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Bankruptcy Cap Only Applies to Future Rent

If you are a landlord and your tenant files for bankruptcy, based on a December 29, 2016 decision of the Ninth Circuit Court of Appeals, your claim may not be as limited as other courts previously held.

Under Bankruptcy Code §502(b)(6) a landlord's claim arising from rejection of its lease by a trustee or Chapter 11 debtor is limited to the greater of one year's rent or 15%, not to exceed three years, of the remaining lease term, plus unpaid rent due under the lease.  The date as of which unpaid rent is calculated is the earlier of the date of the bankruptcy filing or the date on which the landlord recovered or the tenant surrendered the premises.  The statutory cap is intended to strike a balance between the need to compensate a landlord for its loss and to protect other creditors from having a bankruptcy estate depleted by a single creditor.  While the formula for calculating a landlord's claim in bankruptcy appears straightforward, its application has resulted in varying decisions over what damages other than the loss of future rent are subject to the cap.

In Kupfer et al. v. Salma et al. (In re Kupfer), No. 14-16697, 2016 WL 7473790 (9th Cir. Dec. 29, 2016), the Ninth Circuit Court of Appeals reversed a lower court decision which applied the §502(b)(6) cap to encompass all of a landlord's attorney's fees arising from a pre-bankruptcy arbitration and defense of a counterclaim by the tenant.  The arbitration award included past due rent and the present value of future rent.  On appeal, the Ninth Circuit discussed the divergent decisions concerning application of the cap to damages other than loss of future rent.  It held that because the wording of §502(b)(6) only caps claims resulting from a termination of a lease, it does not limit claims for damages such as attorney's fees incurred in litigating the landlord's claim for past due rent or for defending the tenant's counterclaim.  The court remanded the case to the district court with direction that it apportion the landlord's attorney's fees to past due rent (which will not be subject to the cap) and future rent (which is subject to the cap).

By doing so, the Ninth Circuit stated that the "all or nothing" approach taken by certain courts when applying the cap is incorrect and that the test for applying the cap is whether "assuming that all other conditions remain constant, would the landlord have the same claim against the tenant had the lease not been terminated?"

For questions, please contact Larry Coppel (410) 576-4238.