2009 WI App 57
court of appeals of
published opinion
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2007AP2791 |
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†Petition for Review filed |
2009 WI App 57
COURT OF APPEALS DECISION DATED AND FILED April 15, 2009 David R. Schanker Clerk of Court of Appeals |
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NOTICE |
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This opinion is subject to further editing. If published, the official version will appear in the bound volume of the Official Reports. A party may file with the Supreme Court a petition to review an adverse decision by the Court of Appeals. See Wis. Stat. § 808.10 and Rule 809.62. |
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Appeal No. |
2007AP2791 |
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STATE OF |
IN COURT OF APPEALS |
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ADMANCO, Inc. by Michael S. Polsky, Receiver,
Plaintiff-Respondent, v.
Defendant-Appellant, M&I Marshall & Ilsley Bank, EBSCO Industries, Inc. and Alliance Laundry Systems, Inc., Garnishees. |
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APPEAL
from a judgment of the circuit court for
Before
Brown, C.J.,
¶1 NEUBAUER, J.
FACTS AND PROCEDURAL HISTORY
¶2 The facts underlying the dispositive issues on appeal are
undisputed. Admanco was a tenant under a
“Net Industrial Building Lease” dated March 31, 2004, for a property located at
¶3 On December 30, 2004, Admanco filed an Assignment for the Benefit of Creditors pursuant to Wis. Stat. ch. 128.[3] That same day, the court in the receivership proceeding entered an order under ch. 128 appointing Michael S. Polsky as the receiver over all assets of Admanco. The court’s December 30 order additionally enjoined creditors from proceeding against Admanco, “the assignor.”[4]
¶4 Polsky, as Receiver, then remained in possession of the
leased premises until Admanco’s assets were sold in January 2005 at which time
the purchaser of Admanco’s assets, EBSCO Industries, Inc., occupied the
premises.[5] EBSCO later entered into a written lease with
¶5 However, during the initial stages of the receivership
proceeding, Admanco failed to make its January 1, 2005 rent payment as required
under the lease.
¶6 On December 11, 2006, the Receiver filed this action pursuant
to Wis. Stat. § 128.19(1)(c)[6]
to recover excess lease payments from
¶7 In response to the Receiver’s claims,
¶8 Both parties later moved for summary judgment. After a hearing on October 29, 2007, the
circuit court entered judgment in favor of the Receiver in the amount of
$513,292.66 plus statutory costs and fees.[7] In doing so, the circuit court focused on the
application of the receivership statutes under Wis. Stat. ch. 128, specifically § 128.17(2), in
determining that the landlord’s claim was limited to past due rent and payment
at the rate specified in the lease for the one-month period of occupancy by the
Receiver in January 2005.
DISCUSSION
Standard of Review
¶9 Summary judgment is
appropriate when no material facts are in dispute and the moving party is
entitled to judgment as a matter of law.
Wis. Stat. § 802.08. The grant or denial of a motion for summary
judgment is a matter of law that this court reviews de novo. Torgerson v. Journal/Sentinel, Inc.,
210
¶10 The issues in this case center on the application of certain
provisions of Wis. Stat. ch. 128,
which governs creditors’ actions.
Specifically at issue on appeal is whether
The Limitation of Landlord Claims under Wis. Stat. § 128.17(2)
¶11
Debts to become due as well as debts due may be proved, but a lessor’s claim shall be limited to past due rent, and to any actual damage caused the lessor by a rejection of the lease on the part of the debtor or by its termination by force of its provisions. The lessor shall be entitled to payment in full, at the rate specified in the lease, for the period of any actual occupancy by the receiver or assignee.
Wisconsin Stat. ch. 128 is modeled after certain provisions of the federal Bankruptcy Act of 1893 and 1898. Capitol Indem. Corp. v. Hoppe (In re Bossell, Van Vechten & Chapman), 30 Wis. 2d 20, 26, 139 N.W.2d 639 (1966) (“[Chapter 128] was enacted in 1937 and in a large measure was copied from or based upon the National Bankruptcy Act as it then read or as it was originally created in 1893.”) As originally enacted, prior to 1934, the Bankruptcy Act was silent as to the provability of claims for rent to accrue in the future, however, courts were “virtually unanimous in deciding that rent destined to accrue after the filing of a petition was not capable of proof, since there was no fixed liability absolutely owing, but merely a demand contingent upon uncertain events.” Oldden v. Tonto Realty Corp., 143 F.2d 916, 918 (2nd Cir. 1944) (collecting cases).
