Solow v. PPI Enterprises (U.S.), Inc. (In Re PPI Enterprises (U.S.), Inc.)

Opinions of the United

2003 Decisions States Court of Appeals

for the Third Circuit

3-28-2003

In Re: PPI Entr

Precedential or Non-Precedential: Precedential

Docket 01-4140

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PRECEDENTIAL

Filed March 28, 2003

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 01-4140

In Re: PPI ENTERPRISES (U.S.), INC.

and POLLY PECK PRODUCE, INC.,

Debtors

SHELDON H. SOLOW,

d/b/a SOLOW BUILDING COMPANY

v.

PPI ENTERPRISES (U.S.), INC.,

POLLY PECK PRODUCE, INC.,

ARVI LIMITED and PPI HOLDINGS, B.V.

Sheldon H. Solow,

d/b/a Solow Building Company,

Appellant

On Appeal from the United States District Court

for the District of Delaware

D.C. Civil Action No. 00-cv-00469

(Honorable Roderick R. McKelvie)

Argued July 15, 2002

Before: SCIRICA, ALITO and FUENTES, Circuit Judges

(Filed March 28, 2003)

2

STEPHEN J. SHIMSHAK, ESQUIRE

(ARGUED)

JAMES H. MILLAR, ESQUIRE

Paul, Weiss, Rifkind, Wharton &

Garrison

1285 Avenue of the Americas

New York, New York 10019-6064

WILLIAM A. HAZELTINE, ESQUIRE

Potter Anderson & Corroon

Hercules Plaza, 6th Floor

1313 North Market Street

P.O. Box 951

Wilmington, Delaware 19899

Attorneys for Appellant

JAMES L. PATTON, JR., ESQUIRE

(ARGUED)

TIMOTHY E. LENGKEEK, ESQUIRE

Young Conaway Stargatt & Taylor

The Brandywine Building

1000 West Street, 17th Floor

P.O. Box 391

Wilmington, Delaware 19899

Attorneys for Appellees,

PPI Enterprises (U.S.), Inc.,

Polly Peck Produce, Inc.,

ARVI Limited and PPI Holdings,

B.V.

CHARLENE D. DAVIS, ESQUIRE

(ARGUED)

The Bayard Firm

222 Delaware Avenue, Suite 900

P.O. Box 25130

Wilmington, Delaware 19899

Attorney for Appellees,

ARVI Limited and PPI Holdings,

B.V.

3

OPINION OF THE COURT

SCIRICA, Circuit Judge:

This is an appeal by a commercial landlord who contends

a Chapter 11 bankruptcy was filed only to frustrate his

collection of rent. At issue is an interpretation of

Bankruptcy Code § 502(b)(6) and the Code’s good faith

requirements.

I.

Sheldon Solow owns a Manhattan office tower at 9 West

57th Street. On August 9, 1989, he leased 10,000 square

feet to PPI Enterprises (“PPIE”), a Delaware corporation, for

its corporate headquarters. The lease ran for ten years,

requiring annual payments (in monthly installments) of

$620,000 for five years and $650,000 thereafter. Polly Peck

International, PLC, a United Kingdom corporation and the

indirect corporate parent of PPIE, guaranteed these

commercial lease obligations.1 Sanwa Bank issued a stand-

by letter of credit to Solow, on behalf of PPIE, in the

amount of $650,000.

Over time, Polly Peck’s financial status unraveled and

insolvency proceedings commenced in Great Britain. On

October 25, 1990, the Chancery Division of the High Court

of Justice entered an administration order2 for Polly Peck

and appointed three administrators for the company. As

Polly Peck’s subsidiary, PPIE faced credit cancellations and

defaults exceeding $17 million.3

1. There are two debtors in these jointly administered cases: PPIE and

Polly Peck Produce, Inc., a wholly owned subsidiary of PPIE. The joint

Chapter 11 plan, and the order confirming it, contemplate that these two

estates will be consolidated upon the effective date of the plan. Therefore,

we will jointly refer to the two entities as “PPIE.”

2. Administration under the Insolvency Act of 1986 is the closest

analogue in British law to Chapter 11 bankruptcy relief.

3. Meanwhile, Solow contends PPIE engaged in transactions designed to

reduce his eventual damages claim. In January 1990, PPIE acquired a

4

In September 1991, PPIE abandoned its corporate

headquarters in Manhattan and ceased paying rent to

Solow. On October 8, 1991, Solow delivered PPIE written

notice of default under the lease. After PPIE failed to cure

the default, Solow gave notice on October 21, 1991, of his

intent to terminate the lease. Remaining rent due under the

leasehold agreement totaled approximately $5.86 million.

Solow subsequently drew on Sanwa Bank’s letter of credit,

applying it in lieu of monthly rent payments between

October 1991 and July 31, 1992. By the latter date, the

letter of credit was exhausted.

