Opinion
8:22-bk-03542-RCT
11-30-2023
In re: DA LUGO INVESTMENT LLC d/b/a OASIS SPORTS LOUNGE, Debtor.
Chapter 11, Subchapter V
ORDER ON DEBTOR'S SECOND AMENDED OBJECTION TO LANDLORD'S CLAIM 1-2 AND ORDER ON MOTION TO AMEND LANDLORD CLAIM
Roberta A. Colton, United States Bankruptcy Judge
This case was considered on October 19, 2023 at hearing on (1) Debtor's Second Amended Objection to Claim 1-2 (Doc. 159), Landlord's Response in Opposition (Doc. 172), and Debtor's Reply (Doc. 186); and (2) the Motion to Amend Operative Landlord Claim (Doc. 173). As explained below, the Court sustains Debtor's Objection, in part, the Court grants the Motion to Amend, in part, and the Court will set certain remaining issues for trial.
I. Background
On August 31, 2022, Debtor Da Lugo Investments LLC filed for bankruptcy under Chapter 11, Subchapter V after a fire destroyed its leased premises and ended its business operations as a hookah lounge. Debtor had leased the premises from May S&P, LLC ("MSP"). The lease reflects that Debtor rented a unit in a shopping plaza with parking to be shared with other tenants in the building. The cause of the fire is undetermined at this time.
The Court granted Debtor's motion to reject its lease with MSP and directed MSP to file any lease rejection claim by October 13, 2022. The deadline for filing a proof of claim was November 9, 2022.
On September 20, 2022, MSP filed its proof of claim for $717,193, which consisted of all of the remaining rent due under the lease through July 2026. Additionally, MSP included the following in its proof of claim:
As an additional element of the Claim, the Landlord reserves all claims against the Debtor that may exist as a result of the Tenant's intentional or negligent actions leading to a fire incident on the Leased Premises on May 20, 2022. The Landlord is presently unable to determine the nature and extent of the Tenant's liability; however, the Landlord, for itself and any insurer under subrogation rights, may have claims stemming from damage to the Leased Premises, to the Facility itself, and to other parties affected by the fire incident. This element of the Claim must be liquidated or estimated in connection with confirmation of any plan of reorganization proposed by the Debtor. All rights relating to claims of this nature are expressly reserved.Additionally, MSP stated the following regarding reservation of rights: "The Landlord reserves its rights to amend or supplement this Proof of Claim as circumstances require." Thus, MSP asserted a claim for almost four years of rent, plus tort damages to the extent that it could prove that Debtor intentionally or negligently caused the fire.
Claim 1-2 (emphasis added).
Claim 1-2.
On August 24, 2023, Debtor filed its Second Amended Objection to MSP's proof of claim. On September 11, 2023, this Court confirmed Debtor's Modified Second Amended Subchapter V Plan of Liquidation on a non-consensual basis. On September 22, 2023, MSP filed its motion to amend its proof of claim.
Doc. 159.
Docs. 146, 163.
Doc. 173.
II. MSP's Motion to Amend
One of Debtor's objections to MSP's proof of claim is that MSP did not allege sufficient detail to support a claim for fire-related damages. As a result, MSP seeks to amend its claim "to describe the claim with greater particularity." However, upon review of the proposed amended proof of claim, not only does MSP provide additional detail regarding the extent of the fire damage to the leased premises, but MSP also attempts to assert a new claim based on Debtor's alleged contractual duty to repair the leased premises even if it did not intentionally or negligently cause the fire.
Doc. 173, p. 6.
Additionally, while not set forth anywhere in the proposed amended proof of claim, MSP argues in response to Debtor's objection to its claim that Debtor also breached the lease by failing to obtain certain insurance coverage allegedly required under the lease. This is another contractual claim that is not based on the facts alleged in the proof of claim, and as such, is not permitted to be asserted via an amendment.
