The Wasted Sacrifice of Lessors' Lost Profit Claims in Bankruptcy

Abstract

Bankruptcy Code section 502(b)(6) sets the maximum allowable amount of a real property lessor's claim for damages arising for breach of lease in a tenant's bankruptcy case. To the extent a lessor's damages claim under nonbankruptcy law exceeds the maximum amount, it is disallowed. The implicit premise for such disallowance is that real property lessors' damages claims are less worthy of respect in bankruptcy than other claims for damages against the debtor. Real property leases are legally distinct from leases of personal property or other contractual relationships that allocate property rights. But, it does not obviously follow from the distinction that a damages claim for breach of a real property lease is inferior to other claims.

This article considers section 502(b)(6) in light of the political, economic, and legal forces that shaped it. It explores the history of real property lessors' claims for damages in bankruptcy cases from the beginning of the twentieth century to the present. It then considers the stated justifications for disallowance of lessors' claims under section 502(b)(6) and concludes they are unconvincing. Disallowance of part of lessors' damages claims under section 502(b)(6) reflects and perpetuates irrational bias against such claims. Moreover, such disallowance contradicts both contractual theory and modern bankruptcy policy.