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IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
)
In re:
)
Chapter 11
)
VYAIRE MEDICAL, INC.,1
)
Case No. 24-11217 (BLS)
)
Liquidating Debtor.
)
)
)
Hearing Date: TBD
)
Obj. Deadline: May 27, 2025
PLAN ADMINISTRATOR’S OMNIBUS OBJECTION TO (I) PROOF OF CLAIM
NO. 132 FILED BY QUAD DBC HOLDINGS LLC AND (II) QUAD DBC HOLDINGS
LLC MOTION FOR ALLOWANCE OF ADMINISTRATIVE EXPENSE CLAIM
David M. Barse, solely in his capacity as the Plan Administrator of Vyaire Medical, Inc.,
et al. (the “Plan Administrator”), appointed pursuant to the Second Amended Joint Chapter 11
Plan of Vyaire Medical, Inc. and Its Debtor Affiliates [Docket No. 719] (the “Plan”), which was
confirmed by the Order of the United States Bankruptcy Court for the District of Delaware (the
“Court”) on November 14, 2024 [Docket No. 745] (the “Confirmation Order”),2 hereby files this
omnibus objection (the “Objection”) to (i) Proof of Claim No. 132 (the “General Unsecured
Claim”) filed by Quad DBC Holdings LLC (“Landlord”) in the amount of $24,439,923.00 and (ii)
Landlord’s Motion For Allowance of Administrative Expense (the “Motion”) seeking allowance
of an administrative claim in the amount of $2,685,021.30 (the “Administrative Claim”). In
support of the Objection, the Plan Administrator respectfully represents as follows:
1
This chapter 11 case is now being administered by the Plan Administrator pursuant to the terms of the Findings
of Fact, Conclusions of Law, and Order Approving the Debtors’ Disclosure Statement for, and Confirming the
Second Amended Joint Chapter 11 Plan of Vyaire Medical, Inc. and Its Debtor Affiliates Pursuant to Chapter 11
of the Bankruptcy Code [Docket No. 745] (the “Confirmation Order”). The Plan Administrator’s mailing address
is Vyaire Medical, Inc., Attn: David M. Barse, Plan Administrator, c/o Cole Schotz P.C., 500 Delaware Avenue,
Suite 1410, Wilmington, DE 19801
2
Capitalized terms used but not otherwise defined herein shall have the meanings ascribed to such terms in the
Confirmation Order or Plan, as applicable.
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PRELIMINARY STATEMENT3
1.
Landlord is not entitled to a General Unsecured Claim or an Administrative Claim
against the Debtors’ Estates. To the contrary, it is the Plan Administrator that has material and
significant claims against the Landlord for, among other things, Landlord’s breach of the Lease,
fraudulent transfer, unjust enrichment, and/or other remedies due to Landlord’s improper draw on
a $4 million Letter of Credit in November 2023. The Plan Administrator intends to pursue claims
against the Landlord and other third parties for the windfall that it received at the Debtors’ expense.
2.
In the meantime, Landlord should not receive an Allowed General Unsecured
Claim or Administrative Claim in any amount. Initially, the General Unsecured Claim should be
disallowed in its entirety under section 502(d) of the Bankruptcy Code as the Landlord is in
possession of property which is recoverable under section 550 of the Bankruptcy Code and/or the
transferee of a transfer voidable under section 544 or 548 of the Bankruptcy Code.
3.
Even if the General Unsecured Claim can be allowed, at best, it may be a claim for
unpaid rent totaling $713,051, which amount is subject to defenses and material offsets. Landlord
is not entitled to:
“twelve-month” rejection damages because, inter alia, the asserted amount was
premature, Landlord did not suffer any damages, and Landlord failed to mitigate its
damages under applicable law.
any amounts for unsupported “construction,” “improvements, letter of credit, and free
rent,” “building obligations,” or “restoration” costs because (i) some or all of the
Premises were relet to ZOLL Medical Corporation the buyer of the Debtors’ ventilation
business who would use the Premises in the same manner as the Debtors and (ii) the
Proof of Claim provides no support or details for the amount asserted.
3
Capitalized terms used in this Preliminary Statement shall have the meanings ascribed to such terms elsewhere in
this Objection.
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4.
In addition, the Court should disallow any balance for the General Unsecured Claim
and the asserted Administrative Claim of $2,685,021.30. The Plan Administrator has material
claims against Landlord, including rights of recoupment and setoff that eliminate Landlord’s
entitlement to either the remaining General Unsecured Claim or the Administrative Claim.
Moreover, even if Landlord is entitled to a General Unsecured Claim or an Administrative Claim,
it should be compelled to apply the $4 million Letter of Credit that it improperly drew and applied
under the Court’s equitable marshalling principles to any unpaid rent. In any event, Landlord’s
Administrative Claim and General Unsecured Claim are unsupported and significantly overstated,
and the Motion should be denied until Landlord can provide the Plan Administrator and the Court
with an accurate accounting.
5.
To make matters worse, Landlord also seeks payment of more than $100,000 in
unsupported attorneys’ fees. Landlord is not entitled to payment of attorneys’ fees in any amount
under the terms of the Lease and applicable law.
6.
For these reasons, and the reasons discussed below, the Court should disallow the
General Unsecured Claim and the Motion for allowance of an Administrative Claim.
BACKGROUND
I.
General Background
7.
On June 9, 2024, Vyaire Medical, Inc. (“Vyaire”) and its affiliated debtors
(collectively, the “Debtors”) each commenced a voluntary case under title 11 of the United States
Code, 11 U.S.C. §§ 101-1532 (the “Bankruptcy Code”) with the Court.
8.
The Debtors operated their business and managed their properties as debtors in
possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code.
9.
On November 14, 2024, the Court entered the Confirmation Order.
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10.
On November 27, 2024 (the “Effective Date”), the Plan became effective in
accordance with its terms [Docket No. 810].
11.
On the Effective Date, David M. Barse, in his capacity as Plan Administrator,
became the sole representative of the Debtors’ estates for the purpose of, inter alia, reconciling
claims filed against the Debtors’ estates and facilitating distributions in accordance with the Plan.
See Plan, Art. II.A., IV.E., VII.
12.
On January 25, 2025, the Court entered a Final Decree Closing Certain Cases
[Docket No. 974], inter alia, closing all the Debtors’ cases other than the above-captioned case
and authorizing that relief in connection with any of the Debtors be filed in the above-captioned
case.
13.
The deadline to object to all Claims, other than administrative claims, is May 27,
2025. See Plan, Art. VII.E.
14.
On February 11, 2025, the Court entered an Order Approving the Plan
Administrator’s First Motion to Extend the Administrative Claims Objection Deadline [Docket
No. 987], pursuant to which the (i) Administrative Claims Objection Bar Date was extended to
May 27, 2025, and (ii) deadline to respond to any motions or requests for payment of an
administrative claim was extended May 27, 2025.
II.
The Lease and Landlord’s Improper Draw on the Letter of Credit
15.
