2009 Chapter 11 Recent Developments (Part I)

equipment after the Snyder bankruptcy and rejection, Giant Eagle reused some of the equipment, sold some of it and scrapped the rest. In the Claim, Giant Eagle subtracted the amounts it received in rent from the Snyder parties. The Debtor argued that, due to the fact that Giant Eagle re-leased the equipment to Snyder, the Debtor would not be liable for the liquidated damages as set forth in the Lease.

Issue:

(1)

Whether Giant Eagle had fully mitigated its damages when it mitigated its damages by releasing the property to Snyder.

(2)

Whether Giant Eagle was entitled to all of the postpetition pre-rejection rent as an administrative expense.

Holding: The district court was REVERSED and REMANDED with respect to its disallowance of the Claim for future rent. The district court was AFFIRMED with regard to its order granting the administrative expense claim.

Rule: "First calculate the benefit of the bargain 'as of the date of the filing of the petition,' see 502(b)(1), and, from there, determine 'actual damages' based on (Pennsylvania) state law, by reducing the benefit-of-the-bargain calculation by the amount actually or reasonably mitigated."

Reasoning:

(1)

The amount actually mitigated in this case is also the amount reasonably mitigated because Giant Eagle both released the equipment, and, thereafter, further mitigated the damages by re-using or salvaging the equipment. Thus, Giant Eagle is entitled to the Claim against the Debtor for its futurerent damages despite the fact that it released the equipment to Snyder. In other words, that Giant Eagle released the equipment to Snyder did not bar Giant Eagle's Claim against the Debtor to the extent its damages under the Lease were not fully mitigated. "The district court erred by disallowing a lessor's legitimate claim for future-rent damages arising from a lessee's rejection of a lease, on the basis that a substitute lease for that property, if fulfilled, would have mitigated the claimed damages."

(2)

Giant Eagle was entitled to the postpetition pre-rejection rent payments in full. The Debtor's argument that the amounts should be reduced because a portion of the pre-rejection time the equipment was being used for the benefit of Giant Eagle is overruled.

Phar-Mor, Inc. v. McKesson Corp. (In re Phar-Mor, Inc.), 534 F.3d 502 (6th Cir. 2008)

Facts: Phar-Mor, Inc. (the "Debtor") filed for chapter 11 bankruptcy on September 24, 2001. McKesson Corp. ("McKesson") filed a timely reclamation claim under § 546(c) of the Bankruptcy Code and Ohio Rev. Code § 1302.76 (UCC § 2-702) to recover the goods it delivered to the Debtor on credit. On McKesson's request, it was granted an administrative claim under § 503(b) in the amount of its allowed reclamation claim. The Debtor borrowed, post-petition, $135 million and granted the DIP lender a super-priority status over the other secured creditors, including McKesson's administrative claims. After the Debtor sold its inventory and repaid the DIP lenders, it moved to reclassify McKesson's reclamation claim as a general unsecured claim and argued that McKesson's administrative claim was extinguished when the goods that were subject to the claim were sold and the Debtor paid off the DIP lenders. The bankruptcy court denied the motion and the district court affirmed.

Issues: "Whether a vendor's administrative-expense priority on its reclamation claim is effectively extinguished when the goods subject to reclamation are sold and the proceeds used to satisfy a secured creditor's superior claim."