In re Stonebridge Technologies, Inc.

• Decision Date: 04 April 2003
• Docket Number: Adversary No. 02-3187.,Bankruptcy No. 01-37474-HDH-11.
• Citation: 291 B.R. 63
• Parties: In re STONEBRIDGE TECHNOLOGIES, INC., Debtor. Dennis Faulkner, in his capacity as Trustee of the SBTI Liquidating Trust, Plaintiff, v. EOP-Colonnade of Dallas, LP, Defendant.
• Court: U.S. Bankruptcy Court — Northern District of Texas

291 B.R. 63

In re STONEBRIDGE TECHNOLOGIES, INC., Debtor Dennis Faulkner, in his capacity as Trustee of the SBTI Liquidating Trust, Plaintiff, v. EOP-Colonnade of Dallas, LP, Defendant.

Bankruptcy No. 01-37474-HDH-11.

Adversary No. 02-3187.

United States Bankruptcy Court, N.D. Texas, Dallas Division.

April 4, 2003.

David W. Elmquist, Winstead, Sechrest & Minick, P.C., Dallas, TX, for Plaintiff.

Howard C. Rubin, Kessler & Collins, P.C., Dallas, TX, for Defendant.

AMENDED MEMORANDUM OPINION

HARLIN D. HALE, Bankruptcy Judge.

This memorandum opinion addresses a narrow issue of law: whether the letter of credit in this case is a security deposit subject to the lease rejection damages cap of 11 U.S.C. § 502(b)(6) or whether the letter of credit represents only a third-party obligation to the landlord, to which the damage limitation does not apply. For the reasons stated below, the Court finds that the letter of credit at issue in this dispute is part of the security deposit and subject to the § 502(b)(6) damages cap.

Background

Debtor Stonebridge Technologies, Inc. ("Stonebridge") and EOP-Colonnade of Dallas, LP ("EOP") were parties to a lease wherein Stonebridge leased office space in the Colonnade Tower III office building in North Dallas (the "Lease"). Pursuant to the Lease, Stonebridge was required to provide a security deposit to EOP. The security deposit ("Security Deposit") was defined in the Lease as follows:

"Security Deposit": $105,298.85 in cash and a letter of credit in the amount of $1,430,065.74 which sum shall be reduced pursuant to the terms and conditions set forth in Section VI.B. of this Lease and eventually eliminated pursuant to the terms and conditions set forth in Section VI.C. of this Lease.

(Ex. 1 at 1.)

The Lease further provides, in relevant part, as follows:

VI. Security Deposit

A. The Security Deposit shall be ... held by Landlord ... as security for the performance of [Stonebridge's] obligations. The Security Deposit is not an advance payment of Rent or a measure of Tenant's liability for damages. Landlord may, from time to time, without prejudice to any other remedy, use all or a portion of the Security Deposit to satisfy past due Rent or to cure any uncured default by Tenant. If Landlord uses the Security Deposit, Tenant shall on demand restore the Security Deposit to its original amount. Landlord shall return any unapplied portion of the Security Deposit to Tenant within 45 days after the later to occur of: (1) the determination of Tenant's Pro Rata Share of any Tax Excess and Expense Excess for the final year of the terms; (2) the date Tenant surrenders possession of the Premises to Landlord in accordance with this Lease; or (3) the Termination Date.

B. A portion of the Security Deposit may be in the form of an irrevocable letter of credit (the "Letter of Credit").

* * *

XIX. Events of Default

Tenant shall be considered to be in default of this Lease upon the occurrence of any of the following events of default:

A. Tenant's failure to pay when due all or any portion of the Rent, if the failure continues for 5 days after written notice to Tenant ("Monetary Default").

B. Tenant's failure (other than Monetary Default) to comply with any term, provision or covenant of this Lease, if the failure is not cured within 20 days after written notice to Tenant.

C. Tenant or any Guarantor becomes insolvent, makes a transfer in fraud of creditors or makes an assignment for the benefit of creditors, or admits in writing its inability to pay its debts when due.

(Ex. 1 at 7-8, 14-15) (emphasis added.)

Stonebridge tendered the cash and letter of credit required by the Lease as Security Deposit to EOP. The letter of credit was an Irrevocable Stand-by Letter of Credit issued by the Bank of Oklahoma (the "Bank") in favor of EOP (the "Letter of Credit").

Stonebridge executed a promissory note to the Bank to secure the Bank against a draw on the Letter of Credit. The promissory note, in turn, was secured, in part, by a $1,250,000.00 certificate of deposit (the "CD") at the Bank.

Pursuant to the terms of the Letter of Credit, $1,430,065.74 was available for payment at sight by a draft drawn by EOP on the Bank when accompanied by the following documents:

A. The original of the Irrevocable Stand-by Letter of Credit;

B. The beneficiary's (EOP's) dated statement purportedly signed by one of its officers reading:

This draw in the amount of $_________________________ U.S. Dollars ($_________________________) under your Irrevocable Stand-by Letter of Credit No. BOK00SDF07102 represents funds due and owing to us as a result of the applicant's failure to comply with one or more terms of that certain Lease by and between EOP-Colonnade of Dallas Limited Partnership, a Delaware limited partnership, as Landlord, and Stonebridge Technologies, an _________________________, as Tenant beyond notice and cure periods as set forth in Section XIX of the Lease.

