Shopping Center Bankrupt Tenants Security Deposit - PDF document

International Council of Shopping Centers, Inc. V O L . 2 6 I S S U E 1 S P R I N G 2 0 0 6 1221 Avenue of the Americas, 41st floor, New York, NY 10020-1099 Phone (646) 728-3800 In Depth In Re AB Liquidating Corp. : Handling the Matter of a Shopping Center Bankrupt Tenant’s Security Deposit __________________2 ______________________7 Enforcing Exclusive Use Clauses Legal Update __________________________12 Can You Handle Rejection? Supreme Court to Hear Important Wetlands Cases ______13 The legal journal of the shopping center industry Not ‘One Inch’—A Vestige of Feudal Law Erodes ________________________________15 in New York State Green, Red or Blue Light? New Mexico Sends Mixed Celebrating Signals With Kmart Decision ______________________19 25 years! Of Interest Articles ______________________________________________ 22 Cases ________________________________________________ 22 Assignment ______________________________________22 Bankruptcy________________________________________22 Condemnation/Eminent Domain ____________________23 Contracts ________________________________________23 Covenants ________________________________________23 Environment ______________________________________23 Fees ______________________________________________23 Guarantors________________________________________24 Landlord & Tenant ________________________________24 Leases ____________________________________________24 Signs & Billboards ________________________________24 Taxation __________________________________________24 Zoning____________________________________________25 6 Legislation___________________________________________ 25 From Canada In Depth Limiting Tenant Rights ________________________________26 21 Judicial/Legislative Review __________________________30

In Depth In Re AB Liquidating Corp. : Handling the Matter of a Bankrupt Tenant’s Security Deposit Sheila E. Carson Lowenstein Sandler PC Livingston, N.J. In a recent case that may have sealed the fate of landlords trying to apply their security deposit to their damages claim, In re AB Liquidating Corp., 416 F.3d 961 (9th Cir. 2005), the Ninth Circuit Court of Appeals, ruled that a landlord must deduct a bankrupt tenant’s security deposit from its damages claim, after it is capped by § 502(b)(6) of the Bankruptcy Code, rather than from the actual total damages resulting from a tenant’s rejection of the lease pursuant to § 365 of the Bankruptcy Code. (All references to the Bankruptcy Code refer to 11 U.S.C. § 101, et seq. , including, as amended by the Bankruptcy Abuse Prevention and Consumer Protection Act, which became effective Oct. 17, 2005.) The Facts In April 2000, Adaptive Broadband Corp. (“Adaptive”), a Sunnyvale, Calif.-based telecommunications firm, entered into a five-year commercial lease at the annual rent of $2 million. As security for the lease, Adaptive provided a $1 million letter of credit to landlord AMB Property L.P. (“AMB”). In July 2001, Adaptive filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the Northern District of California and immediately rejected the lease pursuant to § 365 of the Bankruptcy Code. AMB successfully mitigated its damages by re-letting the premises to another tenant and then filed a $2 million proof of claim in Bankruptcy Court for damages AMB claimed resulted from Adaptive’s rejection of the lease. Actual damages totaled approximately $5 million; however, the damages were capped at $2 million by virtue of § 502(b)(6) of the Bankruptcy Code. The Official Committee of Unsecured Creditors contested AMB’s claim against Adaptive’s bank- ruptcy estate, arguing that AMB should apply the $1 million security deposit to offset AMB’s claim of a full year’s rent, thus leaving AMB with $1 million claim for rejection damages against Adaptive’s bankruptcy estate. Section 502(b)(6) Lease Damages Cap Section 502(b)(6) of the Bankruptcy Code provides that the Bankruptcy Court should disallow any claim “to the extent that— “(6) if such claim is the claim of a lessor for damages resulting from the termination of a lease of real prop- erty, such claim exceeds— the rent reserved by such lease, without acceleration, for the greater of one year, or 15 percent, not to a) exceed three years, of the remaining term of such lease, following the earlier of— (i) the date of the filing of the petition; and (ii) the date on which such lessor repossessed, or the lessee surrendered, the leased property; plus any unpaid rent due under such lease, without acceleration, on the earlier of such dates. . . .” 11 b) U.S.C. § 502(b)(6) Shopping Center Legal Update is published by the Legal Department of the International Council of Shopping Centers, Inc., 1221 Avenue of the Americas, 41st floor, New York, NY 10020-1099; James E. Maurin , Chairman; Michael P. Kercheval , President; Melina Spadone, General Counsel. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting or other professional services. If legal advice or other expert assistance is required, the services of a competent professional should be sought. Editor-in-Chief: Stephanie McEvily, Esq. Spring Issue Editors: Daniel K. Wright, Taft, Stettinius & Hollister, Steve Snively, Holland & Knight, Orlando, FL; Joshua Stein, Latham & Watkins, NewYork, NY; Mitchell Block, Selman Munson & Lerner, Austin, TX; Thomas Barbuti, Whiteford, Taylor & Preston L.L.P., Baltimore, MD; Natalie Vukovich, Daoust, Vukovich, Baker-Sigal, Banka, Toronto, Ontario. Summer Issue Editors: Kevin Groarke, Sonnenshein, Nath & Rosenthal, New York, NY; Brian D. Huben, Katten Muchin Zavis Rosenman, Los Angeles, CA; Elizabeth Belkin, Piper, Marbury, Rudnick & Wolfe, Chicago, IL; Gregory Pressman, Schulte Roth & Zabel, New York, NY; Eric Rapkin, Akerman, Senterfitt, P.A., Ft. Lauderdale, FL; Sheila E. Carson, Esq., Lowenstein Sandler PC, Livingston, NJ; Sean Ervin, Katz Law Firm, Kansas City, MO; Fredric L. Carsley, De Grandpré Chait LLP. Fall/Winter Issue Editors: Karen O’Malley, Goulston & Storrs, Boston, MA; Kim A. Rieck, Squire, Sanders & Dempsey LLP; Marty Denis, Barlow, Kobata & Denis, Chicago, IL 60606; J Yost Conner, Jr., Patton Boggs LLP, Washington, DC; Matt Seeberger, Cox, Castle & Nicholson, LLP, Los Angeles, CA; Gary Kessler, Kessler Collins, Dallas, TX; Murray F. Tait, T&T Properties, Alberta, Canada HI. 2