Opinion ID: 3036337
Heading Depth: 2
Heading Rank: 2

Heading: rejection of the lease

Text: The Landlord contends that the Trustee’s rejection of the lease eliminated any rights of the Trustee under the lease and removes it from the bankruptcy estate and thus from the jurisdiction of the bankruptcy court. This contention is beside the point. The Trustee’s suit is for the Landlord’s breach of the lease based on its retention of funds from the security deposit, after drawing down the letter of credit, to which it was not entitled. [4] Section 365 of the Bankruptcy Code provides that a trustee may assume or reject an executory contract or unexpired lease. 11 U.S.C. § 365(a) (2000). A rejection of an unexpired lease removes the lease from the bankruptcy estate, and “constitutes a breach of such contract or lease” that is effective immediately before the petition for bankruptcy. § 365(g). “ ‘[R]ejection of an executory contract serves two purposes. It relieves the debtor of burdensome future obligations while he is trying to recover financially and it constitutes a breach of a contract which permits the other party to file a creditor’s claim.’ ” In re Rega Props., Ltd., 894 F.2d 1136, 1140 (9th Cir. 1990) (quoting In re Norquist, 43 B.R. 224, 225 (Bankr. E.D. Wash. 1984)); see also In re Pac. Express, Inc., 780 F.2d 1482, 1486 n.3 (9th Cir. 1986). [5] While rejection of a lease prevents the debtor from obtaining future benefits of the lease (such as ongoing possession of leased premises), it does not rescind the lease or defeat IN RE: ONECAST MEDIA 1973 any pending claims or defenses that the debtor had in regard to that lease. See 3 COLLIER ON BANKRUPTCY § 365.09[1] (Alan N. Resnick & Henry J. Sommer eds., 15th rev. ed. 2005) (“Rejection does not . . . affect the parties’ substantive rights under the contract or lease, such as the amount owing or a measure of damages for breach and does not waive any defenses to the contract.”). According to 11 U.S.C. § 365(g), the rejection of Debtor’s unexpired lease constitutes a pre-petition breach of the lease agreement leaving Creditor with potential remedies under applicable state law. The statutory breach of contract simply put the estate in the position of a breaching party to the executory contract. Rejection under the Bankruptcy Code did not divest the estate from the breaching party’s rights under the terms of the contract and applicable state law. In re Thompson-Mendez, 321 B.R. 814, 819 (Bankr. D. Md. 2005); see also In re G.I. Indus., Inc., 204 F.3d 1276, 128182 (9th Cir. 2000) (allowing the debtor, after rejection, to raise the invalidity of the contract as a defense to creditor’s claims); In re Murphy, 694 F.2d 172, 174 (8th Cir. 1982) (“rejection of an executory contract in accordance with applicable provisions of the Bankruptcy Act is not the equivalent of rescission”); In re Lavigne, 183 B.R. 65, 72 (Bankr. S.D.N.Y. 1995). The rejection of the lease here does not bar the Trustee’s breach of contract action to recover the balance of the security deposit.