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

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
In re: AB LIQUIDATING CORP., fka 
Adaptive Broadband Corporation,
Debtor,
AMB PROPERTY, L.P., No. 03-16979
Appellant,
 D.C. No.
CV-03-00021-RMW
v.
OFFICIAL CREDITORS FOR THE OPINION
ESTATE OF AB LIQUIDATING CORP.,
fka Adaptive Broadband
Corporation,
Appellee.

Appeal from the United States District Court
for the Northern District of California
Ronald M. Whyte, District Judge, Presiding
Argued and Submitted
June 13, 2005—San Francisco, California
Filed July 19, 2005
Before: Mary M. Schroeder, Chief Judge,
M. Margaret McKeown, Circuit Judge, and
Kevin Thomas Duffy,* District Judge.
Opinion by Judge Duffy
*The Honorable Kevin Thomas Duffy, United States District Judge for
the Southern District of New York, sitting by designation.
8487
IN RE: AB LIQUIDATING CORP. 8489
COUNSEL
Michael St. James, St. James Law, San Francisco, California,
for the appellant.
Robert A. Franklin, Murray & Murray, P.C., Cupertino, Cali-
fornia, for the appellee.
OPINION
DUFFY, District Judge:
This case arises from the bankruptcy of Adaptive Broad-
band Corporation (“Debtor”). AMB Property, L.P. (“AMB”),
8490 IN RE: AB LIQUIDATING CORP.
Debtor’s pre-petition landlord, appeals from the district
court’s affirmance of the bankruptcy court’s judgment. In that
judgment, the bankruptcy court sustained the Creditors’ Com-
mittee’s objection to AMB’s claim against Debtor’s estate for
breach-of-lease damages. For the reasons set forth below, we
affirm the judgment of the district court.
I. Background
This case was decided on stipulated facts in the bankruptcy
court. On April 17, 2000 AMB and Debtor entered into a five-
year lease (the “Lease”) for certain commercial property. The
Lease required a Security Deposit of $1,000,000. A contem-
poraneously dated Addendum allowed the Security Deposit to
be in the form of a letter of credit. Debtor established a fully-
collateralized $1,000,000 letter of credit, in favor of AMB,
through Union Bank (“Letter of Credit” or “Letter”).
Debtor filed for Chapter 11 bankruptcy July 26, 2001 and
promptly rejected the Lease. AMB re-let the premises to
another tenant and filed a $2,000,000 proof of claim for dam-
ages resulting from Debtor’s rejection of the Lease. The Cred-
itors’ Committee filed an objection to AMB’s claim, arguing
that the Security Deposit should reduce the allowed claim by
$1,000,000. The bankruptcy court agreed with the Creditors’
Committee, and rejected AMB’s counter-argument that the
security deposit should be applied to reduce AMB’s damages
before calculating the amount of the allowed claim. AMB
appealed the bankruptcy court’s decision to the district court;
the district court affirmed. This appeal followed.
II. The Landlord’s Cap Under The Bankruptcy Code
[1] This appeal turns entirely on a single provision of the
Bankruptcy Code, 11 U.S.C. § 502(b)(6), and presents a ques-
tion of statutory interpretation which we review de novo. See
In re Quintana, 915 F.2d 513, 515 (9th Cir. 1990). Section
502 sets forth the mechanism for calculating the amount of
IN RE: AB LIQUIDATING CORP. 8491
allowable claims against a bankruptcy estate. Subsection
(b)(6) governs claims by landlords and provides that if objec-
tion to a claim is made:
(b) the court, after notice and a hearing, shall deter-
mine 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 dam-
ages resulting from the termination of a lease of real
property, such claim exceeds . . . the rent reserved by
such lease, without acceleration, for the greater of
one year, or 15 percent, not to exceed three years, of
the remaining term of such lease . . .
11 U.S.C. § 502(b)(6). This provision is commonly referred to
as the “Landlord’s Cap” because it caps the amount a landlord
may claim as damages because of a Debtor’s rejection of a
lease. In sum, the relevant part of Section 502(b)(6) provides
that a landlord’s claim is limited to the lesser of: (1) its actual
damages; or (2) one year’s lease payments.1
[2] AMB and the Creditors’ Committee agree that AMB’s
gross damages were $5 million.2 Because this amount exceeds
one year’s rent ($2 million), they agree that the Landlord’s
Cap applies. The only issue in this appeal is whether to apply
the $1 million Security Deposit/Letter of Credit against the $5
million “gross damages” number or the $2 million “capped”
number.
[3] The Creditors’ Committee argues that the plain lan-
guage of the statute, appellate decisions from other circuits,
1
Section 502’s alternative cap of 15% is not at issue in this appeal.
2
The exact damages claimed were $5,602,034.07. Consistent with the
parties’ submissions and argument in this appeal, throughout this opinion
the figure is rounded to $5 million. Likewise, one year’s rent of
$2,000,755.20, and the proceeds of the Letter of Credit of $999,970.00,
are rounded to $2 million and $1 million respectively.
8492 IN RE: AB LIQUIDATING CORP.
and legislative history support deducting the $1 million Secur-
ity Deposit from the “capped” number. AMB counters that the
plain language of the statute, various policy considerations,
and the structure of the Bankruptcy Code as a whole require
that the Security Deposit be applied to the $5 million “gross
damages” number. The proper application of a security
deposit in this context is an issue of first impression before
this Court.
