Kupfer v. Salma (In re Kupfer)
| Decision Date | 26 August 2014 |
| Docket Number | Case No. 14–cv–00668–WHO |
| Citation | 526 B.R. 812 |
| Court | U.S. District Court — Northern District of California |
| Parties | In re Kupfer. Kupfer, et al., Appellants, v. Salma, et al., Appellees. |
Iain A. MacDonald, Matthew Jon Olson, Reno F.R. Fernandez, III, MacDonald Fernandez LLP, Merle Cooper Meyers, Meyers Law Group, PC, San Francisco, CA, for Appellants.
Merle Cooper Meyers, Michele Thompson, Meyers Law Group, PC, Philip Sochet Keith, Attorney At Law, San Francisco, CA, for Appellees.
ORDER AFFIRMING BANKRUPTCY COURT'S ORDER
Re: Dkt. No. 1
This bankruptcy appeal raises the question of the extent to which attorney's fees and costs awarded against the Debtors, Konstantin and Margarita Kupfer, in a pre-petition arbitration proceeding that established the Debtors' obligation to Creditors for the breach of two leases are subject to the Bankruptcy Code's cap on claims by creditors for damages resulting from the termination of a lease.1 The Hon. Dennis Montali of the United States Bankruptcy Court determined that the fees and costs are not capped. I agree—the fees and costs are collateral damages. The order of the Bankruptcy Court is AFFIRMED.
The facts of this case are not in dispute. The Debtors were tenants of the Creditors under two separate commercial leases for property located at 1375–1395 Burlingame Avenue, Burlingame, California. Excerpts of Record (“E.R.”), Dkt. No. 7–1, 35. The Debtors defaulted on each lease at different times prior to their bankruptcy petition. E.R. 39–41.
The Debtors—at that time, the tenants—entered a 10–year lease for Suite 106 in March 2008. E.R. 35. They took possession on May 20, 2008. Id. In September 2009, they stopped paying the minimum rent due, thereby breaching the lease. E.R. 40. However, the Debtors continued to occupy the property. Id. The Creditors—at that time, the landlords—commenced an action for unlawful detainer on March 14, 2011. E.R. 36. The Debtors then filed counterclaims for breach of contract, constructive eviction, negligent interference with contract, nuisance, and other causes of action. Id. The parties later stipulated to a move-out date of May 2, 2011, and brought their disputes to arbitration under the lease's binding arbitration procedure. E.R. 36, 83–85.
In arbitration, the Creditors were awarded $241,893 for unpaid rent and late fees from September 2009 until the stipulated move-out date of May 2, 2011; $140,768.65 for rent and interest from the move-out date until the arbitration began on October 15, 2012; and $495,805 for the remainder of rent due under the lease term, ending June 30, 2019, after reductions for stipulated setoffs and discounting. E.R. 40–41. The total award was $878,466.
The Debtors entered a 10–year lease for Suite 205 in April 2008. E.R. 102, 104. They took possession on April 1, 2008. E.R. 36. They made their last rent payment in May 2010. E.R. 41. The property was then re-leased to a new party as of November 30, 2010, for a lease term starting December 1, 2010, and ending January 31, 2016. E.R. 41. The new tenant began paying rent on February 1, 2011. E.R. 41.
In arbitration, the Creditors were awarded $112,483 for rent and interest due until the new tenant's first rental payment on February 1, 2011, and $296,450 for the remainder of rent due under the lease term, ending March 31, 2018, after reductions for setoffs and discounting. E.R. 41–42. The total award was $408,933. The Debtors' counterclaims were denied. E.R. 43–44.
In arbitration, the Creditors were awarded $137,250 for attorney's fees and $56,934.18 for arbitration costs—a total of $194,184.18 (collectively “fees,” except as otherwise stated). See E.R. 44–46. The arbitration award issued on June 19, 2013: adding the fees and costs to the damages for Suite 106 and Suite 205, the total award amounted to $1,481,583.18. E.R. 46.
Almost a month later, on July 16, 2013, the Debtors petitioned for bankruptcy under chapter 11 of the Bankruptcy Code. The Creditors filed a proof of claim—a document providing proof of a “right to payment,” Travelers Cas. & Sur. Co. of Am. v. Pac. Gas & Elec. Co., 549 U.S. 443, 449, 127 S.Ct. 1199, 167 L.Ed.2d 178 (2007) —with the Bankruptcy Court on September 17, 2013, based on the arbitration award. The Debtors then filed an objection to the claim based on the Bankruptcy Code's cap on claims “for damages resulting from the termination of a lease of real property.”11 U.S.C. § 502(b)(6). As applied to this case, the cap consists of unpaid rent prior to surrender, plus “rent reserved” measured at the cost of rent for 15 percent of the remaining lease period. Id.
