Recent Developments

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Business Bankruptcy Issues Recent Developments

Don’t Miss The Important Business Bankruptcy Rule Amendments That Just Took Effect

On December 1st of almost every year, amendments to the Federal Rules of Bankruptcy Procedure — the ones that govern how bankruptcy cases are managed — take effect to address issues identified by an Advisory Committee made up of federal judges, bankruptcy attorneys, and others. Often the changes are relatively minor and of interest only to bankruptcy practitioners, but this year’s set has made some significant changes that will directly impact debtors, creditors and other stakeholders.

A Look At The Amendments. You may find it interesting to see the entire group of amendments together, so I have included two links. The first is to the full "clean" set of the amended rules. The second is to a redline showing the changes made by these amendments to the existing rules, together with the Advisory Committee’s comments.

The Omnibus Objection Problem. One of the most significant amendments will make changes to the popular practice of filing omnibus objections. In large cases the debtor or other estate representative has so many claims to address that they have combined objections to dozens — sometimes hundreds — of different claims in one single motion. The objection may have a name such as “Debtors’ Fourteenth Omnibus Objections To Claims (Substantive)” or some similarly titled document. Click here for one example. In a post last year called "Objections To Claims: Ignore Them At Your Peril," I discussed how it can be hard to tell which claims an omnibus objection is targeting.

  • The format has often meant that the only reference to an individual creditor is buried within the objection’s many pages of text and exhibits, typically in an attached list or chart.
  • If the creditor doesn’t respond to the objection timely, its claim will likely be disallowed and it will recover absolutely nothing from the bankruptcy estate.

The Amended Rule 3007: An "Anti-Gotcha" Solution. The new rules restrict the use of omnibus objections to certain limited circumstances and impose formatting standards. Otherwise, each claim will require its own separate claim objection unless the combined objection covers claims filed by the same person or entity. What grounds for objection can be made by an omnibus objection under the newly revised Rule 3007?

  • Duplicate claims;
  • Claims filed in the wrong case;
  • Original claims that were amended by later claims;
  • Claims that were not timely filed;
  • Claims that have already been paid or released;
  • Claims filed in a form that does not comply with applicable rules;
  • Claims that are really asserting an equity interest in the debtor; and
  • Priority claims that assert an amount in excess of the maximum amount in the Bankruptcy Code.

In short, if the claim is being challenged on substantive grounds, rather than more technical or procedural ones, then the objection will have to be filed one claimant at a time.

When an omnibus objection does make the permitted objections, it will now have to list claimants in alphabetical order, cross-reference claim numbers, give the ground for the objection and cross-reference that to the text of the objection, describe the objector and the reason for the objection in the document’s title, and combine no more than 100 claims in a single objection. This is all designed to make it easier for the creditor to figure out whether its claim is included and the basis for the objection.

Amended Rule 4001: The Clearer Disclosure Rules. Changes have been made to the rule that governs motions and stipulations for use of cash collateral and obtaining debtor in possession (DIP) financing. The amended rules now require that more details about the key provisions of cash collateral and DIP financing terms and conditions be stated in the motion, that proposed forms of order be filed with the motion, and that cross-references be made in the motion to where in the cash collateral or DIP financing agreements and proposed orders the key provisions are reflected. Since some financing agreements can run hundreds of pages long, with complex formulas and provisions, this rule change is designed to make it easier for the court and the parties to understand their material features without wading through the entire document.

New Rule 6003: Putting The Breaks On Some "First Day" Orders. Another major change is the addition of Rule 6003. This new rule provides that "except and to the extent that relief is necessary to avoid immediate and irreparable harm, the court shall not, within 20 days after the filing of the petition, grant relief" regarding three key areas:

  • The employment of professionals;
  • A motion to pay any prepetition claims (read: critical vendors) or to use, sell, lease (Section 363 sales), or incur an obligation for property of the estate, other than cash collateral or DIP financing motions; or
  • Assumption or assignment of any executory contract or unexpired lease (including commercial real estate leases).

As drafted, unless there is an emergency, and then only to the extent it’s really necessary, the bankruptcy court should defer these decisions until after the 20th day following the filing of the Chapter 11 bankruptcy petition (although technically these apply under the other chapters of bankruptcy). One reason for the rule is to give time for a creditors committee to be appointed and retain counsel before important decisions are made. That said, the exceptions for cash collateral and DIP financing, as well as for rejection of leases and other executory contracts, means a lot can still be done during the early part of a case. When Section 363 sale or critical vendor motions come up on an emergency basis, it’ll be interesting to see how often courts, in applying this new rule, find the existence of irreparable harm.

