Opinion
No. 04 Civ. 3880 (WHP).
November 18, 2004
Nicholas A. Ritrivi, Esq., Reed Smith LLP, New York, NY, Attorneys for Appellant.
Earl A. Rawlins, Esq., Rawlins Gibbs, LLP, New York, NY, Attorneys for Appellees.
ORDER
Appellant Praedium II Broadstone, LLC ("Praedium") appeals from an April 30, 2004 Decision and Order (the "April Order") of the Bankruptcy Court (Drain, J.). The April Order found Praedium in violation of the automatic stay provision of the Bankruptcy Code, 11 U.S.C. § 362, and ordered it to turn over the balance of a security deposit (the "Security Deposit") to Debtor-Appellees, Wall Street Strategies, Inc. and Wall Street Strategies, Corp. (collectively "WSS"). For the following reasons, the April Order is affirmed.
FACTS
In November 1999, Praedium and WSS entered into a lease agreement (the "Lease") for Praedium to rent commercial office space in Manhattan to WSS. (Record Exhibit ("Ex.") 13 ¶¶ 3-4.) WSS was required to provide a security deposit for unpaid rent or other damage. (Ex. 13 ¶ 5.) WSS satisfied this requirement by obtaining a $270,592 Letter of Credit (the "Letter of Credit") from Citibank. (Ex. 10, at 3; Ex. 13 ¶ 5; Transcript of Hearing, dated June 17, 2004 ("Tr.") at 10.)
By August 2001, WSS was in default. (Ex. 9 ¶ 1.a.) Accordingly, Praedium drew down approximately $270,000 from the Security Deposit. (Ex. 9 ¶ 3.a.) However, over the next several months, WSS paid Praedium the arrears owed under the Lease. (Ex. 9 ¶ 1.b.) Praedium nevertheless retained the Security Deposit proceeds in the event that the Lease was rejected or terminated. (Ex. 9 ¶ 3(d).)
In March 2003, WSS filed a voluntary Chapter 11 petition. (Ex. 2 ¶ 1.) In July 2003, WSS moved to reject the Lease and enter into a license agreement with Praedium to remain in the leased premises. The Bankruptcy Court granted WSS' motion on August 11, 2003. (Ex. 2; Ex. 10, at 4; Ex. 13 ¶ 6.) The Bankruptcy Court also allowed Praedium to set off $91,417 for unpaid rent. (Ex. 10, at 4; Ex. 13 ¶ 6.)
As a result, the parties entered into a license agreement (the "License Agreement") on August 20, 2003, which enabled WSS to remain in the leased office space. (Ex. 13 ¶ 7, ex. A.) The License Agreement provided that the Lease "was terminated effective as of May 12, 2003 . . . and is of no further force and effect." (Ex. 13 ¶ 7, ex. A ¶ 1(a).) WSS also released Praedium from all claims they might have in connection with the Lease up to the termination date of May 12, 2003. (Ex. 13 ¶ 7, ex. A ¶ 1(c).) Although the License Agreement provided that WSS was "obligated to [Praedium] in an amount equal to $91,417.00 in connection with the termination of the Lease," it mentioned no other claims by Praedium. (Ex. 13 ¶ 7, ex. A ¶ 1(b).) The License Agreement also makes no mention of the Security Deposit proceeds.
Subsequently, on October 7, 2003, Praedium filed its proof of claim in WSS' Chapter 11 case. (Ex. 4.) Praedium's proof of claim did not assert any claim for Lease rejection damages and listed only an "unknown, contingent and liquidated" sum. (Ex. 4.) The proof of claim also referred to a stipulation that "Praedium hereby expressly reserves all rights to amend this proof of claim and this rider as may be necessary to adjust the amount asserted herein or to supplement this claim in any way." (Ex. 4.) That rider also refers to the License Agreement, which does not preserve any claims under the Lease except for the $91,417 setoff. (Ex. 4.; Ex. 13 ¶ 7, ex. A ¶ 1(b).)
