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UNITED STATES BANKRUPTCY COURT

FOR THE WESTERN DISTRICT OF PENNSYLVANIA

IN RE : BANKRUPTCY NO. 04-11414

: CHAPTER 11

COMMUNITY HEALTH NET, :

DEBTOR :

:

 COMMUNITY HEALTH NET, Movant : DOCUMENT NO. 303

VS. : (OBJECTION TO CLAIMS OF

 AMES SAFETY ENVELOPE CO., ET : BOOKER T. WASHINGTON 

 AL, Respondents : CENTER)

APPEARANCES:

GUY C. FUSTINE, ESQ., ERIE, PA, ATTORNEY FOR DEBTOR

THOMAS J. MINARCIK, ESQ., ERIE, PA, ATTORNEY FOR BOOKER T. WASHINGTON

CENTER

WARREN W. BENTZ, U.S. BANKRUPTCY JUDGE

NOVEMBER 16 , 2005

OPINION

Factual Background

Community Health Net (“Debtor”) filed a voluntary Petition under Chapter 11 of the

Bankruptcy Code on May 29, 2004 (“Petition Date”). On the Petition Date, Debtor was the

Lessee under a Lease Agreement (“Lease”) with the Booker T. Washington Center (“BTW”) as

Lessor for property located at 1720 Holland Street, Erie, PA (the “Property”). The Lease was for

ten (10) years from April 1, 1998 through March 31, 2008 at an annual rental rate of $96,931.72,

payable monthly at the rate of $8,077.64.

On June 9, 2004, BTW filed a motion to compel the Debtor to assume or reject the Lease. 

On June 16, 2004, Debtor filed an emergency motion to reject the Lease. By Order dated July

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16, the Debtor was authorized to reject the Lease. 

After rejection of the Lease, the Debtor and BTW reached an agreement for the Debtor to

continue to occupy a portion of the square footage it previously occupied in the Property. By

motion filed on September 22, 2004, the Debtor sought Court approval to enter into a new lease

agreement with BTW (the “New Lease”). 

The New Lease specifically provides that the prior Lease was rejected and terminated. 

The New Lease is for a six month term from August 1, 2004 to January 31, 2005 at the rate of

$3,500 per month with the Debtor having the right to renew it for an additional six months until

July 31, 2005 if certain conditions are satisfied. 

On November 1, 2004, an Order was entered which provides that “[t]he proposed [new]

Lease between the Debtor and [BTW]. . .is authorized and approved.”

BTW has filed Proofs of Claim in the amounts of $67,544.72 (Claim No. 4), which

represents unpaid prepetition rent; a duplicate claim in the amount of $67,000 (Claim No. 61);

and a third claim in the amount of $96,931.68 (Claim No. 60) which represents one year’s lease

rejection damages in accordance with the cap established by 11 U.S.C. §502(b)(6).

On March 31, 2005, Debtor filed objections to BTW’s claims. At a hearing held on

August 29, 2005, Debtor withdrew its objection to Claim No. 4 and it will be allowed in the

amount of $67,544.72. BTW withdrew Claim No. 61 and it will be disallowed. The remaining

dispute between the parties is over the appropriate amount of BTW’s lease rejection damage

claim which BTW calculates as $96,931.68. Debtor asserts that it is entitled to a credit against

BTW’s rejection damage claim for postpetition rents in the amount of $73,853.40 that it paid to

BTW during the case under both the Lease and the New Lease. Debtor asserts that the correct

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amount of BTW’s rejection claim damage is $23,078.28.

Discussion

A lessor of real property may assert any combination of the following types of claims

against a debtor’s estate: 1) a prepetition claim based upon a prepetition breach or forfeiture of

the lease; 2) a postpetition claim for a breach of the lease prior to debtor’s assumption or

rejection; and 3) a postpetition claim based upon a breach of the lease which occurs, by statute,

upon rejection of the lease within the bankruptcy proceeding. In re Allied Technology, 25 BR

484, 506 (Bankr. SD OH 1982).

