Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca9-14-16697/USCOURTS-ca9-14-16697-0/pdf.json

Parties Involved:
Lindsey S. Bruel
Appellee
Konstantin Kupfer

Margarita Kupfer

Karim Salma
Appellee
Laith K. Salma
Appellee
Riyad R. Salma
Appellee
Robert Salma
Appellee

Document Text:

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

IN RE KONSTANTIN KUPFER;

MARGARITA KUPFER,

Debtors.

KONSTANTIN KUPFER;

MARGARITA KUPFER,

Debtors-Appellants,

v.

KARIM SALMA; ROBERT SALMA,

as Trustees of the Salma Family

Trust; LINDSEY S. BRUEL;

RIYAD R. SALMA; LAITH K.

SALMA,

Creditors-Appellees.

No. 14-16697

D.C. No.

3:14-cv-00668-WHO

ORDER AND

OPINION

Appeal from the United States District Court

for the Northern District of California

William Horsley Orrick III, District Judge, Presiding

Argued and Submitted October 17, 2016

San Francisco, California

Filed December 29, 2016

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2 IN RE KUPFER

Before: Susan P. Graber and Mary H. Murguia, Circuit

Judges, and Mark W. Bennett,* District Judge.

Order;

Opinion by Judge Graber

SUMMARY**

Bankruptcy

The panel filed (1) an order redesignating a

memorandum disposition as an opinion, with modifications,

and (2) an opinion vacating the district court’s affirmance of

the bankruptcy court’s order allowing a claim.

Creditors filed a proof of claim for a pre-petition

arbitration award (1) assessing damages against bankruptcy

debtors for breaches of leases and (2) awarding attorney fees

and arbitration fees.

The panel held that the statutory cap on a landlord’s

claims against a tenant in bankruptcy, set forth in 11 U.S.C.

§ 502(b)(6), applies only to claims that result directly from

the termination of a lease, but not to collateral claims. The

panel held that fees attributable to litigating the creditors’

claims for future rent were capped, because such claims

* The Honorable Mark W. Bennett, United States District Judge for

the Northern District of Iowa, sitting by designation.

** This summary constitutes no part of the opinion of the court. It has

been prepared by court staff for the convenience of the reader.

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IN RE KUPFER 3

would not arise were the leases not terminated. But fees

attributable to litigating claims for past rent were not capped. 

To the extent that the debtors’ counterclaims in the breachof-lease litigation concerned ordinary alleged breaches,

independent of a lease termination, the associated fees and

costs were not capped, either.

The panel vacated the district court’s judgment and

remanded for further proceedings.

COUNSEL

Reno F.R. Fernandez III (argued), Iain A. Macdonald, and

Matthew J. Olson, Macdonald FernandezLLP, San Francisco,

California, for Debtors-Appellants.

Merle C. Meyers (argued) and Michele Thompson, Meyers

Law Group P.C., San Francisco, California, for CreditorsAppellees.

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4 IN RE KUPFER

ORDER

The request to publish the unpublished Memorandum

disposition is GRANTED. The Memorandum disposition

filed October 27, 2016, is redesignated as an authored

Opinion by Judge Graber with modifications.

OPINION

GRABER, Circuit Judge:

“This appeal turns entirely on a single provision of the

Bankruptcy Code, 11 U.S.C. § 502(b)(6), and presents a

question of statutory interpretation which we review de

novo.” AMB Prop., L.P. v. Official Creditors for Estate of AB

Liquidating Corp. (In re AB Liquidating Corp.), 416 F.3d

961, 963 (9th Cir. 2005). We hold that the statutory cap on

a landlord’s claims against a tenant in bankruptcy, set forth in

§ 502(b)(6), applies only to claims that result directly from

the termination of a lease, but not to collateral claims. 

Because the district court used an all-or-nothing approach, we

vacate and remand for further proceedings.

Konstantin Kupfer and Margarita Kupfer (“Debtors”)

leased from Karim Salma and Roberta Salma as Trustees of

the Salma Family Trust, Lindsey S. Bruel, Riyad R. Salma,

and Laith K. Salma (“Creditors”) two commercial properties

located in Burlingame, California. Each lease ran for 10

years. Each lease included an arbitration clause for the

“Resolution of Disputes Between Landlord and Tenant” and

included a clause under which attorney fees, arbitration fees,

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IN RE KUPFER 5

and costs would be awarded to the prevailing party in the

event of such a dispute.