III. Section 502(b)(6) and Oldden v. Tonto Realty Co.
According to the Creditors’ Committee’s interpretation
(which was employed by the bankruptcy court and affirmed
by the district court), Section 502(b)(6) requires a court to: (1)
determine the landlord’s gross damages (net of any recovery
through re-letting the property); (2) compare the gross dam-
ages to the statutory cap of one year’s rent; (3) subtract any
security deposit or letter of credit from the lesser of gross
damages or one year’s rent; and (4) allow a claim for this
amount. Employing this approach, AMB’s gross damages of
$5 million exceed one year’s rent of $2 million. Accordingly,
the $1 million Security Deposit/Letter of Credit was sub-
tracted from one year’s rent, yielding AMB’s allowable claim
of $1 million.
[4] This analytical framework is largely based on Oldden
v. Tonto Realty Co., 143 F.2d 916 (2d Cir. 1944). Oldden, a
case often cited by bankruptcy courts, involved a landlord
who held a cash security deposit from a debtor, and addressed
the question of “whether a landlord is required to deduct the
amount of security held under a lease from the total damages
provided by the lease or from the total claim allowable [under
the Bankruptcy Code].” Oldden, 143 F.2d at 918. The Oldden
court concluded that the security deposit should be deducted
from the allowable claim rather than the total damages. Id.
Congress endorsed this holding, as the House Judiciary
Report to amended Section 502(b)(6) notes:
IN RE: AB LIQUIDATING CORP. 8493
This paragraph will not overrule Oldden, or the
proposition for which it has been read to stand: to the
extent that a landlord has a security deposit in excess
of the amount allowed under this paragraph, the
excess comes into the estate. . . . As under Oldden,
[a landlord] will not be permitted to offset his actual
damages against his security deposit and then claim
for the balance under this paragraph. Rather, his
security deposit will be applied in satisfaction of the
claim that is allowed under this paragraph.
H.R. Rep. No. 95-595, at 353-54 (1977), reprinted in 1978
U.S.C.C.A.N. 5963, 6309 (emphasis added). Indeed, the pur-
pose of the Landlord’s Cap is “to compensate the landlord for
his loss while not permitting a claim so large . . . as to prevent
other general unsecured creditors from recovering a dividend
from the estate.” 1978 U.S.C.C.A.N. at 6309.
AMB argues that Oldden was wrongly decided and should
be rejected by this Court. Mindful of the fact that the legisla-
tive history’s endorsement of Oldden effectively eviscerates
this argument, AMB urges us not to delve into congressional
intent, arguing that the text of Section 502 is unambiguous
and therefore precludes inquiry into legislative history.
According to AMB, the plain language of Section 502
requires a court to: (1) determine the landlord’s gross dam-
ages (net of any recovery through re-letting the property); (2)
subtract from those gross damages any “mitigation” from
security deposits or letters of credit; (3) compare this “miti-
gated damages” amount to the statutory cap of one year’s
rent; and (4) allow a claim for the lesser of either the “miti-
gated damages” or one year’s rent. Employing this approach,
AMB’s gross damages of $5 million, minus the $1 million
Security Deposit/Letter of Credit yield “mitigated damages”
of $4 million. These “mitigated damages” exceed one year’s
8494 IN RE: AB LIQUIDATING CORP.
rent of $2 million. Accordingly, AMB argues the bankruptcy
court should have allowed its entire $2 million claim.
AMB’s plain language argument is misplaced. On its face,
Section 502(b)(6) makes no mention of how security deposits
should be applied in the calculation of allowable claims.
Thus, the statute is ambiguous as to whether such deposits
should be applied to a landlord’s gross damages or its capped
claim. Given this ambiguity, Congress’s explicit endorsement
of Oldden prevents us from accepting AMB’s invitation to
reject the case outright.
AMB alternatively argues that even if we accept Oldden in
the context of cash security deposits, we should not extend
Oldden’s rule to encompass letters of credit. AMB argues that
such an extension will unnecessarily interfere with third-party
relationships, unduly penalize landlords while failing to
advance the policy of the Bankruptcy Code, and generally
wreak havoc on commercial leasing.
[5] Rather than simply applying Oldden to all letters of
credit that are provided as security deposits, AMB urges us to
adopt reasoning set forth by Judge Klein of the Bankruptcy
Appeals Panel. AMB contends that Judge Klein’s majority
opinion in In re Condor Systems, Inc., 296 B.R. 5 (9th Cir.
BAP (Cal.) 2003), and his concurrence in In re Mayan Net-
works, 306 B.R. 295, 301 (9th Cir. BAP (Cal.) 2004), present
the appropriate framework for analyzing the interplay
between letters of credit and statutory caps under the Bank-
ruptcy Code. However, despite AMB’s argument, the resolu-
tion of this appeal does not require that we decide whether
Judge Klein has set forth the appropriate procedure for apply-
ing letter of credit security deposits to landlords’ claims.
Regardless of whether we apply Oldden, or adopt Judge
Klein’s reasoning, the result is the same; the judgment below
IN RE: AB LIQUIDATING CORP. 8495
stands. Under either rationale, the proceeds of the letter of
credit were properly subtracted from AMB’s allowed claim.3
AFFIRMED.
3
In Mayan Networks, Judge Klein concurred in holding that the pro-
ceeds of a letter of credit that was fully-collateralized by the debtor’s prop-
erty should be deducted from the landlord’s capped claim. The letter of
credit in this case was likewise fully-collateralized by Debtor’s property.
Thus, even under Judge Klein’s reasoning, the proceeds were appropri-
ately deducted from AMB’s capped claim.