In re Stonebridge Technologies, Inc., 04-10494.

• Decision Date: 08 November 2005
• Docket Number: No. 04-10494.,04-10494.
• Citation: 430 F.3d 260
• Parties: In re STONEBRIDGE TECHNOLOGIES, INC., Debtor. EOP-Colonnade of Dallas Limited Partnership, Appellant, v. Dennis Faulkner, In his capacity as Trustee of the SBTI Liquidating Trust, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

430 F.3d 260

In re STONEBRIDGE TECHNOLOGIES, INC., Debtor.

EOP-Colonnade of Dallas Limited Partnership, Appellant, v. Dennis Faulkner, In his capacity as Trustee of the SBTI Liquidating Trust, Appellee.

No. 04-10494.

United States Court of Appeals, Fifth Circuit.

November 8, 2005.

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Robert B. Millner (argued), Sonnenschein, Nath & Rosenthal, Chicago, IL, Gary S. Kessler, Howard C. Rubin, Kessler & Collins, Dallas, TX, for Appellant.

Jaime Lynn Myers, David W. Elmquist (argued), Winstead, Sechrest & Minick, Dallas, TX, for Appellee.

Appeal from the United States District Court for the Northern District of Texas.

Before KING, Chief Judge, and JOLLY and DENNIS, Circuit Judges.

PER CURIAM:

The trustee (the "Trustee") of the liquidating trust established under the confirmed Chapter 11 plan of Stonebridge Technologies, Inc. ("Stonebridge") brought an adversary action, as lessee (the "Lessee"), against EOP-Colonnade of Dallas Limited Partnership ("EOP" or the "Lessor"), the lessor, in connection with EOP's draw on a letter of credit that was provided as security for Stonebridge's commercial lease obligations with EOP. The Trustee asserted, in the bankruptcy court, that EOP breached the lease and made negligent misrepresentations to the issuing bank by prematurely drawing on the letter of credit and retaining an amount in excess of the claim cap of 11 U.S.C. § 502(b)(6). The bankruptcy court found that EOP did breach the lease and made negligent misrepresentations by prematurely drawing on the letter of credit and retaining an amount in excess of the § 502(b)(6) cap. The district court affirmed the bankruptcy court's order, and EOP now appeals. We REVERSE. Because EOP did not file a claim in the bankruptcy case, we hold that the § 502(b)(6) cap was not triggered. Further, we hold that EOP did not prematurely draw on the letter of credit. EOP, therefore, did not breach the lease or make negligent misrepresentations to the issuing bank.

I

On September 21, 2000, EOP and Stonebridge entered into a lease ("Lease"), in which Stonebridge agreed to lease space in an EOP-owned office building. Under the terms of the Lease, Stonebridge was required to provide a security deposit to EOP, defined as "$105,298.85 in cash and a letter of credit in the amount of $1,430,065.74."

Stonebridge provided EOP with a cash payment of $105,298.85 and an irrevocable stand-by letter of credit for $1,430,065.74 ("Letter of Credit") issued by the Bank of Oklahoma ("Bank") in favor of EOP. Stonebridge executed a note payable to the Bank, secured by a certificate of deposit for $1,250,000, to reimburse the Bank in the event of a draw on the Letter of Credit.

On September 6, 2001, Stonebridge filed a Voluntary Petition under Chapter 11 of the United States Bankruptcy Code. At the time of the filing, Stonebridge owed EOP $71,895.61 for miscellaneous charges and expenses plus rent for September 2001. After filing the bankruptcy petition, Stonebridge paid EOP $50,000 to be applied against September 2001 post-petition rent. Stonebridge also initiated negotiations with EOP to reduce its lease obligations, seeking an agreement to reject the Lease as soon as possible and enter into a new short-term lease.

On October 23, EOP and Stonebridge announced an agreement in open court that the Lease would be rejected effective no earlier than October 1, 2001 and no later than October 23, 2001. It became clear at this time that the parties intended the effective rejection date to occur within that window of time, regardless of when the bankruptcy court issued its final order approving the rejection.

Prior to the October 23 court appearance, EOP initiated a draw request on October 22 to the Bank under the Letter of Credit for the full amount of the Letter of Credit. The Bank received the draw request on October 23, but refused to honor it because the request was technically deficient. Three days later, after correcting the deficiencies, EOP delivered another draw request to the Bank. The Bank received and promptly processed the second draw request, which became effective as of October 25. The Bank honored the Letter of Credit on October 30 by issuing a check for $1,430,965.74 and delivering it to EOP.

On November 8, the bankruptcy court entered a nunc pro tunc order approving the rejection of the Lease, rendering the rejection effective as of October 1, 2001. As part of the agreement to reject the Lease, EOP was allowed an administrative post-petition rent claim in the amount of $42,137.50, and the parties agreed that pre-petition rent due from September 1 to September 5 was $17,549.81. The record conclusively demonstrates, however, that EOP never filed a proof of claim for its actual lease rejection damages following the bankruptcy court order rejecting the lease and approving EOP's administrative rent claim.

