Failed Mitigation Requires Recalculation of Claim

By: Courtney Pasquariello
St. John’s Law Student
American Bankruptcy Institute Law Review Staff


Injecting uncertainty into the claims process, the Sixth Circuit Court of Appeals held that a lessor’s lease rejection claim must be recomputed if it fails to realize the projected mitigation amount used to compute its claim.  In Giant Eagle, Inc., v. Phar-Mor, Inc., [1] Giant Eagle, Inc. and Valu Eagle Associates (“GE”) entered into long-term equipment leases with Phar-Mor.  Phar-Mor filed Chapter 11 during the lease term and rejected the equipment leases.  As a result of Phar-Mor’s rejection, GE made claims for undisputed administrative expenses as well as claims for future rent minus rent recovered from mitigation.  Upon recovering the equipment from Phar-Mor, GE attempted to fulfill its duty to mitigate damages by releasing the equipment under a new agreement with Snyder’s Drugstores, Inc.  However, during Synder’s new lease term, Snyder too sought relief under Chapter 11 and rejected the equipment leases.  After recovering the equipment, GE was unable to re-let it and sought to recover additional future rental damages in the Phar-Mor bankruptcy case.[2]  Although the lower courts sided with Phar-Mor, stating that “once a lessor mitigates its damages by re-letting the equipment, the lessor cannot claim damages from the debtor for the period covered by the new lease,”[3] the Sixth Circuit disagreed.[4]  Instead, the appellate court focused on the fact that once a lease was rejected, the debtor was liable for damages resulting from the breach regardless of mitigation or attempted mitigation.[5] 

While all courts agreed that an unexpired lease could be rejected under 11 U.S.C. § 365(a) and was considered to have been breached immediately before the filing or petition date, the question of how to properly calculate the claim under 11 U.S.C. §502 remained.[6]    Relying on In re Steiner,[7] the Sixth Circuit determined the proper calculation to be the benefit of the bargain minus the amount mitigated.  This avoids a double recover in those situations where the lessor is able to re-rent the property, an opportunity that would not have otherwise been available had the original lessee not defaulted.[8]   Citing In re American HomePatient, Inc.,[9] Phar-Mor argued that the court must determine the claim as well as the mitigation at the breach time, and as a result, must use a reasonable mitigation value because no actual mitigation would yet have occurred at that point in time.[10]  The Court of Appeals distinguished American HomePatient because there was no mention of mitigation in that decision.[11]  The case, standing for the undisputed point that damages are determined immediately prior to the petition filing date, simply supported GE’s claim for expectation damages for future-rent lost.[12]


The Sixth Circuit’s holding in Giant Eagle is likely to have a significant effect on bankruptcy cases in the future.  As the bankruptcy court noted in the decision appealed from, a holding such as that of the Sixth Circuit would require courts to forecast mitigation viability, causing an extended period of uncertainty concerning damages owed by a defaulting lessee.[13]  This impact may be lessened as a practical matter since, unlike Giant Eagle, in most cases it would be unlikely that the substitute lessee would default on the lease so shortly after entering it.  The court did not consider the effect of claims bar dates, plan confirmation, or other events in the bankruptcy case that may bar amendment of claims.  However, questions remain whether and to what extent cases may be reopened or modifications made to account for damages that were thought to be mitigated,[14] or, on the other hand, whether courts will allow the debtor to seek adjustment of a claim when mitigation exceeds estimates.[15]  If the effect of the Sixth Circuit’s decision is to preserve the lessor’s rights to seek reconsideration of its claims, what effect will that have on the lessor’s incentives to seek mitigation and how should successful mitigation be defined?[16]


[1] 528 F.3d 455, 456 (6th Cir. 2008).

[2] Id. at 457–58.

[3] Id. at 460.

[4] Id. at 461.

[5] Id. at 464–65.

[6] Id. at 459–62.

[7] 50 B.R.181, 185 (Bankr. N.D. Ohio 1985).

[8] Giant Eagle, 528 F.3d at 462–463.

[9] 414 F.3d 614, 618–19 (6th Cir. 2005).

[10] Giant Eagle, 528 F.3d at 465.

[11] Id. at 465–66.

[12] Id.

[13] Id. at 460.

[14] Derek J. Baker, When Attempted Mitigation Fails, Claim Against Debtor is Revived, Com. Restructuring & Bankr. Newsl., (ReedSmith, New York, N.Y.), August 2008, Issue 4, at 4, 4.

[15] Noah A. Gold, Failed Mitigation Efforts Do Not Prevent Lessor’s Claim, Restructuring Rev., (Cadwalader, Wickersham & Taft LLP, New York, N.Y.), July 2008, at 5, 7.

[16] Gold, supra note 18, at 7.