Statutory Cap on Lease Rejection Damage Claims in Bankruptcy Applies to Solvent Debtors
To prevent landlords under long-term real property leases from reaping a windfall for future rent claims at the expense of other creditors, the Bankruptcy Code caps the amount of a landlord's claim against a debtor-tenant for damages "resulting from the termination" of a real property lease. In In re Chrome Holding Co. (f/k/a 23andMe Holding Co.), No. 25-40976-357, 2025 WL 3301036 (Bankr. E.D. Mo. Nov. 26, 2025), the U.S. Bankruptcy Court for the Eastern District of Missouri addressed a challenge to the legitimacy of the statutory cap in cases where the debtor is solvent and able to pay creditors in full.
The court overruled a landlord's objections to confirmation of a chapter 11 plan that capped the landlord's lease rejection damages claim while providing for a possible distribution to shareholders if the debtor turns out to be solvent. Consistent with the almost unanimous consensus among courts and commentators, the bankruptcy court reasoned that the purpose and provenance of the lease damage cap provision—section 502(b)(6) of the Bankruptcy Code—indicate that it was intended to apply regardless of a debtor's solvency.
Statutory Cap on Future Rent Claims Under Rejected Real Property Leases
Section 502(b)(6) of the Bankruptcy Code provides that the maximum allowable amount of the "claim of a lessor for damages resulting from the termination of a lease of real property" is limited to:
(A) the rent reserved by such lease, without 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 petition; 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.
11 U.S.C. § 502(b)(6).
The purpose of this rent cap is to balance the interests of landlords and other unsecured creditors by allowing a landlord to receive compensation for losses suffered from a lease termination "while not permitting a claim so large (based on a long-term lease) as to prevent other general unsecured creditors from recovering a dividend from the estate." Solow v. PPI Enters., Inc. (In re PPI Enters. (U.S.), Inc.), 324 F.3d 197, 207–08 (3d Cir. 2003) (citing legislative history at H.R. Rep. No. 95–595, at 353 (1977); see also generally Collier on Bankruptcy ("Collier") ¶ 502.03[7][a] (16th ed. 2025). The scope of section 502(b)(6) is limited to real estate lease terminations. Lease damages claims by landlords for items such as physical damages to the premises are not subject to the cap. See Kupfer v. Salma (In re Kupfer), 852 F.3d 853, 854, 859 (9th Cir. 2016); Saddleback Valley Cmty. Church v. El Toro Materials Co. (In re El Toro Materials Co.), 504 F.3d 978, 980–81 (9th Cir. 2007).
Courts disagree over the proper way to calculate the cap on lease rejection damages under section 502(b)(6)(A). Two competing approaches have been applied by courts in determining the maximum allowable amount of a landlord's lease termination claim—the "Time Approach" and the "Rent Approach." The focus of the Rent Approach is on the dollar amount of rent payable for the entire remaining lease term. According to the Rent Approach, section 502(b)(6) imposes a cap equal to 15% of that amount, provided that it is at least equal to the rent reserved under the lease for one year and does not exceed the rent reserved for the next three years of the lease term. This approach typically is preferred by landlords with escalating rents to capture the amounts of these increased rental payments in calculating the cap.
By contrast, the Time Approach is anchored to the remaining term of the lease, not the remaining rent payable. According to this approach, section 502(b)(6) imposes a cap equal to the rent reserved under the lease for the time period beginning at lease termination equal to 15% of the remaining lease term, provided that time period is at least one year and no more than three years. Compare In re Cortlandt Liquidating LLC, 658 B.R. 244, 255 (S.D.N.Y. 2024) (affirming bankruptcy court rulings that the statutory cap applied to a landlord's claim against a lease guarantor and that, based on the plain language of section 502(b)(6), its legislative history, and other recent rulings considering the question, the Time Approach represents "the correct interpretation" in calculating the amount of the landlord's lease termination damages); with In re Andover Togs, Inc., 231 B.R. 521, 547 (Bankr. S.D.N.Y. 1999) (holding that the Rent Approach is the "logically sounder" approach); In re Rock & Republic Enters., 2011 WL 2471000, *20 (Bankr. S.D.N.Y. 2011) (ruling that the Rent Approach should govern).