PROCEDURAL BACKGROUND
On November 19, 2003, WSS filed a motion to hold Praedium in violation of the automatic stay for failure to turn over the $179,175 balance of the Security Deposit. (Ex. 5.) In a February 2, 2004 order (the "February Order"), the Bankruptcy Court granted WSS' motion because of Praedium's failure to remit the unused portion of the Security Deposit proceeds. (Ex. 10.)
In reaching that conclusion, the Bankruptcy Court relied on the Lease rider, which provides:
The rider was not submitted as part of the record on appeal. However, it is fully described in the February Order (Ex. 10, at 2), and there is no dispute regarding its provision.
In the event that [WSS] shall fully and faithfully comply with all of the terms, provisions, covenants and conditions of the lease, the security deposit shall be returned to [WSS] after the date fixed as the end of the Lease and after delivery of entire possession of the demised premises to [Praedium].
(Ex. 10, at 2.) The Bankruptcy Court noted that the Lease had been rejected under 11 U.S.C. § 365(d)(4) on May 12, 2003, since WSS never requested an extension of the sixty-day period under Section 365(d)(1) of the Bankruptcy Code. (Ex. 10, at 3.) Thus, the Bankruptcy Court determined that the Lease had been breached at the time WSS filed its Chapter 11 petition in March 2003. (Ex. 10, at 8.) See 11 U.S.C. § 365(g)(1) (rejection of lease under Section 365 "constitutes a breach of such contract or lease . . . immediately before the date of the filing of the petition."). Accordingly, the Bankruptcy Court found that any lease rejection claim by Praedium was a pre-termination claim that was settled for $91,417.20 under the License Agreement, since "[a] claim arising from the rejection, under section 365 of this title, of an . . . unexpired lease . . . shall be determined . . . the same as if such claim had arisen before the date of the filing of the petition." (Ex. 10, at 8 (citing 11 U.S.C. § 502(g)).) The Court also construed the License Agreement as a release by Praedium of any claims against WSS in connection with the Lease before the termination date of May 12, 2003. (Ex. 10, at 8.)
"[I]f the trustee does not assume or reject an unexpired lease of nonresidential real property under which the debtor is the lessee within 60 days after the date of the order for relief, or within such additional time as the court, for cause, within such 60-day period, fixes, then such lease is deemed rejected." 11 U.S.C. § 365(d)(4).
The Bankruptcy Court rejected Praedium's argument that, although it had drawn down the full amount of the Letter of Credit, it was entitled to keep the $179,175 balance. (Ex. 10, at 7.) The Bankruptcy Court recognized the established principle that neither a letter of credit nor its proceeds are property of a bankruptcy estate under Section 541(a) of the Code. (Ex. 10, at 10). Nevertheless, the Court held that Praedium was obligated to remit the unused portion of the Security Deposit to WSS under the Lease because a letter of credit beneficiary's right to retain proceeds after draw-down is governed by the underlying agreement with the debtor, not the letter of credit. (Ex. 10, at 2, 10-11.)See In re Eastern Freight Ways, Inc., 9 B.R. 653, 662-63 (Bankr. S.D.N.Y. 1981). Given WSS' rejection of the Lease and Praedium's failure to raise any claim in connection with the premises not covered by the License Agreement, the Bankruptcy Court held that the conditions for the return of remainder of the Security Deposit proceeds had occurred. (Ex. 10, at 11.)
Praedium moved for reargument, contending that the February Order misread the License Agreement as providing for a release by Praedium of any claims against WSS. (Ex. 11.) As a result, the Bankruptcy Court recognized in its April Order that the License Agreement actually provides for a release of such claims by WSS against Praedium. (Ex. 20, at 4.) The Court therefore struck that portion of the February Order. (Ex. 20, at 4.) However, the Bankruptcy Court denied the ultimate relief sought by Praedium: an amendment of the February Order permitting Praedium to retain the $179,175 until the allowance of its lease rejection claim. The Court reasoned that Praedium's proof of claim did not assert a claim for lease rejection. (Ex. 20, at 5.) The Court thus concluded that the proof of claim implied that Praedium had no claims against WSS except for the $91,417 provided in the License Agreement. (Ex. 20, at 6.)