On October 25, 1991, Solow sued PPIE and Polly Peck in

the United States District Court for the Southern District of

New York. On November 13, 1992, the district court

granted Solow partial summary judgment, holding PPIE

wrongly terminated its lease, but did not address possible

damages. On March 4, 1996, almost four and one half

years after filing its initial lawsuit and after the failure of

settlement negotiations, Solow asked the district court to

schedule a damages trial. On the eve of that proceeding,

PPIE filed for Chapter 11 bankruptcy in Delaware. PPIE

stated it had four objectives: (1) concluding the Polly Peck

“wind-down”; (2) “liquidating” PPIE; (3) invoking provisions

to reject a restriction on its ability to sell the Del Monte

two percent interest in Del Monte Food Co. for $12.6 million. PPIE

transferred the stock to Polly Peck for an accounting credit. In January

1991, Polly Peck’s administrators sold Standard Fruit capital stock

owned by PPI Holdings B.V., PPIE’s direct parent, to a third party,

conveying the $15 million in proceeds to Sanwa Bank. Although PPIE

owed no obligation to Sanwa Bank, the payment was treated as an inter-

company “loan” to PPIE. Solow suggests no legitimate lender would have

made such a loan, given PPIE’s inability to repay. In July 1991, allegedly

to avoid paying $87,000 in withholding taxes, the administrators “sold”

Polly Peck’s interest in Del Monte to PPIE for $12.6 million, the same

amount Polly Peck had paid PPIE two years earlier. PPIE’s vice president

for finance then reduced the balance sheet value of the Del Monte stock

to $3.5 million. But the inter-company “indebtedness” of $12.6 million

remained unchanged, so it continued to accumulate interest. PPIE

eventually owed $50 million in “inter-company debt” to BV and Polly

Peck.

5

stock; and (4) limiting Solow’s lease termination damages

under Bankruptcy Code § 502(b)(6).

On August 9, 1996, Solow filed a proof of claim with the

Bankruptcy Court, reducing his alleged damages to

$4,757,824.94.4 Then, in December 1996, Solow moved to

dismiss the Chapter 11 filing for bad faith. Solow alleged

PPIE’s bankruptcy was a sham filing designed to create

value for Polly Peck and its creditors at his expense, and

that the bankruptcy served no legitimate purpose.

According to Solow, PPIE did not intend its bankruptcy

filing to effectuate a corporate reorganization, because the

company had no ongoing business, only one remaining

employee, and “no assets other than stock certificates

representing a 2% interest in Del Monte Foods Company.”

After an evidentiary hearing, the Bankruptcy Court in

January 1997 denied the motion without prejudice.5

On March 31, 1998, PPIE filed its bankruptcy plan

(“Plan”), dividing administrative claims and priority tax

claims into four classes.6 After providing for the four-class

division, the Plan stated: “The treatment of and

consideration to be received by holders of Allowed Claims

and Interests pursuant to this Article IV of the Plan shall be

4. The reduction is attributable to two factors: (1) Solow had re-let a

portion of the Manhattan premises, mitigating his potential relief, and (2)

as noted, Solow had received $650,000 under the Sanwa Bank letter of

credit.

5. In the meantime, Del Monte agreed to re-purchase its stock from PPIE

for $1.6 million, subject to higher offers. Solow objected, arguing stock

transfer restrictions inhibited bidding by third parties. After Del Monte

lifted the restriction, Del Monte and Solow engaged in an exchange of

bids, with Solow eventually winning at a price of $11 million. A few

months later, Solow resold the Del Monte stock for at least $30 million

to Texas Pacific Group, generating a profit that exceeded $19 million.

6. Class 1 consisted of “priority claims”; Class 2 included “non-insider

general unsecured claims.” Members of Classes 1 and 2 were to be paid,

at 100 cents on the dollar, in “cash and other consideration as required.”

Class 3, encompassing “affiliate claims,” and Class 4, encompassing

“interests,” were to be paid in “remaining cash and the assignment of

certain debtor claims or causes of action.” Those with Class 3 “affiliate

claims,” Solow alleges, were the “insiders” owing more than $50 million

to PPI Holdings B.V., PPIE’s direct corporate parent, and Polly Peck.

6

in full and complete satisfaction, settlement, release and

discharge of such Claims and Interests. The Debtors’

obligations in respect of such Claims and Interests shall be

satisfied in accordance with the terms of this Plan.”

The Plan treated Solow’s claim as a “Class 2 non-insider

general unsecured claim.” PPIE contended Plan approval by

the classes of creditors was unnecessary since none were

impaired. Nonetheless, PPIE solicited votes from Classes 1,

2, and 3. Only two of seven ballots were returned from

Class 2 — Solow’s “no” vote and one “yes” vote. With no

clear majority, Solow contends Class 2 effectively rejected

the Plan.7

Solow renewed his motion to dismiss on April 6, 1998,

contending his vote against the Plan had not counted

because his claim was improperly classified as

“unimpaired.” Over a four-day period, the Bankruptcy

Court heard evidence on the debtors’ objection to Solow’s

claim; Solow’s renewed motion to dismiss; and Solow’s

objections to the Plan’s confirmation. On December 30,

1998, the Bankruptcy Court determined Solow’s claim was

subject to the statutory cap of 11 U.S.C. § 502(b)(6) and

reduced by application of the letter of credit; the

bankruptcy was filed in good faith; and as an “unimpaired

creditor,” Solow was deemed to have accepted the plan. In

re PPI Enters., 228 B.R. 339 (Bankr. D. Del. 1998) (Walsh,

J.).

The United States District Court for the District of

Delaware affirmed without opinion and this appeal followed.8

7. Once claims have been formed and certain classes have been

identified as “impaired,” at least one impaired class must vote in favor of

a Chapter 11 plan. Otherwise, the court will not confirm the plan.

Section 1129(a) provides: “The court shall confirm a plan only if all of the

following requirements are met . . . (10) [i]f a class of claims is impaired

under the plan, at least one class of claims that is impaired under the

plan has accepted the plan, determined without including any

acceptance of the plan by any insider.” Within the impaired class voting

for the plan, “creditors holding at least two-thirds in amount and more

than half in number of the allowed claims” must approve it. 11 U.S.C.