Debtors stopped paying rent on the properties and

eventually vacated the premises. Creditors initiated an action

in California state court for breach of both leases. Debtors

counterclaimed, alleging breach of contract, breach of the

covenant of good faith and fair dealing, inducement to breach

a contract, negligent interference with contract, breach of the

covenant of quiet enjoyment, and claims for declaratory

relief, constructive eviction, and nuisance. The state court

stayed the action pending arbitration.

The arbitrators assessed damages against Debtors for

breaches of the leases; the damages included both unpaid past

rent and future rent discounted to present value. The

damages totaled nearly $1.3 million. The arbitrators also

denied all of Debtors’ claims against Creditors. Finally, the

arbitrators awarded attorneyfees of $137,250, plus arbitration

fees of $56,934.18, to Creditors.

Thereafter, Debtors filed for Chapter 11 bankruptcy. 

Creditors filed a proof of claim for the arbitration award. 

Debtors objected, arguing that the entire arbitral award,

including attorney fees and arbitration fees—not just the

portions of the award representing past and future

rent—should be limited by the cap contained in 11 U.S.C.

§ 502(b)(6). Creditors countered that the cap should apply

only to past and future rent, but not to the fee award. The

bankruptcy court sided with Creditors, allowing an amount

that represented the arbitration award of past and future rent

as limited by the statutory cap, plus the entire uncapped claim

for attorney fees and arbitration fees. The district court

affirmed, Kupfer v. Salma (In re Kupfer), 526 B.R. 812 (N.D.

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6 IN RE KUPFER

Cal. 2014), and Debtors timely appealed. The parties do not

dispute the court’s calculations. Instead, they disagree only

about the legal question whether the fees must be capped or

whether the fees may be claimed in addition to the capped

amount of rent.

Under 11 U.S.C. § 502(a), claims are “deemed allowed,

unless a party in interest . . . objects.” If a party objects, the

claim is allowed except, in relevant part, to the extent that,

if such claim is the claim of a lessor for

damages resulting from the termination of a

lease of real property, such claim exceeds—

(A) 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, following

the earlier of—

(i) the date of the filing of the petition;

and

(ii) the date on which such lessor

repossessed, or the lessee surrendered,

the leased property; plus

(B) any unpaid rent due under such lease,

without acceleration, on the earlier of such

dates[.]

Id. § 502(b)(6). The statute sets forth a category of claims

that is subject to the cap (“claim[s] of a lessor for damages

resulting from the termination of a lease”) and then defines

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IN RE KUPFER 7

the cap as the sum of all outstanding current rent and the

greater of one year of remaining rent or 15% of the remaining

term. In some circumstances, attorney fees and arbitration

fees can be categorized as damages resulting from

termination. See, e.g., In re PPI Enters. (U.S.), Inc., 228 B.R.

339, 349 (Bankr. D. Del. 1998), subsequently aff’d, Solow v.

PPI Enters. (U.S.), Inc., 324 F.3d 197 (3d Cir. 2003). To

determine the extent to which that form of damages is

capped, though, requires some explanation.

Historically, landlords could not recover future unpaid

rent in bankruptcy, on the theory that such claims were

contingent. See Manhattan Props., Inc. v. Irving Tr. Co.,

291 U.S. 320, 334–35 (1934) (describing 1898 bankruptcy

law). Congress revisited that issue following the Great

Depression, when it sought to reconcile “the need for

landlords to be able to participate in the bankruptcy claim

process and share in assets” with “the need not to allow the

debtor’s estate to be depleted through admission of

extravagant claims for damages or unearned rent.” In re Best

Prods. Co., 229 B.R. 673, 675–76 (Bankr. E.D. Va. 1998)

(internal quotation marks omitted). The 1933 and 1934

amendments to the Bankruptcy Act introduced a new, but

circumscribed, claim for unpaid rent. Those provisions

permitted a “claim of a landlord for injury resulting from the

rejection by the trustee of an unexpired lease of real estate or

for damages or indemnity under a covenant contained in such

lease,” but limited the recoverable claim to the unpaid rent

plus one year of rent reserved. Act of June 7, 1934, ch. 424,

§ 4(a), 48 Stat. 911, 923–24. With that law, “Congress

intended to strike a balance between compensating the

landlord for his loss together with a limited sacrifice to

protect other creditors and the debtor’s rehabilitation . . . .” 

In re Heller Ehrman LLP, No. 10-CV-03134 JSW, 2011 WL

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8 IN RE KUPFER

635224, at *4 (N.D. Cal. Feb. 11, 2011) (internal quotation

marks omitted) (quoting Vause v. Capital Poly Bag, Inc. (In

re Vause), 886 F.2d 794, 802 (6th Cir. 1989)).