Amended Rule 6006: Assumption, Assignment, And Rejection Of Executory Contracts. Similar to Rule 3007, Rule 6006 has been changed to put limits on when omnibus motions can be used to deal with executory contracts and leases. Under new Rule 6006(e), absent special court authorization, omnibus motions may be used for multiple executory contracts or leases only when all of the executory contracts to be assumed or assigned are (1) between the same parties, or (2) being assigned to the same assignee. This latter provision likely covers most Section 363 asset sales, so non-debtor contracting parties should continue to carefully review those motions, as discussed in this earlier post. An omnibus motion may also be used when a debtor or trustee seeks to assume, but not assign to more than one assignee, real property leases. In addition, omnibus motions may be used to request rejection of multiple executory contracts or leases.

New Rule 6006(f) provides that, when allowed, these omnibus motions can list no more than 100 executory contracts or leases in any one motion (unlike the chart on this fairly typical pre-amendment motion), and multiple motions will need to be numbered consecutively. The new rule also requires that permitted omnibus motions provide a variety of new information, including:

  • An alphabetical listing by party name;
  • The terms of the assumption or assignment, including for curing defaults; and
  • The identity of the assignee and the adequate assurance of future performance to be provided.

A Few Other Changes. The other amendments this year (1) permit a court to consider a change of venue, (2) clarify when corporate ownership disclosure needs to be made, (3) address constitutional challenges to statutes, and (4) specify procedures for protecting social security numbers and other private information in court filings. Check the clean or redline sets linked above to read these additional rule amendments.

Conclusion. This year’s amendments to the Federal Rules of Bankruptcy Procedure have more than their share of real changes and they will have an impact on business bankruptcy cases. The omnibus motion changes should help creditors from missing when their claim is the target of an objection and contract parties from failing to see that their executory contract or lease is part of a motion to assume and assign. Although cash collateral and DIP financing motions are not affected, the new irreparable harm standard for certain relief in the first 20 days of a case may prove interesting when emergency Section 363 sales are attempted. Stay tuned.

Recent Developments

How The Credit Crunch May Affect Corporate Debt Refinancings And Bank Lending

The Economist has two new articles on how the current troubles in the credit markets may impact the broader economy. The first is on the topic of "Business and the Credit Crunch." After discussing how several private equity buyout deals have unraveled, it offers an interesting observation:

What happens to private equity may be a leading indicator of how the crisis in the financial system will affect the rest of the business world, both because private-equity deals are so dependent on large amounts of debt, and because many of the shrewdest judges of corporate value work for private-equity funds. The number of new private-equity deals has plunged with the financial crisis, and nobody expects activity to pick up again soon. The collapse of deals suggests that the business climate has changed sharply.

While the article stops short of forecasting a recession in the United States, it notes that $160 billion of leveraged loans will come due in 2008 and "refinancing them may be a struggle in today’s financial markets." As one analyst commented, a severe recession — if it were to happen — could push the default rate on corporate bonds as high as 20%.

A second article focuses on the capital needs of commercial and investment banks as a result of recent and predicted write-downs. The open question is what impact these reductions in capital will have on future lending, in particular if banks seek to maintain capital ratios in the 10% range often seen. One prediction: write-downs through next year could reduce lending by as much as $2 trillion.

What does all this mean for business bankruptcy? A lot will depend on how long the credit crunch lasts and how widespread its impact extends.

  • It’s been almost five months since early signs first emerged of a turn in the buyout debt market that presaged the credit crunch and few are ready to predict when it will end.
  • Many insolvency professionals believe a significant increase in Chapter 11 bankruptcy filings is coming, even without a recession.
  • If the economy falls into an actual recession, the number of defaults on corporate bond issuances and other debt would rise dramatically.

With most economists still predicting that the U.S. economy will slow but not dip into recession, the most interesting question may be what would the default picture look like in such a low growth economy. These Economist articles suggest it may not be a pretty sight. 

Business Bankruptcy Issues Recent Developments

Assumption Of Trademark Licenses In Bankruptcy: An Update On The N.C.P. Marketing Case

Over a year ago, I posted on a first of its kind decision in In re: N.C.P. Marketing Group, Inc., 337 B.R. 230 (D.Nev. 2005), in which the U.S. District Court for the District of Nevada held that trademark licenses are personal and nonassignable absent a provision in the trademark license to the contrary. Click here for a copy of the N.C.P Marketing Group decision and here to read the earlier post on the case.