¶12 The limitation on landlord claims recognized both the main
object of the Bankruptcy Act and the difference between a landlord-creditor and
a general creditor.
¶13 As explained in Oldden, in 1934, Congress
amended the Bankruptcy Act to overcome obstacles that previously prevented
landlords from proving claims for future rent.
I. Wisconsin Stat. § 128.17(2) Limits
¶14 At the time of the assignment for the benefit of creditors,
Admanco was current on its rent obligation.
Wisconsin Stat. § 128.17(2)
requires payment to the landlord for post-filing rent for the period of the
receiver’s actual occupancy only.[10] The parties agree that
¶15
¶16 Further, at the time of filing, a receiver is vested with the
debtor’s title to property and rights under contract, including the debtor’s
rights and interest as a tenant under a lease.
See Wis. Stat. § 128.19(1)(c). This is evidenced by the facts of this
case. After Admanco filed for
receivership under Wis. Stat. ch.
128, the Receiver retained control over the lease and negotiated with EBSCO for
its occupancy of leased premises. If
II.
¶17 As discussed earlier,
¶18 Seeking to avoid that result,
A.
¶19
creditor who has either legal or equitable security for his or her debt upon any property of the insolvent debtor of a nature to be liquidated and distributed in a liquidation proceeding, or a creditor to whom is owed a debt for which such security is possessed by some endorser, surety, or other person secondarily liable.
With respect to the letters of
credit,
¶20 The rights and obligations of an issuer of a letter of credit[13] are set forth under Wis. Stat. § 405.103(4):
Rights and obligations of an issuer to a beneficiary or a nominated person under a letter of credit are independent of the existence, performance, or nonperformance of a contract or arrangement out of which the letter of credit arises or which underlies it, including contracts or arrangements between the issuer and the applicant and between the applicant and the beneficiary.
Applying this “independence principle,” the letter of credit gave rise to a primary independent obligation of M&I to Stanton, and not that of a guarantor or one who is secondarily liable for Admanco’s obligations.
¶21 Courts and commentators alike universally agree that the letter
of credit is an independent primary obligation which cannot give rise to the
rights and defenses of a guarantor, or an entity that is secondarily
liable. See, e.g., 3
J. White & R. Summers, Uniform Commercial Code sec. 26-2 (5th
ed.) (“To say that a letter is a guaranty ... is to make an inaccurate
statement about the letter of credit transaction.”); Pastor v. Nat’l Republic Bank,
390 N.E.2d 894, 897 (
Unlike the true contract of guaranty, however, the guaranty [standby] letter of credit will oblige its issuer to pay on the presentation of specified documents showing a default, rather than upon proof of the fact of default. The central distinction between the two instruments, thus, is that the letter of credit creates a primary liability on an original obligation to pay on the presentation of documents whereas the contract of guaranty creates a secondary liability on the pre-existing obligation of another to pay in the event that the other does not. (Citations omitted.)
In the case of a landlord/tenant relationship, the obligation of the issuer to pay the landlord is a primary obligation triggered by the presentation of documents, not secondary to the tenant’s obligation to pay rent.[14]
¶22 Here, to draw on the standby letters of credit
B. The Receiver Is Entitled to Recover the
Security Deposit and Proceeds from Letters of Credit Secured by Debtor’s Assets.
¶23 Having determined that Stanton is not a secured creditor, we
next determine whether the Receiver is entitled to recover the cash security
deposit and the proceeds from the letters of credit, to the extent that the
amounts exceed the limits set forth in Wis.
Stat. § 128.17(2) and deplete estate assets.