In considering this motion, this Court is mindful of the following guidance from the Eleventh Circuit:
[I]n a bankruptcy case, amendment to a claim is freely allowed where the purpose is to cure a defect in the claim as originally filed, to describe the claim with greater particularity or to plead a new theory of recovery on the facts set forth in the original claim. Still, the court must subject post bar date amendments to careful scrutiny to assure that there was no attempt to file a new claim under the guise of amendment.This means that "a court's inquiry should be focused on fair and timely notice to other interested parties, like the debtor, the . . . trustee, and other creditors whose plan treatment will be impacted by allowance of an amendment." Furthermore, MSP is seeking a "post-confirmation amendment[, which]-while not prohibited-is not favored, and only the most compelling circumstances justify it."
In re International Horizons, Inc., 751 F.2d 1213, 1216-17 (11th Cir. 1985) (internal citations omitted).
In re Aguero, 597 B.R. 190, 192 (Bankr. S.D. Fla. 2018) (citation omitted).
In re Winn-Dixie Stores, Inc., 639 F.3d 1053, 1056-57 (11th Cir. 2011).
Thus, while it is permissible for MSP to amend its claim in order to provide additional detail regarding the extent of the fire damage to the leased premises, it is clear that MSP is attempting to assert a new claim by alleging a contractual obligation to repair the premises regardless of Debtor's fault. In its timely filed September 20, 2022 claim, MSP clearly based its claim for fire damages on Debtor's fault-whether it be that Debtor intentionally or negligently caused the fire. Now, MSP is asserting a contractual duty to repair the premises that was not even hinted at in the proof of claim. Accordingly, the Court grants MSP's motion to amend only to the extent that it seeks to provide additional detail regarding the extent of the fire damage to the leased premises; otherwise, the motion is denied.
III. Debtor's Objection to MSP's Claim
Debtor asserts two main objections to MSP's claim: (1) once the fire destroyed the premises, Debtor was relieved of its obligation to pay rent until the premises were restored; and (2) MSP's total damages (for rent and the fire) are capped under 11 U.S.C. § 502(b)(6). As explained below, the Court is persuaded, to an extent, by Debtor's first argument, but the Court rejects Debtor's second argument.
A. Abatement of Rent After Destruction of the Leased Premises
Debtor first argues that once the fire destroyed the premises, it was relieved of its obligation to pay rent until the premises were restored. Debtor's argument is grounded on Article 25 of the lease:
If the leased premises . . . is damaged by theft, fire, water, winds, explosion, flood, air pollution, leaks, accidents, natural disasters, acts of god (hurricane, flood, tornado, earth quake, etc.) or other casualty resulting from any act of negligence of
Lessees or any of Lessees agents, . . . employees, . . . or invitees, rent shall not be . . . abated while such damages are under repair, and Lessee shall carry insurance to cover said losses and shall be responsible for all costs of repairs including but not limited to those not covered by insurance. . . . Lessee shall be responsible, at its expense, for taking safety measures to protect the premises from hurricane, floods and other natural disasters. Lessee shall be responsible, at its expense or through their own insurance, to cover any hurricane or flood damage that may arise following a hurricane incident.
Doc. 3-2, p. 10 of 17 (emphasis added).
The parties hotly contest what the phrase "resulting from any act of negligence of Lessees" modifies. MSP argues that the phrase only modifies "other casualty," while Debtor argues that the phrase modifies all previously listed casualty examples, including "fire." Thus, according to MSP, if the premises was destroyed by fire, then rent is not abated regardless of whether Debtor was at fault for the fire. Conversely, Debtor argues that if it was not at fault for the fire, then rent is abated until the premises are restored.
The Court is persuaded by Debtor's argument that if it was not at fault for the fire, then rent is abated until the premises are restored. The Court reaches this conclusion by finding that the phrase "resulting from any act of negligence of Lessees" modifies both the introductory phrase ("If the leased premises . . . is damaged") plus the specific casualty at issue. Thus, if the leased premises is damaged by water, and the water damage resulted from any act of negligence of Debtor, then rent is not abated. Likewise, if the leased premises is damaged by fire, and the fire damage resulted from any act of negligence of Debtor, then rent is not abated.
