Note: Rich-Taubman Associates (Beneficiary/Creditor) leased commercial real estate in Stamford, Connecticut to KP Fashion Company (Applicant/Debtor) which filed a Chapter 7 (liquidation) bankruptcy petition on 31 December 2008. John S. ereira (Trustee) was appointed trustee of Debtor's estate pursuant to 11 U.S.C. § 701. Applicant/Debtor had provided a standby letter of credit in the amount of US$ 360,000 to the Creditor as collateral for the lease. On 20 January 2009, Trustee attempted to obtain an order rejecting the lease nunc pro tunc on the date of the Chapter 7 petition. Creditor objected to the motion, stating that the premises had not been vacated on 31 December 2008 and that Applicant/ Debtor had continued to seek potential assignees after said date. The bankruptcy court issued an order rejecting the lease effective 30 January 2009, subject to the return of all keys and surrender of the premises. Applicant/Debtor returned keys and surrendered the premises as per the order. Beneficiary/Creditor then filed an administrative claim for US$ 33,734.96 covering the base rent and operating fees up to 30 January 2009.

Trustee moved to expunge this claim, arguing 1) that the lease should have been rejected nunc pro tunc to the original petition date, 2) that, if not nunc pro tunc, then at least the amount of the claim should be far less than the amount required by the original lease, and 3) that if any administrative claim is allowed, proceeds of the letter of credit should be first applied to this claim. The bankruptcy court upheld the full administrative claim. On appeal, the U.S. District Court for the Southern District of New York, Buchwald, J., upheld the bankruptcy court's decision.

The Judge ruled that security deposits are meant to apply to pre-petition claims, such as lease arrearages or lease rejection damages, and not administrative claims. In this case, the $360,000 was insufficient to cover even pre-petition damages, so the bankruptcy court was right to have rejected the motion.



The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.