1. The Cash Security Deposit
¶24 It is well established that the bankruptcy statutory limit on a landlord’s claim applies to cash security deposits. See Redback Networks, Inc. v. Mayan Networks Corp., 306 B.R. 295, 298 (B.A.P. 9th Cir. 2004) (citing Oldden). The statutory limit sets the parameters of a landlord’s damage claim and, in turn, the amount of the security deposit which exceeds that limit is returnable to the receiver. See Oldden, 143 F.2d at 921 (the bankruptcy statute sets a limit on damages for breach of lease by bankruptcy, and the landlord is entitled to only that sum and not more; any surplus security deposit over that amount is returnable to the trustee.); Mayan Networks, 306 B.R. at 305 (Klein, J., concurring) (to the extent that a landlord has a security deposit in excess of the amount of his claim … the excess comes into the estate); see also Waldschmit v. Appleton Inv. Co. (In re Zienel Furniture, Inc.), 13 B.R. 264, 267 (E.D. Wis. 1981) (security deposit offset against landlord’s damages claim, as limited by federal bankruptcy cap on landlord’s damages.).
¶25
¶26 Here,
2. Letters
of Credit
¶27 Pursuant to the terms of the lease,
¶28 Under the “independence principle” discussed above,
¶29 As explained below, we agree with the majority of courts that have concluded that the statutory limit on a landlord’s claim applies to proceeds from a letter of credit to the extent that the proceeds reflect amounts that were secured with the debtor’s assets in the separate reimbursement agreement between the issuer and the debtor. We conclude that this is the better reasoned analysis as it comports with the legislature’s intent to compensate the landlord up until the date of the receivership petition “while not permitting a claim so large as to prevent other general unsecured creditors from recovering a dividend.” Zienel Furniture, 13 B.R. at 266. As noted in Oldden, the landlord has regained the leased premises (and here, leased them out to other tenants) and the unexpired term of the lease does not benefit the assets of the receivership estate.
¶30 Mayan Networks, captures the analysis generally accepted in the federal bankruptcy arena. The issue in Mayan Networks was whether the letter of credit proceeds were available to the landlord to satisfy its lease claim for future rent without regard to the statutory cap—or outside the statutory cap—or whether the proceeds should be applied to the landlord’s capped claim, reducing the claim against the bankruptcy estate. Mayan Networks, 306 B.R. at 297-98.
¶31 Harkening back to the analysis set forth in Oldden,
the court first noted that the letter of credit was essentially a security
deposit, although a bank was inserted between the landlord and the tenant. Mayan Networks, 306 B.R. at
300-01. Despite the separate contractual
relationships, where the letter of credit was, through the separate
reimbursement agreement between the issuer and the debtor, collateralized by
the debtor’s property, the proceeds derived from that amount should be deducted
from the landlord’s capped claim. See id.
at 301. The court instructed that “the
appropriate analysis looks to the impact that the draw upon the letter of credit
has on property of the estate.”
¶32 In Mayan Networks, the debtor entered into a sublease of a large
commercial building, delivering to the landlord two forms of security for the
sublease: cash of $351,033 and a letter of credit for $648,966 issued by a
bank. Mayan Networks, 306 B.R.
at 297. The sublease provided that the
letter of credit was delivered “as security for the faithful performance by
[Debtor] of all of [Debtor’s] obligations under this Sublease.”
¶33 The court’s decision was upheld on appeal. The appellate court explained:
If the collateral would come back to the Debtor, but for the existence of the pledge of security, then it is a security deposit for purposes of this analysis.
On the facts of this case, the letter of credit is in the nature of a security deposit. The lease itself described the letter of credit as “security” for the tenant’s obligation under the lease. Although the words “security deposit” are not used, the principles of Oldden still apply. From the standpoint of the Debtor’s other creditors, the letter of credit has the same effect as a cash security deposit. That is, the amount of money left in the estate to pay unsecured claims is reduced by $650,000 [the amount of the letter of credit].
Mayan Networks, 306
¶34 While the court in Mayan Networks recognized the difficulty of fitting the three-party letter of credit transaction into the bankruptcy scheme it concluded:
Letters of credit have yet to find a comfortable place in bankruptcy law. However, it is not necessary to distinguish the letter of credit in this case from the security deposit in Oldden. Here, the language of the lease described the letter of credit as security for the lease and the letter of credit was fully secured by a cash deposit. The draw upon the letter of credit had the same effect on the estate as the forfeiture of a cash security deposit …. Therefore, the draw upon the letter of credit will be applied in satisfaction of the landlord’s claim against the debtor and the amount of such a claim will be reduced by the amount of the draw.
