Cutler v. Lindsey

UNPUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

In Re: NORMAN E. LINDSEY;
KATHERINE C. LINDSEY,
Debtors.

RONALD CUTLER, Trustee,
Plaintiff-Appellant,

v. No. 96-2222

NORMAN E. LINDSEY; KATHERINE C.
LINDSEY,
Defendants-Appellees,

and

UNITED STATES TRUSTEE,
Party in Interest.
In Re: NORMAN E. LINDSEY;
KATHERINE C. LINDSEY,
Debtors.

RONALD CUTLER, Trustee,
Plaintiff-Appellee,

v.
No. 96-2268
NORMAN E. LINDSEY,
Defendant-Appellant,

and

KATHERINE C. LINDSEY,
Defendant,

UNITED STATES TRUSTEE,
Party in Interest.

Appeals from the United States District Court
for the Eastern District of Virginia, at Alexandria.
Leonie M. Brinkema, District Judge.
(CA-96-602-A, BK-92-13698-AB)

Argued: October 28, 1997

Decided: November 7, 1997

Before ERVIN, HAMILTON, and LUTTIG, Circuit Judges.

_________________________________________________________________

Affirmed in part, vacated in part, and remanded with instructions by
unpublished per curiam opinion.

_________________________________________________________________

COUNSEL

ARGUED: Richard Samuel Stolker, Rockville, Maryland, for Appel-
lant. Roy Baxter Zimmerman, Alexandria, Virginia, for Appellees.

2
Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).

_________________________________________________________________

OPINION

PER CURIAM:

Bankruptcy creditor Ronald Cutler (Cutler) appeals from an order
affirming the bankruptcy court's application of 11 U.S.C. § 502(b)(6)
to cap his claim against the bankruptcy estate of Norman and Kather-
ine Lindsey. For reasons that follow, we affirm in part, vacate in part,
and remand with instructions to increase the allowed amount of Cut-
ler's claim by $4,882.45.

I.

The facts relevant to this appeal are not in dispute. In August 1985,
P/T of Dania, Inc. (P/T) leased a certain piece of commercial property
in Florida from Cutler for a term of ten years. Under the lease, P/T
was responsible for the insurance premiums and the property taxes.
Performance of P/T's obligations under the lease was guaranteed per-
sonally by Norman Lindsey (Lindsey).

As of February 1988, both P/T and Lindsey were in default under
the lease. The lease terminated according to its terms on March 1,
1988. In 1989, Cutler brought a civil action against Lindsey in the
United States District Court for the Southern District of Florida to
collect the unpaid rent (pre- and post-termination) and various related
charges, including unpaid real estate taxes and insurance premiums.1
On September 11, 1990, Cutler obtained a judgment against Lindsey
in the total amount of $356,954.68. Cutler then recorded his judgment
in various locations where Lindsey owned property, thereby obtaining
liens against those properties.

On July 30, 1992, Lindsey and his wife filed for bankruptcy under
Chapter 11 of the Bankruptcy Code in the United States Bankruptcy
_________________________________________________________________
1 Apparently, P/T was insolvent at the time Cutler filed suit.

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Court for the Eastern District of Virginia. Thereafter, Cutler filed a
proof of claim against the bankruptcy estate in the amount of the
judgment plus post-judgment interest, for a total of $431,771.68.
Lindsey and his wife (the Debtors) objected to Cutler's claim on the
ground that it exceeded the amount allowable under 11 U.S.C.
§ 502(b)(6), which caps a lessor's claim for damages resulting from
the termination of a lease of real property. Cutler objected to the pro-
posed reduction of his claim. In support of his objection, he argued
that: (1) Bankruptcy Code § 502(b)(6) does not apply when the debtor
is a guarantor not a lessee; (2) Bankruptcy Code§ 502(b)(6) cannot
operate to cap a secured claim; and (3) principles of res judicata pre-
vented the bankruptcy court from reducing his claim.

The bankruptcy court conducted a hearing on the matter and there-
after ruled in favor of the Debtors. Accordingly, the bankruptcy court
entered an order on December 13, 1995 that allowed Cutler's claim
in the amount of $76,039.65, plus post-judgment interest at 10% per
annum from September 11, 1990. The $76,039.65 constituted 15% of
the post-termination rent due under the lease as determined by the dis-
trict court in the Florida litigation, $7,500 in attorney's fees and
$5,529.45 for pre-termination rent. The Debtors thereafter filed a
motion to reconsider the bankruptcy court's order insofar as it
allowed post-judgment interest and attorney's fees in addition to the
amount allowed under Bankruptcy Code § 502(b)(6). After a hearing
on the Debtors' motion, the bankruptcy court disallowed the post-
judgment interest, but continued to allow the $7,500 in attorney's
fees.

