The U.S. Court of Appeals for the Ninth Circuit held recently that the statutory cap on a landlord’s damages claim in a bankruptcy case only apply to claims arising directly from the termination of a lease, allowing landlords in the Ninth Circuit to pursue uncapped claims for damages not tied to lease termination.
The case — In re Kupfer — involved debtor tenants of two California commercial properties. The debtors stopped paying rent and left the properties. The landlords sued for breach of the leases and the issue was resolved via arbitration, which awarded the landlords past and future rent in the amount of $1.3 million as well as arbitration and attorneys’ fees totaling almost $200,000.
Subsequently, the debtors filed for Chapter 11 bankruptcy protection. The landlords filed proofs of claim for the amount of the arbitration award. The debtors argued that the entire award, including arbitration and attorneys’ fees, should be limited according to the damages cap per 11 U.S.C. § 502(b)(6), which provides that “the claim of a lessor for damages resulting from the termination of a lease of real property” are capped at “the rent reserved by such lease, without acceleration, for the greater of one year, or 15 percent, not to exceed three years, of the remaining term of such lease…”
The landlords asserted that the cap should only apply to past due and future rent, but not to the fee award. The bankruptcy court agreed and the district court affirmed.
On appeal to the Ninth Circuit, the sole question before the court was whether the arbitration and attorneys’ fees are included in the statutory cap. Relying on its 2007 decision in In re El Toro Materials Co., the Ninth Circuit ruled that “damages other than those based on loss of future rent are not subject to the cap.”
However, since El Toro did not address the issue of caps on attorneys’ fees, the Ninth Circuit applied the Eighth Circuit’s test in In re Wigley: “Assuming that all other conditions remain constant, would the landlord have the same claim against the tenant had the lease not been terminated?”
The Ninth Circuit concluded that the arbitration and attorneys’ fees associated with litigation over the landlords’ claims for future rent were capped, since the claim would not have arisen had the debtors not terminated the leases. However, the court found that since the arbitration award also included compensation for past rent, which the landlords were allowed to claim independent of the pre-petition lease termination, the arbitration and attorneys’ fees associated with past rent were not capped.
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