On October 3, 2017, the Landlord and Vyaire entered into that certain lease (the
“Lease”) relating to (a) Suite Nos. 100, 200 and 300 of 510 Technology Drive, Irvine, California
92618 and (b) Suite Nos. 100, 200, 300 and 400 of 520 Technology Drive, Irvine, California 92618
(together, the “Premises”). A copy of the Lease is attached to the Motion as Exhibit A. The Lease
was rejected effective as of October 10, 2024 [Docket No. 676].
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16.
The Premises comprised of two buildings, 510 Technology Drive and 520
Technology Drive. Vyaire only ever occupied a single floor at 510 Technology Drive. Prior to the
Petition Date, Vyaire had sought to negotiate new terms with the Landlord to reduce its occupancy
to 510 Technology Drive, but the Landlord refused. Minimum monthly rent was bifurcated
between the two addresses as follows, $271,011 for 510 Technology Drive and $361,299 for 520
Technology Drive.
17.
Section 4.3 of the Lease, titled “Letter of Credit,” provides as follows:
Tenant shall deliver to Landlord, concurrently with Tenant’s execution of this
Lease, a letter of credit in the amount stated in Item 9 of the Basic Lease Provisions,
which letter of credit shall be in form and with the substance of Exhibit I attached
hereto. The letter of credit shall be issued by a financial institution acceptable to
Landlord with a branch in Orange County, California, at which draws on the letter
of credit will be accepted. The letter of credit shall provide for automatic yearly
renewals throughout the Term of this Lease and shall have an outside expiration
date (if any) that is not earlier than 30 days after the expiration of the Lease Term.
In the event the letter of credit is not continuously renewed through the period set
forth above, or upon any breach under this Lease by Tenant, including
specifically Tenant’s failure to pay Rent or to abide by its obligations under
Sections 7.1 and 15.2 below, Landlord shall be entitled to draw upon said letter
of credit by the issuance of Landlord’s sole written demand to the issuing
financial institution. Any such draw shall be without waiver of any rights
Landlord may have under this Lease or at law or in equity as a result of any Default
hereunder by Tenant.
Lease § 4.3 (emphasis added).
18.
Notably, section 4.3 of the Lease provides that the posted letter of credit could be
drawn against, for among other things, “any breach under this Lease by Tenant, including
specifically Tenant’s failure to pay Rent.” Id. Nevertheless, the Plan Administrator anticipates
that the Landlord will take the position that the posted letter of credit could not be used to offset
any rent, common area maintenance charges or operating expenses, and was exclusively posted to
support construction costs regarding the Premises. Nowhere in this section 4.3 (or elsewhere in
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the Lease) does it indicate that the letter of credit was to be used exclusively for the purpose of
funding construction costs.
19.
In connection with the First Amendment (defined below), on June 6, 2019, Tenant
delivered to Landlord an irrevocable letter of credit with Bank of America in the amount of
$4,000,000 (as amended on August 10, 2023, the “Letter of Credit”).4
20.
Under section 14.1(d) of the Lease, Landlord may call a “Default” under the Lease,
but only upon thirty (30) days’ written notice to Tenant. Section 14.1(d) provides as follows:
14.1. Tenant’s Defaults. In addition to any other event of default set forth in this
Lease, the occurrence of any one or more of the following shall constitute a
“Default” by Tenant:
(d)
Except where a specific time period is otherwise set forth for
Tenant’s performance in this Lease (in which event the failure to perform by Tenant
within such time period shall be a Default), the failure or inability by Tenant to
observe or perform any of the covenants or provisions of this Lease to be
observed or performed by Tenant, other than as specified in any other subsection
of this Section 14.1, where the failure continues for a period of 30 days after
written notice from Landlord to Tenant. However, if the nature of the failure is
such that more than 30 days are reasonably required for its cure, then Tenant shall
not be deemed to be in Default if Tenant commences the cure within 30 days, and
thereafter diligently pursues the cure to completion.
Lease § 14.1 (emphasis added).
21.
Upon information and belief, on or about November 10, 2023 – without notice to
Vyaire as required by section 14.1(d) of the Lease and an opportunity to cure – Landlord drew the
full $4,000,000 Letter of Credit. At the time of the draw, the Lease had neither expired nor
terminated, and Vyaire was current on all obligations under the terms of the Lease. Landlord never
provided Vyaire with a reason for the draw. As a result of the improper drawdown, on or about
4
Tenant provided Landlord with an initial letter of credit following execution of the Lease in 2017 that was
subsequently amended in connection with the First Amendment.
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November 15, 2023, Vyaire was required to and did reimburse Bank of America for the full
$4,000,000 drawn by Landlord, in accordance with the terms of the Letter of Credit.
22.
The Landlord received the benefit of Vyaire’s payment to Bank of America having
retained the Letter of Credit, but did not provide Vyaire with any value in exchange for such
benefit.
III.
Landlord Obtains a $4 Million Windfall from Letter of Credit Draw
23.
On July 31, 2018, Landlord and Vyaire entered into that certain First Amendment
to Lease (the “First Amendment”) that, among other things, modified the term of the Lease and
contained a new provision concerning Tenant Improvements (as defined in the Lease). A copy of
the First Amendment is attached hereto as Exhibit A. That provision, titled, “Phased Construction;
Letter of Credit,” provides as follows:
Tenant intends to construct the Tenant Improvements for a portion of the second
floor and all of third and fourth floors of the 520 Technology Building (the “520
Technology Phased Improvements”) in a later phase after completing construction
of the initial Tenant Improvements for the remainder of the Premises. Tenant has
requested, and Landlord agrees, that the entire Landlord’s Contribution shall
be available for disbursement to Tenant for the initial Tenant Improvement
Work that excludes the 520 Technology Phased Improvements; provided,
however, that as a condition to Landlord’s approval of the design of the initial
Tenant Improvements that excludes the 520 Technology Phased Improvements,
Tenant agrees that, notwithstanding anything to the contrary in Section 4.3 of the
Lease, the amount of the Letter of Credit shall not be eligible for reduction (either
automatically or by satisfaction of the LC Reduction Conditions) unless and until
the 520 Technology Phased Improvements have been substantially completed and
all governmental approvals required for occupancy in connection therewith have
been received. The design, construction, and (if applicable) funding of the 520
Technology Phased Improvements shall be subject to all of the terms and conditions
of Sections II and III of the Work Letter, except that (i) the requirement to approve
the Preliminary Plan and Preliminary Cost Estimate for the 520 Technology Phased
Improvements by the Plan Approval Date shall not apply, (ii) the Commencement
Date shall not be accelerated by Tenant Delay as set forth in Section II.F (it being
understood that the Commencement Date shall be fixed on November 12, 2018 for
the entire Premises), and (iii) if any portion of the Moving Allowance is utilized in
connection with the 520 Technology Phased Improvements, the reimbursement
submittal deadline shall be 6 months after the substantial completion of the 520
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Technology Phased Improvements. Tenant shall fully approve the design and cost
of the 520 Technology Phased Improvements and authorize Landlord to
substantially complete the 520 Technology Phased Improvements prior to the
expiration or earlier termination of the Lease, and the failure to do so shall
constitute a Default that will permit Landlord to draw upon the Letter of Credit to
fund the cost of performing 520 Technology Phased Improvements.