Both parties appealed to the District Court for the Eastern District
of Virginia. In addition to the arguments he raised in the bankruptcy
court, Cutler argued that the bankruptcy court erroneously disallowed
him post-judgment interest, court costs, and amounts for property
taxes and insurance owed to him under the lease. The Debtors contin-
ued to object to Cutler's recovery of attorney's fees. After conducting
a hearing, the district court entered a written order and memorandum
opinion affirming the bankruptcy court's rulings in toto. See In re
Lindsey, 199 B.R. 580 (E.D. Va. 1996). Cutler noted a timely appeal
of the district court's order.2
_________________________________________________________________
2 The Debtors noted a cross-appeal of the district court's affirmance of
the portion of the bankruptcy court's order allowing Cutler $7,500 in
attorney's fees. However, the Debtors abandoned this cross-appeal at
oral argument.

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II.

We apply the same standard of review as the district court applied
to the bankruptcy court's decision. Findings of fact are reviewed for
clear error, and conclusions of law are reviewed de novo. In re
Johnson, 960 F.2d 396, 399 (4th Cir. 1992).

III.

In relevant part, Bankruptcy Code § 502(b) provides:

(b) [I]f . . . objection to a claim is made, the 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 dam-
ages resulting from the termination of a lease
of real property, such claim exceeds--

(A) The rent reserved by such lease, with-
out 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 peti-
tion; 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 . . . .

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11 U.S.C. § 502(b). Bankruptcy Code § 502(b)(6) is "designed to
compensate the landlord for his loss while not permitting a claim so
large (based on a long-term lease) as to prevent other general unse-
cured creditors from recovering a dividend from the estate." S. Rep.
95-989, at 63 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5849.
Courts unanimously recognize that, in practice, Bankruptcy Code
§ 502(b)(6) acts as an equalizer between the claims of lessors, who
can mitigate their damages by reletting, and those of other creditors
by allowing lessors to be compensated for loss due to the breach of
the lease without receiving a windfall. See, e.g., In re Thompson, 116
B.R. 610, 613 (Bankr. S.D. Ohio 1990).

Before this court, Cutler presents the same three arguments in sup-
port of his ultimate contention that Bankruptcy Code§ 502(b)(6) does
not apply to cap his claim against the bankruptcy estate. We address
each argument in turn.

A.

Cutler first relies on a distinction between a lessee and a guarantor.
According to Cutler, Bankruptcy Code § 502(b)(6) does not apply to
cap the claim of a lessor against a guarantor; rather, it only applies
to cap the claim of a lessor against a lessee.

Cutler's argument is without merit. Critically, the statutory lan-
guage of Bankruptcy Code § 502(b) does not make such a distinction.
Rather, it broadly casts its net to apply to any claim that is "the claim
of a lessor for damages resulting from the termination of a lease of
real property . . . ." 11 U.S.C. § 506(b)(6). The term lessee is not even
mentioned. Under the well settled canons of statutory construction,
unless literal application of this statutory provision would produce a
result demonstrably at odds with the intentions of Congress, we are
bound to apply its terms as written. See United States v. Ron Pair
Enterprises, Inc., 489 U.S. 235, 242 (1989).

Applying Bankruptcy Code § 502(b)(6) in this case does not pro-
duce a result demonstrably at odds with the intent of Congress. As
noted above, Congress intended Bankruptcy Code § 502(b)(6) to
fairly compensate lessors for their losses while at the same time per-
mitting other creditors to recover a dividend from the bankruptcy

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estate. Necessarily, it would defeat the intent of Congress if we
allowed a lessor to recover all rent due under a long term lease at the
expense of other creditors simply because the debtor was a guarantor.
For obvious reasons, Congress did not intend to allow a lessor to cir-
cumvent the effect of Bankruptcy Code § 502(b)(6) on this basis.
Thus, application of Bankruptcy Code § 502(b)(6) in this case fur-
thers, rather than hinders, Congress' intent. Finally, we note that our
rejection of a distinction between a lessee and a guarantor in the con-
text of applying Bankruptcy Code § 502(b)(6) is in accord with the
decisions of the overwhelming majority of courts that have addressed
the issue. See, e.g., In re Episode USA, Inc., 202 B.R. 691, 693-96
(Bankr. S.D.N.Y. 1996); Matter of Interco, Inc. , 149 B.R. 934, 940-
41 (Bankr. E.D. Mo. 1993); but see In re Danrik , 92 B.R. 964 (Bankr.
N.D. Ga. 1988).

B.