On December 12, the Bank sought relief from the automatic stay to apply Stonebridge's certificate of deposit as reimbursement for EOP's draw on the Letter of Credit. The Trustee reached a compromise with the Bank, allowing the certificate of deposit to be applied in exchange for an assignment of the Bank's claims against EOP for the allegedly improper draw upon the Letter of Credit. The Trustee then brought this adversary action in the bankruptcy court alleging that EOP breached the Lease and, as assignee, alleging that EOP made negligent misrepresentations to the Bank, by prematurely drawing on the letter of credit and retaining an amount in excess of the § 502(b)(6) cap.

The bankruptcy court held that EOP prematurely drew on the Letter of Credit and retained an amount in excess of the § 502(b)(6) cap, resulting in a breach of the Lease and negligent misrepresentations to the Bank that the funds were "due and owing." In re Stonebridge Technologies, 291 B.R. 63 (Bankr.N.D.Tex. Apr.4, 2003). In ruling in favor of the Trustee, the bankruptcy court reasoned that because the Letter of Credit was part of the security deposit, it was subject to the § 502(b)(6) cap. The bankruptcy court also found that EOP's draw of the full amount of the Letter of Credit before the entry of the nunc pro tunc Lease rejection order was a breach of the Lease and constituted a negligent misrepresentation to the Bank that the full sum of the Letter of Credit was "due and owing." The bankruptcy court awarded to the estate: (i) damages in the amount of $180,065.74 for EOP's negligent misrepresentation to the Bank, calculated by the difference between the amount EOP drew on the Letter of Credit and the amount the Bank received from the certificate of deposit securing its obligations against the Stonebridge estate; and (ii) damages in the amount of $2,267.23 for EOP's breach of the Lease, calculated by the difference between what EOP would have been entitled to claim under 11 U.S.C. § 502(b)(6) (less a cash security deposit) and the amount the Bank collected on the certificate of deposit. EOP appealed to the district court, and the district court affirmed the bankruptcy court's ruling on January 30, 2004. EOP now appeals.

II

A

We apply the same standard of review as the district court: the bankruptcy court's conclusions of law and mixed questions of law and fact are reviewed de novo. AT&T Universal Card Servs. v. Mercer (In re Mercer), 246 F.3d 391, 402 (5th Cir.2001) (en banc). Findings of fact are reviewed for clear error. Id.

B

We must begin our consideration of this case by examining the jurisdiction of the bankruptcy court (and by extension the jurisdiction of the district court and this court). Neither party has raised jurisdictional issues,¹ but we are obligated to raise the matter sua sponte, certainly when jurisdiction appears questionable. See In re Bass, 171 F.3d 1016, 1021 (5th Cir.1999).

This appeal considers four claims brought by the Trustee against EOP in an adversary proceeding arising from Stonebridge's bankruptcy. Two claims directly relate to damage allegedly done directly to the estate by EOP's actions: (1) breach of the Lease by prematurely drawing on the Letter of Credit and (2) breach of the Lease by retaining an amount in excess of the § 502(b)(6) cap. The other two claims were assigned to the Trustee by the Bank: (3) negligent misrepresentation to the Bank that sums were "due and owing" by prematurely drawing on the Letter of Credit and (4) negligent misrepresentation to the Bank that sums were "due and owing" by drawing proceeds in excess of the § 502(b)(6) cap.

District courts have jurisdiction over bankruptcy cases, and they may refer cases at their discretion to bankruptcy courts. 28 U.S.C. § 1334 (district court jurisdiction); 28 U.S.C. § 157 (bankruptcy court jurisdiction). The jurisdictional grant to the bankruptcy court is divided into "core" and "non-core" proceedings. Core proceedings arise under title 11 or arise in a case under title 11. 28 U.S.C. § 157(b). Non-core proceedings are those proceedings that are otherwise related to a case under title 11. 28 U.S.C. § 157(c)(1). Bankruptcy judges may enter all appropriate orders and judgments in core proceedings, but unless the parties consent to core treatment, a bankruptcy judge must submit proposed findings of fact and conclusions of law in non-core proceedings to the district court. 28 U.S.C. § 157(b)-(c).

To determine whether a particular matter falls within general bankruptcy jurisdiction, we ask whether the outcome of that proceeding could have any conceivable effect on the estate being administered in bankruptcy. Wood v. Wood (In re Wood), 825 F.2d 90, 93 (5th Cir.1987). More specifically, an action is related to bankruptcy if "the outcome could alter the debtor's rights, liabilities, options, or freedom of action (either positively or negatively) and which in any way impacts upon the handling and administration of the bankrupt estate." In re Majestic Energy Corp., 835 F.2d 87, 90 (5th Cir.1988) (quoting Pacor Inc. v....