FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

In re: AB LIQUIDATING CORP., fka 

Adaptive Broadband Corporation,

Debtor,

No. 03-16979 AMB PROPERTY, L.P.,

Appellant, D.C. No. 

v. CV-03-00021-RMW

OPINION OFFICIAL CREDITORS FOR THE

ESTATE OF AB LIQUIDATING CORP.,

fka Adaptive Broadband

Corporation,

Appellee. 

Appeal from the United States District Court

for the Northern District of California

Ronald M. Whyte, District Judge, Presiding

Argued and Submitted

June 13, 2005—San Francisco, California

Filed July 19, 2005

Before: Mary M. Schroeder, Chief Judge,

M. Margaret McKeown, Circuit Judge, and

Kevin Thomas Duffy,* District Judge.

Opinion by Judge Duffy

*The Honorable Kevin Thomas Duffy, United States District Judge for

the Southern District of New York, sitting by designation. 

8487
COUNSEL

Michael St. James, St. James Law, San Francisco, California,

for the appellant. 

Robert A. Franklin, Murray & Murray, P.C., Cupertino, California, for the appellee. 

OPINION

DUFFY, District Judge:

This case arises from the bankruptcy of Adaptive Broadband Corporation (“Debtor”). AMB Property, L.P. (“AMB”),

IN RE: AB LIQUIDATING CORP. 8489
Debtor’s pre-petition landlord, appeals from the district

court’s affirmance of the bankruptcy court’s judgment. In that

judgment, the bankruptcy court sustained the Creditors’ Committee’s objection to AMB’s claim against Debtor’s estate for

breach-of-lease damages. For the reasons set forth below, we

affirm the judgment of the district court. 

I. Background

This case was decided on stipulated facts in the bankruptcy

court. On April 17, 2000 AMB and Debtor entered into a fiveyear lease (the “Lease”) for certain commercial property. The

Lease required a Security Deposit of $1,000,000. A contemporaneously dated Addendum allowed the Security Deposit to

be in the form of a letter of credit. Debtor established a fullycollateralized $1,000,000 letter of credit, in favor of AMB,

through Union Bank (“Letter of Credit” or “Letter”). 

Debtor filed for Chapter 11 bankruptcy July 26, 2001 and

promptly rejected the Lease. AMB re-let the premises to

another tenant and filed a $2,000,000 proof of claim for damages resulting from Debtor’s rejection of the Lease. The Creditors’ Committee filed an objection to AMB’s claim, arguing

that the Security Deposit should reduce the allowed claim by

$1,000,000. The bankruptcy court agreed with the Creditors’

Committee, and rejected AMB’s counter-argument that the

security deposit should be applied to reduce AMB’s damages

before calculating the amount of the allowed claim. AMB

appealed the bankruptcy court’s decision to the district court;

the district court affirmed. This appeal followed. 

II. The Landlord’s Cap Under The Bankruptcy Code

[1] This appeal turns entirely on a single provision of the

Bankruptcy Code, 11 U.S.C. § 502(b)(6), and presents a question of statutory interpretation which we review de novo. See

In re Quintana, 915 F.2d 513, 515 (9th Cir. 1990). Section

502 sets forth the mechanism for calculating the amount of

8490 IN RE: AB LIQUIDATING CORP.
allowable claims against a bankruptcy estate. Subsection

(b)(6) governs claims by landlords and provides that if objection to a claim is made:

(b) the court, after notice and a hearing, shall determine the amount of such claim . . . and shall allow

such claim in such amount, except 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

property, such claim exceeds . . . the rent reserved by

such lease, without acceleration, for the greater of

one year, or 15 percent, not to exceed three years, of

the remaining term of such lease . . . 

11 U.S.C. § 502(b)(6). This provision is commonly referred to

as the “Landlord’s Cap” because it caps the amount a landlord

may claim as damages because of a Debtor’s rejection of a

lease. In sum, the relevant part of Section 502(b)(6) provides

that a landlord’s claim is limited to the lesser of: (1) its actual

damages; or (2) one year’s lease payments.1

[2] AMB and the Creditors’ Committee agree that AMB’s

gross damages were $5 million.2 Because this amount exceeds

one year’s rent ($2 million), they agree that the Landlord’s

Cap applies. 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.

[3] The Creditors’ Committee argues that the plain language of the statute, appellate decisions from other circuits,

1Section 502’s alternative cap of 15% is not at issue in this appeal. 

2The exact damages claimed were $5,602,034.07. Consistent with the

parties’ submissions and argument in this appeal, throughout this opinion

the figure is rounded to $5 million. Likewise, one year’s rent of

$2,000,755.20, and the proceeds of the Letter of Credit of $999,970.00,

are rounded to $2 million and $1 million respectively. 

IN RE: AB LIQUIDATING CORP. 8491
and legislative history support deducting the $1 million Security Deposit from the “capped” number. AMB counters that the

plain language of the statute, various policy considerations,

and the structure of the Bankruptcy Code as a whole require

that the Security Deposit be applied to the $5 million “gross

damages” number. The proper application of a security

deposit in this context is an issue of first impression before

this Court. 

