The Leasing Hotline

Thereafter, the trustee for the bankruptcy estate of the tenant brought an action against the landlord, claiming breach of the lease by prematurely drawing on the letter of credit and by retaining an amount in excess of the '502(b) cap. The bankruptcy court found in favor of the tenant, and the landlord appealed. The court of appeals reversed, holding that the '502(b) cap did not alter the entitlement of the landlord to the full proceeds of the letter of credit because the landlord did not make a claim against the tenant's estate in bankruptcy. Moreover, the landlord did not breach the lease by prematurely drawing on the letter of credit because the tenant was in default of the lease at the time the landlord sought to draw on the letter of credit, as the tenant was past due and owed rent to the landlord.

BANKRUPTCY

Where the landlord does not make a claim in the tenant's bankruptcy proceeding, it is not precluded from seeking the remedies contained in the parties' lease. In re: Stonebridge Technologies, Inc., No. 04-10494, U.S. Court of Appeals for the Fifth Circuit, Nov. 8, 2005.

On Sept. 21, 2000, the landlord and tenant entered into a lease whereby the tenant agreed to lease space in an office building. Under the terms of the lease, the tenant was required to provide a security deposit to the landlord plus an irrevocable stand-by letter of credit for $1.4 million. Thereafter, on Sept. 6, 2001, the tenant filed for bankruptcy under Chapter 11. On Oct. 22, 2001, the landlord initiated a draw request to the bank under the irrevocable letter of credit for the full amount. The bank rejected the draw request because of some technical deficiencies. On Oct. 23, 2001, the landlord and tenant announced an agreement in open court that the lease would be rejected effective no earlier than Oct. 1, 2001, and no later than Oct. 23, 2001. On Oct. 25, 2001, the landlord corrected the deficiencies in its draw request to the bank, and the bank honored the letter of credit, issuing a check for $1.4 million to the landlord. On Nov. 8, 2001, the bankruptcy court approved the rejection of the lease. However, the landlord never filed a proof of claim for its actual lease rejection damages.

Thereafter, the trustee for the bankruptcy estate of the tenant brought an action against the landlord, claiming breach of the lease by prematurely drawing on the letter of credit and by retaining an amount in excess of the '502(b) cap. The bankruptcy court found in favor of the tenant, and the landlord appealed. The court of appeals reversed, holding that the '502(b) cap did not alter the entitlement of the landlord to the full proceeds of the letter of credit because the landlord did not make a claim against the tenant's estate in bankruptcy. Moreover, the landlord did not breach the lease by prematurely drawing on the letter of credit because the tenant was in default of the lease at the time the landlord sought to draw on the letter of credit, as the tenant was past due and owed rent to the landlord.