Lease Breach Damages Cap in Bankruptcy Can Include Fees

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By Daniel Gill

The Bankruptcy Code section that caps damages from a terminated lease can include attorney fees and costs with the damages award, the Ninth Circuit Court of Appeals ruled ( Kupfer v. Salma (In re Kupfer) , 2016 BL 433978, 9th Cir., No. 14-16697, 12/29/16 ).

Judge Susan P. Graber said the appeal “turned entirely” on a single provision of the Code, 11 U.S.C. §502(b)(6). That subsection provides that claims of a lessor “resulting from the termination of a lease of real property” are capped by the “the sum of all outstanding current rent and the greater of one year of remaining rent or 15% of the remaining term,” the court said.

The court concluded that the fees “resulting from the termination of the lease” could include attorney fees on that issue.

Konstantin and Margarita Kupfer were the lessees on two commercial properties in Burlingame, Calif. They stopped paying rent on the 10 year leases and eventually lost in an arbitration with the lessors of the properties. The lessors were awarded more than $1.3 million for past and future rent, plus attorney and arbitration fees (recoverable under the subject leases) for nearly another $200,000, the court said. Notably, the litigation included a number of counter-claims asserted by the debtors against the lessors.

The lessees then filed their Chapter 11 case. Chapter 11 allows companies (or individuals) to enjoy protections from creditors while they seek to reorganize their debt or liquidate pursuant to a plan which must be approved by the bankruptcy court.

After the lessors filed a proof of claim based on their arbitration award, the debtors objected, arguing that the entire claim should be capped under Section 502(b)(6). The lessors argued that the cap should apply to only the past and future rent (and not the attorney fees and arbitration fees), and the bankruptcy court—and the district court on appeal—agreed with the lessors, the court said.

The debtors appealed to the Ninth Circuit. After examining the history of the subject Bankruptcy Code provision, the court concluded that the lower courts mistakenly employed an “all or nothing approach” when it allowed all the arbitration and attorney fees and capped only the lease payment part of the claim.

“Fees attributable to litigating Creditors’ claims for future rent are capped, because such claims would not arise were the leases not terminated,” the court said.

The court determined that the fees “resulting from the termination of the lease” could include attorney fees on that issue. So the court remanded the case for the lower courts, instructing the district court first to “categorize all claims as either directly resulting from termination of the leases, or not. The former are capped; the latter are not,” the court said.

“The court then must apportion the associated fees and costs accordingly,” the court explained.

Circuit Judge Mary H. Murguia and District Judge Mark W. Bennett, sitting by designation, joined in the opinion.

Reno F.R. Fernandez III, Macdonald Fernandez LLP, San Francisco, argued the case for the appellant debtors. The appellees were represented by Merle C. Meyers, Meyers Law Group P.C., San Francisco.

To contact the reporter on this story: Daniel Gill in Washington at dgill@bna.com

To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com

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