Mayan Networks, 306 B.R. at 301; see also In re Connectix Corp., 372 B.R. 488, 495 (Bank. N.D. Cal 2007) (recognizing that the landlord’s allowed claim under the statutory cap applied to post-petition draws on a letter of credit security deposit; “a letter of credit was intended to be and should be treated as a security deposit because draws against the letter of credit would have an effect on the property in the debtor’s estate”); AMB Property, L.P. v. Official Creditors (In re AB Liquidating Corp.), 416 F.3d 961, 962, 965 (9th Cir. 2005) (upholding reduction of landlord’s allowed claim by the amount of the security deposit which was in the form of a fully collateralized letter of credit); International Fin. Corp., 399 F.3d at 566 (while the letter of credit itself and the payments thereunder may not be property of the debtor, the collateral pledged as security interest for the letter of credit is); Solow v. PPI Enters., Inc., 324 F.3d 197, 210 (3d Cir. 2003) (finding that the parties intended to treat letter of credit as a security deposit and affirming the Bankruptcy Court’s application of the statutory cap to the proceeds); Kellogg v. Blue Quail Energy, Inc. (In re Compton Corp.), 831 F.2d 586, 589, 590 (5th Cir. 1987); see also First Avenue West Building, L.L.C. v. James (In re Onecast Media, Inc.), 439 F.3d 558 (9th Cir. 2006) (trustee entitled to recover portion of cash security deposit and letter of credit proceeds that exceeded the landlord’s damages arising out the trustee’s rejection of the lease); 9A Am. Jur. 2d Bankruptcy § 1316, Observation (“Collateral which has been pledged by a debtor to secure a bank’s claim against the debtor for indemnification after a letter of credit securing an obligation incurred by the debtor has been honored by the bank constitutes property of the debtor’s estate.”); see also 2 Bankruptcy Desk Guide § 12:84 (March 2009). [17]
¶35 The circuit court’s reasoning in this case reflects the majority rule that a standby letter of credit does not nullify the statutory limit on a landlord’s damages.[18] Whether in the form of cash or proceeds from the draw down on a letter of credit that was secured by the tenant’s assets in the reimbursement agreement, the debtor’s security deposit/assets obtained by the landlord in excess of the allowable damages in a bankruptcy are recoverable by the trustee. We agree with the circuit court that the federal law provides proper guidance in our interpretation of Wis. Stat. § 128.17(2). The federal cases stem back to Oldden’s observation that under the pre-1934 act (upon which Wis. Stat. ch. 128 is modeled), the debtor’s security deposit was returned to the estate, to the extent it exceeded the allowed claim in bankruptcy.[19] Applying § 128.17(2), the circuit court reasoned that the letters of credit were essentially a security deposit under the lease and thus, to the extent the letters of credit were in turn collateralized with Admanco’s assets, the statutory limitations on the estate’s liability govern the landlord’s recovery. We agree.
¶36 At the time
CONCLUSION
¶37 We conclude that
By the Court.—Judgment affirmed.
[1] All references to the Wisconsin Statutes are to the 2007-08 version unless otherwise noted.
[2] The
proceeds of the letter of credit provided by the Bumby guarantors were
initially a subject of this lawsuit.
However, the Receiver later reached a stipulation with the guarantors in
which the Receiver received $267,364.17.
That settlement was approved by the receivership court on March 30,
2006. The circuit court reduced the
Receiver’s claim against
[3] This proceeding is pending as In re Admanco, Inc., Assignor, Case No. 04-CV-775.
[4] The court ordered “[t]hat all creditors of Assignor are hereby enjoined and restrained from (a) commencing in any action or prosecuting any other action now pending other than in these proceedings, (b) enforcing against Assignor or its property any judgment; and (c) taking any action to collect or recover a claim against Assignor.”
[5] Pursuant
to the asset purchase agreement, EBSCO agreed to pay the rent and related
occupancy costs to
[6]
The receiver or assignee upon qualifying shall be vested by operation of law with the title of the debtor as of the date of the filing of the petition or assignment hereunder, except so far as it is property which is exempt, including … [r]ights of action arising upon contracts or from the unlawful taking or detention of or injury to the debtor’s property.
[7] This amount represents the letter of credit proceeds ($750,000) and security deposit ($61,313.66), less the $267,364.17 received by the receiver from the Bumbys and the $30,656.83 administrative rent claim, plus prejudgment interest at the statutory rate.
