue was whether the Bankruptcy Court should have applied different discount rates based on the creditworthiness of the original tenant and the replacement tenant when calculating the present value of Strobeck's damages.

The central issue addressed in Kuehner and City Bank was the construction and constitutionality of the statutory predecessor to section 502(b)(6), which had enlarged the category of provable bankruptcy claims to include one by a lessor for damages arising from the debtor's lease rejection.

Rule

The court held that a lessor's damages arising from a debtor's lease rejection are determined according to the terms of the lease and applicable state law, and are limited by the cap established in 11 U.S.C. § 502(b)(6).

We hold that the district court erred when it concluded as a matter of law that, for purposes of calculating the present value of Strobeck's claim, the bankruptcy court should have applied two different discount rates to the total future rental streams under the Highland and Syms Leases in order to account for the relative creditworthiness of the Debtor and Syms.

Analysis

The court analyzed the methodologies proposed by both Strobeck and the Committee for calculating damages. It concluded that the Bankruptcy Court correctly applied the terms of the Highland Lease and Illinois law to determine Strobeck's actual damages, rejecting the Committee's approach of using different discount rates based on creditworthiness, which lacked legal precedent.

The Committee's argument relies heavily on two companion cases, Kuehner v. Irving Trust Co., 299 U.S. 445, 57 S.Ct. 298, 81 L.Ed. 340 (1937), and City Bank Farmers Trust Co. v. Irving Trust Co., 299 U.S. 433, 57 S.Ct. 292, 81 L.Ed. 324 (1937). According to the Committee, Kuehner and City Bank established a federal rule for determining a lessor's damages when a debtor in bankruptcy rejects its lease.

Conclusion

The Court of Appeals reversed the District Court's decision, reinstating the Bankruptcy Court's ruling that Strobeck was entitled to damages of $923,446.98, as limited by the Bankruptcy Code.

For the foregoing reasons, we REVERSE the judgment of the district court.

Who won?

Strobeck Real Estate, Inc. prevailed in the case because the Court of Appeals upheld the Bankruptcy Court's calculation of damages based on the lease terms and applicable state law, rejecting the Committee's unsupported methodology.

Strobeck contends that its damages should be calculated by reference to the Highland Lease and Illinois law. It argues that the bankruptcy court properly calculated the lessor's actual damages under nonbankruptcy law (i.e., under the terms of the rejected Highland Lease and pursuant to Illinois law).

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