§ 1126(c).

8. Under the Amended and Restated PPIE Memorandum of Agreement,

the debtors and the “insiders” settled to “avoid litigation.” BV (PPIE’s

direct corporate parent) and Arvi Ltd. (an affiliate of BV) will receive all

remaining cash and an assignment of causes of action.

7

II.

The Bankruptcy Court had subject matter jurisdiction

under 28 U.S.C. §§ 1334 and 157. The District Court had

jurisdiction over the Bankruptcy Court’s order under 28

U.S.C. § 158(a). We have jurisdiction under 28 U.S.C.

§ 158(d). We review the Bankruptcy Court’s “legal

determinations de novo, its factual findings for clear error,

and its exercises of discretion for abuse thereof.” In re

Cont’l Airlines, 203 F.3d 203, 208 (3d Cir. 2000).

III.

The central issue on appeal is whether the doctrine of

impairment precludes Solow from having voting rights

against PPIE’s Chapter 11 bankruptcy plan.

“Impairment” is a term of art crafted by Congress to

determine a creditor’s standing in the confirmation phase of

bankruptcy plans. In re L&J Anaheim Assoc., 995 F.2d 940,

942-43 (9th Cir. 1993). Each creditor has a set of legal,

equitable, and contractual rights that may or may not be

affected by bankruptcy. If the debtor’s Chapter 11

reorganization plan does not leave the creditor’s rights

entirely “unaltered,” the creditor’s claim will be labeled as

impaired under § 1124(1) of the Bankruptcy Code. If the

creditor’s claim is impaired, the Code provides the creditor

with a vote that, depending on the value of the creditor’s

claim, may be sufficient to defeat confirmation of the

bankruptcy plan.

The Bankruptcy Code creates a presumption of

impairment “so as to enable a creditor to vote on

acceptance of the plan.” In re Monclova Care Ctr., Inc., 254

B.R. 167, 178-79 (Bankr. N.D. Ohio 2000); In re Seasons

Apartments, L.P., 215 B.R. 953, 958 (Bankr. W.D. La.

1997). Under 11 U.S.C. § 1124(1), the presumption of

impairment is overcome only if the plan “leaves unaltered

the [creditor’s] legal, equitable, and contractual rights.”9

The burden is placed on the debtor to demonstrate the plan

leaves the creditor’s rights unaltered.

9. A second exception to the presumption is found in 11 U.S.C. § 1124(2)

but it is not relevant here.

8

The Bankruptcy Court here began by reviewing 11 U.S.C.

§ 502(b)(6). The court determined the Plan did not impair

Solow’s legal, equitable, and contractual rights, since the

limitation on Solow’s potential recovery was dictated by

§ 502(b)(6), which was independent of the Plan. Solow

contends application of § 502(b)(6) alters his claim and

entitles him to vote against the Plan’s confirmation. The

question is whether the impairment sections of the

Bankruptcy Code require such a result.

A.

1.

We begin with the language of the Bankruptcy Code.

United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241

(1989). As noted, § 1124(1) provides that a claim is

impaired unless the plan “leaves unaltered the legal,

equitable, and contractual rights to which such claim . . .

entitles the holder of such claim.” Under § 101(5), a “claim”

refers broadly to a creditor’s right to recovery.10 See also

Johnson v. Home State Bank, 501 U.S. 78, 83 (1991) (“We

have previously explained that Congress intended by this

language to adopt the broadest available definition of

‘claim.’ ”) (citations omitted).

Solow contends a broad definition of “claim” requires a

finding of impairment whether the source of impairment is

the plan or a statute. The Bankruptcy Court rejected

10. The section defines “claim” as:

(A) right to payment, whether or not such right is reduced to

judgment, liquidated, unliquidated, fixed, contingent, matured,

unmatured, disputed, undisputed, legal, equitable, secured, or

unsecured; or

(B) right to an equitable remedy for breach of performance if such

breach gives rise to a right to payment, whether or not such right

to an equitable remedy is reduced to judgment, fixed, contingent,

matured, unmatured, disputed, undisputed, secured or unsecured

. . .

11 U.S.C. § 101(5).

9

Solow’s argument, finding he “confuse[d] two distinct

concepts: (i) plan impairment, under which the debtor

alters the ‘legal, equitable, and contractual rights to which

[the] claim entitles the holder of such claim,’ and (ii)

statutory impairment, under which the operation of a

provision of the Code alters the amount that the creditor is

entitled to under nonbankruptcy law.” PPI Enters., 228 B.R.

at 353.

The Bankruptcy Court relied on In re American Solar King

Corp., 90 B.R. 808 (Bankr. W.D. Tex. 1988), to reach its

conclusion. In Solar King, a Chapter 11 corporate debtor

sought confirmation of a modified reorganization plan.