Cutler next argues that Bankruptcy Code § 502(b)(6) does not
apply to his claim because his claim is secured. We find his argument
to be without merit.

Cutler essentially concedes, as he must, that Bankruptcy Code
§ 502(b)(6) makes no distinction between lessors with secured claims
and lessors with unsecured claims. However, Cutler relies on certain
legislative history of Bankruptcy Code § 502(b)(6) that suggests that
Congress viewed the average landlord as a general unsecured creditor
and enacted Bankruptcy Code § 502(b)(6) so as to treat all unsecured
general creditors relatively the same. The legislative history relied
upon provides that the § 502(b)(6) cap "is designed to compensate the
landlord for his loss while not permitting a claim so large (based on
a long-term lease) as to prevent other general unsecured creditors
from recovering a dividend of the estate." S. Rep. 95-989, at 63
(1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5849 (emphasis
added). Because the plain language of Bankruptcy Code § 502(b)(6)
unambiguously applies to the secured claim of a lessor for damages
resulting from termination of a lease, we do not engage in interpreta-
tion of it. See United States v. Southern Management Corp., 955 F.2d
914, 920 (4th Cir. 1992). Accordingly, the question for us is whether
the literal application of Bankruptcy Code § 502(b)(6) to the secured
claim of a lessor for damages resulting from termination of a lease is

7
demonstrably at odds with the intent of Congress. See Ron Pair
Enterprises, Inc., 489 U.S. at 242. We answer this question in the
negative.

Admittedly, the legislative history that Cutler relies upon seems to
make the very distinction that he wants us to recognize. However,
Cutler's proposed distinction is at odds with the mechanics of the
Bankruptcy Code. Under Bankruptcy Code § 502, the bankruptcy
court first determines the amount of a creditor's claim and then deter-
mines how much of that claim will be "allowed" as a liability against
the bankruptcy estate. 11 U.S.C. § 502; see 4 Collier on Bankruptcy,
¶ 502.01 (15th ed. 1997). In determining the allowed amount of a
creditor's claim, the bankruptcy court considers the applicability of
statutory provisions that may limit a creditor's claim, such as the cap
on a lessor's claim for damages resulting from termination of a lease
found in Bankruptcy Code § 502(b)(6). See 11 U.S.C. § 502. "Al-
lowed" claims are then classified for purposes of determining their
priority in recovering from the bankruptcy estate. Bankruptcy Code
§ 506 is the basic provision governing the determination of the
secured status of allowed claims. In relevant part, Bankruptcy Code
§ 506(a) provides that:

[a]n allowed claim of a creditor, secured by a lien on prop-
erty in which the estate has an interest . . . is a secured claim
to the extent of the value of such creditor's interest in the
estate's interest in such property . . . and is an unsecured
claim to the extent that the value of such creditor's interest
. . . is less than the amount of such allowed claim.

11 U.S.C. § 506(a) (emphasis added). This framework makes clear
that the secured/unsecured nature of a lessor's claim is irrelevant in
determining the allowed amount of a lessor's claim for damages
resulting from termination of a lease. Likewise, this framework makes
clear that the secured/unsecured nature of a lessor's claim is not rele-
vant until the bankruptcy court is ready to classify that claim pursuant
to Bankruptcy Code § 506. Therefore, the fact that Cutler recorded his
judgment, thereby perfecting liens against the Debtors' real property,
simply means that his allowed claim is secured and that the amount
of his allowed claim is entitled to be paid to the extent of such secur-
ity.

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C.

Cutler next argues that principles of res judicata prevent the bank-
ruptcy court from capping his claim under Bankruptcy Code
§ 502(b)(6). For reasons that follow, we reject this argument as well.

The law is settled that the doctrine of res judicata applies in the
bankruptcy context to preclude subsequent litigation on matters actu-
ally and necessarily resolved in a prior adjudication between the same
parties. See In re Varat Enterprises, Inc., 81 F.3d 1310, 1315 (4th Cir.
1996). At first blush, Cutler's argument that the doctrine of res
judicata prevents application of Bankruptcy Code§ 502(b)(6) in this
case appears to have merit. Any reduction in the amount of Cutler's
judgment appears to violate the doctrine of res judicata. But, as intel-
ligently explained by the district court for the Northern District of
New York in Kohn v. Leavitt-Berner Tanning Corp. , 157 B.R. 523,
526-27 (N.D.N.Y. 1993), a close examination of the language of
Bankruptcy Code § 502 permits a reading which both honors the doc-
trine of res judicata and at the same time allows the bankruptcy court
to fulfill the equitable purpose of the Bankruptcy Code. See Pepper
v. Litton, 308 U.S. 295, 304-05 (1939) (providing that in passing on
allowance of claims, bankruptcy courts sit as courts of equity).