The Bankruptcy Court further denied Praedium's request to amend its proof of claim to assert a cause of action for lease rejection damages because it provided no factual basis for such a claim. (Ex. 20, at 9-10.) The Court determined that, based on the proof of claim, WSS could not reasonably expect any claim by Praedium other than the $91,417 setoff. (Ex. 20, at 10.)
The Bankruptcy Court also rejected Praedium's argument that its failure to file a similar claim prior to the established bar date of October 9, 2003 was the result of excusable neglect. The Court concluded that WSS had reasonably relied on the absence of any claim for lease rejection damages, as evidenced by its offer to pay Praedium a small sum for early termination of the Lease and execution of the License Agreement. (Ex. 20, at 15.) The Bankruptcy Court also found that because WSS, a small company, had been forced to engage in substantial litigation, it would be prejudiced by any further delay. (Ex. 20, at 16.) Based on that analysis, the April Order found no basis for excusable neglect sufficient to allow Praedium to file a late lease rejection claim. (Ex. 20, at 17.)
Praedium subsequently filed an order to show cause in this Court to stay the Bankruptcy Court's April Order pending its appeal, which this Court granted on May 17, 2004. Praedium filed this appeal on May 21, 2004.
DISCUSSION
On appeal, Praedium contends that the Bankruptcy Court erred by failing to recognize that letters of credit and their proceeds are not property of the bankruptcy estate and, therefore, need not be asserted in a proof of claim. Praedium further maintains that the Bankruptcy Court abused its discretion by denying it leave to amend its proof of claim to assert a cause of action for lease rejection damages. Both arguments are without merit.I. Proceeds of the Letter of Credit
On appeal from a bankruptcy court, a district court must independently examine the bankruptcy court's opinion, "applying the clearly erroneous standard to findings of fact and de novo review to conclusions of law." In re Manville Forrest Prods. Corp., 209 F.3d 125, 128 (2d Cir. 2000); In re Regency Holdings (Cayman), Inc., No. 00 Civ. 8115 (HB), 2001 WL 1033429, at *4 (S.D.N.Y. Sept. 7, 2001). "Findings of fact, whether based on oral or documentary evidence, shall not be set aside unless clearly erroneous." Fed.R.Bankr.P. 8013.
In response to Praedium's argument, WSS maintains that the letter of credit issue is not properly before this Court because only the February Order specifically addressed that question — not the April Order from which this appeal was taken. However, an appeal from a final judgment preserves for review all issues addressed in previous interlocutory orders such as the Bankruptcy Court's February Order. See Anobile v. Pelligrino, 303 F.3d 107, 115 (2d Cir. 2001) (a "final judgment . . . incorporates all previous interlocutory judgments in that case and permits their review on appeal."); In re Graybill Corp., 983 F.2d 773, 775 (7th Cir. 1993) ("An appeal from a final judgment brings up for review by the appellate court all orders . . . rendered by the trial court previously in litigation."). Because Praedium moved for reargument pursuant to Bankruptcy Rule 9023, it could not have filed this appeal until the entry of the April Order, which disposed of that motion. See Fed.R.Bankr.P. 8002(b)(2) ("If any party makes a timely motion . . . the time for appeal for all parties runs from the entry of the order disposing of the last such motion outstanding. This provision applies to a timely motion . . . under Rule 9023."); Lazzarino v. Kenton Assocs., Ltd., No. 96 Civ. 7842 (RO), 1999 WL 377859, at *1 (S.D.N.Y. June 9, 1999) (stating that order remains interlocutory pending motion for reconsideration while issues are unresolved); see also In re Branding Iron Steak House, 536 F.2d 299, 301 (9th Cir. 1976) ("It would be a waste of judicial resources to require that an appeal be filed when the granting of a pending motion to reconsider might eliminate the need for an appeal."). Accordingly, this Court may consider whether the remainder of the Security Deposit drawn down by Praedium is property of WSS' Chapter 11 estate.