III. Section 502(b)(6) and Oldden v. Tonto Realty Co.

According to the Creditors’ Committee’s interpretation

(which was employed by the bankruptcy court and affirmed

by the district court), Section 502(b)(6) requires a court to: (1)

determine the landlord’s gross damages (net of any recovery

through re-letting the property); (2) compare the gross damages to the statutory cap of one year’s rent; (3) subtract any

security deposit or letter of credit from the lesser of gross

damages or one year’s rent; and (4) allow a claim for this

amount. Employing this approach, AMB’s gross damages of

$5 million exceed one year’s rent of $2 million. Accordingly,

the $1 million Security Deposit/Letter of Credit was subtracted from one year’s rent, yielding AMB’s allowable claim

of $1 million. 

[4] This analytical framework is largely based on Oldden

v. Tonto Realty Co., 143 F.2d 916 (2d Cir. 1944). Oldden, a

case often cited by bankruptcy courts, involved a landlord

who held a cash security deposit from a debtor, and addressed

the question of “whether a landlord is required to deduct the

amount of security held under a lease from the total damages

provided by the lease or from the total claim allowable [under

the Bankruptcy Code].” Oldden, 143 F.2d at 918. The Oldden

court concluded that the security deposit should be deducted

from the allowable claim rather than the total damages. Id.

Congress endorsed this holding, as the House Judiciary

Report to amended Section 502(b)(6) notes:

8492 IN RE: AB LIQUIDATING CORP.
This paragraph will not overrule Oldden, or the

proposition for which it has been read to stand: to the

extent that a landlord has a security deposit in excess

of the amount allowed under this paragraph, the

excess comes into the estate. . . . As under Oldden,

[a landlord] will not be permitted to offset his actual

damages against his security deposit and then claim

for the balance under this paragraph. Rather, his

security deposit will be applied in satisfaction of the

claim that is allowed under this paragraph. 

H.R. Rep. No. 95-595, at 353-54 (1977), reprinted in 1978

U.S.C.C.A.N. 5963, 6309 (emphasis added). Indeed, 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.” 1978 U.S.C.C.A.N. at 6309.

AMB argues that Oldden was wrongly decided and should

be rejected by this Court. Mindful of the fact that the legislative history’s endorsement of Oldden effectively eviscerates

this argument, AMB urges us not to delve into congressional

intent, arguing that the text of Section 502 is unambiguous

and therefore precludes inquiry into legislative history. 

According to AMB, the plain language of Section 502

requires a court to: (1) determine the landlord’s gross damages (net of any recovery through re-letting the property); (2)

subtract from those gross damages any “mitigation” from

security deposits or letters of credit; (3) compare this “mitigated damages” amount to the statutory cap of one year’s

rent; and (4) allow a claim for the lesser of either the “mitigated damages” or one year’s rent. Employing this approach,

AMB’s gross damages of $5 million, minus the $1 million

Security Deposit/Letter of Credit yield “mitigated damages”

of $4 million. These “mitigated damages” exceed one year’s

IN RE: AB LIQUIDATING CORP. 8493
rent of $2 million. Accordingly, AMB argues the bankruptcy

court should have allowed its entire $2 million claim.

AMB’s plain language argument is misplaced. On its face,

Section 502(b)(6) makes no mention of how security deposits

should be applied in the calculation of allowable claims.

Thus, the statute is ambiguous as to whether such deposits

should be applied to a landlord’s gross damages or its capped

claim. Given this ambiguity, Congress’s explicit endorsement

of Oldden prevents us from accepting AMB’s invitation to

reject the case outright.

AMB alternatively argues that even if we accept Oldden in

the context of cash security deposits, we should not extend

Oldden’s rule to encompass letters of credit. AMB argues that

such an extension will unnecessarily interfere with third-party

relationships, unduly penalize landlords while failing to

advance the policy of the Bankruptcy Code, and generally

wreak havoc on commercial leasing. 

[5] Rather than simply applying Oldden to all letters of

credit that are provided as security deposits, AMB urges us to

adopt reasoning set forth by Judge Klein of the Bankruptcy

Appeals Panel. AMB contends that Judge Klein’s majority

opinion in In re Condor Systems, Inc., 296 B.R. 5 (9th Cir.

BAP (Cal.) 2003), and his concurrence in In re Mayan Networks, 306 B.R. 295, 301 (9th Cir. BAP (Cal.) 2004), present

the appropriate framework for analyzing the interplay

between letters of credit and statutory caps under the Bankruptcy Code. However, despite AMB’s argument, the resolution of this appeal does not require that we decide whether

Judge Klein has set forth the appropriate procedure for applying letter of credit security deposits to landlords’ claims.

Regardless of whether we apply Oldden, or adopt Judge

Klein’s reasoning, the result is the same; the judgment below

8494 IN RE: AB LIQUIDATING CORP.
stands. Under either rationale, the proceeds of the letter of

credit were properly subtracted from AMB’s allowed claim.3

AFFIRMED.

3

In Mayan Networks, Judge Klein concurred in holding that the proceeds of a letter of credit that was fully-collateralized by the debtor’s property should be deducted from the landlord’s capped claim. The letter of

credit in this case was likewise fully-collateralized by Debtor’s property.

Thus, even under Judge Klein’s reasoning, the proceeds were appropriately deducted from AMB’s capped claim. 

IN RE: AB LIQUIDATING CORP. 8495