AMB Property, L.P. v. Official Creditors for the Estate of AB Liquidating Corp.

Citation: 416 F.3d 961Docket: 03-16979

Court: Court of Appeals for the Ninth Circuit; July 18, 2005; Federal Appellate Court

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AMB Property, L.P. appeals the affirmance of a bankruptcy court judgment that sustained the Creditors’ Committee's objection to its $2,000,000 claim for breach-of-lease damages against the estate of Adaptive Broadband Corporation, which had rejected a five-year lease with AMB after filing for Chapter 11 bankruptcy. The lease included a $1,000,000 security deposit, structured as a fully-collateralized letter of credit. The Creditors’ Committee argued that the claim should be reduced by the amount of the security deposit, resulting in an allowed claim of $1,000,000. The bankruptcy court agreed, rejecting AMB’s argument that the security deposit should first be applied to its damages before calculating the claim. The district court upheld this decision, leading to AMB's appeal. The case hinges on the interpretation of 11 U.S.C. § 502(b)(6), which limits landlord claims for lease termination damages to the lesser of one year’s rent or 15% of the remaining lease term, capped at three years.

The “Landlord’s Cap” limits a landlord's claim for damages due to a Debtor’s lease rejection to the lesser of the actual damages or one year’s lease payments, as outlined in Section 502(b)(6). AMB’s agreed gross damages total $5 million, which exceeds the one-year rent cap of $2 million, confirming that the cap applies. The central issue in this appeal is whether to apply a $1 million Security Deposit/Letter of Credit against the $5 million gross damages or the $2 million capped amount. The Creditors’ Committee advocates for deducting the Security Deposit from the capped amount, supported by statutory language, case law, and legislative history. Conversely, AMB argues that the Security Deposit should be applied to the gross damages due to statutory interpretation and policy considerations. 

According to the Creditors’ Committee's interpretation, which was upheld by lower courts, the process involves determining gross damages, comparing them to the cap, and deducting the Security Deposit from the lesser amount, resulting in an allowable claim of $1 million for AMB. This interpretation is based on the precedent set in *Oldden v. Tonto Realty Co.*, where the court ruled that security deposits should be deducted from the allowable claim, not total damages. Legislative history supports this view, as it asserts that security deposits must satisfy the allowed claim under Section 502(b)(6). AMB disputes this interpretation and argues against the validity of *Oldden*, but legislative backing for the case complicates this position, leading AMB to contend that the statutory language is clear enough to negate the need for examining legislative intent.

Section 502 outlines the process for determining a landlord's allowable claim in bankruptcy. It requires the court to (1) assess the landlord's gross damages, excluding any recovery from re-letting; (2) deduct any mitigation from security deposits or letters of credit; (3) compare the mitigated damages to the statutory cap of one year's rent; and (4) permit a claim for the lesser amount. AMB calculated its gross damages at $5 million, subtracting a $1 million security deposit/letter of credit to arrive at mitigated damages of $4 million, which exceeds one year's rent of $2 million. AMB contends the bankruptcy court should have allowed its full $2 million claim. However, Section 502(b)(6) does not explicitly address the treatment of security deposits in claim calculations, creating ambiguity regarding their application to gross damages or capped claims. Consequently, the court referenced the Oldden case, which Congress endorses, indicating that AMB's interpretation is flawed. AMB also argues against applying Oldden to letters of credit, citing potential negative impacts on third-party relationships and commercial leasing. Instead, AMB suggests adopting Judge Klein's framework from past cases to analyze letters of credit concerning statutory caps. Despite AMB's arguments, the court concluded that it does not need to determine the applicability of Judge Klein's reasoning, as the outcome remains the same: the letter of credit proceeds were correctly deducted from AMB’s claim. The judgment was affirmed, confirming that the fully-collateralized letter of credit proceeds should be subtracted from the landlord's capped claim.