Turning to the substance of Praedium's appeal, this Court finds that the Bankruptcy Court did not err in finding that Praedium was in violation of the automatic stay. As in the proceedings below, Praedium relies on the general principle that neither a letter of credit, nor its proceeds, are property of a debtor's Chapter 11 estate. See, e.g., In re Keene Corp., 162 B.R. 935, 942 (Bankr. S.D.N.Y. 1994) (letter of credit proceeds "are not the debtor's property even if . . . secured by the debtor's property."); In re Elegant Merch., Inc. v. Republic Nat. Bank, 41 B.R. 398, 399 (S.D.N.Y. 1984) ("A letter of credit and its proceeds are not `property of the estate' within the meaning of 11 U.S.C. § 541.").
However, the cases cited by Praedium are inapposite since they do not deal with a situation where the letter of credit beneficiary already drew down the full amount of the letter, as Praedium did. (Ex. 9 ¶ 3.a.) The general rule on which Praedium relies does not apply to the use of letter of credit proceeds after draw down, because "when the proceeds are in the beneficiary's hands the underlying agreement controls, unless otherwise unequivocally directed." Eastern Freight Ways, 9 B.R. at 662 (holding that underlying contract governed use of proceeds after debtor's surety had drawn down letter of credit issued by debtor's bank); see also Lancaster Steel Co., 284 B.R. 152, 158 (Bankr. S.D. Fla. 2002) ("One of the most basic precepts of letter of credit law and practice is the principle of independence. . . . The concept is that each of these relationships is independent of the others, and the rights and obligations of the parties to one are not affected by . . . the other.") (internal quotations omitted).
Because Praedium drew down the full amount of the Security Deposit in August 2001, it is the underlying agreement between the parties that controls. See In re Eastern Freight Ways, 9 B.R. at 662-63; In re Lancaster Steel Co., 284 B.R. at 159-60. To that end, the Bankruptcy Court properly referred to the Lease, since that was the operative agreement between the parties when WSS entered Chapter 11. See 4 Collier on Bankruptcy ¶ 541.04 at 541-22 (15th ed. 1995) (issue of what property comprises debtor's estate is determined as of the filing of the petition);Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114, 118 (2d Cir. 1991) ("[W]e must determine what claims [the debtor] possessed against Shearson before [the debtor] went bankrupt.") (emphasis in original).
As discussed in the February order, the Lease rider provides that "the security deposit shall be returned to [WSS] after the date fixed as the end of the Lease," provided that WSS complies with terms and condition of the Lease, a fact Praedium does not dispute. (Ex. 10, at 2.) Although Praedium could have asserted claims for holdover or repairs for the premises under the License Agreement, it did not do so; the License Agreement provides only for the $91,417 setoff. (Ex. 13 ¶ 7, ex. A.) Because Praedium agreed to the setoff but asserted no other claims regarding the premises, the Bankruptcy Court concluded that the conditions for return of the outstanding balance were satisfied according to the terms of the Lease rider — a point also not disputed by Praedium. Accordingly, the outstanding $179,175 balance is property of WSS' estate. See 11 U.S.C. § 541(a)(1). The Bankruptcy Court therefore did not err in holding Praedium in violation of the automatic stay for failing to return the remainder of the Security Deposit under the Lease.
