First Avenue West Building, LLC v. James ( 2006 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
In re: ONECAST MEDIA, INC. dba 
Seasonticket.com,
Debtor.
FIRST AVENUE WEST BUILDING,
LLC; FIRST WEST BUILDING 00, No. 04-35324
LLC,
Appellants,  D.C. No.
CV-03-02811-TSZ
v.
OPINION
NANCY JAMES, in her capacity as
Chapter 7 Trustee of Bankruptcy
Estate of Onecast Media, Inc. dba
Seasonticket.com and Comerica
Bank – California,
Appellee.

Appeal from the United States District Court
for the Western District of Washington
Thomas S. Zilly, District Judge, Presiding
Argued and Submitted
December 6, 2005—Seattle, Washington
Filed February 23, 2006
Before: Ronald M. Gould and Marsha S. Berzon, Circuit
Judges, and William W Schwarzer,* Senior District Judge.
*The Honorable William W Schwarzer, Senior United States District
Judge for the Northern District of California, sitting by designation.
1965
1966 IN RE: ONECAST MEDIA
Opinion by Judge Schwarzer
IN RE: ONECAST MEDIA 1967
COUNSEL
John R. Rizzardi and John R. Knapp, Cairncross & Hempel-
mann, P.S., Seattle, Washington, for the appellants.
1968 IN RE: ONECAST MEDIA
Andrew A. Guy, Stoel Rives LLP, Seattle, Washington, for
the appellee.
OPINION
SCHWARZER, Senior District Judge:
OneCast Media, Inc. (OneCast) held a lease for office
space in a building owned by First Avenue West Building,
LLC, later acquired by First West Building 00, LLC (the
Landlord). The lease was secured by a substantial security
deposit comprised of cash and a letter of credit. In November
2000, OneCast ceased paying rent and filed for bankruptcy.
Nancy James was appointed bankruptcy trustee for the estate
(Trustee) and rejected the lease. The Landlord drew down the
letter of credit and retained the proceeds as a security deposit.
In an adversary proceeding in bankruptcy court, the Trustee
sought to recover the remaining security deposit. The court
ruled that to the extent the claim sought recovery of the por-
tion of the security deposit secured by the letter of credit, the
letter of credit was not property of the bankruptcy estate and
therefore not within the bankruptcy court’s jurisdiction. The
Trustee moved for reconsideration, which the bankruptcy
court denied. The Trustee then appealed to the district court
and that court reversed and remanded to the bankruptcy court
to permit the Trustee to pursue recovery of damages up to the
full amount of the security deposit, including the letter of
credit. This appeal by the Landlord from the district court’s
order followed. For the reasons stated below, we affirm.
STANDARD OF REVIEW
“We review de novo a district court’s decision on appeal
from a bankruptcy court.” In re Dawson, 390 F.3d 1139, 1145
(9th Cir. 2004). “[W]e review the bankruptcy court’s decision
independently and give no deference to the district court’s
IN RE: ONECAST MEDIA 1969
determinations.” Id. A bankruptcy court’s denial of a motion
for reconsideration is reviewed for abuse of discretion. In re
Kaypro, 218 F.3d 1070, 1073 (9th Cir. 2000). A court abuses
its discretion in denying a motion to reconsider if the underly-
ing decision “involved a clear error of law.” McDowell v. Cal-
deron, 197 F.3d 1253, 1255 (9th Cir. 1999) (en banc).
I. TIMELINESS OF THE MOTION TO
RECONSIDER
At the bankruptcy court trial in July 2002, that court ruled
that “the letter of credit and its proceeds were never property
of the estate.” It went on to find that on the facts the Trustee
was not entitled to any of the cash security deposit. It issued
no order or judgment on its rulings but directed counsel for
the Landlord to prepare and present orders.1 This was never
done. The bankruptcy court docket reflects the oral rulings
made by the bankruptcy judge, but no written judgment or
orders were ever entered. On March 10, 2003, almost eight
months after the court’s ruling, the Trustee filed a motion for
reconsideration in the bankruptcy court, arguing that the rul-
ing excluding the letter of credit from the estate was manifest
error. The Trustee explained that she had been waiting for the
Landlord’s attorney to prepare an order from which to seek
reconsideration, but as no order had been submitted, the
Trustee based the motion on the court’s oral ruling. On
August 5, 2003, the court denied the motion. On August 15,
the Trustee filed a notice of appeal to the district court.2 We
1
The Western District of Washington’s Bankruptcy Local Rule 9021-1
provides that “[u]nless the court directs otherwise, all orders, findings of
fact and conclusions of law, and judgments shall be prepared by the pre-
vailing party.”
2
The Trustee appealed both the July 2002 ruling and the denial of the
motion to reconsider to the district court. The district court found that it
lacked jurisdiction over the July 2002 ruling because no written order set-
ting forth the judgment had been entered. The Trustee does not challenge
that determination on appeal to this Court. Accordingly, we limit our anal-
ysis to the motion to reconsider, which formed the basis for the district
court’s decision.