This construction makes sense given that the leased premises is located within a shopping plaza with shared walls, parking, and common areas. If a neighboring tenant or MSP started the fire and that fire also destroyed the leased premises at issue, it would not make sense that Debtor's rent would not be abated while Debtor was dispossessed of the premises through no fault of its own. The Court will not construe the paragraph in a manner that leads to an absurd result when more a reasonable construction exists.
To the extent that MSP had intended the harsh result described in the above example, MSP could have more clearly articulated its intent. It makes more sense that the lessee is either responsible for, and rent will not be abated for, all casualty damages regardless of fault or all casualty damages resulting from any act of negligence of the lessee.
For example, MSP could have listed the casualties that will not result in rent abatement (and specifically state that it is regardless of fault on the part of the lessee) and then added a separate sentence to address casualties caused by the lessee's negligence. Thus, MSP could have stated: "If the leased premises is damaged by theft, fire, water, winds, explosion, flood, air pollution, leaks, accidents, natural disasters, or acts of god (hurricane, flood, tornado, earth quake, etc.), rent shall not be abated while such damages are under repair, regardless of whether the lessee was negligent in causing the damage or failing to prevent the damage. Additionally, if the leased premises is damaged by a casualty resulting from any act of negligence of the lessee, rent shall not be abated while such damages are under repair."
Furthermore, if the Court construed the paragraph in the manner suggested by MSP- that if the leased premises is damaged by any of the other listed casualty examples (without regard to fault), then rent is not abated and Debtor shall be responsible for all costs of repairs- then the last sentence of the paragraph would be superfluous ("Lessee shall be responsible, at its expense or through their own insurance, to cover any hurricane or flood damage that may arise following a hurricane incident."). Instead, the last sentence of the paragraph is an additional situation in which Debtor shall be responsible for the cost of repairing damage to the premises.
To the extent that MSP argues that the paragraph is ambiguous, the ambiguity would be construed against the drafter, which appears to be MSP. It was certainly possible for MSP to clearly specify within the lease that if the premises is damaged or destroyed by fire, without regard to Debtor's fault, rent would not be abated.
See, e.g., City of Homestead v. Johnson, 760 So.2d 80, 84 (Fla. 2000); Arriaga v. Fla. Pacific Farms, L.L.C., 305 F.3d 1228, 1248 (11th Cir. 2002); Goodwin v. Blu Murray Ins. Agency, Inc., 939 So.2d 1098, 1102 (Fla. 5th DCA 2006).
Accordingly, the Court construes the paragraph as requiring the following: If the leased premises is damaged by fire resulting from any act of negligence of Debtor, then rent shall not be abated while such damages are under repair. Conversely, if the leased premises is damaged by fire that did not result from an intentional or negligent act of Debtor, then rent will be abated while such damages are under repair.
A question of fact exists regarding whether Debtor intentionally or negligently caused the fire. The answer to that question will dictate whether Debtor owed any rent under the lease after the fire destroyed the premises. The Court will set a trial on this issue.
B. Application of the § 502(b)(6) Cap
Next, Debtor argues that MSP's total damages (for rent and the fire) are capped under 11 U.S.C. § 502(b)(6). Under the facts of this case, § 502(b)(6) provides that MSP's claim for damages resulting from the termination of the lease cannot exceed: (1) the rent reserved by the lease, without acceleration, for one year (calculated beginning on the earlier of the date of the filing of the petition (August 31, 2022) and the date on which MSP repossessed, or Debtor surrendered, the leased property (which is unclear from the record)); plus (2) any unpaid rent due under the lease, without acceleration, on the earlier of the petition date and the repossessed/surrendered date. Clearly, this calculation is dependent on the determination of whether Debtor intentionally or negligently caused the fire, because that determination dictates whether any rent could be due under the lease after fire destroyed the premises.
