Court Opinion

ID: 4112144
Source: CourtListenerOpinion
Date Created: 2016-12-29 18:01:18.180424+00
Date Added: 2024-06-11T15:08:40.608697
License: Public Domain

FOR PUBLICATION

  UNITED STATES COURT OF APPEALS
       FOR THE NINTH CIRCUIT

IN RE KONSTANTIN KUPFER;                No. 14-16697
MARGARITA KUPFER,
                    Debtors.              D.C. No.
                                    3:14-cv-00668-WHO

KONSTANTIN KUPFER;
MARGARITA KUPFER,                      ORDER AND
         Debtors-Appellants,            OPINION

               v.

KARIM SALMA; ROBERT SALMA,
as Trustees of the Salma Family
Trust; LINDSEY S. BRUEL;
RIYAD R. SALMA; LAITH K.
SALMA,
            Creditors-Appellees.

     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
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.
                        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 breach-
of-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 Fernandez LLP, San Francisco,
California, for Debtors-Appellants.

Merle C. Meyers (argued) and Michele Thompson, Meyers
Law Group P.C., San Francisco, California, for Creditors-
Appellees.
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,
                        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 attorney fees 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.
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
                        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
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”).
                       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
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 creditor-
landlord 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
                        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
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 landlord-
creditor was entitled to those damages at all. The BAP
remanded for a determination of both whether the landlord-
creditor 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
                         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
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.