Rejection Damages Claim
A Rejection Damages Claim is a bankruptcy claim for damages resulting from rejection of an executory contract or unexpired lease, with Bankruptcy Code Sections 365(g) and 502(g) generally treating an unassumed contract's rejection as a prepetition breach for claim purposes.
Rejection is treated as breach, not disappearance
Section 365(g) generally characterizes rejection as a breach.
The estate stops carrying the contract forward, while the counterparty receives the bankruptcy claim treatment available for damages caused by that breach.
Section 502(g) generally makes the claim prepetition
For an unassumed contract, the resulting rejection claim is generally determined and allowed or disallowed as though it arose before the petition.
That usually places the counterparty within the prepetition creditor structure rather than granting automatic administrative priority for all future contract damages.
Allowed claim and contractual damages can differ
Nonbankruptcy contract law can determine the underlying damages, while bankruptcy law can impose separate allowance rules or caps.
Real-property lease claims are a prominent example because Section 502(b)(6) limits specified termination damages.
Recovery can be much lower than the allowed claim
Even after the claim amount is determined, the creditor receives the distribution assigned to its bankruptcy class.
A $10 million allowed unsecured rejection claim with a 20% class recovery produces only about $2 million of estimated plan value.
Rejection can convert a large contractual obligation into a smaller economic recovery
Assume a service contract would have required the debtor to pay $20 million over the remaining term. Rejection gives the counterparty a $20 million contract-damages theory before mitigation and bankruptcy-specific limitations.
If the allowed unsecured claim is ultimately $14 million and the plan pays unsecured creditors 25%, estimated recovery is only $3.5 million.
The debtor has eliminated the obligation to continue paying $20 million in future performance, while the counterparty receives a fractional bankruptcy recovery.
That is the economic power of rejection—and the reason the distinction between assumption cure cost and rejection damages recovery matters.
For leases, Section 502(b)(6) can further separate the remaining contractual rent from the allowed bankruptcy claim.
Common mistakes
Treating rejection as cancellation with no damages The counterparty can retain a claim.
Assuming future contract payments equal the allowed claim Bankruptcy caps and nonbankruptcy mitigation rules can matter.
Confusing rejection damages with cure amounts Cure is associated with assumption; rejection creates a different claim path.
Example
A debtor rejects a long-term office lease with $6 million of remaining contractual rent. The landlord can assert a rejection-damages claim, but the allowed amount is not automatically $6 million because Section 502(b)(6) can cap real-property lease termination damages under its formula.
Example
A debtor rejects a long-term office lease with $6 million of remaining contractual rent. The landlord can assert a rejection-damages claim, but the allowed amount is not automatically $6 million because Section 502(b)(6) can cap real-property lease termination damages under its formula.
Professional note
Rejection damages and cure claims belong on opposite sides of the assumption decision. Assumption can require cure and future performance; rejection can replace future performance with a bankruptcy claim whose allowed amount and recovery may be far lower.
Related terms
- Recovery Rate
Recovery Rate is the value a creditor receives or is expected to receive after a default, restructuring or bankruptcy, expressed as a percentage of the creditor's allowed or affected claim.
- Liquidation Value
Liquidation Value is the estimated net value available for distribution to creditors and other stakeholders if a business's assets are sold or otherwise realized in liquidation rather than preserved in an operating reorganization.
- Executory Contract
An Executory Contract in bankruptcy is a contract subject to treatment under Bankruptcy Code Section 365 that the trustee or debtor in possession may generally assume or reject, subject to statutory conditions, exceptions and court approval.
- Assumption and Assignment
Assumption and Assignment is the Bankruptcy Code Section 365 process through which a debtor first assumes an executory contract or unexpired lease and then transfers it to an assignee, subject to statutory requirements including cure obligations where applicable and adequate assurance of future performance.
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