First Amendment § III.C (emphasis added).
24.
“Landlord’s Contribution” is defined in the Lease as up to $14,236,222.00 which
is the “maximum amount Landlord will pay toward Tenant Improvements, and not by way of
limitation, any partitions, modular office stations, fixtures, cabling, furniture and equipment
requested by Tenant are not in event subject to payment as part of Landlord’s Contribution except
as provided herein below.” Lease, Ex. X, § III.B.
25.
Notwithstanding Landlord’s commitment to fund more than $14 million for Tenant
Improvements, upon information and belief, only $8 million was funded.
26.
Moreover, prior to the Petition Date, on March 28, 2024, Vyaire entered into a
sublease agreement with Inari Medical Inc. (“Inari”) pursuant to which it subleased the third floor
of the 510 Technology Drive. Upon information and belief, Inari has entered into a direct lease
with the Landlord expanding its occupancy to an additional floor and now occupies two of the
three floors of 510 Technology Drive.
27.
In addition, following the filing of the chapter 11 cases, Vyaire brought to Landlord
a new tenant in Zoll Medical Corporation (“ZOLL”), which purchased the Debtors’ ventilation
business and entered into a new lease agreement with the Landlord to occupy the remaining floor
at 510 Technology Drive previously occupied by Vyaire. Thus, Landlord is not required to “refit”
the building already constructed for a new tenant and Vyaire is not aware of any need by the
Landlord to draw on the Letter of Credit to fund its construction costs. Indeed, as Landlord had
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not exceeded, and was in fact, well below the required Landlord Contribution, Landlord received
a windfall of $4 million when it drew on the Letter of Credit.
28.
Further, in 2023, Vyaire brought to Landlord two potential sub-tenants for 520
Technology Drive which would have resulted in a rent reduction to Vyaire and permanent tenancy
to the Landlord for the unoccupied building. Upon information and belief, the Landlord refused
the subtenants without a reasonable basis and placed both subtenants into another building owned
by Landlord to the detriment of Vyaire and improperly inflating the Landlord’s damages. Prior to
the Petition Date in 2024, the Debtors engaged Jones Lang LaSalle (“JLL”) to assist with
subleasing the Premises. Upon information and belief JLL procured two additional prospective
tenants, but the Landlord also refused these subtenants.
IV.
The Proof of Claim
29.
On August 1, 2024, Landlord filed the General Unsecured Claim. A copy of the
General Unsecured Claim is attached hereto as Exhibit B. By the General Unsecured Claim,
Landlord asserts an unsecured claim of $24,439,923.00, broken down as follows:
510 Technology Drive
Unpaid Prepetition Rent
$295,084.00
Unamortized Costs Related to
Tenant Improvements, Letters of
Credit, and Free Rent
$4,174,499.00
Restoration Costs
$3,809,142.00
Twelve Month Damages
$3,910,329.00
TOTAL
$12,189,054.00
520 Technology Drive
Unpaid Prepetition Rent
$417,967.00
Unamortized Costs Related to
Tenant Improvements, Letters of
Credit, and Free Rent
$1,904,724.00
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Restoration Costs
$535,663.00
Twelve Month Damages
$5,213,081.00
TOTAL
$16,205,869.00
30.
In the aggregate, Landlord asserts a General Unsecured Claim of $28,394,923.00,
plus an additional unsupported $45,000 related to legal expenses. Landlord reduces the asserted
General Unsecured Claim by the $4 million Letter of Credit that Landlord asserts is currently being
held by an escrow agent, reducing the General Unsecured Claim to $24,439,923.00.
31.
The General Unsecured Claim did not include any support whatsoever for the
amounts asserted therein. Other than unpaid prepetition rent, the entire General Unsecured Claim
appears to include a prospective assertion of rejection damages before the Lease was rejected and
any such damages were known or could be ascertained. Without documentation, it is unclear
whether all the amounts asserted are subject to the statutory cap codified in section 502(b)(6) of
the Bankruptcy Code as damages resulting from termination of the Lease or what the Letter of
Credit was actually applied to.
32.
The Letter of Credit certainly could not have been applied to a rejection damages
claim, if any, until at least October 10, 2024. Therefore, any such application was improper.
Indeed, the Letter of Credit, could only have been applied to properly accounted for claims, which
at the time, at best could only be for unpaid rent.
33.
In addition, at the time the Lease was rejected on October 10, 2024, the Landlord
had already been in negotiations with ZOLL or its affiliate for a new lease which the Debtors
understand the parties shortly thereafter entered into on or about November 1, 2024. Despite this
fact, the Landlord has never amended the General Unsecured Claim to account for the new lease.
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V.
Landlord’s Motion for Allowance of Administrative Claim
34.
On December 27, 2024, Landlord filed the Motion seeking allowance and payment
of an administrative claim.
35.
By the Motion, Landlord seeks allowance of: (a) charges attributable to 510
Technology Drive of $936,905.65, Mot. ¶ 17; (b) charges attributable to 520 Technology Drive of
$1,681,355.64, Mot. ¶ 18; and (c) legal expenses of $66,760.01, Mot. ¶ 19. In sum, Landlord seeks
allowance of an administrative claim of $2,685,021.30. Mot. ¶ 20. Attached as Exhibit B to the
Motion is a breakdown of all unpaid charges asserted by Landlord.
36.
The Administrative Claim includes “Minimum Rent” for July and August 2024
totaling approximately $722,598.00, which Vyaire already paid to the Landlord reducing any
potential claim to at least $1,962,423.30 before considering other defenses and offsets.
OBJECTION
37.
The Plan Administrator objects to the General Unsecured Claim and the Motion for
allowance and payment of the Administrative Claim for the reasons discussed below. Further, in
both cases, Landlord is not entitled to any attorneys’ fees under the terms of the rejected Lease and
applicable law.
I.
THE GENERAL UNSECURED CLAIM MAY BE DISALLOWED
38.
The Plan Administrator believes he has viable claims against the Landlord under
sections 544 and 548 of the Bankruptcy Code based on theories of fraudulent conveyance related
to Vyaire’s payment to Bank of America in connection with the Landlord’s improper drawdown
on the Letter of Credit. The Plan Administrator’s claims are recoverable under section 550 of the
Bankruptcy Code.
39.
Section 502(d) of the Bankruptcy Code provides in the relevant part that “the court
shall disallow any claim of any entity from which property is recoverable under section…550 of
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this title or that is a transferee of a transfer avoidable under section…544 [or] 548…of this title,
unless such entity or transferee has paid the amount, or turned over the property, for which such
entity or transferee is liable under section…550 [ ] of this title. See 11 U.S.C. § 502(d).
40.
Based on the foregoing, the General Unsecured Claim may be disallowed pursuant
to section 502(d) of the Bankruptcy Code and therefore no application of the Letter of Credit to
such claim can be had until the Plan Administrator’s claims are adjudicated.
II.
THE GENERAL UNSECURED CLAIM SHOULD BE SIGNIFICANTLY
REDUCED
41.