About one year into the lease term, Stonebridge filed a Petition for Relief under Chapter 11 of the United States Bankruptcy Code and eventually confirmed a plan of liquidation. At the time of the bankruptcy filing, Stonebridge owed EOP rent and other charges, including tenant improvement overages, electric bills and invoices from work orders performed by EOP, totaling $71,895.61, plus rent for September 2001 totaling $105,298.85. Neither Stonebridge nor EOP offered any evidence that EOP provided any written notice to Stonebridge prior to the filing date of the bankruptcy petition, thereby triggering the time period necessary to find an Event of Default under the Lease.

Following the bankruptcy filing, in September 2001, Stonebridge negotiated with EOP to reduce the amount of leased space and to reduce the lease obligations, including post-petition expenses. Stonebridge paid EOP a total of $50,000 which was applied to the September, 2001, post-petition rent due under the Lease.

Stonebridge filed a Motion to Sell Assets ("Motion to Sell") to Stonebridge Acquisition, Inc. ("SAI"), a corporation that was formed by insiders of Stonebridge to acquire the assets of Debtor. EOP filed a Motion for Payment of Rent Pursuant to 11 U.S.C. § 365(d)(3), and asked the court to order Stonebridge to pay the unpaid balance of the September 2001 rent of $37,749.50, plus late fees, and October rent of $105,888.40, plus late fees. A hearing on this motion was set in late October 2001, on the same day as the hearing on Debtor's Motion to Sell.

At that hearing, EOP and Stonebridge announced in open court an agreement that the Lease would be rejected effective no earlier than October 1, 2001 and no later than October 23, 2001, depending on the parties' success in finalizing a new short-term lease. The short-term lease was to be assumed by Stonebridge and assigned to SAI. The Court did not enter an order rejecting the Lease at the hearing. Instead, a hearing was set in early November 2001, at which the Court was to determine whether to approve the agreement to reject the Lease and if so, the effective date of the lease rejection if no new short-term lease had been consummated.

As part of the agreement reached in accordance with the rejection of the Lease, EOP was allowed an administrative rent claim in the amount of $42,137.50 and the parties agreed that pre-petition rent due for September was $17,549.81. At the hearing, the Court also approved Debtor's Motion to Sell.

One day before the October hearing, EOP initiated a draw request via overnight delivery to the Bank under the Letter of Credit in the amount of $1,430,065.74. However, no agreement existed between the parties on that day that the Lease would be rejected retroactively to October 1, 2001.

In its draw request to the Bank, EOP represented the following:

THIS DRAW REQUEST IN THE AMOUNT OF ONE MILLION FOUR HUNDRED THIRTY THOUSAND SIXTY-FIVE AND 74/100 U.S. DOLLARS (1,430,065.74) UNDER YOUR IRREVOCABLE STANDBY LETTER OF CREDIT NO. BOK00SDF07102 REPRESENTS FUNDS DUE AND OWING TO U.S. AS A RESULT OF THE APPLICANT'S FAILURE TO COMPLY WITH ONE OR MORE OF THE TERMS OF THAT CERTAIN LEASE BY AND BETWEEN EOP-COLONNADE OF DALLAS LIMITED PARTNERSHIP, A DELAWARE LIMITED PARTNERSHIP, AS LANDLORD, AND STONEBRIDGE TECHNOLOGIES, A DELAWARE CORPORATION, AS TENANT BEYOND NOTICE AND CURE PERIODS AS SET FORTH IN SECTION XIX OF THE LEASE.

The draw request was received by the Bank on October 23, 2001. The next day, on October 24, 2001, the Bank notified EOP that the documents submitted by EOP did not meet the strict requirements of the Letter of Credit, and refused to honor it. Specifically, the draw request was not made on EOP's letterhead or signed by an officer of EOP. Thereafter, on October 24th, EOP delivered another draw request to the Bank, still dated October 22, 2001, that corrected the deficiencies. This request was received by the Bank on October 25, 2001 and the Bank considered the draw request effective as of that date.

On October 30, 2001, the Bank honored EOP's draw request, issued an expense check in the amount of $1,430,065.74 and delivered it to EOP. In addition, as of trial, EOP also held the $105,298.85 representing the cash portion of the Security Deposit.

On November 7, 2001, a new short-term lease was executed by EOP and Stonebridge. On November 8, 2001, the Court entered an Agreed Order Approving Rejection of Lease and Allowing Claim of EOP-Colonnade of Dallas Limited Partnership for Rent Pursuant to 11 U.S.C. § 365(d)(3) (the "Agreed Order"). Pursuant to the terms of the Agreed Order, the Lease was deemed rejected as of October 1, 2001.

As of the effective rejection date, EOP's statutory damages were capped at $1,353,031.02, representing one year's rent reserved by the Lease from the date of the filing of the petition and unpaid rent due under the Lease, without acceleration.

Plaintiff Dennis Faulkner, the Trustee of the SBTI Liquidating Trust, the entity charged with liquidating the...