Although section 502(b)(6) provides that the "claim of a lessor for damages resulting from the termination of a lease of real property" is subject to the statutory cap, it does not specify that the claim must be asserted by the lessor against a debtor-lessee. For this reason, most courts have concluded that lease termination damages asserted against a debtor who is a lease guarantor also are capped by section 502(b)(6). See, e.g., In re Arden, 176 F.3d 1226, 1229 (9th Cir. 1999); Cutler v. Lindsey (In re Lindsey), 1997 WL 705435, *3 (4th Cir. Nov. 7, 1997); Cortlandt Liquidating, 658 B.R. at 250–51; In re Concepts Am., Inc., 621 B.R. 848, 862 (Bankr. N.D. Ill. 2020); Flanigan v. Samalex Trust (In re Flanigan), 374 B.R. 568, 574 (Bankr. W.D. Pa. 2007); In re Henderson, 297 B.R. 875, 886 (Bankr. M.D. Fla. 2003); see generally Collier at ¶ 502.03[f] ("[Section 502(b)(6)] merely results in the limitation of the allowance of damages that a lessor of real property may recover from a bankruptcy estate for termination of a lease, regardless of the identity of the entity that is the debtor…. [T]he cap applies in the bankruptcy of a guarantor."). But see In re Dronebarger, 2011 WL 350479, at **19–20 (Bankr. W.D. Tex. Jan. 31, 2011) (ruling that the cap did not apply to a lessor's claim for damages against the debtors as joint guarantors of a commercial real property lease due to the court's belief, based on its reading of in In re Goforth, 179 F.3d 390 (5th Cir. 1999), that the Fifth Circuit would have concluded that section 502(b)(6) would not apply to a debtor lease guarantor); In re Danrik, Ltd., 92 B.R. 964, 971 (Bankr. N.D. Ga. 1988) (holding that section 502(b)(6) did not limit the lessor's claim against a debtor lease guarantor given the "unusual" facts of the case, where the guarantor debtor was solvent, all other claims have been paid in full, the lessee itself had not filed for bankruptcy, and the claim was not disproportionately large).
The provenance of section 502(b)(6)—which was originally denominated in 1978 as section 502(b)(7)—is a 1934 amendment to the former Bankruptcy Act of 1898, which provided that:
The claim of a landlord for injury resulting from the rejection of an unexpired lease of real estate or for damages or injury indemnity under a covenant contained in such lease shall be treated as a claim ranking on a parity with debts which would be provable under section 63(a) of this Act, but shall be limited to an amount not to exceed the rent, without acceleration, reserved by said lease for the three years next succeeding the date of surrender of the premises to the landlord or the date of reentry of the landlord, whichever first occurs, whether before or after the filing of the petition, plus unpaid rent accrued up to such date of surrender or reentry: Provided, That the court shall scrutinize the circumstances of an assignment of future rent claims and the amount of the consideration paid for such assignment in determining the amount of damages allowed assignee hereunder.
Act of June 7, 1934, ch. 424, § 1, 48 Stat. 911, 915 (enacting § 77B(b) of the Bankruptcy Act of 1898). Another provision in the 1934 legislation amended section 63(a) of the former Bankruptcy Act to include a similar cap on landlord claims, providing that such a claim "shall in no event be allowed in an amount exceeding" the cap. 48 Stat. at 924.
Despite the cap on damages, the amendments provided some measure of relief to landlords, whose claims for lease rejection damages had previously not been deemed "provable" in bankruptcy. See City Bank Farmers Trust Co. v. Irving Trust Co., 299 U.S. 433, 437 (1937) (noting that, prior to the amendment, "[t]he tenant's liability for future rent was not discharged and remained enforceable as installments of rent fell due"). The provision not only allowed landlords under rejected leases to equitably participate in distributions from an estate, but provided for the discharge the lease rejection claims in bankruptcy.