When asserting a claim against a bankrupt estate, a claimant must allege facts that,
if true, would support a finding that the debtor is legally liable to the claimant. In re Allegheny
Int’l, Inc., 954 F.2d 167, 173 (3d Cir. 1992); see also In re Int’l Match Corp., 69 F.2d 73, 76 (2d
Cir. 1934) (finding that a proof of claim should at least allege facts from which legal liability can
be seen to exist). Where the claimant alleges sufficient facts to support its claim, its claim is
afforded prima facie validity. Allegheny, 954 F.2d at 173. A party wishing to dispute such a claim
must produce evidence in sufficient force to negate the claim’s prima facie validity. Id. In practice,
the objecting party must produce evidence that would refute at least one of the allegations essential
to the claim’s legal sufficiency. Id. at 173–74. Once the objecting party produces such evidence,
the burden shifts back to the claimant to prove the validity of his or her claim by a preponderance
of the evidence. Id. at 174. Ultimately, the burden of persuasion is on the claimant. Id.; In re
Tribune Media Co., 616 B.R. 475, 486 (Bankr. D. Del. 2020) (discussing and applying the burden-
shifting approach from Allegheny).
A.
The Portion of the General Unsecured Claim For “Twelve-Month Damages”
Should be Disallowed
42.
The portion of the General Unsecured Claim for “twelve-month damages” should
be disallowed in full because the Landlord has not established that it was damaged by the rejection
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of the Lease and failed to mitigate its damages under applicable California law. Presumably,
Landlord calculated its rejection damages for 510 Technology Drive at $3,910,329.00 and 520
Technology Drive at $5,213,081.00 by applying the one-year “cap” on rejection damages
contained in section 502(b)(6) of the Bankruptcy Code. 11 U.S.C. § 502(b)(6). For the reasons
discussed below, however, both amounts should be disallowed in full.
43.
First, the claim had not even accrued at the time the General Unsecured Claim was
filed, and thus there was no basis to even assert it. Vyaire had not yet rejected the Lease. Thus,
the rejection damages claim was speculative at best at the time filed and does not fairly and
accurately reflect Landlord’s rejection damages.
44.
Second, even if the rejection damages portion of the General Unsecured Claim were
accurate, Landlord did not suffer any damages caused by rejection of the lease because ZOLL,
which purchased the Debtors’ ventilation business in the chapter 11 cases, entered into a new lease
agreement with the Landlord to occupy the portion of the Premises previously occupied by Vyaire
and Inari is believed to occupy the remaining two floors at 510 Technology Drive. With tenants
in place following the rejection date of October 10, 2024, the Landlord has not provided any
evidence as to what, if any, rejection damages it suffered that would otherwise be capped by section
502(b)(6) of the Bankruptcy Code.
45.
Third, prior to the Petition Date, Vyaire sought to sublease the unoccupied portions
of the Premises to numerous subtenants which could have resulted in permanent occupancy of
those parts of the Premises and substantial savings to the Debtors during the Lease pre-rejection
period. Instead, Landlord refused the subtenants without any reasonable basis and moved some of
them into other premises owned by the Landlord to the detriment of Vyaire.
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46.
Fourth, even if Landlord could claim an entitlement to rejection damages, Landlord
failed to undertake reasonable efforts to mitigate its damages as required by California law. Under
section 1951.2 of the California Civil Code, a lessor may recover damages only to the extent
unpaid rent exceeds “the amount of such rental loss that the lessee proves could have been
reasonably avoided.” Cal. Civ. Code § 1951.2(a)(2), (a)(3); Lu v. Grewal, 130 Cal. App. 4th 841,
849-850 (Cal. Ct. App. 2005). Under California law, Landlord’s duty to mitigate its damages will
“require that the property be relet at a rent that is more or less than the rent provided in the original
lease.” Id. “The test in each case is whether the lessor acted reasonably and in good faith in
reletting the property.” Id. Simply, Landlord “cannot be compensated for damages for which [it]
could have avoided by reasonable effort or expenditures.” Id.
47.
Here, Landlord was on notice that the Debtors intended to vacate the space it
occupied going back to at least the Petition Date when Vyaire indicated that it was intending to
pursue a sale of substantially all its assets. As a result, Landlord had more than four (4) months to
take reasonable steps to mitigate its damages under California law by, among other things,
renovating the Premises for future use, reletting the Premises to a third party, and/or obtaining
multiple estimates for construction work on the Premises that must be undertaken before it can be
re-occupied. In addition, the Landlord was well aware that Vyaire had no intentions to occupy
520 Technology Drive even prior to the Petition Date as Vyaire sought to amend the Lease to
reduce space and also brought to Landlord potential subtenants for that space.
48.
The Plan Administrator does not believe that the Landlord undertook reasonable
efforts to mitigate its damages. Rather, the Plan Administrator believes that the Landlord “dragged
its feet” by refusing to entertain other tenants (some of which were proposed by Vyaire prepetition)
in the hopes of obtaining a significant claim against the Debtors.
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49.
Because the Premises were relet to ZOLL and Inari, and the Landlord cannot be
compensated for damages that could have been avoided by reasonable effort,5 the General
Unsecured Claim should be reduced by $9,123,410.00 to $19,271.513.00.
B.
The Portion of the General Unsecured Claim For “Restoration Costs” Should
be Disallowed
50.
Pursuant to Bankruptcy Rule 3001(c)(1), “when a claim . . . is based on a writing,
a copy of the writing shall be filed with the proof of claim.” Bankruptcy Rule 3001(c)(1). In the
absence of a writing with sufficient documentation to support the amounts asserted in a validly
filed proof of claim, the proof of claim is not entitled to prima facie validity under Bankruptcy
Rule 3001(f) and the burden of proof on those items remains on the claimant. See Acthar Ins. v.
Mallinckrodt plc (In re Mallinckrodt plc), 2002 U.S. Dist. LEXIS 147924, *10-11 (D. Del. Aug.
18, 2022)6; In re O’Brien, 440 B.R. 654, 667 (Bankr. E.D. Pa. 2010) (finding that lack of a prima
facie evidentiary effect through Bankruptcy Rule 3001(f), and the failure of claimant to come
forward with additional evidence to support the claim, warranted disallowance).
51.
The Landlord has provided no support or documentation as to the “Restoration
Costs” of approximately $4,344,805.00 identified in the General Unsecured Claim. Given the
lack of documentation, the burden of proof on those costs remains on the Landlord. See In re
Mallinckrodt plc, 2002 U.S. Dist. LEXIS 147924, at *10-11. Without such support, neither the
Court nor the Plan Administrator can determine whether the Landlord actually incurred such costs
or whether it was entitled to recover on account of such costs under the Lease.
5
To this end, the Plan Administrator intends to take discovery from the Landlord to obtain information concerning
what, if any, efforts it took to relet the Premises and related matters.
6
In re Mallinckrodt Plc, 2022 WL 3545583, at *2 (D. Del. Aug. 18, 2022).
Case 24-11217-BLS Doc 1056 Filed 04/07/25 Page 15 of 30
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52.
In addition, as set forth above, the Debtors secured ZOLL as a new tenant for the
Premises. ZOLL purchased the Debtors’ ventilation business and effectively stepped into the
Debtors’ operational shoes at the Premises. Therefore, it is unclear how if at all, any “restoration”
or refitting costs were required by the Landlord.
