Issue link: https://mbozikis.ufcontent.com/i/1422521
100 Generally, damages resulting from the rejection of an unassumed executory contract or lease are calculated pursuant to the terms of the contract and the general law of contracts. However, in certain instances, the Bankruptcy Code provides caps on the amount of such damages (such as the so-called "502(b)(6) limitation" discussed in Chapter V.D.5.) where the nature and/or length of the contract or lease at issue would result in an extremely large rejection damage claim. One exception to the rule that rejection damage claims constitute prepetition unsecured claims is where the contract subject to rejection had previously been assumed by the debtor. In such an instance, the breach arising from the rejection is deemed to have occurred at the time of such rejection and the concomitant claim will be deemed to be an administrative expense claim rather than a prepetition unsecured claim, since the rejection will have occurred postpetition. 11 U.S.C. § 365(g)(2)(A); see also Nostas Assocs. v. Costich (In re Klein Sleep Prods.), 78 F.3d 18, 26 (2d Cir. 1996). As discussed below in Chapter V.D.2.a, this can have significant consequences on the debtor's ability to confirm a plan of reorganization. 52 As a result, as part of the 2005 Amendments, Congress capped the amount that can be awarded for a rejection damage claim in this context with respect to nonresidential real property leases (although not other leases or contracts). 11 U.S.C. § 503(b)(7). 53 The cap established by Section 503(b)(7) is an amount equal to all monetary obligations due for a period of two years following the later of the date of rejection of the lease or the date of actual turnover of the premises by the trustee to the lessor, 52 This issue is especially relevant in the context of retail debtors who have a large number of nonresidential real property leases due to the short deadline by which the decision to assume or reject must be made (discussed in Chapter V.E.3.e. below). Such debtors must prioritize their analysis of which store leases to keep and to discard or else find themselves in the situation of mistakenly discarding valuable, performing stores in order to avoid the potential consequences of keeping an underperforming store or mistakenly keeping underperforming stores and then later having to discard them with the harsh impact this can have on determining the terms of a plan of reorganization. 53 Damages in excess of this amount would be general unsecured claims subject to the cap in Section 502(b)(6) described above.