With respect to Suite 106, possession of the leased property was surrendered on May 2, 2011. E.R. 36. Applying the 15–percent measurement, there were 447 days' worth of rent reserved for the remainder of the lease period. When added to the $241,893 due prior to the surrender date, this yielded a claim for Suite 106 capped at $529,511.43. Appellants' Am. Opening Br. 2–3; Appellees' Br. 5–6.
With respect to Suite 205, possession of the leased property was surrendered on November 30, 2010. E.R. 36. Using the 15–percent measurement, there were 402 days' worth of rent reserved for the remainder of the lease period. When added to the $77,527 due prior to the surrender date, this yielded a claim for Suite 205 capped at $189,708.33. Appellants' Am. Opening Br. 2–3; Appellees' Br. 5–6.
For both leases, the total capped claim for unpaid rent and rent reserved was $719,219.76. The parties do not dispute this figure. Rather, they disagree about whether the $194,184.18 in fees awarded at the arbitration also falls within that cap and cannot be claimed. The Bankruptcy Court held that the section 502(b)(6) cap is a restriction only on claims for future rent, whereas the fees are a collateral claim to which the cap does not apply. E.R. 171, 175–76. It noted that the fees and costs award was not rent reserved, citing McSheridan, 184 B.R. at 99. The Bankruptcy Court therefore allowed the Creditors' claim in the amount of $913,403.94—the sum of the capped claims for rent and the claim for fees. E.R. 176. The Debtors then filed this appeal.
Under 28 U.S.C. § 158, district courts have jurisdiction to hear appeals of the “final judgments, orders, and decrees” of bankruptcy courts. 28 U.S.C. § 158(a)(1). In such proceedings, “[t]he district court acts as an appellate court, reviewing the bankruptcy court's findings of fact under the clearly erroneous standard and its conclusions of law de novo.” In re Daniels–Head & Assocs., 819 F.2d 914, 918 (9th Cir.1987) ; see also Fed. R. Bankr. P. 8013. The facts of this case are not in dispute, so I will review the legal issues de novo.
Section 502 of the Bankruptcy Code provides that claims against a bankruptcy estate are “deemed allowed, unless a party in interest ... objects.” 11 U.S.C. § 502(a). Once an objection is made, the bankruptcy court will review the claim and allow it “except to the extent” it contravenes or exceeds any of the nine enumerated claims caps. 11 U.S.C. § 502(b) ; Travelers Cas. & Sur. Co. of Am., 549 U.S. at 449, 127 S.Ct. 1199.
Here, the relevant claims cap applies “if such claim is the claim of a lessor for damages resulting from the termination of a lease of real property.” 11 U.S.C. § 502(b)(6). The amount of the cap is equal to the sum of two kinds of “rent” damages: unpaid rent and rent reserved. 11 U.S.C. § 502(b)(6)(A)–(B). Unpaid rent is defined as the rent due at the time of the bankruptcy petition or the property repossession or surrender—whichever is earlier—and is claimable in full. 11 U.S.C. § 502(b)(6)(B). Rent reserved is defined as the future rent for a fraction of the lease term after this date. 11 U.S.C. § 502(b)(6)(A) ; see, e.g., In re Connectix Corp., 372 B.R. 488, 493 (Bankr.N.D.Cal.2007) (). The formula for calculating rent reserved may vary according to the circumstances, but as relevant to this case, it amounts to the future rent for 15 percent of the remaining lease term.2
See 11 U.S.C. § 502(b)(6)(A). Because unpaid rent and rent reserved together comprise the total claims cap, and because claims for “damages resulting from the termination of a lease of real property” are allowed “except to the extent” they exceed this cap, all other lease termination damages are effectively barred.3 See, e.g., In re AB Liquidating Corp., 416 F.3d 961, 963 (9th Cir.2005) ; In re Healthy Hut Inc., 506 B.R. 526, 531–32 (Bankr.D.Haw.2014) ; In re Denali Family Servs., 506 B.R. 73, 80 (Bankr.D.Alaska 2014) ; In re Iron–Oak Supply Corp., 169 B.R. 414, 419–20 (Bankr.E.D.Cal.1994). But since section 502(b)(6) only reaches claims arising out of lease termination, all damages collateral to lease termination are unaffected by the claims cap and may be claimed in full. See, e.g., In re El Toro Materials Co., Inc., 504 F.3d 978, 981 (9th Cir.2007).
This latter distinction is at the heart of the dispute. In the bankruptcy proceedings, the Creditors argued that their pre-petition fees did not constitute lease termination damages. The Bankruptcy Court ruled in favor of the Creditors, holding that their claim for fees fell outside the section 502(b)(6) claims cap and allowing the fees in full. The Debtors argue that the fees are more accurately regarded as non-rent lease termination damages, which fall within the cap and are barred in full.
Non-rent damages potentially fall within the scope of section 502(b)(6). The claims cap amounts to the sum of unpaid rent and rent reserved, but it applies to the “claim of a lessor for damages resulting from the termination of a lease of real property.” 11 U.S.C. § 502(b)(6). These...
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