53.
Based on the above, the General Unsecured Claim should be further reduced by
an additional $4,344,805.00, further reducing the claim to approximately, $14,926,708.00.
C.
Landlord Has Failed to Provide Sufficient Documentation to Support the
Other Damages and Construction Costs Identified in the Claim
54.
Similar, to the rejection damages and restoration costs asserted, the Landlord has
provided no documentation, let alone, sufficient documentation to support the costs identified as
“unamortized costs related to tenant improvements, letters of credit, and free rent” or “building
obligations” in the General Unsecured Claim. Given the lack of documentation, the burden of
proof on those costs again, remains on the Landlord. See In re Mallinckrodt plc, 2002 U.S. Dist.
LEXIS 147924, at *10-11. Landlord’s failure to provide documentation also make it impossible
for the Plan Administrator or the Court to determine whether there are prepetition damages
payable under the terms of the Lease. Absent sufficient documentation to support the costs, the
Claim must be reduced accordingly.
55.
Notably, the Landlord includes in the General Unsecured Claim just over $6 million
in costs related to tenant improvements and free rent. This amount is strikingly similar to the same
$6 million remaining obligation of the Landlord under the Lease for the Landlord Contribution
towards the construction of two buildings. The Landlord was required to fund approximately $14.2
million, but only funded approximately $8 million leaving a balance on the Landlord Contribution
of approximately $6.2 million. The Landlord now seeks to recast that obligation onto Vyaire.
Case 24-11217-BLS Doc 1056 Filed 04/07/25 Page 16 of 30
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56.
In addition, the Landlord asserts “building obligations” owed by Vyaire in the
General Unsecured Claim totaling approximately $8,134,434.00. The Landlord has provided no
support for these obligations or any basis as to why Vyaire owes such amount.
D.
All of the Damages Asserted in the General Unsecured Claim May be Subject
to the Statutory Cap Under Section 502(b)(6) of the Bankruptcy Code
57.
As set forth above, the Landlord has failed to meet its burden for allowance of a
claim as the Proof of Claims lacks any documentation or evidentiary support. Therefore, neither
the Court nor the Plan Administrator can determine whether the damages asserted are subject to
the statutory cap set forth under section 502(b)(6) as “damages resulting from the termination of
a lease.” This is notable, because if these damages are considered part of the Landlord’s section
502(b)(6) claim, the General Unsecured Claim would be significantly reduced and there would
not have been any claim to apply the Letter of Credit to until at the earliest October 10, 2024,
when the Lease was rejected. Thus, the only application of the Letter of Credit would have been
for past due rents and the Landlord cannot now retroactively apply the Letter of Credit to different
potential damages.
58.
In summary, after removing the amounts which should be disallowed for reasons
set forth above, the maximum amount of the General Unsecured Claim should be limited to the
amount of asserted unpaid minimum rent totaling $713,051.00 (the “Remaining GUC”), and an
inappropriate request for attorneys’ fees. Although the Remaining GUC and attorneys’ fees should
be disallowed for reasons discussed more fully below, even if valid, the Letter of Credit is more
than sufficient to satisfy the Remaining GUC and asserted Administrative Claim. Any balance
should be left to Vyaire.
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III.
THE COURT SHOULD DENY THE MOTION FOR AN ADMINISTRATIVE
CLAIM AND DISALLOW THE REMAINING GUC
A.
The Plan Administrator’s Rights of Recoupment and Setoff Eliminate
Landlord’s Entitlement to any Claims
59.
Landlord is not entitled to the Remaining GUC or an Administrative Claim in any
amount because the Plan Administrator has material claims against the Landlord that will reduce
the amount asserted by Landlord to zero. Section 558 of the Bankruptcy Code expressly preserves
the Plan Administrator’s right to exercise the common law rights of setoff and/or recoupment that
justify reduction of the Remaining GUC and Landlord’s asserted Administrative Claim in full,
meaning it is entitled to nothing.
60.
“The doctrines of ‘setoff’ and ‘recoupment’ had their origins in the era of common
law pleading, under which the scope of a ‘case’ was far less inclusive than it is today, and under
which the claim of joinder was far narrower.” Lee v. Schweiker, 739 F.2d 870, 875 (3d Cir. 1984).
These doctrines served the important function of permitting countervailing claims to be asserted
together, rather than having to proceed on reciprocal claims in separate trials, when in effect, the
damages would net. Id.
1.
Recoupment
61.
Section 558 of the Bankruptcy Code preserves the Plan Administrator’s common
law right to assert a defense of recoupment to any debt asserted against them. In re Papercraft
Corp., 126 B.R. 926, 931 (Bankr. W.D. Pa. 1991). Indeed, the right to assert recoupment is a
longstanding one in the bankruptcy context. See In re Monongahela Rye Liquors, 141 F.2d 864
(3d Cir. 1944). The doctrine of recoupment applies where the parties are debtors vis-à-vis each
other as part of the same transaction (i.e., the reciprocal obligations arise from the same
transaction). In re Univ. Med. Center, 973 F.2d 1065, 1079 (3d Cir. 1992) (“Recoupment is the
Case 24-11217-BLS Doc 1056 Filed 04/07/25 Page 18 of 30
19
setting up of a demand arising from the same transaction as the plaintiff’s claim or cause of action,
strictly for the purpose of abatement or reduction of such claim.” (internal quotations omitted)).
62.
In effect, recoupment is a defense to a creditor’s claim under a transaction, rather
than a mutual obligation. Lee v. Schweiker, 739 F.2d at 875 (citing In re Monongahela Rye
Liquors, 141 F.2d at 869). To be eligible for recoupment, the relevant claims need not have yet
crystalized. Instead, recoupment may be applied for advance payments based on estimates of what
would be owed, subject to subsequent correction. In re Univ. Med. Center, 973 F.2d at 1079
(quoting In re B&L Oil Co., 782 F.2d 155, 157 (10th Cir. 1986)).
63.
Additionally, the Plan Administrator is free to assert recoupment where prepetition
amounts are owed to the Debtors against any postpetition arrears. Section 558 contains no
restriction on applying the doctrine of recoupment to postpetition obligations, including rental
arrearages. In re Prince Sports, Inc., 2013 WL 6906717, at *2 (Bankr. D. Del. Dec. 11, 2013)
(allowing debtor, under theory of recoupment, to apply prepetition credit to reduce postpetition
administrative rent claim under section 365(d)(3)). “Because both setoff and recoupment are
equitable remedies, [the debtor’s] right to assert those remedies is not impaired by the Lease
provisions.” Id.; see also CDI Trust v. U.S. Electronics, Inc. (In re Commc’n Dynamics, Inc.), 382
B.R. 219, 226 (Bankr. D. Del. 2008) (“Setoff and recoupment are not dependent on the parties’
contract; rather, they are equitable remedies available independent of any contractual remedy.”
(citing In re Univ. Med. Center, 973 F.2d at 1080)). Recoupment’s “same transaction” test is loose
and does not constrain parties to a single event in time. See B&L Oil Co., 782 F.2d at 156.