The N.C.P. Marketing Court’s Analysis. In reaching its conclusion, the District Court held that under the Lanham Act, the federal trademark statute, a trademark owner has a right and duty to control the quality of goods sold under the mark:

Because the owner of the trademark has an interest in the party to whom the trademark is assigned so that it can maintain the good will, quality, and value of its products and thereby its trademark, trademark rights are personal to the assignee and not freely assignable to a third party.  

The trademark owner in that case, Billy Blanks of the Billy Blanks® Tae Bo® fitness program, successfully moved the court to compel rejection of the trademark license because under the "hypothetical test" analysis of Section 365(c)(1) of the Bankruptcy Code adopted by the U.S. Court of Appeals for the Ninth Circuit, contracts that cannot be assigned by the debtor without the nondebtor party’s consent cannot be assumed by the debtor either. (For a full discussion of these issues, take a look at this earlier post entitled "Assumption of Intellectual Property Licenses In Bankruptcy: Are Recent Cases Tilting Toward Debtors?")  

The Ninth Circuit Appeal. In December 2005, the parties appealed this decision to the Ninth Circuit. The appeal was fully briefed and had been scheduled for oral argument on November 5, 2007.

  • In July 2007, however, the N.C.P. Marketing Chapter 11 case was converted to Chapter 7. 
  • On October 24, 2007, the Chapter 7 trustee asked the Ninth Circuit to reschedule the oral argument because of a pending settlement in the case.
  • In response, the Ninth Circuit took the oral argument off calendar and directed the parties to move to dismiss the appeal if the settlement is approved by the Bankruptcy Court.

Still No Court Of Appeals Decision. If the settlement is approved, no Ninth Circuit decision will be issued. Instead, this case seems to be headed to an ending similar to that in In re Wellington Vision, Inc. (see this earlier post on the Wellington Vision case for more details), perhaps the only other bankruptcy decision to date to address this trademark issue. There, conversion of the case to Chapter 7 also led to a settlement without an appellate decision. With these recent developments in the In re N.C.P. Marketing case, trademark licensors and licensees will have to wait longer still for an appeals court decision on this important issue at the intersection of trademark and bankruptcy law.

Recent Developments

Merrill Lynch Comments On The Current U.S. Economy’s Striking Similarities To The Late 1980s

Merrill Lynch economists David Rosenberg and Neil Dutta have prepared a fascinating analysis comparing a number of current economic indicators with those from the late 1980s. (Hat tip to Brad Feld and Seth Levine.) You can view the report, entitled 1980s Redux?, by clicking on its title in this sentence.

Here are a few of their observations, which when combined with their startling side-by-side charts comparing the two cycles, make their point:

  • Inverted Yield Curve. "At the peak of the tightening cycle in the late 1980s, the Fed inverted the yield curve. It did the very same thing this time around. The yield curve leads by 5-6 quarters and was flashing economic stress signals a year-ago just as it did in the late 1980s."

  • Increase In Unemployment. "This expansion and the one in the late 1980s witness a dramatic tightening in labor markets and chronic shortages of skilled labor. [O]nce the unemployment rate hooks up from its low, a recession was not far behind."

  • Housing Market Deflation. "This cycle is also hauntingly similar to the 1980s because of what happened to the housing market. Years of massive credit extension, overbuilding and "new paradigm" thinking of housing as an asset class ultimately morphed into a massive excess inventory overhang, eroding credit quality and house price deflation. We are reliving that today, except the deflation is much broader and the credit issues far more complex and global in nature."

They also point out further similarities between the two periods, including that both had an LBO-financed M&A boom, a falling dollar, and a strong Asian stock market (then Japan, now China). These observations take on even more force when looking at their charts.

For companies, credit managers, and bankruptcy professionals trying to determine where the economy is headed, a look back to the economy of the late 1980s — which was followed by the recession of the early 1990s and a spike in Chapter 11 filings — might be a good starting point.

Business Bankruptcy Issues Recent Developments

A Fly In The Ointment: Sale Of Property May Cut Off Landlord’s Section 502(b)(6) Lease Rejection Claim For Future Rent

Here’s a scenario frequently seen in Chapter 11 cases. A tenant files bankruptcy and rejects a commercial real estate lease. The landlord files an unsecured lease rejection claim seeking to recover the lost future rent under the rejected lease. The claim amount is capped by Bankruptcy Code Section 502(b)(6) but may still be one of the larger unsecured claims in the case. Now let’s add a small, but relatively common, twist. Sometime later, but before distributions are made on the claim, the landlord sells the real estate that the debtor had occupied under the rejected lease.

