Ctr. Operating Co. v. Base Holdings, LLC (In re Base Holdings, LLC)

• Decision Date: 05 March 2014
• Docket Number: Adv. No. 09-03256-SGJ,Bank. Ct. No. 09-34269-SGJ-7,Civil Action No. 3:13-CV-1584-D
• Parties: IN RE BASE HOLDINGS, LLC, Debtor. CENTER OPERATING COMPANY, L.P., Plaintiff-Appellee, v. BASE HOLDINGS, LLC , Defendant-Appellant.
• Court: U.S. District Court — Northern District of Texas

IN RE BASE HOLDINGS, LLC, Debtor.CENTER OPERATING COMPANY, L.P., Plaintiff-Appellee, v. BASE HOLDINGS, LLC , Defendant-Appellant.

Civil Action No. 3:13-CV-1584-D

Bank. Ct. No. 09-34269-SGJ-7

Adv. No. 09-03256-SGJ

UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF TEXAS DALLAS DIVISION

March 5, 2014

APPEAL FROM THE

UNITED STATES BANKRUPTCY COURT

FOR THE NORTHERN DISTRICT OF TEXAS

FITZWATER, Chief Judge:

In this appeal from a final summary judgment of the bankruptcy court entered in an adversary proceeding in which the debtor asserted state-law counterclaims but apparently did not file an objection to the creditor's proof of claim, subsequent developments in the law of this circuit interpreting Stern v. Marshall, ___ U.S. ___, 131 S.Ct. 2594 (2011), require that the judgment be vacated and the adversary proceeding remanded for further proceedings.

I

Defendant-appellant Base Holdings, LLC ("Base"), a chapter 7 debtor, appeals the bankruptcy court's final summary judgment entered in favor of plaintiff-appellee CenterOperating Company, L.P. ("Center"). Pursuant to a Lease Agreement ("Lease"), Base leased commercial property from Center at the American Airlines Center in Dallas and opened a restaurant at the location. The restaurant struggled financially, and Base was unable to satisfy all of its financial obligations. After Base allegedly failed to make timely rent payments, Center notified Base of its default and instituted eviction proceedings in county court. Soon thereafter, Base filed for chapter 11 protection, which the bankruptcy court converted to chapter 7 on Base's motion.

Center initiated the instant adversary proceeding against Base, seeking a declaratory judgment that it had not materially breached the Lease, that any claims Base might have for punitive or consequential damages were barred by the Lease, and that Base was obligated to begin paying rent to Center on October 1, 2008.¹ Base, and then Base's trustee (the "Trustee" or "Base"²), answered Center's complaint,³ asserting both affirmative defenses and counterclaims.⁴ Many of Base's affirmative defenses and counterclaims rest onrepresentations that a Center employee allegedly made to a Base executive regarding a parking contract that Center was obligated to procure under the Lease for use by restaurant patrons.

Base filed a motion to reject the Lease, which the bankruptcy court granted. Center then filed a proof of claim.⁵ Center seeks $297,989.33 in unpaid prepetition rent,construction, and other charges. Center also seeks $1,297,929.50 in post-petition rent from the bankruptcy estate pursuant to 11 U.S.C. § 502(b)(6)(A)(i). As of today, Base apparently has not filed an objection to Center's proof of claim.

In the adversary proceeding, Center filed a motion to dismiss Base's counterclaims. The bankruptcy court granted the motion in part, dismissing with prejudice Base's counterclaims for breach of the warranty of quiet enjoyment, breach of the warranty of suitability,⁶ and unjust enrichment. The bankruptcy court denied Center's motion to dismiss the remaining counterclaims. After the parties engaged in discovery, Center and Base filed motions for summary judgment. Shortly thereafter, the bankruptcy court granted Base's motion to realign the parties.⁷

While the summary judgment motions were pending, Base filed a motion to withdraw the reference. Citing Stern, Base argued that the bankruptcy court lacked constitutional authority to enter a final order. The bankruptcy court addressed the motion to withdraw the reference and the summary judgment motions in two rulings filed the same day: a report and recommendation addressing the motion to withdraw the reference, and a memorandum opinion and order addressing the parties' cross-motions for summary judgment. In the report and recommendation, the bankruptcy court recommended that this court deny the motion towithdraw the reference on the grounds that it was necessary to resolve Base's counterclaims as part of the process of allowing or disallowing Center's proof of claim (thus distinguishing the case from Stern), and 9that Base should be deemed to have consented to the bankruptcy court's finally adjudicating the adversary proceeding. See In re Base Holdings, LLC, No. 09-34269-SGJ-7, Adv. No. 09-03256, at *8-11 (Bankr. N.D. Tex. July 3, 2012) ("Base I"). Alternatively, the bankruptcy court recommended that, if this court determined that the bankruptcy court lacked constitutional authority to enter final orders on the counterclaims, the court consider the bankruptcy court's memorandum opinion and order on the parties' cross-motions for summary judgment to be a proposed ruling and adopt the decision as its own. Id. at *9. In the memorandum opinion and order, the bankruptcy court granted Center's summary judgment motion as to all but one of Base's counterclaims, and it denied Center's motion on the question whether Center improperly charged rent before December 6, 2008. See In re Base Holdings, LLC, 487 B.R. 727 (Bankr. N.D. Tex. 2012) ("Base II"). This court later adopted the bankruptcy court's report and recommendation in Base I and denied the motion to withdraw the reference. See In re Base Holdings, LLC, 2013 WL 357607, at *1 (N.D. Tex. Jan. 30, 2013) (Fitzwater, C.J.) ("Base III").