Case 24-11217-BLS Doc 1056 Filed 04/07/25 Page 19 of 30
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64.
The standard is easily met here. The Plan Administrator believes it has viable
claims against the Landlord arising from the Landlord’s conduct under the Lease for, among other
things, breach of contract, fraudulent transfer, unjust enrichment, and/or other remedies.7
65.
More specifically the Landlord breached the Lease by drawing upon the Letter of
Credit (i) when Vyaire was current on its obligations and (ii) prior to providing Vyaire adequate
notice and opportunity to cure. The breach resulted in the premature funding of $4 million by
Vyaire to Bank of America, which issued the Letter of Credit.
66.
In addition, the Plan Administrator has claims against the Landlord under theories
of fraudulent conveyance based on Vyaire’s required reimbursement to Bank of America in the
amount of $4 million. The payment to Bank of America was a result of the improper draw down
on the Letter of Credit, which payment the Landlord benefitted from without providing Vyaire any
value in exchange.
67.
Last, as an alternative or in addition to the breach of contract claims, the Landlord
has been unjustly enriched by having received a significant and improper windfall from its $4
million draw on the Letter of Credit. The Landlord was required to complete certain tenant
improvements and fund approximately $14,236,222 towards such improvements. To the best of
Vyaire’s knowledge, only $8 million was ever funded. Thus, the Landlord avoided at least $6.2
million in construction obligations, and at the same time drew on a $4 million letter of credit to
support the construction of the Premises in favor of its bank. Moreover, as set forth above, none
of the Landlord’s claims, other than potentially rent, are supported or supportable. Thus, its
retention and application of the Letter of Credit are wholly improper.
7
The summary of claims set forth in this Objection is not meant to be an exhaustive list of potential claims or
relevant facts and the Plan Administrator reserves all rights to all claims against the Landlord as well as the right
to assert such claims by way of separate contested matter or adversary proceeding.
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21
68.
In summary, because the Debtors’ Lease obligations, including rent payments, are
contractually linked to the Plan Administrator’s affirmative claims, such amounts “aris[e] from the
same transaction” and qualify for recoupment. In re Univ. Med. Center, 973 F.2d at 1079.
Through recoupment, the Landlord’s Remaining GUC and asserted Administrative Claims will be
reduced in total by the amounts it owes the Plan Administrator. Such a result is lawful and
equitable insofar as any amounts owed to the Landlord would be returned to the Plan Administrator
in connection with the adjudication of the affirmative claims noted above.
2.
Setoff
69.
Similar to recoupment, the common law right to setoff allows the Plan
Administrator to reduce any debt the Debtors owe a party by the amount such party owes to the
Debtors. See In re Univ. Med. Center, 973 F.2d at 1079; see also Citizens Bank of Maryland v.
Strumpf, 516 U.S. 16, 18 (1995) (setoff avoids “the absurdity of making A pay B when B owes
A.”). Claims to be setoff, in effect, represent mutual obligations in bankruptcy. Lee v. Schweiker,
739 F.2d at 875.
70.
Mutuality of obligations exists between the Debtors and the Landlord. In this
Circuit, mutuality merely means there are debts “owing from a creditor directly to the debtor and,
in turn, owing from the debtor directly to that creditor.” In re Orexigen Therapeutics, Inc., 990
F.3d 748, 754 (3d Cir. 2021). Here, mutual debts exist as a result of the asserted rental arrears and
other claims on the one hand and the affirmative claims under the Lease on the part of the Plan
Administrator on the other. Because the mutual debts are by and among the Debtor parties to the
Lease and the Landlord, the parties then incurred the debts in the same capacities such that setoff
is available. Further, because the Plan Administrator retains all defenses available to it prepetition
Case 24-11217-BLS Doc 1056 Filed 04/07/25 Page 21 of 30
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pursuant to section 558, they are not precluded from meeting mutuality by their status as debtors
in possession. 11 U.S.C. § 558.
71.
Like recoupment, a debtor’s setoff rights emanate from state law and are
incorporated into chapter 11 via section 558 of the Bankruptcy Code. See 11 U.S.C. § 558 (“The
estate shall have the benefit of any defense available to the debtor as against any entity other than
the estate . . . .”). Unlike a creditor’s setoff rights, which are restricted by section 553, “there is no
such restrictive language in section 558 and, consequently, courts have concluded that a debtor
may set off pre-petition claims against post-petition obligations it owes.” In re Women First
Healthcare, Inc., 345 B.R. 131, 134 (Bankr. D. Del. 2006). This conclusion plainly applies to
section 365(d)(3) claims, and courts in this circuit have allowed debtors to use prepetition credits
to setoff against postpetition rent obligations. In re Prince Sports, Inc., 2013 WL 6906717, at *2
(Bankr. D. Del. Dec. 11, 2013) (“[I]t does not matter that [the debtor] seeks setoff of a post-petition
rent claim, so long as there are valid, mutual debts between the same two parties.”).
72.
Because the Plan Administrator may set off from any allowed Administrative Claim
or the Remaining GUC, amounts that can be recovered for affirmative claims against the Landlord,
the Plan Administrator’s right to setoff preempts Landlord’s entitlement to an Administrative
Claim or the Remaining GUC. Accordingly, any amounts that may be owed to Landlord on
account of the Remaining GUC or postpetition rent and other charges must be reduced by the
damages obtained by the Plan Administrator on account of the affirmative claims against Landlord.
To preserve the Plan Administrator’s setoff rights, Landlord should not be entitled to an allowed
Administrative Claim unless and until the Plan Administrator has an opportunity to adjudicate and
recovery on his claims for, among other things, breach of contract, fraudulent transfer, unjust
enrichment, and/or other remedies against Landlord.
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B.
Landlord Should be Compelled to Apply to the $4 Million it Drew on the
Letter of Credit to the Remaining GUC or Any Administrative Claim Under
Court’s Equitable Marshaling Principles
73.
The Court should also exercise its equitable powers and compel the Landlord to
apply the $4 million letter of credit that it drew upon in November 2023 to the Remaining GUC
or any allowed Administrative Claim.
74.
Section 105(a) of the Bankruptcy Code authorizes this Court to “issue any order,
process, or judgment that is necessary or appropriate to carry out the provisions of this title.” 11
U.S.C. § 105(a). Under this provision and this Court’s inherent powers, this Court has broad
authority to fashion appropriate relief based on the facts before it. See, e.g., In re Cont’l Airlines,
203 F.3d 203, 211 (3d Cir. 2000) (“Section 105(a) of the Bankruptcy Code supplements courts’
specifically enumerated bankruptcy powers by authorizing orders necessary or appropriate to carry
out provisions of the Bankruptcy Code.”). Invoking such power is particularly appropriate where,
as here, it will assist the Court’s administration of the estate. See, e.g., In re W.R. Grace & Co.,
386 B.R. 17, 31-32 (Bankr. D. Del. 2008).
75.