Does the Statutory Cap on Lease Rejection Damages Apply When the Debtor Is Solvent?
The limitation imposed by the amendment on lease rejection damages as it applied to solvent debtors was immediately challenged on both statutory and constitutional grounds. The U.S. Court of Appeals for the Second Circuit turned aside such a challenge in Kuehner v. Irving Trust Co., 85 F.2d 35 (2d Cir. 1936), aff'd sub nom. Kuehner v. Irving Trust Co., 299 U.S. 445 (1937). In Kuehner, the Second Circuit noted:
The appraisal of realty at a distant time is the merest guess; nobody can possibly know anything about it, and one man's guess is nearly as good as another's. For this reason Congress might circumscribe its use to the near future, not only as against creditors, but against the lessee itself. That would be no more drastic or unfair than the common law had been again and again.
Kuehner, 85 F.2d at 38.
In affirming the Second Circuit's ruling, the U.S. Supreme Court agreed that the provision disallowed claims in excess of the specified limit, rather than merely subordinating the excess to the claims of other creditors or distributions to shareholders. See Kuehner, 299 U.S. at 449–50. The Supreme Court also rejected any constitutional challenge to the provision, writing that:
Whatever courts, in the absence of a statutory formula, might feel compelled to adopt as the measure of damage in such a case, we cannot hold that Congress could not reasonably find that an award of the full difference between rental value and rent reserved for the remainder of the term smacks too much of speculation and that a uniform limit upon landlords' claims will, in the long run, be fairer to them, to other creditors, and to the debtor.
Id. at 454.
Courts interpreting the modern incarnation of the provision—section 502(b)(6) of the Bankruptcy Code—have almost uniformly rejected the argument that it does not apply to solvent debtors. See, e.g., 1500 Mineral Spring Assocs., LP v. Gencarelli, 353 B.R. 771, 785 (D.R.I. 2006) (discussing the "overwhelming weight of authority" favoring debtors); In re Federated Dep't Stores, Inc., 131 B.R. 808, 817 (S.D. Ohio 1991) ("There is simply nothing in the plain language of § 502(b)(6) to suggest that a bankruptcy court may depart from the application of the cap on a lessor's claim any time the debtor is solvent or the court otherwise believes the equities of the case might warrant such a departure."); In re Farley, Inc., 146 B.R. 739, 748 (Bankr. N.D. Ill. 1992) ("[T]he solvency question is not a material issue of fact which would have any effect on determination of the statutory cap under § 502(b)(6)."); In re PPI Enters, (U.S.), Inc., 228 B.R. 339, 346 (Bankr. D. Del. 1998) ("The Code allows for no such distinction between value for creditors involving the application of § 502(b)(6) and value for equity holders excluding the application of § 502(b)(6)."), aff'd, 324 F.3d 197 (3d Cir. 2003).
In the leading decision expressing a contrary view, a Georgia bankruptcy court relied on equitable principles in ruling that the statutory cap did not limit lease rejection damages against a solvent debtor-lease guarantor, as distinguished from a debtor-tenant, because the court determined that section 502(b)(6) does not clearly speak to the issue one way or another. See In re Danrik, Ltd., 92 B.R. 964, 967 (Bankr. N.D. Ga. 1988); accord In re Dronebarger, No. 10–10889, 2011 WL 350479, at *20 (Bankr. W.D. Tex. Jan. 31, 2011).
Many courts have disagreed with this approach, concluding that section 502(b)(6)'s plain language extends to claims against debtor-guarantors as well, even if the debtor is solvent. See, e.g., In re Arden, 176 F.3d 1226, 1229 (9th Cir. 1999) (criticizing the bankruptcy court for relying on Danrik in the case of solvent debtor-guarantor); In re Ancona, 2016 WL 828099, at *6 (Bankr. S.D.N.Y. Mar. 2, 2016) ("Notwithstanding the fact that this Court does not (and need not) adopt the rationale in Danrik or Dronebarger…, neither case stands for the proposition that a court must first find a debtor to be insolvent or determine all other claims against a debtor before analyzing a claim under section 502(b)(6). To do so would effectively rewrite the statute to include a prerequisite or exception to section 502(b)(6)'s applicability where none exists, and lead to the absurd result where landlord-creditors' claims against a debtor cannot be ascertained until after a plan has been filed."); see also In re Interco Inc., 137 B.R. 1003, 1006 (Bankr. E.D. Mo. 1992) (§ 502(b)(6) "is applicable whether the debtor is the tenant or the guarantor").