Debtor rejected the Lease. As a result of Debtor’s rejection of the Lease, BTW is entitled

to rejection damages. There is no dispute that $96,931.68 is the correct calculation of the

§502(b)(6) cap amount for a lease rejection claim. The dispute is whether the Debtor is entitled

to receive a credit against the cap amount for rents paid postpetition. 

“Postpetition rentals are not to be deducted from the statutory cap.” In re All For A

Dollar, Inc., 191 BR 262, 264-65 (Bankr. D MA 1996) citing In re Financial News Network,

Inc., 149 BR 348, 350-53 (Bankr. SD NY 1993); In re Bob’s Sea Ray Boats, Inc., 143 BR 229,

231 (Bankr. D ND 1992); In re Atlantic Container Corp., 133 BR 980, 989-90 (Bankr. ND IL

1991); In re Conston Corp., Inc., 130 BR 449, 451-54 (Bankr. ED PA 1991); In re McLean

Enterprises, Inc., 105 BR 928, 937 (Bankr. WD MO 1989); In re Goldblatt Bros., Inc., 66 BR at

346-48. Contra, In re Stewart’s Properties, Inc., 41 BR 353, 355 (Bankr. D HI 1984). 

The Court of Appeals for the Third Circuit states:

The landlord retains a duty to mitigate the tenant’s reach, but any mitigation of

damages secured by reletting the premises will offset only the landlord’s overall

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potential recovery, and does not affect the §502(b)(6) cap. The “overwhelming

majority of courts” have held that the §502(b)(6) statutory cap is not reduced by

any amount a landlord has received by reletting the leased premises and

mitigating its damages. 5th Ave. Jewelers, 203 B.R. at 381; see also In re Atl.

Container Corp., 133 B.R. 980, 990 (Bankr.N.D.Ill.1991).

In re PPI Enterprises (U.S.), Inc., 324 F.3d 197, 208, FN. 17 (3d Cir. 2003).

Debtor acknowledges that case law provides that a landlord should not be required to

reduce a rejection damage claim by the amount of postpetition rents received from a new tenant

but attempts to distinguish those cases because, here, there was not a new tenant but, rather, after

the Lease was rejected, the Debtor continued to occupy a portion of the Property.

Section 502(b)(6) does not distinguish between re-letting a property to the same tenant or

a “new” tenant after a debtor rejects a lease in the calculation of lease rejection damages. “The

overwhelming majority of courts have held that the §502(b)(6) statutory cap is not reduced by

any amount a landlord has received by reletting the leased premises and mitigating its damages.” 

Id. (emphasis added)

The Debtor’s objection to Claim No. 60 will be overruled. An appropriate Order will be

entered.

_________/s/________________

Warren W. Bentz

United States Bankruptcy Judge

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UNITED STATES BANKRUPTCY COURT

FOR THE WESTERN DISTRICT OF PENNSYLVANIA

IN RE : BANKRUPTCY NO. 04-11414

: CHAPTER 

COMMUNITY HEALTH NET, :

DEBTOR :

:

 COMMUNITY HEALTH NET, Movant : DOCUMENT NO. 303

VS. : (OBJECTION TO CLAIMS OF

 AMES SAFETY ENVELOPE CO., ET : BOOKER T. WASHINGTON 

 AL, Respondents : CENTER)

ORDER

This 16 day of November, 2005, in accordance with the accompanying

Opinion, it shall be, and hereby is, ORDERED as follows:

1. Claim No. 4 filed by the Booker T. Washington Center is allowed as a general

unsecured claim in the amount of $67,544.72.

2. Claim No. 61 filed by the Booker T. Washington Center is disallowed in its entirety.

3. Claim No. 60 filed by the Booker T. Washington Center for lease rejection damages

is allowed as a general unsecured claim in the amount of $96,931.68.

_________/s/________________

Warren W. Bentz

United States Bankruptcy Judge

c: Guy C. Fustine, Esq.

 Thomas J. Minarcik, Esq.

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