1970 IN RE: ONECAST MEDIA
raised the issue of the timeliness of the motion to reconsider
sua sponte at oral argument, neither party having raised the
issue in briefs or oral argument.
[1] A timely motion for reconsideration is governed by
Federal Rule of Civil Procedure 59(e). See Bestran Corp. v.
Eagle Comtronics, Inc., 720 F.2d 1019, 1019 (9th Cir. 1983);
see also FED. R. BANKR. P. 9023 (applying Rule 59 to bank-
ruptcy cases). A Rule 59(e) motion must be filed within ten
days after entry of judgment. See also W.D. WASH. BANKR. R.
9013-1(h) (stating that such motions must be filed within ten
days after entry of judgment or order). Here, no written judg-
ment or order was entered and the motion for reconsideration
was filed almost eight months after the bankruptcy court’s
oral ruling.
Federal Rule of Civil Procedure 58 defines when entry of
judgment has occurred. See also FED. R. BANKR. P. 9021
(applying Rule 58 to bankruptcy proceedings). At the time of
the bankruptcy court’s ruling and until December 1, 2002,
Rule 58 did not limit the time for filing a motion for reconsid-
eration when no separate written judgment has been entered.
See Carter v. Beverly Hills Sav. & Loan Ass’n, 884 F.2d
1186, 1189-90 (9th Cir. 1989) (holding that a notation on the
docket indicating court’s decision, without a separate written
order or judgment, did not start time for post-judgment
motion). On December 1, 2002, an amendment of Rule 58
took effect, providing that where no separate written judg-
ment was entered, the entry of judgment would occur “when
150 days have run from entry in the civil docket under Rule
79(a).” FED. R. CIV. P. 58(b)(2)(B). The court’s ruling that it
lacked jurisdiction over the letter of credit claim was entered
on the bankruptcy docket on August 6, 2002. The motion to
reconsider, filed March 10, 2003, was therefore untimely
under the amended Rule.
The order of the Supreme Court amending Rule 58 states
the amendment “shall govern in all proceedings in civil cases
IN RE: ONECAST MEDIA 1971
thereafter commenced and, insofar as just and practicable, all
proceedings then pending.” 207 F.R.D. 50, 53 (2002). Ordi-
narily, we would proceed to determine whether application of
the amended Rule to this case is just and practicable. See In
re Kaypro, 218 F.3d at 1077; Schroeder v. McDonald, 55
F.3d 454, 459-60 (9th Cir. 1995).3
[2] Here, however, there is no need to consider the applica-
tion of Rule 58 as amended to this case. Under Kontrick v.
Ryan, 540 U.S. 443 (2004), time constraints contained in the
bankruptcy rules are claim-processing rules and do not affect
federal subject matter jurisdiction. In Kontrick, a creditor
failed to object to the debtor’s discharge within the sixty-day
time limit set by Federal Rule of Bankruptcy Procedure 4004.
Id. at 456-57. Rule 9006 allows extension of the Rule 4004
time limit only to the extent permitted by Rule 4004. When
the creditor in Kontrick did raise an objection, the debtor
responded by addressing the merits of the objection, and did
not raise the timeliness issue until later. Id. at 449, 451. The
Court held that the rule limiting the time for filing an objec-
tion was a claim-processing rule that did not implicate subject
matter jurisdiction and that the debtor’s failure to timely
assert it resulted in a forfeiture under the rule.4 Id. at 456-59.
Rule 59 is as much a claim-processing rule as the rule at issue
in Kontrick. See also Eberhart v. United States, 126 S. Ct.
403, 407 (2005) (holding that the time limit to move for a new
trial under Federal Rule of Criminal Procedure 33(b)(2) is
claim-processing rule forfeited by government’s failure to
timely raise it); Brickwood Contractors, Inc. v. Datanet
3
In Ford v. MCI Communications Corp. Health & Welfare Plan, 399
F.3d 1076, 1080-81 (9th Cir. 2005), the court, without discussion, applied
the 150-day rule to a pending case and found that the notice of appeal had
been timely filed.
4
“Characteristically, a court’s subject-matter jurisdiction cannot be
expanded to account for the parties’ litigation conduct; a claim-processing
rule, on the other hand, even if unalterable on a party’s application, can
nonetheless be forfeited if the party asserting the rule waits too long to
raise the point.” Kontrick, 540 U.S. at 456.
1972 IN RE: ONECAST MEDIA
Eng’g, Inc., 369 F.3d 385, 396 (4th Cir. 2004) (en banc)
(finding that Rule 11’s safe harbor provisions are claim-
processing rules that are forfeited if not timely raised).
