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Note:AMB Property, L.P. (Landlord) entered into a five-year lease with Adaptive Broadband Corp.(Tenant) for certain commercial property. As permitted under the Lease, Tenant posted a fully collateralized LC for US$1,000,000 as a Security Deposit which was issued by Union Bank, in lieu of a cash deposit.

One year later, Tenant filed for bankruptcy under the US Bankruptcy Code Chapter 11 (reorganization) and, pursuant to its provisions, promptly rejected the lease. Landlord filed a US$2,000,000 proof of claim for damages resulting from Tenant's rejection of the lease. The Creditors' Committee objected claiming that allowable damages should be reduced toUS$1,000,000 after taking the amount of the LC into account.

The U.S. Bankruptcy Court for the Northern District of California, San Jose Division, Weissbrodt, J., granted Creditor's motion and reduced Landlord's claim to US$1,000,000. On appeal, the United States District Court for the Northern District of California, Whyte, J., affirmed. On further appeal, the US Court of Appeals for the Ninth Circuit, Duffy, J., affirmed.

The 9th Circuit opinion stated "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."

Landlord claimed that the Security Deposit should only be used to offset its actual damages of US$5,602,034.67 and not its maximum allowable damages under Section 502(b)(6) of the Bankruptcy Code (commonly described as a "Landlord's cap"),which caps a landlord's damages at the lesser of either one year's rent or actual damages, of US$2,000,000. Landlord argued that the "Landlord's cap" sub-section was clear and unambiguous and therefore there was no need to examine other case law and legislative intent to determine its meaning.

The Creditor's Committee argued that both case law from other states and evidence of legislative intent favored a deduction of the Security deposit from the maximum allowable damages and not actual damages.

The 9th Circuit opinion concluded that the Landlord's cap provision was ambiguous because it did not clearly indicate whether a security deposit should be deducted from the actual damages or the maximum allowable damages. The court then proceeded to draw on both case law from other states and legislative intent to interpret the "Landlord's cap" sub-section to mean that the security deposit had to be deducted from the maximum allowable damages and not actual damages. The court opinion quoted from the US Congress' House Judiciary Report related to the amendment of 11 U.S.C. Section502(b)(6) in summarizing its reasoning: "the purpose 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." H.R. Rep.No. 95-595 (1977), reprinted in 1978 U.S.C.C.A.N.5963, 6309.

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