Certain parties already involved in litigation with the

bankrupt company — doubtless concerned about reduced

recoveries — challenged the plan. Id. at 812-13. The court

recognized the operation of § 510(b)11 in altering the

petitioning creditors’ claims, but found the reduction in the

creditors’ potential, nonbankruptcy recovery did not result

in impairment. Id. at 819-22. The court reasoned:

A closer inspection of the language employed in

Section 1124(1) reveals “impairment by statute” to be

an oxymoron. Impairment results from what the plan

does, not what the statute does. A plan which “leaves

unaltered” the legal rights of a claimant is one which,

by definition, does not impair the creditor. A plan

which leaves a claimant subject to other applicable

provisions of the Bankruptcy Code does no more to

alter a claimant’s legal rights than does a plan which

leaves a claimant vulnerable to a given state’s usury

11. That section provides:

For the purposes of distribution under this title, a claim arising

from rescission of a purchase or sale of a security of the debtor or

an affiliate of the debtor, for damages arising from the purchase or

sale of such a security, for reimbursement or contribution allowed

under section 502 on account of such a claim, shall be

subordinated to all claims or interests that are senior to or equal the

claim or interest represented by such security, except that if such

security is common stock, such claim has the same priority as

common stock.

11 U.S.C. § 510(b).

10

laws or to federal environmental laws. The Bankruptcy

Code itself is a statute which, like other statutes, helps

to define the legal rights of persons, just as surely as

it limits contractual rights. Any alteration of legal

rights is a consequence not of the plan but of the

bankruptcy filing itself.

Id. at 819-20; see also In re Smith, 123 B.R. 863, 867

(Bankr. C.D. Cal. 1991) (“[A] plan may limit payment of

claims to ‘the extent allowed,’ without impairing them; for

until claims are allowed, or deemed allowed, the holders

thereof are not entitled to distribution from the bankruptcy

estate.”).12

Generally, we agree with the Solar King analysis. The

relevant impairment language requires bankruptcy plans to

leave unaltered those rights to which the creditor’s “claim

or interest entitles the holder of such claim or interest.” 11

U.S.C. § 1124(1). This language in § 1124(1) does not

address a creditor’s claim “under nonbankruptcy law.” The

use of a present-tense verb suggests a creditor’s rights

must be ascertained with regard to applicable statutes,

including the § 502(b)(6) cap. In other words, a creditor’s

claim outside of bankruptcy is not the relevant barometer

for impairment; we must examine whether the plan itself is

a source of limitation on a creditor’s legal, equitable, or

contractual rights.

Under Solow’s interpretation, every landlord-creditor’s

capped claim under § 502(b)(6) would be impaired and

entitled to a vote. Yet this would make § 502(b)(6) a nullity,

since, unlike some other Code sections, the limitation on

damages under § 502(b)(6) is “absolute” and “is a limit

based on fairness rather than a rule of convenience.” 4

Collier on Bankruptcy, § 502.03, at 7a (Alan N. Resnick &

Henry J. Sommer, eds., 15th ed. 2002). Thus, PPIE could

not offer a plan that departed from the § 502(b)(6)

12. Solow contends Solar King is inapposite. Because Solar King was

decided six years before the repeal of 11 U.S.C. § 1124(3), he suggests

the court did not have “the benefit of history demonstrating Congress’s

intent to enfranchise claimants not fully returned to non-bankruptcy

status.” But, as we discuss, the legislative history surrounding the 1994

repeal of § 1124(3) does not support this view.

11

limitation. Accordingly, we hold that where § 502(b)(6) alters

a creditor’s nonbankruptcy claim, there is no alteration of

the claimant’s legal, equitable, and contractual rights for

the purposes of impairment under § 1124(1).

2.

The Solar King court adopted a similar rationale when

interpreting § 510(b), which automatically subordinates

security purchase and sale claims to the claims of general,

unsecured creditors. The rationale for this Code section is

that general creditors should not share in the risk of an

unlawful issuance of securities. See 4 Collier on

Bankruptcy, § 510.04, at 1. Like § 502(b)(6), this Code

section is mandatory, not discretionary. To hold that its

mere application in a bankruptcy proceeding causes

impairment would nullify its meaning.

Further, as the Bankruptcy Court here noted, Solow’s

interpretation would create “perverse incentives” for all

creditors, effectively urging them to file “inflated claims,

disputed claims, or claims of questionable validity.” Once

those claims were reduced by operation of the Bankruptcy

Code, under Solow’s analysis, creditors would succeed in

having their claims “impaired” and would receive a vote to

defeat the plan.

In sum, PPIE’s Chapter 11 Plan intends to pay Solow his

“legal entitlement” and provide him with “full and complete

satisfaction” of his claim on the date the Plan becomes

effective. Solow is only “entitled” to his rights under the

Bankruptcy Code, including the § 502(b)(6) cap. Solow

might have received considerably more if he had recovered

on his leasehold claims before PPIE filed for bankruptcy.

But once PPIE filed for Chapter 11 protection, that

hypothetical recovery became irrelevant. Solow is only

entitled to his “legal, equitable, and contractual rights,” as

they now exist. Because the Bankruptcy Code, not the

Plan, is the only source of limitation on those rights here,

Solow’s claim is not impaired under § 1124(1).13

13. Because we hold the Plan did not impair Solow’s claim, we need not

reach whether the proceedings required a vote of the creditors to confirm

the Plan.

12

B.

Solow also contends Congress’s 1994 repeal of 11 U.S.C.

§ 1124(3), a separate exception to the presumption of

impairment, supports his broad definition of “claim.” Before

1994, § 1124(3) specified that a creditor receiving full

payment of an “allowed claim” was not impaired. This

subsection, eliminated in 1994, provided:

Except as provided in section 1123(a)(4) of this title,

a class of claims or interests is impaired under a plan

unless, with respect to each claim or interest of such

class, the plan — (3) provides that, on the effective date

of the plan, the holder of such claim or interest

receives, on account of such claim or interest, cash

equal to — (A) with respect to a claim, the allowed

amount of such claim . . . .