In pertinent part, Bankruptcy Code § 502(b) provides that upon
objection to the claim of a creditor, "the court, after notice and hear-
ing, 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" one of its
enumerated limiting provisions applies. As correctly noted by the
court in Kohn, this language requires the bankruptcy court to under-
take a two-step analysis in applying a limiting provision such as the
cap on a lessor's claim for damages resulting from termination of a
lease found in Bankruptcy Code § 502(b)(6). See Kohn, 157 B.R. at
527. First, the court must determine the amount of a creditor's claim
as of the date of the filing of the petition. See id. In a case such as
the one before us, this means accepting as non-reviewable the amount
of Cutler's claim as determined by the United States District Court for
the Southern District of Florida. See id."This figure then forms the
basis for the second part of the analysis, wherein the court determines
how much of the claim should be allowed." Id. Applying the princi-

9
ples of equity inherent in the Bankruptcy Code, the bankruptcy court
then looks behind the judgment to ascertain the nature of the claim
underlying the judgment. See id. When the judgment stems from a
lessor's claim for damages resulting from termination of a lease of
real property, then Bankruptcy Code § 502(b)(6) applies to cap the
allowed amount of the creditor's claim. See id. Through this two-step
process, the bankruptcy court pays deference to the doctrine of res
judicata and, at the same time, to Congress' notions of equity as
expressed by the Bankruptcy Code. See id.

In sum, we reject all three of Cutler's arguments on the applicabil-
ity of Bankruptcy Code § 502(b)(6) in this case and hold that the dis-
trict court did not err in affirming the bankruptcy court's application
of Bankruptcy Code § 502(b)(6) to cap the portion of Cutler's claim
that flowed from termination of the lease.

IV.

Cutler alternatively contends that even if Bankruptcy Code
§ 502(b)(6) applies to cap his claim with respect to post-termination
rent, his claim should still be allowed in amounts equal to his post-
judgment interest, unpaid real estate taxes for the years 1987, 1988,
and 1989, unpaid insurance premiums for the years 1988 and 1989,
and court costs related to obtaining the judgment in Florida. We agree
with Cutler to the extent that some of these items of damages did not
flow from the termination of the lease.

By its plain language, Bankruptcy Code § 502(b)(6) only limits
those damages which would have been avoided but for termination of
a lease. Thus, we must determine whether each item of damage
relates to the termination of the lease at issue.

It is axiomatic that Lindsey would have avoided damages for post-
judgment interest and court costs from his district court action had the
lease not been terminated. Indeed, Cutler points to no evidence that
would indicate a contrary conclusion. Thus, the district court did not
err in affirming the bankruptcy court's refusal to allow Cutler post-
judgment interest and court costs.

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With respect to Cutler's claim for unpaid real estate taxes and
unpaid insurance premiums, the amounts that accrued prior to termi-
nation of the lease on March 1, 1988 are not subject to the cap, but
the amounts for future taxes and premiums that would become due
under the lease (i.e., prospective damages) are subject to the cap. The
record shows that the unpaid property taxes for 1987 and the first two
months of 1988 amount to $4774.28, and the unpaid insurance premi-
ums for the first two months of 1988 amount to $108.17. The district
court erred in affirming the bankruptcy court's refusal to include these
amounts as part of the allowed amount of Cutler's claim. The district
court did not err in affirming the bankruptcy court's refusal to include
any amounts for unpaid real estate taxes or unpaid insurance premi-
ums that accrued after the termination of the lease on March 1, 1988.

V.

In conclusion, we hold that the district court did not err in affirm-
ing the bankruptcy court's decision that Bankruptcy Code § 502(b)(6)
applies to cap Cutler's claim as it relates to damages flowing from ter-
mination of the lease. We also hold that the district court did not err
in affirming the bankruptcy court's refusal to include post-judgment
interest, court costs, and unpaid real estate taxes and insurance premi-
ums that accrued after the lease terminated on March 1, 1988.
Accordingly, we affirm the district court's order in these respects.
Finally, we hold the district court erred in affirming the bankruptcy
court's refusal to allow $4774.28 for unpaid property taxes for 1987
and the first two months of 1988 and $108.17 for unpaid insurance
premiums for the first two months of 1988 as part of the allowed
amount of Cutler's claim. We, accordingly, vacate the district court's
order in this respect and remand with instructions to the district court
to enter an order consistent with this opinion.

AFFIRMED IN PART, VACATED IN PART,
AND REMANDED WITH INSTRUCTIONS

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