Chrome Holding Co., formerly known as 23andMe Holding Co., won a significant ruling when a Missouri bankruptcy judge held that a San Francisco landlord's rejection damages claim must be capped at approximately $5.6 million, rejecting arguments that the statutory limit shouldn't apply to potentially solvent debtors. The ruling overruled objections from KR OP Tech, LLC, which had filed a proof of claim for approximately $9.7 million following the genetic testing company's rejection of its San Francisco office lease.
In a comprehensive 15-page memorandum opinion issued November 26, 2025, U.S. Bankruptcy Judge Brian C. Walsh of the Eastern District of Missouri confirmed the debtor's Fourth Amended Chapter 11 Plan, holding that Section 502(b)(6) of the Bankruptcy Code—which caps landlord claims for lease rejection damages—applies regardless of whether a debtor is solvent. The decision resolved a dispute involving a difference of approximately $4.1 million between the landlord's filed claim and the capped amount.
Background of the Bankruptcy Case
The case stems from Chrome Holding's Chapter 11 bankruptcy filing following a 2023 data breach that affected approximately seven million customers of its direct-to-consumer genetic testing business. The company had operated a business model where customers sent saliva samples in exchange for detailed information about their personal genomes, including ancestry and health susceptibility information. According to the opinion, hackers accessed highly sensitive personal data—including DNA testing results, names, and email addresses. The court noted that extensive litigation followed the data breach, and the fallout strained the debtors' resources and, along with other economic factors, led to the bankruptcy filing.
In June 2025, the bankruptcy court approved the sale of substantially all of the debtor's assets for $302.5 million, with the transaction closing on July 14, 2025. The company's Chapter 11 plan also contemplates selling its Lemonaid telehealth business to Bambumeta Ventures for $10 million. The court noted that after these transactions, the debtors will no longer have any business operations.
The Landlord's Claim and Legal Dispute
ChromeCo, Inc., the debtor's operating subsidiary, rejected its lease of a building in San Francisco owned by KR OP Tech during the bankruptcy proceedings. The landlord filed a proof of claim for rejection damages totaling approximately $9.7 million. However, if Section 502(b)(6)'s statutory cap applies, the allowed claim would be limited to roughly $5.6 million—representing the greater of one year's rent or 15 percent of the remaining lease term, not to exceed three years, plus any accrued unpaid rent.
The landlord raised several objections to plan confirmation. Its principal argument was that the statutory cap should not apply when a debtor is solvent. Judge Walsh noted that courts have been "nearly unanimous" in rejecting this argument. The landlord contended that applying the cap in a solvent debtor case would allow shareholders to receive distributions while the landlord's claim went partially unsatisfied.
Court's Ruling on Section 502(b)(6) Cap
Judge Walsh rejected this reasoning, citing legal precedent dating back to 1934. The court explained that Congress first enacted a landlord claim cap in 1934 as part of amendments to the Bankruptcy Act of 1898. The court quoted a Second Circuit decision describing the provisions relating to landlords as "an obvious compromise" reached after serious research and study by legislators. The Supreme Court upheld this statutory scheme in the 1937 case Kuehner v. Irving Trust Co., which addressed whether the cap should apply when a debtor has sufficient assets to pay shareholders.
In Kuehner, the Supreme Court held that Congress could reasonably conclude that "an award of the full difference between rental value and rent reserved for the remainder of the term smacks too much of speculation" and that a uniform limit would be "fairer to [landlords], to other creditors, and to the debtor" in the long run. Judge Walsh emphasized that nothing in the statute or the Kuehner opinion limits application of the cap to situations where the debtor receives a discharge of its debts generally or of the landlord's claim in particular.
Best-Interests-of-Creditors Test
The court also addressed the landlord's argument that the cap conflicts with the "best-interests-of-creditors" test under Section 1129(a)(7). The landlord argued that in a hypothetical Chapter 7 liquidation, it would recover its full uncapped claim. The landlord's reasoning was that the corporate debtor would not receive a discharge in Chapter 7, would receive any surplus from the trustee under Section 726(a), and would remain liable under state law—particularly Delaware law, where the debtor is incorporated—to pay creditors before making distributions to shareholders.
