Redback Networks, Inc. v. Mayan Networks Corp. [2004]

Redback Networks, Inc. v. Mayan Networks Corp.
(In re: Mayan Networks Corp.)
306 B.R. 295 (B.A.P. 9th Cir. 2004) [U.S.A.]

Type of Lawsuit: Applicant/Debtor disputed the Landlord/Beneficiary’s unsecured claim for rent.

Topics: US Bankruptcy Code 11 USCA Section 502(b)(6) (Damage Cap); Subrogation

Parties:
• Appellant/Beneficiary/Landlord– Redback Networks, Inc. (Counsel: Randy Michelson of Bingham McCutchen LLP, San Francisco, CA)
• Appellee/Applicant/Sublessee/Debtor– Mayan Networks Corporation; David Judd, Estate Manager of Reorganized Debtor (Counsel: Margaret P. Sheneman, Murphy, Sheneman, Julian & Rogers, San Francisco, CA)

Underlying Transaction: Sublease of a commercial building.

LC: Financial standby LC for US$648,966. Silent as to governing rules.

Decision: The US Bankruptcy Appellate Panel of the Ninth Circuit, Jones, J., Ryan, J., and Klein J. (concurring in a separate opinion), in an opinion by Jones, J., affirmed the judgment of the US Bankruptcy Court for the Northern District of California, Weissbrodt, J., holding that the proceeds of a drawing on the LC given as security for a lease applies to beneficiary’s maximum allowed damages claim under US Bankruptcy Code 11 USCA Section 502(b)(6). 

Rationale: Majority: The letter of credit was in the nature of a security deposit and should be treated just as a cash security deposit for purposes of the cap on allowed damages for future rent under US Bankruptcy Code 11 USCA Section 502(b)(6).

Concurring: Judge Klein concurred in the result on grounds that a letter of credit issuer should be treated similar to a guarantor of the obligations of the tenant.