[8] As explained in Oldden v. Tonto Realty Corp., 143 F.2d 916, 917 (2nd Cir. 1944), the 1934 amendment to the Bankruptcy Act, then titled § 63 sub. a(9), provided for one year’s rent following the surrender of the premises and any past due rent.
[9] The current landlord cap is set forth in the Bankruptcy Code, in 11 U.S.C. § 502(b)(6). Section 502(b)(6) provides that a landlord’s claim is not allowed to the extent it exceeds
(A) 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, 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 lease property; plus
(B) any unpaid rent due under such lease, without acceleration, on the earlier of such dates.
[10] See also
Floerscheimer v. Cousins (In re Citizens’ Savings & Trust Co.),
171
[11] We
note that Wis. Stat. § 128.17(2)
additionally permits actual damages if the lease was terminated by the force of
its provisions. While
[12]
[13] A standby
letter of credit, like a security deposit, provides assurance for the
performance of an obligation. A letter
of credit provides for payment by a third party to one party to a contract when
the other contracting party fails to perform its obligation. There are typically three parties to a letter
of credit: the issuer (usually a bank),
the applicant (the tenant, for present purposes), and the beneficiary (the
landlord). The tenant pays the bank a
fee and provides a reimbursement agreement for the bank to issue the letter of
credit for the landlord’s benefit. If
the tenant defaults on his [or her] obligations under the lease, the landlord
may draw upon the letter of credit, i.e., request payment, and the bank is
obligated to pay the landlord.
Joshua E. Luber, Comment, Letters of Credit and 11 U.S.C. § 502(b)(6): The Full Analysis—Why the Fifth Circuit’s Decision In In re Stonebridge Is Only Part of the Answer, 22 Emory Bankr. Dev. J. 679, 680 (2006) (footnotes omitted). The Wisconsin statutes define a letter of credit as “a definite undertaking … by an issuer to a beneficiary at the request or for the account of an applicant or, in the case of a financial institution, to itself or for its own account, to honor a documentary presentation by payment or delivery of an item of value.” Wis. Stat. § 405.102(1)(j).
[14]
[15]
[16] We reiterate that our discussion as to the Bumby letter of credit is limited to that amount ultimately collateralized with Admanco’s assets. The $267,000 portion of the Bumby letter of credit that was, in related agreements, collateralized with the Bumbys’ personal assets, is not at issue in this case.
[17] While
we follow the more widely accepted view regarding letters of credit, we
acknowledge Stanton’s position that some early cases conclude that letters of
credit arranged for by a debtor-obligor, and the proceeds thereof, are not
property of the debtor’s bankruptcy estate because the payment to the
beneficiary of the letter of credit comes from the assets of the issuer, not
the assets of the debtor. See In re Ocana, 151 B.R. 670, 672
(S.D.N.Y. 1993); Keene Corp. v. Acstar Ins. Co. (In
re Keene Corp.), 162 B.R. 935, 942 (Bankr. S.D.N.Y. 1994). However, certain cases cited do not bear out
Certain other cases cited by Stanton do not address the issue at hand: P.A. Bergner & Co. v. Bank One, 140 F.3d 1111, 1118, 1119 (7th Cir. 1998) (recognizing the independence principle in determining whether payments from a debtor to the issuer of a letter of credit were voidable preferences under 11 U.S.C. § 547(b)); In re Delaware River Stevedores, Inc., 129 B.R. 38 (Bankr. E.D. Pa. 1991) (addressing whether an automatic stay under 11 U.S.C. § 105(a) applies to an attempt to draw on a letter of credit). Finally in Musika v. Arbutus Shopping Center, Ltd. (In re Farm Fresh Supermarkets of Maryland, Inc.), 257 B.R. 770 (Bankr. D. Md. 2001), the facts did not reveal whether the letter of credit was secured by the debtor’s assets and the issue was not otherwise raised or addressed. In the end, we agree that, if the reimbursement agreement was not collateralized with the debtor’s assets, the analysis should be inapplicable because it does not defeat the purpose of the limit, which is to fairly distribute the debtor’s assets to its creditors.
[18] The
doctrine of independence protects only the distribution of the proceeds of the
letter of credit. Here, the Receiver
does not challenge the initial payment of the proceeds of the letters of credit
to
[19]
[20] We
acknowledge