Courts across the country have long used their equitable and inherent powers
pursuant to section 105(a) to compel creditors with two paths to recovery to choose the one that
did not diminish the amount of the res available to other creditors. Section 105(a) gives a
bankruptcy court ample authority to channel creditor recovery in this way. In re A.H. Robins Co.,
Inc., 880 F.2d 694, 701-02 (4th Cir. 1989) (“We think the ancient but very much alive doctrine of
marshaling of assets is analogous here. A creditor has no right to choose which of two funds will
pay his claim. The bankruptcy court has the power to order a creditor who has two funds to satisfy
his debt to resort to the fund that will not defeat other creditors.”). Exercising equitable relief akin
to marshalling would prevent an undue double recovery to the Landlord at the expense of other
Case 24-11217-BLS Doc 1056 Filed 04/07/25 Page 23 of 30
24
holders of Administrative Claims without access to two funds. Accordingly, to the extent that
Landlord is entitled to any payment after first applying setoff or recoupment, as applicable, this
Court should not countenance the Landlord’s decision to deplete a shared fund when a dedicated
means of recovery is available to it.
76.
In addition, as discussed above, substantially all of the Landlord’s claims in the
General Unsecured Claim may be a result of termination of the Lease. Therefore, the only logical
application of the Letter of Credit which was prematurely drawn upon was an application for
unpaid rent as no other claims would have accrued by that time.
C.
Landlord’s Administrative Claim is Significantly Overstated
77.
In addition to being subject to setoff, recoupment, and equitable marshalling, the
Administrative Claim sought by the Landlord is significantly overstated. Set forth below is the
Plan Administrator’s summary of Landlord’s calculation of charges asserted by Landlord, broken
down by property:
78.
As to the “Minimum Rent” asserted, which makes up the largest portion of the
asserted Administrative Claim, Landlord fails to take into account that, according to the Plan
Administrator’s books and records, rent was paid for 520 Technology Drive for the months of July
and August in full. As a result, even if the Court entertains allowance of an Administrative Claim
Property 520
Months
CAM
Insurance
Minimum Rent
CAM Tax
CAM Rec
Late Fees
Others
Total
June
19,052.88
2,494.80
185,466.82
-
-
-
207,014.50
July
21,318.20
4,876.00
361,299.00
56,623.93
-
-
444,117.13
August
39,692.00
4,876.00
361,299.00
23,898.00
(21,107.98)
-
408,657.02
September
39,692.00
4,876.00
361,299.00
23,898.00
21,488.25
1,500.00
452,753.25
October (Prorated)
12,803.87
1,572.90
116,548.06
7,709.03
21,488.25
8,691.62
168,813.73
132,558.95
18,695.70
1,385,911.88
112,128.96
(21,107.98)
42,976.50
10,191.62
1,681,355.63
Property 510
Months
CAM
Insurance
Minimum Rent CAM Tax
CAM Rec
Late Fees
Others
Total
June
15,697.22
1,871.61
139,118.98
8,890.00
-
-
-
165,577.81
July
31,388.00
3,658.00
17,926.00
-
-
318.78
53,290.78
August
31,388.00
3,658.00
17,926.00
(36,434.18)
12,884.05
193,566.86
222,988.73
September
32,434.27
3,779.93
280,044.70
18,523.53
16,199.15
350,981.58
October
10,125.16
1,180.00
87,422.90
5,782.58
16,199.00
23,357.10
144,066.74
121,032.65
14,147.54
506,586.58
69,048.11
(36,434.18)
45,282.20
217,242.74
936,905.64
Case 24-11217-BLS Doc 1056 Filed 04/07/25 Page 24 of 30
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at this time, Landlord’s asserted Administrative Claim must be reduced by at least $722,598.00,
which amount represents “Minimum Rent” paid to Landlord for July and August 2024.
79.
In addition, the Landlord’s asserted Administrative Claim for the “stub” rent period
totaling $372,592.31 is also overstated. Unlike other postpetition rent obligations, claims for
postpetition rent during the “stub” period are not allowed administrative expenses under section
365(d) of the Bankruptcy Code. In re Sportsman's Warehouse, Inc., 436 B.R. 308, 310 (Bankr. D.
Del. 2009). Instead, a landlord is subject to the same heavy burden of proof to establish an
administrative claim under section 503(b) of the Bankruptcy Code. Id. (“it was inappropriate for
this Court to apply a per se rule in Goody's Family Clothing that the use and occupancy of the
premises confers a benefit to the estate. Rather, the Court must analyze the evidence submitted and
determine, on a case by case basis, the amount of the benefit to the estate”)
80.
Section 503(b)(1) of the Bankruptcy Code provides in the relevant part that:
(b) after notice and a hearing, there shall be allowed, administrative
expenses…including –
(1)(A) the actual, necessary costs and expenses of preserving the estate. …
11 U.S.C. § 503(b)(1).
81.
Section 503 of the Bankruptcy Code allows for the collection of administrative
expenses from a bankruptcy estate with first priority in distribution of the assets of a debtor. In re
Hechinger Inv. Co. of Delaware, 298 F.3d 219, 224 (3d Cir. 2002). Section 503(b)(1) is intended
to limit priority to solely those claims that are actual and necessary, to avoid “the estate being
consumed by administrative expenses” and to “preserve[] the estate for the benefit of creditors.”
In re Marcal Paper Mills, Inc., 650 F.3d 311, 315 (3d Cir. 2011).
82.
Thus, in interpreting this provision, the Third Circuit has held that to qualify for
administrative priority, the claimant has the heavy burden of establishing that the expenses need
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26
to both (1) arise from a postpetition transaction with the debtor-in-possession and (2) must be
beneficial to the debtor-in-possession in the operation of its business. Marcal Paper Mills, 650
F.3d at 314-15; In re O'Brien Env't Energy, Inc., 181 F.3d 527, 533 (3d Cir. 1999). In addition, the
Third Circuit has further explained that the benefit “must be actual, not hypothetical.” In re Energy
Future Holdings Corp., 990 F.3d 728, 742 (3d Cir. 2021).
83.
Here, the Landlord has not and cannot meet its burden for the stub rent period. As
discussed above, Vyaire only occupied one floor at the Premises located at 510 Technology Drive
and sublet one floor in the same building to Inari. Vyaire did not occupy or benefit from any other
portion of the Premises. In addition, the Landlord refused other subtenants, instead putting those
subtenants into other buildings owned by the Landlord to the detriment of Vyaire. Since Vyaire,
at best, only benefitted from two floors at 510 Technology Drive, the Administrative Claim should
be reduced accordingly by $262,207.108 reducing the claim to at most $1,700,216.20 before
considering the Landlord’s unsupported request for attorneys’ fees.
84.
Last, Landlord has also not met its burden of establishing the validity or
administrative priority of the amounts asserted for “Common Area Maintenance” charges,
insurance, taxes, utilities, work orders, credits, reconciliations, unapplied payments, furniture
removal, FF&E removal, sign removal, repairs, and late fees. Landlord failed to provide support
for the calculation of the additional charges asserted in the Motion. Until the Plan Administrator
and the Court have an opportunity to review and challenge the validity of the amounts asserted, no
Administrative Claim should be awarded at this time.
