## Facts

- Klein Sleep Products, Inc. filed for Chapter 11 in June 1991 and moved to assume a shopping-center lease with its landlord, Nostas Associates, for retail space in Paramus, New Jersey.
- The bankruptcy court approved assumption of the lease; Klein paid rent through October 1992.
- By January 1993, reorganization appeared infeasible; the court appointed a Chapter 11 trustee to liquidate the estate.
- The trustee rejected the lease and surrendered the premises.
- Nostas sought administrative-expense priority for (a) rent arrears incurred before rejection and (b) post-rejection “future rent” and related damages.
- The trustee objected, arguing that post-rejection damages were unsecured and limited by the landlord-claim cap.

## Issues

1. Whether a landlord may treat post-rejection future rent and rejection-related damages as administrative expenses when the lease was previously assumed in Chapter 11.
2. Whether 11 U.S.C. § 502(b)(6)’s cap on a landlord’s future-rent claim applies to damages arising from rejection of an assumed lease.

## Decision

- The Second Circuit affirmed the district court’s judgment affirming the bankruptcy court.
- The landlord was entitled to administrative-expense priority only for lease obligations arising during the period the lease was assumed and provided an actual benefit to the estate (post-assumption, pre-rejection).
- Post-rejection future rent and rejection-related damages were treated as general unsecured claims.
- The unsecured post-rejection landlord claim was subject to the statutory limitation in 11 U.S.C. § 502(b)(6) (capping the allowable claim for future rent).

## Legal Principles

- Administrative-expense priority is limited to obligations that arise post-petition and reflect actual, necessary costs of preserving the estate, commonly assessed by whether the estate received a tangible benefit.
- Assumption of a prepetition lease obligates the estate to perform while the lease remains in effect, and obligations incurred during that period may qualify for administrative priority.
- Rejection of an assumed lease constitutes a breach that gives rise to damages generally treated as a prepetition unsecured claim, notwithstanding prior assumption.
- 11 U.S.C. § 502(b)(6) limits a landlord’s allowable unsecured claim for future rent and related termination damages; the cap applies to post-rejection damages to prevent long-term lease claims from consuming distributions otherwise available to unsecured creditors.

## Conclusion

The court held that a landlord receives administrative-expense priority only for lease obligations incurred while the estate actually uses the premises after assumption and before rejection; once the lease is rejected and the premises surrendered, future rent and rejection damages revert to capped, unsecured status under § 502(b)(6).


In re Klein Sleep Prods., Inc., 78 F.3d 18 (2d Cir. 1996)