Chrome Holding
Genetic testing business Chrome Holding Co., formerly known as 23andMe, Inc., and certain affiliates (collectively, the "debtors") filed for chapter 11 protection in March 2025 in the Eastern District of Missouri after a 2023 data breach of customers' personal data sparked extensive litigation. The bankruptcy court authorized the debtors to sell substantially all of their assets in July and September 2025, after which the debtors rejected a San Francisco office lease with landlord KR OP Tech, LLC (the "landlord").
The landlord filed an uncapped lease rejection damage claim in the bankruptcy case for approximately $9.7 million. The landlord also objected to confirmation of the debtors' liquidating chapter 11 plan, which limited the lease rejection claim to approximately $5.6 billion based upon the statutory cap in section 502(b)(6). The landlord argued, among other things, that because the debtors were solvent (or at least potentially solvent depending on the outcome of the claims process) and the plan contemplated possible recoveries for equity holders, section 502(b)(6) should not limit its claim for lease rejection damages.
The Bankruptcy Court's Ruling
The bankruptcy court overruled the landlord's objections to plan confirmation.
U.S. Bankruptcy Judge Brian C. Walsh rejected the landlord's argument that section 502(b)(6) does not apply to lease rejection damage claims against solvent debtors. The landlord argued that the statutory cap was not appropriate under the facts for two reasons based on changes in the bankruptcy statute over time.
First, it argued that the rationale articulated by the Supreme Court in Kuehner no longer applies because it was decided in 1937 when the excess rejection damage claim would be discharged even in a liquidation. The landlord pointed out that the Bankruptcy Code now prohibits a liquidating corporation from receiving a discharge (see 11 U.S.C. § 1141(d)(3))—the opposite of the result under the former Bankruptcy Act, which included no such prohibition. Given this change, the landlord claimed that the reasoning of Kuehner no longer governs.
Second, the landlord argued that the predecessor provision to section 502(b)(6) stated that a landlord's rejection damage claim "shall be limited," whereas section 502(b)(6) provides that a landlord's lease rejection claim is allowed "except to the extent that" it "exceeds" the cap. This difference in wording, the landlord argued, required a different result.
According to Judge Walsh, considered in the historical context, neither of these changes is meaningful:
[T]here is no room for me to decide that it would be preferrable for the Landlord to recover in full before shareholders may receive distributions. Congress has made its decision—in 1934 and again in 1978—about what a landlord may recover in the bankruptcy case of its tenant, and the Supreme Court has determined that Congress may do so, even if the tenant is solvent.
Chrome Holding, 2025 WL 3301036, at *5 (endnote omitted). The change in dischargeability rules for liquidating debtors and the wording of how the cap is described were of no moment, and reflected no intention to change the treatment of capped lease rejection claims.
The bankruptcy court also found that the landlords' reliance on the "solvent-debtor exception"—permitting unsecured claims to accrue postpetition interest in solvent debtor cases—was misplaced. The landlord argued that if solvent debtors must pay unmatured interest to unsecured claims notwithstanding the statutory language, they also should be required to pay uncapped lease rejection claims.