11 U.S.C. § 1124(3) (repealed).

Interpreting this statute in 1994, one bankruptcy court

held that § 1124(3) allowed a solvent debtor to pay the

“allowed” claims of unsecured creditors in full, excluding

postpetition interest, without risking impairment. In re New

Valley Corp., 168 B.R. 73, 77-80 (Bankr. D.N.J. 1994).14

The New Valley court held that a portion of a creditor’s

claim that was not “allowed” under the Bankruptcy Code

need not be paid after a bankruptcy filing, even if the claim

would be recoverable in a non-bankruptcy context. Id. This

decision contrasted with several cases holding that

unsecured creditors of a solvent debtor must be paid in

full, including postpetition interest, under the “fair and

equitable” test of § 1129(b)(2). E.g., Consol. Rock Prods. Co.

v. Dubois, 312 U.S. 510 (1941); Debentureholders Protective

Comm., 679 F.2d at 264.

After the New Valley decision, Congress repealed

§ 1124(3). Relevant legislative history recited:

14. An impaired creditor in a solvent debtor case can demand

postpetition interest under the “fair and equitable” test of § 1129(b)(2).

See Debentureholders Protective Comm. of Cont. Inv. Corp. v. Cont. Inv.

Corp., 679 F.2d 264, 269 (1st Cir. 1982). “Unimpaired” creditors have no

such rights.

13

The principal change in this section is set forth in

subsection (d) and relates to the award of post petition

interest. In a recent Bankruptcy Court decision (New

Valley), unsecured creditors were denied the right to

receive post petition interest . . . . In order to preclude

this unfair result in the future, the Committee finds it

appropriate to delete section 1124(3) from the

Bankruptcy Code. As a result of this change, if a plan

proposed to pay a class of claims in cash in the full

allowed amount of the claims, the class would be

impaired, entitling creditors to vote for or against the

plan of reorganization.

H.R. Rep. No. 103-835, at 47-48 (1994), reprinted in 1994

U.S.C.C.A.N. 3340, 3356-57.

Solow contends this repeal established that creditors

receiving cash equal to their “allowed claims,” even

including postpetition interest, were still impaired by

bankruptcy filings. He claims the repeal was not limited to

fact situations involving postpetition interest and that

Congress “went beyond” the New Valley “problem,”

providing creditors with voting rights if a bankruptcy plan

alters their nonbankruptcy rights in any manner. Some

bankruptcy courts appear to have adopted this rationale.

See, e.g., Seasons Apartments, 215 B.R. at 955-56 (“While

the Congressional Record reveals that Congress was most

concerned about solvent debtors avoiding post-petition

interest on unsecured claims, Congress repealed the entire

subsection.”); In re Crosscreek Apartments, Ltd., 213 B.R.

521, 536 (Bankr. E.D. Tenn. 1997) (“In light of the deletion

of subsection (3) to § 1124 by the Bankruptcy Reform Act of

1994, the court concludes that it is no longer a valid

argument to assert that the plan proponent can render a

claim unimpaired by paying the claim in full at

confirmation.”); Equitable Life Ins. Co. of Iowa v. Atlanta-

Stewart Partners, 193 B.R. 79, 80 (Bankr. N.D. Ga. 1996)

(concluding Congress’s repeal of § 1124(3) was an “extreme

remedy” for the New Valley issue but that legislative history

demonstrates “Congress intended to do away with the

14

concept that a creditor receiving payment in full is

unimpaired”).15

The Bankruptcy Court here rejected such a broad

reading of the 1994 repeal, concluding, “[M]y reading of the

legislative history indicates that Congress merely intended

to eliminate the anomalous result created by the New

Valley decision. Thus, I conclude that Congress did not

intend to eliminate unimpairment for purely money claims.

It intended that to be unimpaired, the claim must receive

postpetition interest.” PPI Enters., 228 B.R. at 352 (citation

omitted); see also In re Rocha, 179 B.R. 305, 307 n.1

(Bankr. M.D. Fla. 1995) (“[A] solvent debtor must now pay

post-petition and pre-confirmation interest on a claim to

have a class considered ‘unimpaired.’ Section 1124(3) has

been deleted in its entirety, which had previously allowed a

class of creditors to be considered ‘unimpaired’ without

paying interest on the claim.”). The Bankruptcy Court also

held that §§ 1124(1) and 1124(3) offered different tests for

nonimpairment: “Section 1124(3) created nonimpairment

status by a cash payment equal to the allowed amount of

the claim but without postpetition interest. Such treatment

could not qualify for nonimpairment under § 1124(1)

because the failure to pay postpetition interest does not

leave unaltered the contractual or legal rights of the claim.”

PPI Enters., 228 B.R. at 352.

In other words, § 1124(1) and § 1124(3) were different

exceptions to the presumption of impairment, and the

repeal of one should not affect the other. We agree with the

Bankruptcy Court’s analysis. Contrary to Solow’s

representations, the legislative history does not reflect a

sweeping intent by Congress to give impaired status to

creditors more freely outside the postpetition interest

context. Instead, as the Bankruptcy Court noted, the

legislative history accompanying the repeal of § 1124(3)

indicated the “principal change” in the repeal “relates to the

award of post petition interest.” The congressional

committee specifically referenced the New Valley decision

15. The Atlanta-Stewart Partners and Seasons Apartments courts did not

discuss the plain language of § 1124, at issue here, focusing instead

almost exclusively on the statute’s legislative history.