The FLYi Chapter 11 Case. That, complete with the twist, was the situation in the In re FLYi, Inc. Chapter 11 case pending in the Delaware Bankruptcy Court. After the landlord sold the property, the liquidation trust established under the debtor’s Chapter 11 plan of reorganization objected to the landlord’s claim, arguing that after the sale of the property the debtor had no further obligations under the lease. Virginia law applied because the property was located in Dulles, Virginia. As described by the Bankruptcy Court, the landlord had three options under Virginia law:

[D]o nothing and sue for the rent remaining under the Lease; reenter the Premises for the sole purpose of re-letting it without terminating the Lease; or re-enter the Premises and exercise full dominion over the premises thereby terminating the Lease and eliminating FLYi’s obligation to pay any future rent.

The landlord argued that this interpretation of the law was wrong but asserted that provisions in the lease protected the landlord’s claim anyway. The Bankruptcy Court rejected those arguments and held that the landlord’s sale of the property terminated both the lease and the landlord’s right to future rent after the date of the sale. A copy of the Bankruptcy Court’s decision is available here.

Be sure to read the Delaware Business Bankruptcy Report’s interesting discussion for more details on the decision, including the arguments advanced and the Bankruptcy Court’s treatment of them.

What Does This Mean For Landlords? A landlord contemplating a sale of the real property will have to consider what impact that sale might have on its lease rejection claim.

  • In states like Virginia where, according to the Bankruptcy Court in the FLYi case, termination of a lease cuts off a landlord’s claim for future rent, landlords will have to be prepared to lose all or a portion of a lease rejection claim if they sell the real property. 
  • The outcome may be different in other states. Section 1951.2 of the California Civil Code, for example, expressly permits a landlord, upon termination of a lease, to recover the present value of the difference between the unpaid future rent under the lease and the amount of rent that could reasonably be avoided through mitigation efforts. This may permit a landlord to sell the property and still retain a lease rejection claim.
  • When state law allows it, landlords may seek to include provisions in a lease to preserve contractually the right to a post-sale lease damages claim.

What Does This Mean For Bankruptcy Estates? Debtors, liquidation trusts, and other estate representatives may have an incentive to determine whether the landlord still owns the property. In states where a post-rejection sale of the property operates to cut off the landlord’s future rent claim, this fact could provide a new ground for an objection to the landlord’s Section 502(b)(6) claim.

Conclusion. Time will tell how frequently this scenario will play out in future cases, but landlords should expect to see the "did you sell the property" question asked more often going forward.

Business Bankruptcy Issues Recent Developments

New Article Tackles Whether Unsecured Creditors Should Be Able To Recover Post-Petition Attorney’s Fees, The Question Left Open By The Travelers Decision

When the U.S. Supreme Court overruled the Ninth Circuit’s so-called Fobian rule in the Travelers Casualty & Surety Co. of America v. Pacific Gas & Electric Co. decision (available here) in March 2007, it left for another day the question of whether unsecured creditors could recover, as part of their unsecured claims, post-petition attorney’s fees incurred during the course of the bankruptcy case.

Early Decisions Take Different Views. Since the Travelers decision, two bankruptcy courts have issued decisions but have come to different conclusions on that question. 

  • In May 2007, in the In re Qmect, Inc. decision (available here), the U.S. Bankruptcy Court for the Northern District of California held that unsecured creditors could recover post-petition attorney’s fees. For more on that decision, see this earlier post on the case and its analysis. 
  • In July 2007, in the In re Electric Machinery Enterprises, Inc. case (available here), the U.S. Bankruptcy Court for the Middle District of Florida came to the opposite conclusion, following a majority of courts that had addressed this issue unrestrained by the Ninth Circuit’s Fobian decision. See this previous post for more on the Florida decision.

New Article Sides With Majority View. A new article to be published in the Winter 2007 issue of the American Bankruptcy Institute Law Review, gives context for these differing views and argues that the majority position is the correct one. The article, entitled "Interpreting Bankruptcy Code Sections 502 and 506: Post-Petition Attorneys’ Fees in a Post-Travelers World," was written by Professor Mark S. Scarberry, Professor of Law at the Pepperdine University School of Law. Professor Scarberry is the current Robert M. Zinman Scholar in Residence at the American Bankruptcy Institute. A copy of the article is available for download from the Social Science Research Network website by following this link.