8
This amount is calculated as follows: one third (1/3) of amounts asserted by Landlord for stub period as to 510
Technology Drive, or $55,192.60, plus all amounts asserted by Landlord for stub period as to 520 Technology
Drive, or $207,014.50 for a total of $262,207.10.
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IV.
LANDLORD IS NOT ENTITLED TO PAYMENT OF ATTORNEYS’ FEES
85.
Landlord improperly seeks allowance of legal expenses of $66,760.01 in the
Motion and $45,000 in the General Unsecured Claim. Neither request is accompanied with
supporting detail nor payable under applicable law.
86.
It is unclear from the Motion which Bankruptcy Code section Landlord relies upon
in seeking allowance of the attorneys’ fees as administrative claims. The Plan Administrator,
however, presumes that the Landlord is taking the misguided position that the attorneys’ fees fall
within section 365(d)(3) of the Bankruptcy Code. Section 365(d)(3) of the Bankruptcy Code
provides that “the trustee shall timely perform all the obligations of the debtor, except those
specified in section 365(b)(2), arising from and after the order for relief under any unexpired lease
of nonresidential real property, until such lease is assumed or rejected, notwithstanding section
503(b)(1) of this title.” 11 U.S.C. § 365(d)(3).
87.
Relying on the phrase “all of the obligations of the debtor” in this section, some
courts have allowed as administrative expenses a landlord’s attorneys’ fees under section 365(d)(3)
of the Bankruptcy Code if such fees were (1) reasonably incurred for the purpose of enforcing
performance under the lease, (2) authorized under the terms of the lease, and
(3) supported by detailed invoices. See, e.g., In re Pelican Pool & Ski Ctr., Inc., 2009 Bankr.
LEXIS 4623, at *43-50 (Bankr. D.N.J. July 27, 2009) (“Pelican Pool”) (allowing post-petition,
pre-rejection attorneys’ fees pursuant to section 365(d)(3), pending the court’s determination of
the reasonableness of such fees); In re Pac-West Telecomm, Inc., 377 B.R. 119, 126 (Bankr. D.
Del. 2007) (court agrees to consider payment of attorneys’ fees under section 365(d)(3) upon the
submission of detailed invoices). Bankruptcy courts being asked to approve fees have “a duty to
examine the reasonableness of all fees requested[.]” In re Pac. Sea Farms, Inc., 134 B.R. 11, 16
(Bankr. D. Haw.) (citing Matter of Daylight Transp., Inc., 42 B.R. 20 (Bankr. E.D.N.Y. 1984)
Case 24-11217-BLS Doc 1056 Filed 04/07/25 Page 27 of 30
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(finding that time entries such as “research”, “conference” or “telephone call” was insufficient to
support payment of attorneys’ fees under section 365(d)(3) of the Bankruptcy Code).
88.
The court’s decision in Pelican Pool is instructive here. 2009 Bankr. LEXIS 4623,
at *43-50. There, a landlord filed a motion for summary judgment seeking entry of an order
allowing an administrative claim for, inter alia, attorneys’ fees incurred through the landlord’s
efforts to enforce obligations under the lease. Id. at *43. The landlord in Pelican Pool relied upon
a provision in the lease stating that “the occurrence of default will be treated as a breach of the
lease agreement, thereby giving the landlord the right to bring suit for the collection of both rent
and damages, including reasonable attorney’s fees.” Id. at *43-44. The court first looked at
whether attorney’s fees can be considered an “obligation” under section 365(d)(3) as to warrant
the payment of such fees to the landlord. Id. at *44. Applying the Third Circuit’s reasoning in
Centerpoint Props. v. Montgomery Ward Holding Corp. (In re Montgomery Ward), 268 F.3d 205,
211 (3d Cir. 2001), the court concluded that “where authorized by a provision in the lease
enforceable under state law, a landlord is entitled to attorney’s fees when such fees are reasonably
incurred for the purpose of enforcing performance under the lease.” Id. at *46. As a result, the
court found that, because the lease provides for attorney’s fees and is enforceable, the landlord was
entitled to pre-rejection attorney’s fees pursuant to section 365(d)(3) “as a matter of law pending
the court’s determination of the reasonableness of such fees.” Id. at *47. However, because the
certification provided by the landlord’s attorney was missing certain details to support the payment
of attorney’s fees, such as the novelty and difficulty involved in the work, the time and labor
required, and the billing rate of the attorney, the landlord’s counsel was required to submit a
certification of fees relating solely to the enforcement of pre-rejection obligations within twenty
(20) days. Id. at *48.
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89.
Consistent with Pelican Pool and the Third Circuit’s decision in Montgomery
Ward, Landlord here is only entitled to the payment of attorneys’ fees as a component of its
damages if the attorneys’ fees were (1) authorized by a provision in the lease enforceable under
state law, (2) “reasonably incurred for the purpose of enforcing performance of the lease,” id. at
*46, and (3) supported by detailed invoices.
90.
First, there is nothing in the Lease that provides for payment of attorneys’ fees
sought by the Landlord and Landlord points to none. Second, Landlord has not made any attempt
to establish that the fees were incurred for the purpose of enforcing performance of the lease. And
third, Landlord has not provided the Court with copies of the detailed invoices supporting the
attorneys’ fees sought in the Motion or in the Claim. Thus, the Court should disallow the request
for payment of attorneys’ fees in the Motion and in the Claim.
RESERVATION OF RIGHTS
91.
The Plan Administrator hereby reserves the right to amend, modify, and supplement
this Objection prior to the hearing before the Court on this Objection, if any; provided, however,
that nothing in this Objection shall affect the Plan Administrator’s right to object to the claims at
a future date on a basis other than as set forth in this Objection as permitted by bankruptcy and
nonbankruptcy law, subject to any limitations set forth in the Local Rules or in the Order.
92.
In addition, the Plan Administrator reserves the right to seek discovery with regard
to the Motion and the General Unsecured Claim. The Plan Administrator further reserves the right
to pursue any and all rights and remedies against the Landlord with regard to the Lease, including
commencing an adversary proceeding against the Landlord for, among other things, breach of
contract, fraudulent transfer, unjust enrichment, and/or other remedies.
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CONCLUSION
WHEREFORE, the Plan Administrator respectfully requests that the Court (i) enter an
order denying the Motion, and (ii) grant such other relief as the Court may deem just and proper.
Dated: April 7, 2025
Wilmington, Delaware
COLE SCHOTZ P.C.
/s/ Patrick J. Reilley
Patrick J. Reilley (No. 4451)
Stacy L. Newman (No. 5044)
500 Delaware Avenue, Suite 1410
Wilmington, DE 19801
Telephone: (302) 652-3131
Facsimile: (302) 652-3117
preilley@coleschotz.com
snewman@coleschotz.com
- and -
Matteo Percontino, Esq. (Admitted Pro Hac Vice)
Court Plaza North, 25 Main Street
Hackensack, NJ 07601
Telephone: (201) 489-3000
Facsimile: (201) 489-1536
mpercontino@coleschotz.com
Counsel to David M. Barse, solely in his capacity as
the Plan Administrator of Vyaire Medical, Inc., et al.
Case 24-11217-BLS Doc 1056 Filed 04/07/25 Page 30 of 30