15

without referencing the text of § 1124(1) or the many cases

addressing its provisions, including Solar King. Therefore,

the legislative history supports our holding.

IV.

Having determined Solow’s claim is not impaired, we

must consider the operation of § 502(b)(6). As the

Bankruptcy Court noted, PPIE asserts that Solow’s claim

under § 502(b)(6) entitles him to $100,612.07. Solow

counters that capping his claim still would award him

$863,937.67. These disparate views are due to conflicting

interpretations of § 502(b)(6).

A.

Section 502(b)(6) caps a landlord’s claim in bankruptcy

for damages resulting from the termination of a real

property lease.16 Under § 502(b)(6), a landlord-creditor is

entitled to rent reserved from the greater of (1) one lease

year or (2) fifteen percent, not to exceed three years, of the

remaining lease term. The cap operates from the earlier of

the petition filing date or “the date on which [the] lessor

repossessed or the lessee surrendered, the leased property.”

The landlord also retains a claim for any unpaid rent due

16. Section 502(b)(6) provides:

[I]f an objection to a claim is made, 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 if such

claim is the claim of a lessor for damages resulting from the

termination of a lease of real property, such claim exceeds —

(A) the rent reserved by such lease, without acceleration, for the

greater of one year, or fifteen percent, not to 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

(B) any unpaid rent due under such lease, without acceleration, on

the earlier of such dates.

11 U.S.C. § 502(b)(6).

16

under such lease prior to the earlier of those dates. This

language reflects Congress’s intent to limit lease

termination claims to prevent landlords from receiving a

windfall over other creditors. See H.R. Rep. No. 95-595, at

353 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6309

(“[The cap] limits the damages allowable to a landlord of the

debtor. . . . It is designed to compensate the landlord for his

loss while not permitting a claim so large (based on a long-

term lease) as to prevent other general unsecured creditors

from recovering a dividend from the estate. The damages a

landlord may assert from termination of a lease are limited

. . . .”); 4 Collier on Bankruptcy, § 502.03 at 7a (“[The cap

is] designed 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.”).17

Just over two years into the parties’ ten-year lease, PPIE

breached the leasehold agreement by failing to pay rent.

Solow gave PPIE ten days to cure its breach. When PPIE did

not respond, Solow initiated termination proceedings and

filed suit seeking damages for the term of the lease. Since

Solow terminated the lease long before PPIE filed its

bankruptcy petition, the Bankruptcy Court correctly fixed

the date on which Solow accepted PPIE’s surrender of the

leased property as the starting point for its § 502(b)(6)

calculation.18

17. The landlord retains a duty to mitigate the tenant’s breach, but any

mitigation of damages secured by reletting the premises will offset only

the landlord’s overall potential recovery, and does not affect the

§ 502(b)(6) cap. The “overwhelming majority of courts” have held that the

§ 502(b)(6) statutory cap is not reduced by any amount a landlord has

received by reletting the leased premises and mitigating its damages. 5th

Ave. Jewelers, 203 B.R. at 381; see also In re Atl. Container Corp., 133

B.R. 980, 990 (Bankr. N.D. Ill. 1991).

18. In determining the final § 502(b)(6) calculation, the Bankruptcy Court

should make a finding of fact as to the exact date of Solow’s termination

or PPIE’s formal surrender of the leasehold agreement, and start the

calculation from that point.

17

B.

Once the § 502(b)(6) calculation is complete, the

prevailing view, and the view adopted by the Bankruptcy

Court here, favors deduction of a security deposit from the

§ 502(b)(6) cap of a landlord’s claim. E.g., Atl. Container,

133 B.R. at 988 (“[It is] well-settled that a security deposit

held by a lessor on a rejected lease must be applied against

the maximum claim for lease termination damages allowed

to the lessor under § 502(b)(6).”). Equating a letter of credit

with a security deposit, the Bankruptcy Court held that

“because Solow drew down the letter of credit for $650,000

subsequent to termination of the lease, Solow’s § 502(b)(6)

claim should be reduced by that amount.”19 PPI Enters.,

228 B.R. at 350.

The Bankruptcy Court relied upon Oldden v. Tonto Realty

Corp., 143 F.2d 916, 921 (2d Cir. 1944), which established

the pre-Code practice of deducting security deposits from

§ 502(b)(6) calculations. See also H.R. Rep. No. 95-595, at

354 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6310 (“[A

landlord] will not be permitted to offset his actual damages

against his security deposit and then claim for the balance

under [§ 502(b)(6)]. Rather, his security deposit will be

applied in satisfaction of the claim that is allowed under

[the statute].”). Oldden stands for the proposition that a

bankruptcy filing limits damages for breach of a leasehold

agreement and requires a return of the tenant’s security

deposit. 143 F.2d at 921. Nonetheless, it bears noting that

Oldden involved a security deposit given directly to the

creditor from the debtor, not from a third party. We must

consider whether this factor requires different treatment

under § 502(b)(6).

Solow contends § 502(b)(6) applies only to funds collected

by the landlord directly from the tenant, and that any other

funds recovered by a landlord, whether from a letter of

19. Solow also contends that even if he had a security deposit, and not

a letter of credit, the Bankruptcy Court’s application of the security

deposit rule was erroneous because he drew down the letter of credit’s

proceeds before the Chapter 11 filing. But the § 502(b)(6) cap starts to

operate on the date on which the lessee surrendered the leased property,

and the Bankruptcy Court correctly rejected Solow’s argument.

