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Ninth Circuit ruling allows landlords to seek more damages against bankrupt tenants

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By Ethan Bailey | Jan 17, 2017

SAN FRANCISCO (Legal Newsline) – A recent ruling from the U.S. Court of Appeals for the Ninth Circuit will help California landlords seek and claim more damages against tenants who file for bankruptcy.  

The Dec. 29 ruling helps clarify when claims against bankrupt tenants for damages can and cannot be limited, or capped. 

142 Westbury Lane | Courtesy of Century 21 Hellmann Stribling

It was found that, because the tenant in the case owed more than $1.3 million in damages and arbitration fees before filing for bankruptcy, the entire amount would be awarded to the landlord because the damages didn't directly stem from a termination of the lease. Therefore, the damages claims would not be capped.

Jeff Krieger, partner at Greenberg Glusker and business lawyer, believes the Ninth Circuit made a correct ruling on the subject and took a logical approach in its decision. 

"I actually kind of think the decision was correct ... it didn't just go all one way and all the other way," Krieger told Legal Newsline. "If the attorneys fees related to something that was capped, then the attorneys fees were part of the cap, and vice versa." 

At the center of the issue at hand is whether or the damages result directly from the termination of a lease. The Ninth Circuit, according to Krieger, decided that the claims cap is applicable for litigation costs regarding a tenant's future rent - something that could only be possible after a lease had been terminated.   

The decision protects landlords from being limited in the amount of damages they can seek from tenants. Krieger used a succinct example to demonstrate such a conflict.

"If you damage the premises, that's going to be damages to the landlord whether the lease is being terminated or not," Krieger said. "You don't get carte blanche as a debtor who is rejecting a lease, to then destroy the premises and tell the landlord, 'Hey, I already owe you so much rent that it's already at the cap, so forget it.'"

The cap, according to Krieger, is limited to landlords claiming 15 percent of remaining rents due up to three years of the remaining lease agreement, and any unpaid rent that is owed as of the time a tenant files for bankruptcy or, in some cases, when the tenant loses the property before filing for bankruptcy. 

The basis for applying the cap in the first place, according to Krieger, is so that landlords' claims don't dwarf those of other creditors. Basically the long-term nature of leases means that claims for, let's say, unpaid rent could stack up over months and years (including future rent) and become a huge cost that would only go to landlords, upsetting the financial balance for other creditors.  

The bottom line, according to Krieger, is that California landlords can feel more comfortable pursuing more damages claims from tenants - especially attorneys fees.

"They'll be able to cover their attorneys fees in battles over past rent... they will be able to recover that, so that's good," Krieger said.

Krieger also noted that landlords won't be able to recover any fees that are related to future rent, but he said that as long as landlords know that fact, it should help them going forward. 

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