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Precedential or Non-Precedential: Precedential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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Recommended Citation
"In Re: PPI Entr " (2003). 2003 Decisions. Paper 673.
http://digitalcommons.law.villanova.edu/thirdcircuit_2003/673


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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., 

(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, 

, 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., 

,
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., 

, 178-79 (Bankr. N.D. Ohio 2000); In re Seasons
Apartments, L.P., 

, 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., 

, 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, 

, 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 

.
  The Bankruptcy Court relied on In re American Solar King
Corp., 

(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. 

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. 

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.

see also In re Smith, 

, 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., 

, 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. 

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, 

(1941); Debentureholders Protective

.
   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., 

, 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 

(“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., 

, 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, 

, 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 

(citation
omitted); see also In re Rocha, 

, 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 

.
   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. 

; see also In re Atl. Container Corp., 

, 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. 

(“[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 

.
   The Bankruptcy Court relied upon Oldden v. Tonto Realty
Corp., 

, 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

. 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.

(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., 

, 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., 

, 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., 

, 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 

.
  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., 

, 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 

& 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. 

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 

; accord SGL 

. 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

(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, 

,
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 

(“[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 

;
see also Lawrence Ponoroff & F. Stephen Knippenberg, The Implied Good
Faith Filing Requirement, 85 NW. U. L. Rev. 919, 944 (1991).
                                   22


Inc., 

, 967-68 (Bankr. E.D. Pa. 1987) (§ 365); In
re Bofill, 

, 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 

. “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.” 

(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

(“[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