You Did What to my Claim? Capping a Commercial Landlord’s Attorney’s Fees in Bankruptcy

After many months, a commercial landlord successfully ousts a non-paying tenant and recovers an award for past and future rent and contractual attorney’s fees. So far, so good. The tenant files a bankruptcy case. Unfortunate, but at least the landlord will be paid from available assets pro rata on the same basis as other unsecured creditors, right? Wrong. In bankruptcy, a landlord’s claim for damages resulting from lease termination is capped. This means that the landlord’s claim for future rent is first reduced to the cap and then paid pro rata with other claims. But the landlord’s claim for attorney’s fees is not capped, is it? Well, yes and no. The United States Court of Appeals for the Ninth Circuit’s recent decision in In re Kupfer, 852 F.3d 853 (9th Cir. 2016) clarifies the line between capped and un-capped claims other than claims for future rent.

Kupfer involved a business reorganized in a Chapter 11 bankruptcy case. Among the contested issues was the commercial landlords’ claim for about $200,000 in attorney’s fees and costs incurred in an earlier arbitration awarding some $1.3 million in damages. The landlords conceded that the cap applied to their claim for future rent but contended that the attorney’s fees were not capped. The debtor argued that all elements of a landlord’s claim are capped. The bankruptcy court declined to apply the cap. On appeal, the district court affirmed. Both courts applied an “all or nothing” approach. On further appeal, the Ninth Circuit reversed and remanded.

The issue was whether such attorney’s fees constitute damages resulting from lease termination. Bankruptcy Code Section 502(b)(6) caps a landlord’s claim for “damages resulting from termination of a lease” pursuant to a certain formula. Under the Ninth Circuit Bankruptcy Appellate Panel’s decision in In re McSheridan, 184 B.R. 91 (9th Cir. BAP 1995), the cap was applied broadly to include virtually all claims. The Ninth Circuit narrowed the cap in In re El Toro Materials Co., 504 F.3d 978 (9th Cir. 2007), in which a tenant deposited one million tons of hazardous wet clay goo on the property before vacating. The court held that the landlord’s claim was a tort arising independently from the lease and therefore was not capped.

In Kupfer, the landlords argued that their attorney’s fees for evicting the tenant, recovering an award of past and future rent and defending against certain counterclaims were not capped because they arose independently of the lease, like the tort claim in El Toro. The debtor argued that the contractual attorney’s fees had no source other than the lease and arose from the landlords’ efforts to recover rent and other termination damages.

The Ninth Circuit agreed that attorney’s fees arising from litigation surrounding termination of the lease are capped. Attorney’s fees for litigation arising from other sources, such as independent torts or breaches of contract unrelated to termination, are not capped. The court disagreed with the lower courts’ all-or-nothing approach and remanded for further factual findings in apportioning attorney’s fees between termination-related efforts and work unrelated to termination.

This opinion clarifies a murky issue for commercial landlords and tenants, and so far the Ninth Circuit is the highest court to address the issue. Both landlord and tenant counsel are well advised to consult Kupfer in drafting leases, litigating termination and handling claims in bankruptcy.