KAREN S. JENNEMANN, Bankruptcy Judge.
The debtor, Telligenix Corporation, previously occupied many square feet of commercial space in a prominent Orlando office building subject to a lease with Lincoln Orlando Holdings, LLC. Shortly after filing this Chapter 11 case, the debtor rejected its lease and, undisputedly, owes $2,436,628 in pre-petition, rejection damages.
In 2009, the debtor's predecessor, Dynatech Corporation, and Lincoln modified the parties' 2005 lease agreement. The debtor posted a $1.5 million security deposit in exchange for Lincoln's agreement to forebear further collection efforts on then due but unpaid rent. The debtor later filed this Chapter 11 case on October 8, 2009. The debtor then rejected its lease with Lincoln, effective as of the last date of its
The debtor now asks the Court to hold that Lincoln's administrative claim ($284,052.22) is really a pre-petition claim for purposes of § 553(a) and that the Court should force Lincoln to offset its administrative claim against the security deposit before offsetting its pre-petition rejection damages claim. The debtor's request is understandable: if Lincoln must first offset its rejection damages claim, no portion of the security deposit will remain to pay Lincoln's administrative claim. Because § 1129(a)(9) of the Bankruptcy Code requires a debtor to pay all administrative claims in full in order to confirm a plan of reorganization, and because Telligenix lacks the funds to pay its substantial administrative claims if the $284,000 amount due to Lincoln for post-petition rent is included, the debtor likely will fail in its reorganization efforts. On the other hand, if Lincoln is required to first offset its administrative claim against the security deposit, the debtor's chances of successfully reorganizing improve.
Although the Court is sympathetic to the debtor's financial plight and acknowledges that the goal of every Chapter 11 case is to facilitate the reorganization of a viable debtor and to maximize payments to creditors, neither the Bankruptcy Code nor case law supports the debtor's position. Section 553(a) of the Bankruptcy Code preserves a creditor's right to offset only with regard to pre-petition claims between the debtor and the creditor:
The Court of Appeals for the Eleventh Circuit has held that the plain language of this section means exactly what it says: "In preserving the right of setoff, Section 553 requires that the obligation between the debtor and creditor arose before filing the bankruptcy petition...."
A rejection damages claim is deemed to arise pre-petition under §§ 365(g) and 502(g) of the Bankruptcy Code. Section 365(g) states that "the rejection of an executory contract or unexpired lease of the debtor constitutes a breach of such contract or lease—(1) ... immediately before the date of the filing of the petition." And more to the point, under § 502(g), a lessor's claim arising out of a debtor's rejection of an unexpired lease shall be allowed "the same as if such claim had arisen before the date of the filing of the petition," despite the fact that the rejection took place after the commencement of the case. Accordingly, bankruptcy courts routinely allow a landlord to offset rejection damages claims against security deposit funds, as this Court already has done in this case.
Therefore, it is no surprise that bankruptcy courts routinely grant administrative priority status to claims for unpaid post-petition rent. This Court previously has held that, under §§ 365(d)(3)
The debtor now makes a new and unique argument that, because the underlying lease agreement with Lincoln is a pre-petition contract, a claim for rent arising under the lease, whether accruing before or after the bankruptcy is filed, is properly considered "a claim that arose before the commencement of the case," as required by § 553(a). The debtor cites several cases from other jurisdictions that dealt with various contract claims.
Moreover, the debtor mischaracterizes these courts' analysis of administrative claims. The debtor, for example, cites Highland Group
Thus, even aside from the fact that Highland Group is irrelevant because it dealt with an indemnity claim, and also ignoring §§ 365(d)(3) and 503(b)(1) of the Bankruptcy Code expressly give commercial lessors an administrative priority claim for post-petition rent, the logic of the opinion undermines the debtor's argument. There, the bankruptcy court focused on when the debtor sold the claimant the defective trailer—pre-petition—because that was the act that gave rise to claimant's indemnity claim. It did not focus on when the parties signed the indemnity agreement.
Here, the relevant act is the debtor's continued occupancy of Lincoln's office space after the bankruptcy was filed. Lincoln continued to provide the debtor with its offices for almost three months post-petition. The pre-petition date that the parties entered into the lease agreement is irrelevant, just as the date the parties in Highland Group signed the indemnity agreement was irrelevant.
As the debtor admits, only the Bankruptcy Court for the Southern District of California has allowed a party to offset a pre-petition security deposit against a post-petition administrative claim for unpaid rent.
As in Standard Furniture, there may be some narrow circumstances under which a party could offset a pre-petition security deposit against a post-petition administrative claim for unpaid rent, despite § 553(a). For this reason the Court stops short of holding that post-petition administrative priority claims can never be set off against pre-petition debts owed to the debtor. But these are not such circumstances. Lincoln sought, and this Court allowed, setoff of the security deposit funds. The debtor's post-petition rent liability simply did not "arise before the commencement" of this case. The Court now allows Lincoln to apply the security deposit funds against its pre-petition rejection damages claim as allowed by § 553(a).
Lincoln may offset its rejection damages claim against the debtor's security deposit funds in the full amount of the security deposit—$1,500,000. Lincoln shall have an unsecured claim for the remaining $936,052.22, and an administrative claim in the amount of $284,052.22. The debtor's motion
DONE AND ORDERED.