IN RE: WILLIAM HARRY DADSON (2024)

CHAPTER 13

ORDER PARTIALLY SUSTAINING DEBTOR'S OBJECTON TO S.O.S. PARTNERS, LLC'S PROOF OF CLAIM

(RE: ECF No. 45)

William Dadson objects to S.O.S. Partners, LLC's Proof of Claim No. 6. Dadson asserts S.O.S. Partners’ entire claim is subject to the cap on damages imposed under 11 U.S.C. § 502(b)(6). S.O.S. Partners believes that § 502(b)(6) is inapplicable to its claim or, in the alternative, that Dadson incorrectly calculates the amount of the claim. For the reasons stated below, the Court finds that a portion of S.O.S. Partners’ claim is subject to § 502(b)(6), but many parts are not capped.

Jurisdiction and Venue

The Court has jurisdiction under 28 U.S.C. § 1334(b). This is a core proceeding under 28 U.S.C. § 157(b). The Court has constitutional authority to enter final orders and judgments. Stern v. Marshall, 564 U.S. 462, 486–87 (2011). Venue is proper in this District under 28 U.S.C. §§ 1408 and 1409.

Background

S.O.S. Partners’ Proof of Claim is based on a prepetition default judgment order against Dadson entered by a Texas state court on February 27, 2012 (“Default Judgment Order”).¹ In the prepetition case, S.O.S. Partners sued Dadson over breach of a lease agreement.² An affidavit established the necessary facts to obtain a default judgment, describing the lease agreement, Dadson's unpaid rent, accelerated rent due because of the breach, and certain construction costs incurred by S.O.S. Partners to prepare the leased property for Dadson.³ The state court awarded S.O.S. Partners $63,381.86—including prejudgment interest and costs—and postjudgment interest at 5%.⁴

Dadson started this chapter 13 case on June 24, 2024.⁵ S.O.S. Partners filed its Proof of Claim alleging unsecured damages totaling $115,664.62. This amount represented the damages awarded under the Default Judgment Order, plus postjudgment interest accrued as of the petition date.⁶

Dadson argues that S.O.S. Partners’ entire damages claim is capped under § 502(b)(6) and should be reduced to $25,780, which represents 12 months’ rent plus two months of past due rent.⁷ S.O.S. Partners claims that equitable considerations establish that § 502(b)(6)’s cap should not apply to its claim. But if the cap does apply, the allowed claim should be $98,814.38.⁸

Analysis

Section 502(b) of the Bankruptcy Code provides that:

[T]he court, after notice and a hearing, shall 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, except to the extent that ․

(6) if such claim is the claim of a lessor for damages resulting from the termination of a lease of real property, such claim 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.․

Section 502(b)(6)(A) caps the amount of future damages a lessor may recover because of the termination of a lease. Unpaid rent and other damages that do not result from the termination of a lease are not subject to the cap. In cases like this one, bankruptcy courts “must look beyond the face of a state court judgment” to determine whether the award is subject to § 502(b)(6)’s cap. In re Fulton, 148 B.R. 838, 843–44 (Bankr. S.D. Tex. 1992).

Here is a chart detailing the components of S.O.S. Partners’ claim based on the Default Judgment Order:

Past Due Rent and Late Fees $10,246.18 Accelerated Rent $30,375.12 Construction Costs Incurred to $15,425.63 Prepare Property for Dadson 6% Prejudgment Interest on $56,046.93 $1,768.93 (economic damages awarded) from August 19, 2011 to February 27, 2012 Court Costs $235.00 Attorney's Fees $5,000.00 Expenses $331.00 Total Judgment Awarded $63,381.86 5% Postjudgment Interest from $52,282.76 February 27, 2012 to June 24, 2024 Total Proof of Claim $115,664.62

A. Non-Capped Damages

The $10,246.18 in past due rent and late fees are not subject to § 502(b)(6)(A)’s cap on damages. It falls under § 502(b)(6)(B) as unpaid rent. The $15,425.63 of construction costs incurred to prepare the property for Dadson to lease is also not subject to the cap. Dadson was liable for those costs regardless of the lease's termination.

The past due rent and construction costs total $25,671.81. The Default Judgment Order awarded 6% prejudgment interest on those costs from the date the lawsuit was filed (August 19, 2011) to the date of the judgment (February 27, 2012).⁹ Adding prejudgment interest increases these non-capped damages to $26,482.05.

