In In re Roberson, an opinion issued by the Bankruptcy Appellate Panel for the Sixth Circuit Court of Appeals, the debtors rented a residence from GCB. They defaulted in payment of rent. GCB sent a notice to quit and the Robersons filed bankruptcy. They indicated that they did not intend to reaffirm the lease and the trustee took no action to reaffirm the lease. They were granted a discharge. GCB took action to collect post-petition rent from the Robersons, who filed a motion to hold GCB in contempt for violation of the discharge injunction. The Robersons were granted sanctions. When their attorney inquired why the sanctions were not paid, GCB claimed a setoff against the sanctions for rent that had accrued post-petition. The Robersons then filed a motion to show cause against GCB. Although the bankruptcy court originally denied the motion, on reconsideration the court held that GCB was not entitled to set off rent that accrued under the lease against the sanctions.
Under 11 USC 365(g)(1), rejection of an unexpired lease of residential property constitutes a breach of the lease deemed to have occurred immediately prior to the filing of the bankruptcy. Rejection in bankruptcy does not terminate a lease, it is simply a breach of the lease. The other party has the option to continue to perform, or refuse to perform further. While GCB could have simply evicted the Robersons because of the breach (refused to perform further), GCB’s remedies for the breach of the lease did not include any claim of damages, because the breach occurred pre-petition and the damages were discharged in the bankruptcy. GCB was not entitled to any setoff.
This case should be a cautionary tale to landlords: be sure you know the effect of a bankruptcy before attempting to pursue your tenant for post-filing claims.