18

credit or a new tenant, are immaterial. Accord Atl.

Container, 133 B.R. at 990 (post-petition rent, use, and

occupancy payments “should not be applied against the

Landlord’s maximum allowable lease termination claim”);

see also In re Conston Corp., 130 B.R. 449, 453-54 (Bankr.

E.D. Pa. 1991). In this context, Solow suggests a security

deposit and a letter of credit are fundamentally different.

Solow argues he never had the functional equivalent of a

security deposit and instead simply maintained contractual

rights to the letter of credit’s proceeds, which should not

affect his recovery under § 502(b)(6).

This distinction is important because if Sanwa Bank had

defaulted on its letter of credit to Solow, Solow would have

pursued a separate legal action against Sanwa Bank; he

would have no claim against PPIE based on the letter of

credit. Because the letter of credit allegedly is independent

of his claim against PPIE, Solow contends the $650,000

should not be deducted from the § 502(b)(6) cap

calculation.

Under similar circumstances, some courts have adopted

the “independence principle” to separate proceeds from a

letter of credit from the debtor’s estate. E.g., Kellogg v. Blue

Quail Energy Inc., 831 F.2d 586, 589-90 (5th Cir. 1987)

(holding that “the independence principle [is] the

cornerstone of letter of credit law”); Musika v. Arbutus

Shopping Ctr., L.P., 257 B.R. 770, 772 (Bankr. D. Md. 2001)

(determining the § 502(b)(6) cap without regard to the letter

of credit); see also 5 Collier on Bankruptcy, § 549.04[1]

(“Property of the estate does not include the proceeds of a

letter of credit paid to a creditor of the debtor who is a

beneficiary of the letter.”); Geoffrey L. Berman et al, Last in

Line: Landlords Use Letters of Credit to Bypass the Claim

Cap of § 502(b)(6), 20 Am. Bankr. Inst. J. 16 (Dec. 2001).

Under this view, the independence principle should

generally govern in situations where a third-party issuer,

not the tenant itself, provides the letter of credit.

Yet there is another view. PPIE argues that once the letter

of credit is drawn down, Sanwa Bank, as guarantor, will

pursue recovery of its $650,000 loss directly against PPIE.

Under Solow’s interpretation, this means Solow would keep

the $650,000 and PPIE would be liable for that same

19

amount to Sanwa Bank. In effect, this result would be an

end run around § 502(b)(6), since Solow would receive a

windfall at PPIE’s, and other creditors’, expense, and PPIE

would be liable twice for the same amount of money. The

more appropriate outcome under the relevant case law and

legislative history, PPIE contends, is to treat the letter of

credit as a payment from PPIE to Solow, thus reducing

PPIE’s burden under § 502(b)(6) in bankruptcy.

Chapter 11 is intended to permit the debtor to

rehabilitate itself while simultaneously protecting creditors.

The parties here posit competing legal and equitable

arguments that reflect the dual purposes of bankruptcy.

Although there are reasons to the contrary, we are not

inclined to disturb the rationale followed since Oldden. As

the Second Circuit explained in Oldden:

Although the instant case is admittedly different in

that the tenant here pledged his own property to cover

the possibility of default, and the rights of a third party

are in no way involved, yet in both situations there is

an attempt on the part of the landlord to insure

performance by the tenant. The difference is purely

technical. . . . [I]n one case the insurance is security

put up by the tenant himself, while in the other it is

the credit standing of a third party procured by the

tenant; this difference is insufficient to justify divergent

rules as to the respective allowable claims. If the total

damages are limited in the one instance, they should

likewise be limited in the other instance.

143 F.2d at 921.

Nonetheless, we need not decide the underlying question

because it is clear the parties intended the letter of credit

to operate as a security deposit. Article 33A of the parties’

lease required PPIE to give Solow a security deposit in the

amount of $650,000. Article 50 of the rider attached to the

lease clarified PPIE’s obligation:

50. Cash Security: Letter of Credit

A. In lieu of the cash security provided for in Article

33A, Tenant may deliver to Landlord, as security

pursuant to Article 33A, an irrevocable, clean,

20

commercial letter of credit in the amount of $650,000

issued by a bank . . . , which shall permit Landlord (a)

to draw thereon up to the full amount of the credit

evidenced thereby in the event of any default by Tenant

. . . or (b) to draw the full amount thereof to be held as

cash security pursuant to Article 33A hereof if for any

reason the Letter is not renewed . . . .

B. If Landlord shall use or apply any of the cash

security deposited pursuant to Article 33A or any of

the cash drawn by Landlord under the Letter of Credit

. . . , Tenant shall, promptly on Landlord’s demand

therefor, deposit with Landlord the amount of cash

required to restore the cash security deposited with

Landlord to the level specified in Article 33A or in lieu

thereof, shall deliver to Landlord a Letter of Credit in

the amount and complying with the requirements

specified in Part A above.

Interpreting this language, we find the parties intended

the letter of credit to serve as a security deposit. Entitled

“Cash Security: Letter of Credit,” the rider expressly

provided the letter of credit was “in lieu” of PPIE’s cash

security obligation in the leasehold agreement. The rider

also provided that PPIE would be liable to Solow for

replenishment of the security if he was forced to draw upon

the letter of credit. We will affirm the Bankruptcy Court’s

treatment of the letter of credit under § 502(b)(6).

V.