The real question posed by the parties is whether MSP's claim for fire damages is subject to the § 502(b)(6) cap. However, in making their arguments, the parties focused on Debtor's alleged breach of a duty to maintain and repair the premises after the fired destroyed it and whether those breach of contract damages are subject to the cap. While that is certainly an interesting issue, that contractual claim is not set forth in MSP's proof of claim. Instead, MSP's proof of claim for fire damages is a tort claim based on Debtor intentionally or negligently causing the fire that destroyed the premises. And even the cases cited by Debtor do not go as far as saying that tort claims that arise independent of the lease are subject to the § 502(b)(6) cap. Instead, those cases address the issue of whether claims for breaches of covenants to maintain and repair the premises are subject to the § 502(b)(6) cap. As such, this Court comes to the unremarkable conclusion that damages arising from a tort independent of the lease (such as MSP's claim that Debtor intentionally or negligently caused the fire) are not subject to the § 502(b)(6) cap.
See In re Mr. Gatti's, Inc., 162 B.R. 1004, 1007 (Bankr.W.D.Tex. 1994) (stating that the issue before the court was "whether or not all damage claims of a lessor, arising out of the lease agreement with the Debtors, are capped by § 502(b)(6) once the lease is rejected"); In re Foamex International, Inc., 368 B.R. 383, 394 (Bankr. D. Del. 2007) (finding that the lessor's "damages from the failure, if any, by Debtors to perform the maintenance and repair obligations under the Leases are limited by the statutory cap" of § 502(b)(6)).
See, e.g., In re Atlantic Container Corp., 133 B.R. 980, 988 (Bankr. N.D.Ill. 1991) (refusing to subject a landlord's claim that the debtor intentionally damaged the leased premises to the § 502(b)(6) cap); In re Best Products Co., Inc., 229 B.R. 673, 678 (Bankr. E.D. Va. 1998) (stating that the majority of courts do not subject a lessor's damages to the §502(b)(6) cap when those damages do not result from the termination of the lease); In re El Toro Materials Co., Inc., 504 F.3d 978, 980-81 (9th Cir. 2007) (stating that the § 502(b)(6) cap applies to damages resulting from rejection of the lease and that "[a] simple test reveals whether the damages result from the rejection of the lease: Assuming all other conditions remain constant, would the landlord have the same claim against the tenant if the tenant were to assume the lease rather than rejecting it"); In re Filene's Basement, LLC, 2015 WL 1806347, at *10 (Bankr. D. Del. April 16, 2015) (stating that the § 502(b)(6) cap does not apply to a landlord's claims for damages that do not directly arise from termination of the lease); In re Kupfer, 852 F.3d 853, 854 (9th Cir. 2016) (holding "that the statutory cap on a landlord's claims against a tenant in bankruptcy, set forth in § 502(b)(6), applies only to claims that result directly from the termination of a lease, but not to collateral claims"); In re Cortlandt Liquidating LLC, 648 B.R. 137, 144 (Bankr. S.D.N.Y. 2023) (stating that the plain language of the statute dictates that the statutory cap applies only to damages that are attributable to the fact that the term of the lease has come to an end).
IV. Conclusion
Accordingly, it is ORDERD that:
(1) MSP's motion to amend (Doc. 173) is GRANTED to the extent that MSP seeks to provide additional detail regarding the extent of the fire damage to the leased premises; otherwise, the motion is DENIED. MSP is granted leave to file an amended proof of claim consistent with this order within fourteen days after entry of this order.
(2) Debtor's Second Amended Objection to Claim 1-2 (Doc. 159) is SUSTAINED to the extent that MSP's claim based on four years of rent due under the lease is subject to the § 502(b)(6) cap. However, whether any rent is even due is dependent on the determination of whether Debtor intentionally or negligently caused the fire-an issue that will be set for trial. Likewise, a trial is necessary in order to liquidate the amount of MSP's fire-related damages if Debtor is found to have intentionally or negligently caused the fire. Debtor's Objection is OVERRULED to the extent that Debtor contends that MSP's fire damage tort claim is subject to the § 502(b)(6) cap.
(3) The Court will hold a status conference on December 14, 2023 at 11:30 a.m. in Courtroom 9A to discuss setting a date for a trial on the factual issues identified in this order.
ORDERED.
Attorney Erik Johanson is directed to serve a copy of this order on interested parties who do not receive service by CM/ECF and file a proof of service within three days of its entry.