Owner Violated Lease by Drawing Down Full Amount of Letter of Credit

May 31, 2003

A lease required the tenant to give a security deposit that consisted of both cash and a letter of credit. When the tenant filed for bankruptcy, it owed rent and other charges. The owner took the cash part of the security deposit and drew down the full amount of the letter of credit. The court later determined the amount of the owner's damages, which were capped by bankruptcy law. This capped amount was less than the total amount of the cash and letter of credit that the owner had taken.

A lease required the tenant to give a security deposit that consisted of both cash and a letter of credit. When the tenant filed for bankruptcy, it owed rent and other charges. The owner took the cash part of the security deposit and drew down the full amount of the letter of credit. The court later determined the amount of the owner's damages, which were capped by bankruptcy law. This capped amount was less than the total amount of the cash and letter of credit that the owner had taken. So the tenant's trustee sued the owner for violating the lease by improperly drawing down the full amount of the letter of credit.

A bankruptcy court in Texas ruled that the owner had violated the lease by improperly drawing down the full amount of the letter of credit. The court said that the law required any security deposit to be applied against the owner's capped damages claim. The court rejected the owner's argument that this requirement didn't apply to letters of credit because the lease in this case defined the security deposit to include the letter of credit. Drawing down the letter of credit in an amount “over and above” the capped damages amount was a lease violation, the court said [In re: Stonebridge Technologies, Inc.].

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