Judge Walsh rejected this argument on two grounds. First, the plain language of Section 1129(a)(7) requires comparing what a creditor would "receive or retain" from the bankruptcy estate in each chapter, not what might be recovered from the debtor after the bankruptcy case concludes. The court stated that the statute "requires an analysis of what the creditor would recover from the bankruptcy estate in each chapter," and by the landlord's own analysis, it would receive only the capped amount from the estate in either scenario. Second, the court noted that the best-interests test only applies to impaired classes of creditors. The court observed that a debtor might classify a landlord separately, pay its capped claim in full, and treat it as unimpaired. The court stated this would create "an absurd result" if an obviously solvent debtor faced less scrutiny than a potentially solvent one.
Discharge-Related Issues
The landlord also challenged numerous plan provisions as effectively providing the debtor with a discharge despite its ineligibility as a liquidating corporation. Under Section 1141(d)(3) of the Bankruptcy Code, corporations that do not engage in business after plan consummation do not receive discharges. The landlord argued that plan language stating creditors are "bound" by the plan and that assets vest "free and clear" of claims improperly discharged its debt.
Judge Walsh acknowledged that some plan language could be construed as discharge-like, particularly provisions using the term "discharged" and language enjoining creditors from pursuing claims. However, the court stated that while the debtor will not receive a discharge, creditors must still comply with the plan's orderly distribution process. The court wrote that "the Plan provides for the orderly distribution of [the debtor's] assets, and creditors must comply with its requirements."
To address these concerns, Judge Walsh stated he would include clarifying language in the confirmation order providing that: (1) the landlord's claim is not discharged; (2) nothing in the plan extinguishes the debtor's liability under the lease or any related non-debtor liability; and (3) the landlord nevertheless is not entitled to any greater recovery under the plan or from the plan administration trust than that set forth in the plan.
Additional Plan Objections
The court also rejected the landlord's challenge under the absolute priority rule. The landlord argued the plan did not comply with Section 1129(b)(2)(B) because it did not explicitly adopt either payment in full of allowed claims or elimination of equity interests. Judge Walsh held that nothing requires a debtor with assets or liabilities of uncertain value to commit preemptively to one of the two outcomes. The court stated that "the waterfall built into the Plan ensures that shareholders will not be paid before allowed claims of creditors are satisfied."
The court also dismissed the landlord's objection to third-party releases in the plan, finding the landlord lacked standing to challenge releases from which it had opted out.
Plan Structure and Distributions
The liquidation analysis attached to the disclosure statement suggests the debtors may be solvent, potentially resulting in substantial distributions to equity holders of the publicly traded parent company. However, the court noted it is "too soon to know whether the Debtors are solvent." The court observed that creditors have filed proofs of claim with an aggregate face value in the trillions of dollars, while the debtors have approximately $200 million to distribute. The court stated that whether equity holders receive distributions "will be uncertain until the Debtors complete the claims reconciliation process."
All eligible classes voted to accept the plan except for three classes: commercial creditors of the genomics business, general unsecured creditors of the genomics business, and equity holders. The plan provides for creation of a Plan Administration Trust to make pro rata distributions to creditors. General unsecured creditors and commercial creditors will be paid from the trust, with commercial creditors also receiving post-petition interest if sufficient assets remain after all allowed claims are paid in full.
Under the plan structure, the debtors identified as "Wind-Down Debtors" will not "engage in business after consummation of the plan" and therefore are ineligible to receive discharges under Section 1141(d)(3)(B). However, the Lemonaid subsidiaries being sold will receive discharges.
The case is In re Chrome Holding Co. (f/k/a 23andMe Holding Co.), Case No. 25-40976-357, in the United States Bankruptcy Court for the Eastern District of Missouri, Eastern Division. The memorandum opinion was issued on November 26, 2025.
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