Holding that a statutory predecessor to the cap did not

violate due process, the Supreme Court explained the purpose

of capping a landlord’s damages in bankruptcy: “It is well

known that leases of business properties, particularly retail

business properties, commonly run for long terms. The

longer the term the greater the uncertainty as to the loss

entailed by abrogation of the lease.” Kuehner v. Irving Tr.

Co., 299 U.S. 445, 454 (1937) (construing former

§ 77B(b)(10) of the Bankruptcy Act, 11 U.S.C. § 207(b)(10)

(1934)). The Court continued that “the rent reserved, broadly

speaking, has some relationship to the value of the property

and the value of a lease thereon” and, even with a cap, “the

landlord stands a reasonable chance of restoring himself to as

good a position as if the lease had not been terminated.” Id.

at 455.

The statutory cap was modified over the years, but did not

change significantly until the 1978 enactment of the current

law. Whereas the 1930s provision capped “injury resulting

from the rejection” of a lease (a post-petition event) as well

as “damages or indemnity under a covenant contained in such

lease,” 11 U.S.C. § 103(a)(9) (1976), the current provision

caps only “damages resulting from the termination of a

lease,” 11 U.S.C. § 502(b)(6). Thus the older statute, by its

text, may have capped a broader set of landlord-creditor

claims than does the current statute. See Michael St. Patrick

Baxter, The Application of § 502(b)(6) to Nontermination

Lease Damages: To Cap or Not to Cap?, 83 Am. Bankr. L.J.

111, 142–44 (2009) (describing as “counterintuitive” the idea

that this difference in text effected “no substantive change”). 

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IN RE KUPFER 9

Since enactment of the current provision, courts have differed

on the proper interpretation of its scope: that is, what

damages “result[] from the termination of a lease”?

11 U.S.C. § 502(b)(6).

On one end of the spectrum, some courts have interpreted

the provision expansively, as a kind of subject matter cap on

all lease-related damages. For example, a Colorado

bankruptcy court held that, “as a matter of law, the actual

damage claim . . . for termination of the lease, whether for

non-payment of rent, taxes, costs, attorney’s fees, or other

financial covenants such as the Residual Guarantee, are

limited by the damage cap.” In re Storage Tech. Corp.,

77 B.R. 824, 825 (Bankr. D. Colo. 1986). The court

explained that the statute “does not qualify or in any way

limit the type of damages involved. The damage cap applies

to all damages, which are then arbitrarily capped and

measured by rent reserved.” Id. The Ninth Circuit’s

Bankruptcy Appellate Panel (“BAP”) likewise held that

rejection of the lease results in the breach of

each and every provision of the lease,

including covenants, and § 502(b)(6) is

intended to limit the lessor’s damages

resulting from that rejection. . . . The

distinction between past obligations under the

lease and damages “caused” by the

termination is incorrect because all damages

due to nonperformance are encompassed by

the statute.

Kuske v. McSheridan (In re McSheridan), 184 B.R. 91, 102

(B.A.P. 9th Cir. 1995), overruled in part by Saddleback

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10 IN RE KUPFER

Valley Cmty. Church v. El Toro Materials Co. (In re El Toro

Materials Co.), 504 F.3d 978 (9th Cir. 2007).

On 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. Finding that cases applying the

cap broadly “rest[] upon a somewhat tortured analysis of the

relevant code sections” and are unsupported by legislative

history, one court held that “the weight of authority in

reported opinions where landlords have actually claimed

damages for such items as maintenance and repairs is that

these damages do not result ‘from the termination of a lease

of real property’ and are therefore not subject to the cap of

§ 502(b)(6)(A).” In re Best Prods. Co., 229 B.R. at 677–78.

We entered the debate by taking the middle ground in In

re El Toro Materials Co., 504 F.3d 978. There, the debtor, a

mining company, sought to use the cap “to limit its liability

for allegedly leaving one million tons of its wet clay ‘goo,’

mining equipment and other materials on Saddleback

Community Church’s property after rejecting its lease.” Id.