II. Leave to Amend
The decision to grant or deny an amendment to a proof of claim is within the sound discretion of the bankruptcy judge. (Ex. 20, at 7-8.) See In re Integrated Resources, Inc., 157 B.R. 66, 69-70 (Bankr. S.D.N.Y. 1993); In re McLean Indus., Inc., 121 B.R. 704, 708 (Bankr. S.D.N.Y. 1990); In re Black Geddes, Inc., 58 B.R. 547, 553 (Bankr. S.D.N.Y. 1983). "Matters concerning decisions within the discretion of bankruptcy judges will not be disturbed by the district court unless the district court finds that no reasonable man could agree with the bankruptcy judge's decision." Integrated Resources, 157 B.R. at 72. On appeal, therefore, an abuse of this discretion will be found only where the decision was based on an erroneous conclusion of law, where the record is bereft of evidence on which the decision was based, or where the bankruptcy judge made clearly erroneous findings of fact. Deitchman v. E.R. Squibb Sons, Inc., 740 F.2d 556, 563 (7th Cir. 1984); accord Integrated Resources, 157 B.R. at 72.
Praedium first contends that its proof of claim should have been read broadly enough to assert a claim for lease rejection damages. "In deciding whether or not to allow an amendment to the proof of claim the court must first determine whether there was timely assertion of a similar claim." In re MacMillan, Inc., 186 B.R. 35, 49 (Bankr. S.D.N.Y. 1995). Praedium's proof of claim does not expressly assert a claim for lease rejection damages. (Ex. 4.) The proof of claim simply incorporates the License Agreement, which provides for the $91,417 setoff for WSS' arrears but mentions no other claims. (Ex. 13 ¶ 7, ex. A.) Praedium has not shown that the $91,417 setoff, which is incorporated into the proof of claim through the License Agreement, relates to its claim for lease rejection damages in excess of $1 million. (Ex. 13, at 1, 4.) The License Agreement created a new relationship between the parties; it did not deal with rejection of the Lease. (Ex. 13 ¶ 7, ex. A ¶ 1 (a).) Therefore, Praedium's proposed lease rejection claim does not arise out of the same "conduct, transaction or occurrence" as the License Agreement or, concomitantly, the proof of claim. Fed.R.Bankr.P. 7015; In re Am. Intern., Inc., 67 B.R. 79, 82 (N.D. Ill. 1986) (for amendment to be permissible, it must be of the same type as timely filed claim); see In re PT-1 Communications, Inc., 292 B.R. 482, 487 (Bankr. E.D.N.Y. 2003) (denying leave to amend proof of claim for taxes with similar claim for a different year); In re Sage-Dey, Inc., 170 B.R. 46, 49 (Bankr. N.D.N.Y. 1994) (same); cf. MacMillan, 186 B.R. at 50 (allowing amendment where creditor's claims sought to recover same legal fees and costs, albeit under different legal theories). The Bankruptcy Court was thus correct in holding that Praedium failed to assert a similar claim for lease rejection in its proof of claim.
Praedium further maintains that, even if its lease rejection claim does not relate back, it should have been permitted an amendment since its late-filed claim is the result of excusable neglect, i.e., a faultless omission to act or an omission caused by carelessness. MacMillan, 186 B.R. at 49. "Whether a claimant's neglect is excusable is an equitable determination, which takes into account all of the relevant circumstances."PT-1 Communications, 292 B.R. at 487. "These include . . . the danger of prejudice to the debtor, the length of the delay and its potential impact on judicial proceedings, the reason for the delay, including whether it was in the reasonable control of the movant, and whether the movant acted in good faith." Pioneer Inv. Servs. Co. v. Brunswick Assocs. Ltd. P'ship, 507 U.S. 380, 395 (1993). No single factor is controlling. See In re Enron Corp., 298 B.R. 513, 525 (Bankr. S.D.N.Y. 2003). The burden of demonstrating that such neglect is excusable rests with the party seeking relief from the time bar.See In re McCrory Corp., No. 93 Civ. 4054 (PKL), 1994 WL 30470, at *1-2 (S.D.N.Y. Feb. 2., 1994).