Adding the $235.00 in court costs, $331.00 in expenses, and $5,000.00 in attorney's fees increases the non-capped damages to $32,048.05. Based on the evidence, these damages do not result from the termination of the lease. The Default Judgment Order also provided for postjudgment interest at a rate of 5%.¹⁰ In Texas, postjudgment interest is compounded annually.¹¹ Thus, as of the petition date, the total amount owed by Dadson to S.O.S. Partners not subject to § 502(b)(6)’s cap is $58,476.13.

B. Capped Damages

The damages awarded for accelerated rent totaling $40,621.30 are subject to § 502(b)(6)(A)’s cap.

Courts calculate § 502(b)(6)(A)’s cap two ways. The time approach is based on 15% of the remaining lease term. See In re Cortlandt Liquidating LLC, 648 B.R. 137, 140 (Bankr. S.D.N.Y. 2023), aff'd, 658 B.R. 244 (S.D.N.Y. 2024); In re Filene's Basement, LLC, No. 11-13511 (KJC), 2015 WL 1806347, at *7 (Bankr. D. Del. Apr. 16, 2015); In re Metals USA, Inc., No. 01-42530-H4-11, 2004 WL 771096, at *6 (Bankr. S.D. Tex. Jan. 15, 2004). The rent approach is based on 15% of the remaining rent due under the lease. In re Cortlandt Liquidating LLC, 648 B.R. at 140. The time method adheres to the text of § 502(b)(6), which states, “for the greater of one year, or 15 percent, not to exceed three years, of the remaining term of such lease,” and is the right approach to use. 11 U.S.C. § 502(b)(6)(A) (emphasis added).

The remaining lease term at the time of termination was 16 months.¹² 15% of 16 months is 2.4 months. The greater of 2.4 months’ rent or one year's rent is one year. The parties agree that the cost of one year's rent is $21,896.00.¹³

Adding the non-capped and capped amounts ($58,476.13 plus $21,896.00) totals $80,372.13.

Here is a revised chart detailing S.O.S. Partners’ allowed claim:

Past Due Rent and Late Fees $10,246.18 Construction Costs Incurred to Prepare $15,425.63 Property for Dadson 6% Prejudgment Interest from $810.24 August 19, 2011 to February 27, 2012 Total $26,482.05

Damages Awarded with $26,482.05 Prejudgment Interest Court Costs $235.00 Expenses $331.00 Attorney's Fees $5,000.00 Total $32,048.05

Total $32,048.05 5% Postjudgment Interest from $26,428.08 February 27, 2012 to June 24, 2024 Total Non-Capped Damages $58,476.13

Non-Capped Damages $58,476.13 Capped Damages (one year rent) $21,896.00 Total Allowed Unsecured Claim $80,372.13

Conclusion

For the reasons stated above, Dadson's Objection to S.O.S. Partners, LLC's Proof of Claim is partially SUSTAINED. It is ORDERED S.O.S. Partners, LLC's allowed general unsecured claim is $80,372.13.

FOOTNOTES

1.   S.O.S. Partners, LLC's Response, Exhibit B, ECF No. 61.

2.   S.O.S. Partners, LLC's Response, Exhibit B, ECF No. 61.

3.   S.O.S. Partners, LLC's Response, Exhibit C, ECF No. 61.

4.   S.O.S. Partners, LLC's Response, Exhibit B, ECF No. 61.

5.   Chapter 13 Petition, ECF No. 1.

6.   S.O.S. Partners, LLC's Proof of Claim, No. 6.

7.   Debtor's Objection to Claim No. 6 of S.O.S. Partners, LLC ¶ 3, ECF No. 45.

8.   S.O.S. Partners, LLC's Response ¶¶ 16-17, ECF No. 61.

9.   S.O.S. Partners, LLC's Response, Exhibit B, ECF No. 61.

10.   S.O.S. Partners, LLC's Response, Exhibit B, ECF No. 61.

11.   Tex. Fin. Code Ann. § 304.006 (West).

12.   S.O.S. Partners, LLC's Response, Exhibit C, ECF No. 61.

13.   Debtor's Objection to Claim No. 6 of S.O.S. Partners, LLC ¶ 3, ECF No. 45; S.O.S. Partners, LLC's Response ¶ 16, ECF No. 61.

Christopher Lopez United States Bankruptcy Judge