In particular, section 502(b)(2) of the Bankruptcy Code specifically disallows claims for "unmatured interest," thereby effectively precluding the payment of postpetition (or "pendency") interest to unsecured creditors. Even so, based on the pre-Bankruptcy Code solvent-debtor exception to that rule derived from English law, many courts, including six federal circuit courts have ruled or suggested that the exception survived the enactment of the Bankruptcy Code in 1978 to require the payment of pendency interest on unsecured claims as a prerequisite to confirmation of a cram-down chapter 11 plan. See In re Hertz Corp., 117 F.4th 109, 125 (3d Cir. 2024), as amended, 120 F.4th 1181 (3d Cir.), reh'g denied, Nos. 23-1169 and 23-1170 (3d Cir, Nov. 6, 2024), cert. denied, No. 24-1062, 2026 WL 79954 (U.S. Jan. 12, 2026); In re LATAM Airlines Grp. S.A., 55 F.4th 377, 385–87 (2d Cir. 2022); In re Ultra Petroleum Corp., 51 F.4th 138, 156 (5th Cir. 2022); In re PG&E Corp., 46 F.4th 1047, 1062; Gencarelli v. UPS Capital Bus. Credit, 501 F.3d 1, 7 (1st Cir. 2007); In re Dow Corning Corp., 456 F.3d 668, 678 (6th Cir. 2006).
But, according to Judge Walsh, those cases "depend significantly on the long-standing pre-Code practice of requiring solvent debtors to pay interest" and the landlord's claim for lease rejection damages in excess of the section 502(b)(6) cap "has no such pedigree." Chrome Holding, 2025 WL 3301036, at *5. In addition, he emphasized, a court should "'not read the Bankruptcy Code to erode past bankruptcy practice absent a clear indication that Congress intended such a departure.'" Id. (quoting Cohen v. de law Cruz, 523 U.S. 213, 221 (1998) (cleaned up)).
The bankruptcy court dismissed the landlord's remaining objections to confirmation of the debtor's chapter 11 plan. Judge Walsh concluded, among other things, that: (i) the landlord would receive no more than the capped amount of its lease rejection damages claim (i.e., the allowable amount of the claim) either in chapter 11 or a hypothetical chapter 7 liquidation, as required by section 1129(a)(7)'s "best interest of creditors" test; (ii) given that the best interests test applies only to impaired classes, it would be an "absurd result" if a landlord in a case with a clearly solvent debtor could not invoke the best interests test because its capped lease rejection claim was paid in full and therefore unimpaired, whereas a landlord in a case, like this one, "with a potentially solvent debtor, claims that the best interests test requires payment of its claim in full, without regard to the cap"; (iii) despite various typical provisions ensuring implementation of the plan, the chapter 11 plan did not grant the liquidating debtors a discharge in derogation of section 1141(d)(3) of the Bankruptcy Code; (iv) by limiting the landlord's claim to the statutory cap and deeming its rejection damages claim fully satisfied, the plan did not impose a settlement on the landlord without its consent; (v) the landlord's claim that the plan violated the "absolute priority rule" in section 1129(b)(2)(B) of the Bankruptcy Code by making distributions to shareholders without paying the landlord's rejection damages claim in full was unfounded; and (vi) the landlord lacked standing to argue that the plan included illegal third-party release because it opted out of the releases and the objections of other parties on that score were resolved. Id. at **7–10.
Outlook
Disputes over whether solvent debtors should be required to pay creditor claims in full despite statutory provisions limiting or disallowing certain kinds of claims has figured prominently in recent bankruptcy headlines. Chrome Holding is emblematic of one such dispute. However, in recent times, they have arisen more commonly in connection with cases involving the solvent-debtor exception, or even at a more fundamental level, cases addressing whether a solvent (or non-financially distressed) debtor can file for bankruptcy at all—even though there is clearly no insolvency requirement for chapter 11 debtors in the Bankruptcy Code. Of note, in January 2026, the U.S. Supreme Court denied a petition for review of the Third Circuit's ruling in Hertz concerning the solvent-debtor exception.
Chrome Holding does not represent a sea change in the interpretation of section 502(b)(6) to limit lease rejection damage claims against tenants (solvent or otherwise). Even so, the bankruptcy court's careful analysis of the purpose and provenance of the provision provides useful guidance. The ruling, however, is unlikely to end the debate over whether bankruptcy and the provisions of the Bankruptcy Code that benefit debtors can be utilized by debtors that are able to pay their creditors in full.
