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DCW Litigation Digest
Redback Networks, Inc. v. Mayan Networks Corp. [2004]
How LC Proceeds Impact Bankruptcy Damage Caps: Explore how a U.S. court ruled LC proceeds as security deposits under bankruptcy caps, reshaping landlord claims and issuer risks.
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Redback Networks, Inc. v. Mayan Networks Corp.
(In re: Mayan Networks Corp.)
306 B.R. 295 (B.A.P. 9th Cir. 2004) [U.S.A.]
Type of Lawsuit: Applicant/Debtor disputed the Landlord/Beneficiary’s unsecured claim for rent.
Topics: US Bankruptcy Code 11 USCA Section 502(b)(6) (Damage Cap); Subrogation
Parties:
• Appellant/Beneficiary/Landlord– Redback Networks, Inc. (Counsel: Randy Michelson of Bingham McCutchen LLP, San Francisco, CA)
• Appellee/Applicant/Sublessee/Debtor– Mayan Networks Corporation; David Judd, Estate Manager of Reorganized Debtor (Counsel: Margaret P. Sheneman, Murphy, Sheneman, Julian & Rogers, San Francisco, CA)
Underlying Transaction: Sublease of a commercial building.
LC: Financial standby LC for US$648,966. Silent as to governing rules.
Decision: The US Bankruptcy Appellate Panel of the Ninth Circuit, Jones, J., Ryan, J., and Klein J. (concurring in a separate opinion), in an opinion by Jones, J., affirmed the judgment of the US Bankruptcy Court for the Northern District of California, Weissbrodt, J., holding that the proceeds of a drawing on the LC given as security for a lease applies to beneficiary’s maximum allowed damages claim under US Bankruptcy Code 11 USCA Section 502(b)(6).
Rationale: Majority: The letter of credit was in the nature of a security deposit and should be treated just as a cash security deposit for purposes of the cap on allowed damages for future rent under US Bankruptcy Code 11 USCA Section 502(b)(6).
Concurring: Judge Klein concurred in the result on grounds that a letter of credit issuer should be treated similar to a guarantor of the obligations of the tenant.
(In re: Mayan Networks Corp.)
306 B.R. 295 (B.A.P. 9th Cir. 2004) [U.S.A.]
Type of Lawsuit: Applicant/Debtor disputed the Landlord/Beneficiary’s unsecured claim for rent.
Topics: US Bankruptcy Code 11 USCA Section 502(b)(6) (Damage Cap); Subrogation
Parties:
• Appellant/Beneficiary/Landlord– Redback Networks, Inc. (Counsel: Randy Michelson of Bingham McCutchen LLP, San Francisco, CA)
• Appellee/Applicant/Sublessee/Debtor– Mayan Networks Corporation; David Judd, Estate Manager of Reorganized Debtor (Counsel: Margaret P. Sheneman, Murphy, Sheneman, Julian & Rogers, San Francisco, CA)
Underlying Transaction: Sublease of a commercial building.
LC: Financial standby LC for US$648,966. Silent as to governing rules.
Decision: The US Bankruptcy Appellate Panel of the Ninth Circuit, Jones, J., Ryan, J., and Klein J. (concurring in a separate opinion), in an opinion by Jones, J., affirmed the judgment of the US Bankruptcy Court for the Northern District of California, Weissbrodt, J., holding that the proceeds of a drawing on the LC given as security for a lease applies to beneficiary’s maximum allowed damages claim under US Bankruptcy Code 11 USCA Section 502(b)(6).
Rationale: Majority: The letter of credit was in the nature of a security deposit and should be treated just as a cash security deposit for purposes of the cap on allowed damages for future rent under US Bankruptcy Code 11 USCA Section 502(b)(6).
Concurring: Judge Klein concurred in the result on grounds that a letter of credit issuer should be treated similar to a guarantor of the obligations of the tenant.
Factual Summary:
Sublessee of a commercial building provided Landlord with two forms of security: (1) a cash deposit of US$351,033, and (2) a US$648,966 letter of credit. The sublease provided that the letter of credit was delivered “as security for the faithful performance by [Sublessee/Applicant] of all of its obligations under this Sublease.” To secure the letter of credit, Sublessee/Applicant pledged over US$650,000 cash to Issuer.
After entering into the sublease, Sublessee/Applicant filed a Chapter 11 (reorganization) petition under the US Bankruptcy Code, and, pursuant to its provisions, moved to reject the sublease. After the bankruptcy filing, Landlord/Beneficiary drew on the LC. Landlord/Beneficiary filed a general unsecured claim for damages arising from the rejection of the sublease and an administrative claim for post-petition rent.
On an objection by the Debtor/Applicant and the Official Committee of Unsecured Creditors to the amount of the Landlord/Beneficiary’s claim, the Bankruptcy Court ruled that both the cash deposit and LC proceedings reduced Landlord’s claim. On appeal, affirmed by two judges with a concurring opinion.
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Cases Referenced:
• In re: Mayan Networks Corp. (Bankr. N. D. Cal. Nov. 5, 2001) [U.S.A.]
• In re: Mayan Networks Corp. (Bankr. N. D. Cal. Nov. 5, 2001) [U.S.A.]