A Textual Argument. The centerpiece of the article is Professor Scarberry’s interesting analysis of the interplay between Sections 502(b) and 506 of the Bankruptcy Code and the textual argument he advances to support the majority view.

  • A key building block of this argument is his conclusion that the language in Section 502(b), which provides that a claim is to be allowed in an amount "as of the date of the filing of the petition," precludes inclusion of post-petition amounts as part of the Section 502(b) claim allowance. 
  • He then argues that Section 506(b)’s function is to add post-petition interest and "reasonable fees, costs, and charges" to this Section 502(b) allowed amount but only for secured claims (determined under Section 506(a)) and only when the value of a secured creditor’s collateral exceeds the allowed amount of the claim, determined under Section 506(a).
  • He contends that Section 506(b)’s use of the phrase "there shall be allowed" demonstrates that its purpose is to allow amounts not otherwise allowable under Section 502(b).

The Debate Continues. Professor Scarberry’s article is an excellent resource for those seeking to understand the history and background of this issue. It also provides debtors, creditors committees, and their attorneys with arguments to oppose an unsecured creditor’s attempt to recover post-petition attorney’s fees. The issue, however, remains far from settled in the courts. 

  • The majority view, now bolstered by the arguments in Professor Scarberry’s article, will probably prevail in many cases.
  • Still, the In re Qmect decision shows that at least some courts may allow these fees.

Until this issue is resolved by the Supreme Court, or at least by more Courts of Appeals, unsecured creditors with a contractual or nonbankruptcy statutory right to attorney’s fees may try their luck and seek allowance of post-petition attorney’s fees in bankruptcy cases as part of their unsecured claims.

Business Bankruptcy Issues Recent Developments The Financially Troubled Company

The Bull Rips A Hole In The Matador’s Cape: New Ninth Circuit Decision Limits Reach Of Section 502(b)(6)’s Landlord Cap

A commercial real estate lease often represents the largest single liability of many debtors. For retailers, which typically have scores or even hundreds of store leases, the liability involved is orders of magnitude larger. It’s fair to say that the management of lease obligations can be of enormous consequence to debtors, landlords, and other creditors in Chapter 11 bankruptcy cases.

Rejected Leases And The Capped Claim. As explained in an earlier post on how commercial real estate leases are treated in bankruptcy, one of a debtor’s options in a Chapter 11 case is to reject uneconomic or otherwise burdensome leases, terminating the debtor’s obligation to pay rent and turning the landlord’s claim for termination of the lease into a prepetition claim. Section 502(b)(6) of the Bankruptcy Code goes further and caps the landlord’s prepetition rejection claim at an amount equal to the greater of (1) one year’s rent or (2) fifteen percent of the remaining lease term, up to a maximum of three years’ worth of rent. The starting date for calculating the claim is the earlier of the date when the bankruptcy petition was filed or when the landlord recovered possession of, or the tenant surrendered, the premises. A landlord with six years left on a rejected lease, for example, would have its claim capped at one year’s worth of rent.

What’s Covered By The Cap? This ability to cap a landlord’s claim in bankruptcy can be a major benefit to debtor tenants. Ever since a 1995 decision by the Bankruptcy Appellate Panel (BAP) of the Ninth Circuit in In re McSheridan, 184 B.R. 91 (B.A.P. 9th Cir. 1995), debtors have been successful in many cases in capping a variety of claims by landlords. In McSheridan, the BAP held that the cap applied to all damages for the lessee’s nonperformance of the lease, not just to claims based on future rent. Landlords have challenged that analysis but, at least in the Ninth Circuit, have had little success — until this week.

The Ninth Circuit’s El Toro Decision. In an eight-page opinion (available here) issued on October 1, 2007 in the In re El Toro Materials Company, Inc. Chapter 11 case,, the U.S. Court of Appeals for the Ninth Circuit took a very different view of the landlord cap under Section 502(b)(6). In the El Toro case, the debtor was a mining company that leased property from the Saddleback Community Church, paying $28,000 per month in rent. After the lease was rejected, Saddleback brought an adversary proceeding against El Toro for $23 million in damages alleging that El Toro left a million tons of wet clay "goo," mining equipment, and other materials on the property.