at 979. After an adversary proceeding in which the creditorlandlord alleged waste, nuisance, trespass, and breach of

contract, the Ninth Circuit’s BAP held that those damages

were capped by § 502(b)(6) because they resulted from

termination of the lease. Id. We reversed. Reviewing the

provision’s legislative history, we observed that “section

502(b)(6) of the 1978 Act was intended to carry forward

existing law allowing limited damages for lost rental

income.” Id. at 980 (citing S. Rep. No. 95-989, at 63 (1978),

as reprinted in 1978 U.S.C.C.A. 5787, 5849). We also

reasoned from the statute’s purpose: “The structure of the

cap—measured as a fraction of the remaining term—suggests

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IN RE KUPFER 11

that damages other than those based on a loss of future rental

income are not subject to the cap.” Id. Although “[i]t makes

sense to cap damages for lost rental income based on the

amount of expected rent,” “collateral damages are likely to

bear only a weak correlation to the amount of rent: A tenant

may cause a lot of damage to a premises leased cheaply, or

cause little damage to premises underlying an expensive

leasehold.” Id. “Metering these collateral damages by the

amount of the rent would be inconsistent with the goal of

providing compensation to each creditor in proportion with

what it is owed.” Id. We held that tort claims for waste,

nuisance, and trespass “do not result from the rejection of the

lease—they result from the pile of dirt allegedly left on the

property.” Id.

Summarizing its reasoning, El Toro established a test for

determining which claims would be capped and which claims

would be allowed in full:

A simple test reveals whether the damages

result from the rejection of the lease: 

Assuming all other conditions remain

constant, would the landlord have the same

claim against the tenant if the tenant were to

assume the lease rather than rejecting it?

Id. at 981. Saddleback’s tort claims would have been viable

even if El Toro had never rejected its lease in bankruptcy, and

Saddleback could have sued on them even if El Toro had

remained a lessee in good standing. We concluded: “To the

extent that McSheridan holds section 502(b)(6) to be a limit

on tort claims other than those based on lost rent, rent-like

payments or other damages directly arising from a tenant’s

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12 IN RE KUPFER

failure to complete a lease term, it is overruled.” Id. at

981–82.

The Eighth Circuit’s BAP adopted El Toro and then

proposed its own test “for cases involving, not a post-petition

rejection of a lease, but a pre-petition termination of a lease: 

Assuming all other conditions remain constant, would the

landlord have the same claim against the tenant if the lease

had not been terminated?” Lariat Cos. v. Wigley (In re

Wigley), 533 B.R. 267, 270–71 (B.A.P. 8th Cir. 2015). The

court capped the creditor’s claim for interest on the award of

future rent, reasoning that, without termination of the lease,

there would be no claim for future rent, and without an award

for future rent, there is no interest. Id. at 272. Because the

asserted damages for “unpaid [past] rent, common area

maintenance, and late fees” had “accrued prior to termination

of the lease and thus cannot be said to have resulted from

termination of the lease, the related attorney fees, costs, and

disbursements—and the pre-petition interest thereon—

likewise cannot be said to have resulted from termination of

the lease” and were not capped. Id. The court did not rule on

the “attorney fees, costs, and disbursements” that did not

derive from damages awarded under the lease or the debtor’s

guarantee of his bankrupt business, because there had been a

dispute in the first instance about whether the landlordcreditor was entitled to those damages at all. The BAP

remanded for a determination of both whether the landlordcreditor was entitled to those damages and, if so, whether

they are subject to the cap. Id.

We agree with Wigley’s adaptation of our El Toro test in

the context of a pre-petition lease termination: Assuming that

all other conditions remain constant, would the landlord have

the same claim against the tenant had the lease not been

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IN RE KUPFER 13

terminated? Applying that principle here, we conclude that

the parties’ and the courts’ all-or-nothing approach is

incorrect.

As noted, the arbitration giving rise to the disputed fees

and costs concerned two leases. The prevailing Creditors

demanded both past-due rent and future rent. Debtors

brought a variety of counterclaims, alleging torts and

breaches of contract committed by Creditors. Even though

Debtors did not prevail on those claims, they were litigated,

and the fees and costs reflect that litigation. The obligation

to reimburse Creditors for fees and costs arose from

covenants in the leases, but § 502(b)(6) does not cap damages

resulting from every breach of contract—only those claims

for “damages resulting from the termination of a lease.” 

11 U.S.C. § 502(b)(6) (emphases added).

Fees attributable to litigating Creditors’ claims for future

rent are capped, because such claims would not arise were the

leases not terminated. But the arbitration award also included

damages for past rent, which Creditors 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.

On remand, the district court first must categorize all

claims as either directly resulting from termination of the

leases, or not. The former are capped; the latter are not. The

court then must apportion the associated fees and costs

accordingly. The district court may decide whether to

apportion the fees itself or to remand the case to the

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14 IN RE KUPFER

bankruptcy court for apportionment. We also leave to the

district court’s or the bankruptcy court’s discretion whether

to take additional evidence or conduct further hearings in aid

of the apportionment.

VACATED and REMANDED. The parties shall bear

their own costs on appeal.

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