Praedium maintains that the Bankruptcy Court erroneously concluded that WSS would be prejudiced if Praedium was allowed to amend its proof of claim because no disclosure statement has been served and the plan of reorganization has not yet been approved. While the filing of a disclosure statement or plan of reorganization with notice of a creditor's claim is a factor to be considered in determining whether a debtor will be prejudiced, other factors include the amount of the late claim relative to the estate and whether the debtor had reason to anticipate the claim. See In re Keene Corp., 188 B.R. 903, 910 (Bankr. S.D.N.Y. 1995); In re Alexander's, Inc., 176 B.R. 715, 722 (Bankr. S.D.N.Y. 1995).
Praedium's lease rejection claim is over $1 million. (Ex. 13, at 1, 4.) That claim far outweighs the earlier filed claim pursuant to the License Agreement. (Ex. 20, at 12-13.) This factor weighs against permitting the amendment. See Am. Intern, 67 B.R. at 82 ("Ordinarily, to be within the scope of a permissible amendment, the second claim should not only be of the same nature as the first but also reasonably within the amount to which the first claim provided notice."); see also Enron, 298 B.R. at 525-26 (finding possible prejudice to debtor because additional claim might adversely affect debtor's assessment of its liabilities).
Praedium does not challenge the Bankruptcy Court's finding that it was reasonable for WSS to rely on the absence of a claim for lease rejection damages. In June and July 2003, for example, WSS' counsel sent successive emails offering Praedium a small sum for early termination of the Lease and as an inducement for Praedium to enter the License Agreement. (Ex. 18, at 2.) Those emails make no reference to any claim for lease rejection. (Ex. 18, at 2). Praedium points to no evidence in the record showing that the parties contemplated a lease rejection claim during their negotiations over the License Agreement. Accordingly, Praedium has not demonstrated that "no reasonable man could agree with the bankruptcy judge's decision" that WSS reasonably relied on Praedium not asserting a claim for lease rejection damages. Integrated Resources, 157 B.R. at 72.
While Praedium asserts that it has "consistently asserted the right to retain the Security Deposit and has not intentionally delayed in seeking to supplement its original claim" (Brief of Appellant ("App. Brf."), at 21), it does not dispute that the bar date for filing its claim was October 9, 2003. (Ex. 20, at 16.) Nor does Praedium dispute that it failed to comply with that deadline. (Ex. 20, at 16.) See Enron, 298 B.R. at 520 (Congress intended bar date in Chapter 11 cases to provide debtor and creditors with finality); In re Manville Forest Prods. Corp., 89 B.R. 358, 374 (Bankr. S.D.N.Y. 1988) (same);MacMillan, 186 B.R. at 49 ("[B]ar dates are likened to statutes of limitations which must be strictly observed."). Praedium is a sophisticated business entity. It has not offered a specific justification for its failure to draft the proof of claim to include a claim for lease rejection damages, save for its erroneous interpretation of letter of credit law. See Black Geddes, 58 B.R. at 554 (failure to provide excuse for a late claim is a factor to consider in balancing the equities for excusable neglect inquiry); Enron, 298 B.R. at 526 ("[A] creditor . . . must explain the circumstances surrounding the delay in order to supply the Court with sufficient context to fully and adequately address the reason for delay.").
Given this synergy of factors, Praedium has failed to satisfy its burden of demonstrating that the Bankruptcy Court abused its discretion by denying it leave to amend based on excusable neglect. The disparity between Praedium's lease rejection claim for over a million dollars and its original claim, and WSS' reasonable reliance on the absence of such a claim, provided an adequate basis for the Bankruptcy Court's conclusion that WSS would be prejudiced by the proposed amendment.
CONCLUSSION
For the foregoing reasons, the Bankruptcy Court's Decision and Order dated April 30, 2004 is affirmed. This Court's stay of the April Order is dissolved effective November 23, 2004. Praedium is directed to remit to WSS $179,175 plus accrued interest within three business days of this Order or pay $750 per day for its failure to do so. The Clerk is directed to mark this case closed.SO ORDERED.