## Facts

- Highland Superstores, Inc. filed a Chapter 11 petition on August 24, 1992, while leasing shopping-center space in Hoffman Estates, Illinois from Strobeck Real Estate, Inc. under a 20-year lease.
- As of the petition date, Highland was in default and owed $190,632.35 in arrears, with roughly 14 years remaining on the term.
- The lease permitted the landlord, after tenant default, to terminate or to relet without terminating, crediting reletting proceeds against the tenant’s obligations and leaving the tenant liable for monthly deficiencies.
- Highland announced it would stop operating in Illinois, closed the Hoffman Estates store, and obtained bankruptcy-court approval to reject the lease, constituting a breach.
- Strobeck later relet the premises to Syms Corporation under a new lease.
- Strobeck filed (and amended) a proof of claim seeking rejection damages for lost rent value, subject to the limitation in 11 U.S.C. § 502(b)(6).
- The bankruptcy court valued damages by discounting to present value the difference between the rental streams under the rejected lease and the replacement lease using a single statutory interest rate.
- The unsecured creditors’ committee argued for using different, tenant-specific discount rates reflecting relative credit risk (a higher rate for Highland and a lower rate for Syms), which would materially reduce or eliminate damages.

## Issues

1. In valuing a landlord’s lease-rejection damages, may a court discount the rejected and replacement rent streams using different, risk-adjusted rates tied to each tenant’s creditworthiness?
2. Alternatively, should damages be computed using a conventional present-value calculation applying a single statutory interest rate to the rent-stream differential, subject to the § 502(b)(6) cap?

## Decision

- The Sixth Circuit reversed the district court and reinstated the bankruptcy court’s allowance of Strobeck’s rejection-damages claim (subject to § 502(b)(6)).
- The court held the district court erred by adopting the committee’s risk-adjusted, dual-rate discounting method and by concluding the landlord suffered no actual damages.
- The bankruptcy court’s single-rate, statutory-interest present-value method for the difference between the two rent streams was proper and consistent with governing law.

## Legal Principles

- Rejection of a lease in bankruptcy constitutes a breach, and the landlord has a claim for contract damages measured by the loss in value of the lease.
- Lease-rejection damages are generally measured by the present value of the difference between the rent reserved under the rejected lease and the rent obtainable (or obtained) under a replacement lease, then limited by 11 U.S.C. § 502(b)(6).
- Courts need not—and should not absent supporting authority—apply different, tenant-specific risk discount rates to the rejected and replacement rent streams where doing so would negate an otherwise measurable rent shortfall.
- A statutory interest rate may be used as an administrable discount rate to convert future contractual payment differences into present value in this setting.

## Conclusion

The Sixth Circuit held that a landlord’s damages from lease rejection should be calculated using a conventional single-rate present-value comparison of the rejected and replacement rent streams, with § 502(b)(6) operating as a separate cap, and rejected a dual-rate, credit-risk-based discounting approach that would erase the landlord’s economic loss.


Unsecured Creditors’ Comm. of Highland Superstores, Inc. v. Strobeck Real Est., Inc. (In re Highland Superstores, Inc.), 154 F.3d 573 (6th Cir. 1998)