A Delaware bankruptcy judge has denied a landlord's request for administrative priority status on approximately $125,000 in cleanup costs for equipment and hazardous materials left behind by American Tire Distributors after the tire giant rejected leases on two distribution facilities.
U.S. Bankruptcy Judge Craig T. Goldblatt ruled November 7 that the cleanup expenses incurred by landlord HEF NC SC QRS 14-86 Inc. constitute "rejection damages" that must be treated as prepetition claims under Section 502(g) of the Bankruptcy Code, rather than administrative expenses entitled to priority payment. The decision came in the Chapter 11 case of Oldco Tire Distributors, Inc. (Case No. 24-12391), the post-effective date entity for American Tire Distributors, one of North America's largest replacement tire distributors.
Background of the Dispute
The dispute arose from American Tire Distributors' February 2025 sale of substantially all its assets to prepetition lenders for approximately $600 million. The buyer, Asphalt Buyer II LLC, received "designation rights" allowing it to direct the debtors to either assume and assign or reject existing leases after the sale closed.
Following the buyer's direction, the debtors filed notice in May 2025 to reject leases on facilities in Lincolnton, North Carolina and Mauldin, South Carolina, with an effective rejection date of May 30, 2025. Under the lease terms, the debtors were contractually obligated to remove all equipment and hazardous materials upon termination.
However, the debtors failed to fulfill this obligation, leaving behind forklifts, racks, and a 55-gallon drum labeled as containing hazardous materials. Marina Folz, a vice president of the landlord's parent company, stated in a declaration that her team obtained quotes for removal, with "the most economical offer" exceeding $123,000.
Court's Legal Analysis
Judge Goldblatt rejected the landlord's argument that it was entitled to administrative priority under Section 365(d)(3), which requires trustees to perform post-petition lease obligations until rejection. The landlord contended that because the debtors vacated the premises on May 20, 2025—before the May 30 effective rejection date—the cleanup obligation arose during this interim period.
"The landlord's argument here is a clever one," Judge Goldblatt wrote, but ultimately found it "too clever." The court determined that Section 502(g), which specifically addresses rejection damages, controls over the more general provision of Section 365(d)(3).
The court noted extensive Delaware bankruptcy caselaw establishing that claims for breach of "return condition" clauses in connection with lease rejection are "paradigmatically" rejection damages claims. Judge Goldblatt cited previous decisions including In re Unidigital, Inc. and In re Universal Building Products, which held that costs for removing equipment upon lease rejection are treated as prepetition claims.
The court also rejected the landlord's alternative argument for administrative expense status under Section 503(b)(1) based on post-petition benefit to the estate. While acknowledging that if a debtor tortiously damages premises post-petition, a landlord would be entitled to administrative priority for repair costs, Judge Goldblatt found "nothing in the record to suggest that the condition of facility was any worse when the debtors vacated the premises than it was on the petition date."
Jurisdictional Ruling on Buyer Liability
The court separately dismissed the landlord's claim against the asset purchaser for lack of subject-matter jurisdiction. The landlord had argued that since the buyer owned the abandoned equipment after the February sale closing, the buyer committed trespass by leaving its property on the landlord's premises.
While Judge Goldblatt acknowledged that the buyer indeed owned the equipment from the sale closing until the premises were returned to the landlord, he found the court lacked jurisdiction over this state law claim between non-debtor parties. The court applied the Third Circuit's "close nexus" test from In re Resorts International, Inc., concluding that post-confirmation related-to jurisdiction was unavailable for this particular dispute.
"This is not a claim by a post-petition trust that would augment the recoveries of creditors generally," Judge Goldblatt wrote. "It is simply a claim by a particular creditor against the buyer."
Implications for Future Cases
The ruling reinforces established Delaware bankruptcy precedent that contractual obligations to return leased premises in specified conditions are treated as rejection damages rather than administrative expenses. This distinction is significant because administrative claims receive priority payment over general unsecured claims in bankruptcy distributions.
The decision also highlights jurisdictional limitations bankruptcy courts face in addressing disputes between non-debtor parties, even when those disputes arise from transactions closely connected to the bankruptcy case.
The landlord's claims against the buyer were dismissed without prejudice, allowing the landlord to pursue those claims in state court. The court directed the parties to settle appropriate orders and indicated that any remaining issues regarding the post-effective date debtor's objection to the landlord's proof of claim should be addressed through chambers.
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