Finally, we consider whether PPIE’s Chapter 11

bankruptcy filing met certain legal prerequisites. Under

§ 1112(b), bankruptcy courts may dismiss Chapter 11

filings for “cause” if a petition is filed in “bad faith.” The

Bankruptcy Court denied Solow’s motion to dismiss for

alleged bad faith20 and his objection to the confirmation of

20. Solow characterized the filing as:

involv[ing] a struggle between [Solow] and the [Polly Peck]

Administrators in their many guises . . . over the right to [PPIE]’s

remaining asset, the Del Monte stock. Recognizing that Mr. Solow

was gaining the upper hand in that struggle, the Administrators

retreated to this Court solely to frustrate and delay Mr. Solow’s

collection efforts. But such a case involving a debtor with no

ongoing business, a single asset and only a few real creditors

warrants dismissal.

21

PPIE’s plan under § 1129(a)(3).21 At issue is whether this

bankruptcy filing contravened the purposes of the

Bankruptcy Code under its good faith requirements. The

debtor bears the burden of establishing good faith. In re

SGL Carbon Corp., 200 F.3d 154, 162 n.10 (3d Cir. 1999).

In SGL Carbon, we recognized that “no list is exhaustive

of all the factors which could be relevant when analyzing a

particular debtor’s good faith.” 200 F.3d at 166 & n.10

(internal quotations omitted). We directed courts to

consider the totality of the circumstances in assessing the

good faith of a Chapter 11 petition. Id. at 165. Although

SGL Carbon was decided a year after the Bankruptcy

Court’s decision, the Bankruptcy Court properly assumed

an implicit good-faith requirement for Chapter 11 filings.

PPI Enters., 228 B.R. at 344-45; accord SGL Carbon, 200

F.3d at 162. As noted, the Bankruptcy Court conducted

four days of evidentiary hearings on this matter and made

factual findings.22 We review for abuse of discretion. SGL

Carbon, 200 F.3d at 159 (abuse exists upon clearly

erroneous finding of fact, errant legal conclusions, or

improper application of fact to law). “An abuse of discretion

can occur when no reasonable person would adopt the . . .

[lower] court’s view.” Rode v. Dellarciprete, 892 F.2d 1177,

1182 (3d Cir. 1990).

The Bankruptcy Court determined it was not necessarily

“bad faith” for debtors to file for bankruptcy to avail

themselves of certain Code provisions. PPI Enters., 228 B.R.

at 345 (“[I]n evaluating a debtor’s good faith, the court’s

only inquiry is to determine whether the debtor seeks to

abuse the bankruptcy law by employing it for a purpose for

which it was not intended.”); see, e.g., In re W&L Assocs.,

21. That section requires a plan be proposed “in good faith and not by

any means forbidden by law.”

22. Although the Bankruptcy Court may not have applied the test in a

formulaic way, the Court evaluated the relevant factors before reaching

its judgment. The Court mirrored our SGL Carbon analysis in noting that

“courts have not identified with any consistency which circumstances of

the debtor’s filing are indicia of good faith.” PPI Enters., 228 B.R. at 344;

see also Lawrence Ponoroff & F. Stephen Knippenberg, The Implied Good

Faith Filing Requirement, 85 NW. U. L. Rev. 919, 944 (1991).

22

Inc., 71 B.R. 962, 967-68 (Bankr. E.D. Pa. 1987) (§ 365); In

re Bofill, 25 B.R. 550, 552 (Bankr. E.D.N.Y. 1982) (rejection

of contract). The Bankruptcy Court found “the primary

purpose of the petition was to cap Solow’s claim pursuant

to § 502(b)(6).” PPI Enters., 228 B.R. at 343. “Because

PPI[E]’s intention to cap Solow’s claim using § 502(b)(6)

[was] not a use of the Code for a purpose for which it was

not intended — indeed, PPI[E] [was] using § 502(b)(6) for

exactly its intended purpose — . . . PPI[E]’s filing does not

violate the good faith filing doctrine.” Id. at 345 (internal

quotations omitted).23 The Bankruptcy Court also noted

that PPIE filed its Chapter 11 petition in an attempt to

divide its assets during the dissolution of its parent

company. The Court found this an appropriate use of

Chapter 11 since the Code clearly contemplates liquidating

plans under 11 U.S.C. § 1123(b)(4), whereby a debtor may

develop a Chapter 11 plan to sell off all of its assets.

A good faith determination must be a fact-intensive, case-

by-case inquiry. Here, the Bankruptcy Court analyzed the

purpose of § 502(b)(6) and the totality of the circumstances,

and determined that PPIE’s bankruptcy filing did not

contravene the good faith requirement. Under the

circumstances, we see no abuse of discretion.

VI.

For the foregoing reasons, we will affirm the District

Court.

23. Moreover, as the Bankruptcy Court noted, Chapter 11 does not

require reorganization, and even if PPIE had filed for Chapter 7

protection, it still would have been able to benefit from § 502(b)(6). PPI

Enters., 228 B.R. at 347 (“[Section] 502(b)(6) is not tethered to Chapter

11 cases. It applies equally to Chapter 7 cases.”); 4 Collier on

Bankruptcy, § 502.03, at 7a (“Under section 502(b)(6), whether the

landlord’s claim arises in the course of a liquidation of a debtor or

whether it arises in connection with debtor reorganization under chapter

11, a single standard applies.”).

23

A True Copy:

Teste:

Clerk of the United States Court of Appeals

for the Third Circuit