  • The bankruptcy court held that Saddleback’s claim, which asserted waste, nuisance, and other tort theories, would not be limited by the Section 502(b)(6) cap. 
  • Following its McSheridan precedent, the BAP reversed and held that any damages would be subject to the cap. 
  • Interestingly, two of the three judges on the BAP panel filed concurring opinions, voicing doubts about the wisdom of the McSheridan case. A copy of the BAP’s unpublished El Toro decision from July 2005 is available here.

Judge Kozinski’s Analysis. On appeal, the Ninth Circuit reversed the BAP’s decision, holding that the cap did not apply to the landlord’s tort claims. Judge Alex Kozinski authored the opinion and analyzed the key issues this way:

The structure of the cap—measured as a fraction of the remaining term—suggests that damages other than those based on a loss of future rental income are not subject to the cap. It makes sense to cap damages for lost rental income based on the amount of expected rent: Landlords may have the ability to mitigate their damages by re-leasing or selling the premises, but will suffer injury in proportion to the value of their lost rent in the meantime. In contrast, collateral damages are likely to bear only a weak correlation to the amount of rent: A tenant may cause a lot of damage to a premises leased cheaply, or cause little damage to premises underlying an expensive leasehold.

One major purpose of bankruptcy law is to allow creditors to receive an aliquot share of the estate to settle their debts. Metering these collateral damages by the amount of the rent would be inconsistent with the goal of providing compensation to each creditor in proportion with what it is owed. Landlords in future cases may have significant claims for both lost rental income and for breach of other provisions of the lease. To limit their recovery for collateral damages only to a portion of their lost rent would leave landlords in a materially worse position than other creditors. In contrast, capping rent claims but allowing uncapped claims for collateral damage to the rented premises will follow congressional intent by preventing a potentially overwhelming claim for lost rent from draining the estate, while putting landlords on equal footing with other creditors for their collateral claims.

The statutory language supports this interpretation. The cap applies to damages “resulting from” the rejection of the lease. 11 U.S.C. § 502(b)(6). Saddleback’s claims for waste, nuisance and trespass do not result from the rejection of the lease—they result from the pile of dirt allegedly left on the property. Rejection of the lease may or may not have triggered Saddleback’s ability to sue for the alleged damages.But the harm to Saddleback’s property existed whether or not the lease was rejected. A simple test reveals whether the damages result from the rejection of the lease: Assuming all other conditions remain constant, would the landlord have the same claim against the tenant if the tenant were to assume the lease rather than rejecting it? Here, Saddleback would still have the same claim it brings today had El Toro accepted the lease and committed to finish its term: The pile of dirt would still be allegedly trespassing on Saddleback’s land and Saddleback still would have the same basis for its theories of nuisance, waste and breach of contract. The million-ton heap of dirt was not put there by the rejection of the lease—it was put there by the actions and inactions of El Toro in preparing to turn over the site.

(Footnotes omitted.)

McSheridan Holding Overruled. The Ninth Circuit opinion noted the two concurrences from the BAP decision questioning McSheridan and suggested that the BAP consider adopting an en banc procedure to reconsider such doubtful precedents. Given the Ninth Circuit’s holding, it will come as no surprise that the Court of Appeals also explicitly overruled McSheridan:

To the extent that McSheridan holds section 502(b)(6) to be a limit on tort claims other than those based on lost rent, rent-like payments or other damages directly arising from a tenant’s failure to complete a lease term, it is overruled.

The Ninth Circuit noted that McSheridan also holds that "damages flowing from the failure of a party that has rejected a lease to perform future routine repairs or pay utility bills are capped," but declined to address — or overrule — that holding.

Post-El Toro Ramifications.  At least in the Ninth Circuit, with McSheridan overruled landlords will work hard to characterize their damage claims as arising from tort theories or otherwise not being based on "lost rent, rent-like payments or other damages directly arising from a tenant’s failure to complete the lease term." At the negotiation stage, when the market permits landlords may demand larger security deposits and letters of credit on the view that the Section 502(b)(6) cap no longer limits every type of damage recoverable against such security. They may also structure leases to separate claims for items such as clean-up costs, hazardous waste removal, property damage, and even tenant improvement repayments from rent claims, in an attempt to bolster the argument that these claims fall outside of the cap.

Conclusion. Like a bull charging a matador, the El Toro decision has ripped a hole in the Section 502(b)(6) cape previously used to turn away cap-busting landlord claims. Time will tell just how significant the decision turns out to be, but at first blush it seems that debtors and non-landlord creditors may be the ones who end up seeing red.