Statutory Cap on Landlords’ Claims
When a tenant is a debtor in bankruptcy, section 502(b)(6) of the Bankruptcy Code imposes a cap on claims that the landlord possesses “for damages resulting from the termination of a lease of real property,” pursuant to a formula set out in the statute.1 This cap can often take a significant bite out of a landlord’s claim.
The sort of claim most commonly affected by this section is for future rent reserved under the lease. This loss to the landlord undeniably constitutes “damages resulting from the termination” of the lease, as the loss would not exist if the lease were still in force. Accordingly, claims for future rent reserved under the lease are clearly subject to the statutory cap.
However, landlords often suffer other damages as a result of tenants’ actions, either collateral or unrelated, to rent. Whether other damages suffered by a landlord “result from the termination” of the lease might not be clear. The consequences of this distinction may be significant, as only claims “for damages resulting from the termination” of the lease are subject to the cap. Any other claims held by a landlord may be asserted in full.
Test Set Out in In re Kupfer
In a recent opinion,2 the U.S. Court of Appeals for the Ninth Circuit set out a clear and seemingly easy to follow test to determine whether a given claim held by a landlord is “for damages resulting from the termination of a lease of real property,” and therefore subject to the cap. The court asked, “Assuming that all other conditions remain constant, would the landlord have the same claim against the tenant had the lease not been terminated?”3 If the landlord’s claim would still exist even if the lease had not been terminated, then the claim is not subject to the statutory cap.
Facts and Holding of In re Kupfer
In In re Kupfer, a landlord leased two commercial properties to a married couple as tenants, pursuant to leases that provided for the award of attorney’s fees and arbitration fees to the prevailing party in the event of a dispute. The tenants stopped paying rent and eventually vacated the properties. State court litigation and then an arbitration proceeding for breach of the leases ensued, resulting in the landlord winning an arbitration award of nearly $1.3 million, comprised not only of past due and future rent but also significant attorney’s fees and arbitration fees. Counterclaims asserted by the tenants were denied.
The tenants began a Chapter 11 case, and the landlord filed a claim for the full amount of the arbitration award. The debtors argued that the entire claim — including the portion representing attorney’s and arbitration fees — should be subject to the statutory cap as damages “resulting from the termination” of the lease. The landlord conceded that the unpaid rent was capped, but argued that the portion of the claim representing fees was uncapped, as this latter portion of the award did not “result from the termination” of the lease. The bankruptcy court agreed with the landlord that the portion of the award representing fees should be uncapped, and the district court affirmed on appeal. The debtors then appealed to the Ninth Circuit Court of Appeals.
The court of appeals began its analysis by summarizing the history of the statutory cap, and noting that “courts have differed on the proper interpretation of its scope: that is, what damages ‘result from the termination of a lease?’”4 The court explained that “[o]n one end of the spectrum, some courts have interpreted the provision expansively, as a kind of subject matter cap on all lease-related damages,” and that “[o]n the other end of the spectrum, the provision has been interpreted narrowly to cap claims for future rent, but to exclude all other damages, thereby permitting collateral claims to be asserted in full.”5
Rather than taking either extreme, the court of appeals settled on what it termed a “middle ground,” and set out the test quoted above: “Assuming that all other conditions remain constant, would the landlord have the same claim against the tenant had the lease not been terminated?”6 If the answer is “yes,” then the claim in question is not capped, as it cannot be said to have “result[ed] from the termination of the lease.”
Applying this test to the facts at hand, the court of appeals held that the portion of the landlord’s claim representing “fees attributable to litigating [the landlord’s] claims for future rent are capped, because such claims would not arise were the leases not terminated.”7 On the other hand, the court of appeals continued, “[T]he arbitration award also included damages for past rent, which [the landlord] could claim independent of termination; the fees attributable to that portion of the litigation are not capped. The parties also litigated debtors’ numerous counterclaims. To the extent that the counterclaims concerned ordinary alleged breaches, independent of a lease termination, the associated fees and costs are not capped either.”8
The court of appeals remanded the dispute, and instructed the district court to “categorize all claims as either directly resulting from termination of the leases or not.”9 “The former are capped,” the court of appeals reiterated, and “the latter are not. The court must then apportion the associated fees and costs accordingly.”10
The Ninth Circuit is one of a growing number of courts to have adopted this approach to determining whether a given claim belonging to a landlord is subject to the statutory cap of section 502(b)(6) of the Bankruptcy Code. Others include the Delaware Bankruptcy Court,11 the Southern District of New York Bankruptcy Court,12 the Bankruptcy Appellate Panel for the Eighth Circuit,13 and the Eastern District of Michigan Bankruptcy Court.14 The day may soon come when courts are unanimous, or near unanimous, in adopting this approach.
In jurisdictions using this approach, landlords should make sure to claim the full uncapped amount of all of their damages, with the sole exception being those damages that would not exist absent the termination of the lease. This approach typically will result in the cap applying only to lost future rent and any damages directly related thereto.
Even if a landlord finds itself a creditor in a jurisdiction that has not yet adopted the test set out in Kupfer and is still applying the cap more broadly, the landlord may well be able to persuade the bankruptcy court that it should join the growing trend, and limit the statutory cap to only those damages that would not exist absent the termination of the lease.