After this court denied the motion to withdraw the reference, Center and Base stipulated regarding the remaining contested factual issues, enabling the bankruptcy court to enter a final judgment based on its memorandum opinion and order in Base II. Base then filed the instant appeal.

In Base's reply brief, under the heading "recent developments," it asserts that thebankruptcy court erred in recommending that this court deny the motion to withdraw the reference. Base cites the Supreme Court's grant of a petition for a writ of certiorari in In re Bellingham Insurance Agency, Inc., 702 F.3d 553 (9th Cir. 2012), cert. granted sub nom. Executive Benefits Insurance Agency v. Arkison, 82 U.S.L.W. 3416 (U.S. June 24, 2013) (No. 12-2100) (addressing whether Article III allows bankruptcy courts to hear matters based on express or implied consent, and whether a bankruptcy judge may submit proposed findings of fact and conclusions of law for de novo review by a district court in a core proceeding under 28 U.S.C. § 157(b)).

Shortly before and after this court heard oral argument on this appeal, the Fifth Circuit decided In re Frazin, 732 F.3d 313 (5th Cir. 2013), petition for cert. filed, ___ U.S.L.W. ___ (U.S. Feb. 12, 2014) (No. 13-1003), and In re BP RE, L.P., 735 F.3d 279 (5th Cir. 2013), reh'g en banc denied, ___ F.3d ___, Nos. 12-51270, 12-51279 (5th Cir. Feb. 28, 2014). In Frazin the Fifth Circuit clarified how courts in this circuit should apply Stern. In both Frazin and BP RE the court held that consent and waiver cannot cure a bankruptcy court's lack of authority to enter final judgment on state-law counterclaims. See Frazin, 732 F.3d at 320 n.3; BP RE, 735 F.3d at 288.

II

Because of developments in the law since the bankruptcy court decided Base II and this court decided Base III, and because there are unsettled issues in the record that are material to a Stern analysis (examples of which the court will address below), the court concludes that the bankruptcy court's final judgment must be vacated and this adversaryproceeding remanded for further proceedings. The Fifth Circuit's decisions in Frazin and BP RE make clear that parties cannot cure a bankruptcy court's lack of constitutional authority to enter final judgment through consent or waiver. See Frazin, 732 F.3d at 320 n.3; BP RE, 735 F.3d at 288. And in light of the guidance provided in Frazin, this court is unable to determine whether the bankruptcy court had constitutional authority to enter a final judgment on Base's state-law counterclaims.

The court starts from the premise that neither Stern nor Frazin curtails the bankruptcy court's constitutional authority to fully adjudicate Center's proof of claim. See Frazin, 732 F.3d at 319 n.2 ("We do not decide today whether the Stern holding extends to other core proceedings under [28 U.S.C.] § 157(b)(2)."). Both before and after Stern and Frazin, the bankruptcy court should "examine and resolve all challenges" made to Center's proof of claim, "even if the challenges could or do constitute one or more elements of state-law or other causes of action that must be finally resolved by an Article III or state court." Id. at 325 (Owen, J., concurring). And the bankruptcy court is not "required to determine, in advance, which facts will ultimately prove strictly necessary to resolve a creditor's proof of claim." In re Global Technovations Inc., 694 F.3d 705, 722 (6th Cir. 2012) (addressing Stern issue).

In the usual case, the debtor's objection defines the range of issues that must be decided during the claims-allowance process. See In re Simmons, 765 F.2d 547, 552 (5th Cir. 1985) (stating that objection "plac[es] the parties on notice that litigation is required to resolve an actual dispute between the parties"). But in the present case, so far as the court can determine from the appellate record and the judicially-noticed records, Base has not filedan objection to Center's proof of claim. Thus the bankruptcy court is left to adjudicate Base's objections, if any, based on its state-law counterclaims.⁸ This task may not be straightforward because some of Base's counterclaims provide multiple, varied remedies that could impact how Center's proof of claim is adjudicated by the bankruptcy court, and, in turn, affect its authority under Stern. For example, under Texas law, a party who prevails on a fraudulent inducement claim can elect rescission, damages, or both. See, e.g., Aegis Ins. Holding Co. v. Gaiser, 2007 WL 906328, at *3 (Tex. App. Mar. 28, 2007, pet. denied) (mem. op.) (holding that party can seek rescission or damages for fraudulent inducement). If, for example, the bankruptcy court construes Base's state-law fraudulent...