Landlord's recovery of attorneys fees in bankruptcy court

When tenant declares bankruptcy, Bankruptcy Code §502(b)(6)'s cap on landlord's recoverable damages, although phrased in terms of rent, does not limit landlord solely to claims for rent reserved, but may support an additional claim for attorney's fees, so long as total claim is within the cap limits.


from DIRT, August 28, 2006


Landlord Wall Street was awarded a state court judgment for damages against lessee JSJF for breach of lease. Wall Street also prevailed on JSJF's counterclaim, obtaining a judgment of dismissal with attorney fees to be awarded later. A few days later, before the final entry of the order determining the attorney's fees, JSJF filed its Chapter 11 petition; Wall Street was its primary unsecured creditor.


Wall Street Plaza, LLC v JSJF Corp. (In re JSJF Corp.) 344 B.R. 94 (9th Cir. BAP 2006)


Wall Street filed three proofs of claim to which JSJF objected on various ground. One of the objections was that the claims for attorney fees, not rent reserved under 11 USC §502(b)(6), and that two were time-barred. The bankruptcy court disallowed all three claims and denied Wall Street's motion for reconsideration. When the state court ascertained the amount of the attorney fee award, Wall Street sought leave to file a fourth proof of claim, either as an amendment to the first timely claim or as late filed, which the bankruptcy court denied.
It also denied Wall Street's motion for reconsideration.


The 9th Circuit BAP held that the bankruptcy court's disallowance of the first claim because it was not for rent was an error of law. In re McSheridan (BAP 9th Cir 1995) 184 BR 91, 99, articulated a test to determine what charges are rent reserved and therefore capped under §502(b)(6).


As the court read this statute, it does not limit lessors' claims only to those items that fall within the cap. Thus, a lessor may have an uncapped claim for something other than damages resulting from the termination of the lease. The landlord's cap of §502(b)(6) may limit the amount of a lessor's claim, but it is not a criterion for its allowance; it becomes significant only if the claim otherwise allowable under nonbankruptcy law exceeds the cap calculated under the statute.
In the instant case, the landlord's claim for future rent was relatively small, and there was lots of room within the cap amount to support payment of some or all of the attorney's fee claim. In interpreting McSheridan in this way, the court appears to have departed from rulings by several other federal district court in California.


As the lower court had not based its opinion on the grounds that the landlord's claim exceeded the total allowable cap amount, but on the ground that the attorney's fees did not constitute rent, the court reversed and remanded for determination of whether the landlord's cap applied to some or all of the first claim under McSheridan and, if so, what that cap was.


The court further ruled that the trial court abused its discretion in disallowing the fourth claim as an amendment to the first claim. In the absence of prejudice to the opposing party, the Ninth Circuit has a liberal policy permitting amendments to a proof of claim to cure defects in the claim as filed.


The gravamen of the first claim was the assertion of all of Wall Street's rights vis-a-vis JSJF arising out of the lease litigation that resulted in the state court judgment. Because the total amount of attorney fees had not been determined, the amount stated in the claim was incorrect. The fourth claim corrected the error and set forth the proper amount of Wall Street's claim; it did not assert a new theory of relief. As to prejudice, nothing in JSJF's papers suggested any worsening of its position or bad faith or unreasonable delay on Wall Street's part. Prejudice requires more than simply having to litigate the merits of, or to pay, a claim, the mistaken legal premise on which the bankruptcy court denied the claim. There must be some legal detriment to the opposing party. The equities favored Wall Street because JSJF's own plan of reorganization included Wall Street's claim for lease damages. Indeed, Wall Street's successful assertion of these rights triggered JSJF's bankruptcy filing. The panel remanded for determination of the fourth claim and the extent to which it might be limited by the §502(b)(6) cap.


Note: The lease had designated the attorney's fee claim as rent"
but the trial court concluded that it was not rent because it was not regular and periodic and the appeals court did not disturb that finding.
It simply stated that the claim did not have to constitute rent to be payable as damages on account of the termination of the lease so long as there was room under the cap.


Comment from Roger Bernhardt Bernhard of the Golden Gate Law School in San Francisco.


It seems clear that a nonperiodic award of attorney fees entirely unrelated to the value of the premises is not rent, even when it is designated as such in the lease. The BAP here, however, read McSheridan to apply only to capping the recovery, and having nothing to do with allowability; attorney fees that do not constitute rent are merely not subject to the cap, they are not therefore disallowable.


Thus, one court [the bankruptcy court] read §502(b)(6) to deny the attorney fee claim entirely, while the other read it to permit it completely. It's not that I like compromises, but I don't know why the section wasn't construed to allow the attorney fee claim, even though it was not for rent, but to subject to the cap, even though it was still not for rent.


Section 506(b) provides that the court shall determine the amount of such claim ... and shall allow such claim in such amount except to the extent that ... 6) 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 ... for one year.


Thus, while one needs to determine what was rent reserved for capping purposes, what is capped is not that item, but rather the damages resulting from the termination of a lease. Damages resulting from termination seem to me to include related attorney fees, whether or not they are characterized as rent by the lease or by a court.


These attorney fees were awarded in an action brought by the lessor (1) for breach of the lease and for lost rent because the tenant abandoned, as well as (2) in defending against the tenant's cross-complaint for constructive eviction. All of that seems to perfectly qualify as damages resulting from the termination of a lease. If so, the syntax of the section seems to require their capping.




Comment from Patrick Randolph, University of Missouri, Kansas City, School of Law.


The court concluded that the attorney's fees did have to fit under the cap, but that there was room under the cap in this case because the claim for damages for breach of the lease - future rent - did not exceed the cap. e are not told what the term was, so we don't know whether the one year limit or the 15% limit applied; but the rent was $7,000 per month and the total claim for future rent was $80,000. So obviously there was some room for additional claims for attorney's fees." For more information see: www.houstonrealtyadvisors.net
or www.houstonrealtyadvisor.com