[3] As neither the amendment to Rule 58, nor any timeli-
ness challenge to the motion for reconsideration was raised by
the Landlord in its briefs, we consider the timeliness issue for-
feited.
II. REJECTION OF THE LEASE
The Landlord contends that the Trustee’s rejection of the
lease eliminated any rights of the Trustee under the lease and
removes it from the bankruptcy estate and thus from the juris-
diction of the bankruptcy court. This contention is beside the
point. The Trustee’s suit is for the Landlord’s breach of the
lease based on its retention of funds from the security deposit,
after drawing down the letter of credit, to which it was not
entitled.
[4] Section 365 of the Bankruptcy Code provides that a
trustee may assume or reject an executory contract or unex-
pired lease. 11 U.S.C. § 365(a) (2000). A rejection of an
unexpired lease removes the lease from the bankruptcy estate,
and “constitutes a breach of such contract or lease” that is
effective immediately before the petition for bankruptcy.
§ 365(g). “ ‘[R]ejection of an executory contract serves two
purposes. It relieves the debtor of burdensome future obliga-
tions while he is trying to recover financially and it constitutes
a breach of a contract which permits the other party to file a
creditor’s claim.’ ” In re Rega Props., Ltd., 894 F.2d 1136,
1140 (9th Cir. 1990) (quoting In re Norquist, 43 B.R. 224,
225 (Bankr. E.D. Wash. 1984)); see also In re Pac. Express,
Inc., 780 F.2d 1482, 1486 n.3 (9th Cir. 1986).
[5] While rejection of a lease prevents the debtor from
obtaining future benefits of the lease (such as ongoing posses-
sion of leased premises), it does not rescind the lease or defeat
IN RE: ONECAST MEDIA 1973
any pending claims or defenses that the debtor had in regard
to that lease. See 3 COLLIER ON BANKRUPTCY § 365.09[1] (Alan
N. Resnick & Henry J. Sommer eds., 15th rev. ed. 2005)
(“Rejection does not . . . affect the parties’ substantive rights
under the contract or lease, such as the amount owing or a
measure of damages for breach and does not waive any
defenses to the contract.”).
According to 11 U.S.C. § 365(g), the rejection of
Debtor’s unexpired lease constitutes a pre-petition
breach of the lease agreement leaving Creditor with
potential remedies under applicable state law. The
statutory breach of contract simply put the estate in
the position of a breaching party to the executory
contract. Rejection under the Bankruptcy Code did
not divest the estate from the breaching party’s rights
under the terms of the contract and applicable state
law.
In re Thompson-Mendez, 321 B.R. 814, 819 (Bankr. D. Md.
2005); see also In re G.I. Indus., Inc., 204 F.3d 1276, 1281-
82 (9th Cir. 2000) (allowing the debtor, after rejection, to
raise the invalidity of the contract as a defense to creditor’s
claims); In re Murphy, 694 F.2d 172, 174 (8th Cir. 1982)
(“rejection of an executory contract in accordance with appli-
cable provisions of the Bankruptcy Act is not the equivalent
of rescission”); In re Lavigne, 183 B.R. 65, 72 (Bankr.
S.D.N.Y. 1995). The rejection of the lease here does not bar
the Trustee’s breach of contract action to recover the balance
of the security deposit.
III. LETTER OF CREDIT
The district court held that the bankruptcy court erred in its
July 2002 ruling, and therefore abused its discretion when it
denied the motion to reconsider. On appeal, the Landlord con-
tends that the district court erred in reaching the merits of the
bankruptcy court’s July 2002 ruling and not limiting its analy-
1974 IN RE: ONECAST MEDIA
sis to the motion to reconsider. We disagree. While the denial
of a motion to reconsider is reviewed for abuse of discretion,
a court abuses its discretion if the legal conclusions underly-
ing the court’s determination are clearly erroneous. McDow-
ell, 197 F.3d at 1255.
[6] Letter of credit transactions involve three relationships:
that of the bank to its customer who purchases the letter of
credit; that of the bank to the beneficiary to whom it makes
a promise to pay; and finally, that between the customer and
the beneficiary. See Kenney v. Read, 997 P.2d 455, 458
(Wash. Ct. App. 2000). Under the so-called principle of inde-
pendence, each of those three transactions must be treated
separately. 1 RICHARD A. LORD, WILLISTON ON CONTRACTS
§ 2:23 (4th ed. 1999). This case does not involve the first two
relationships. There is no issue concerning the bank’s perfor-
mance under the letter of credit. Indeed, the Landlord, the
beneficiary, has drawn down the full amount of the letter of
credit. What is at issue here is simply the controversy between
the Landlord and the Trustee over how much of the funds
held by the Landlord it is entitled to retain. Following One-
Cast’s default under the lease, the Landlord drew down the
entire letter of credit as the security deposit. The Trustee now
seeks to recover so much of the security deposit as exceeded
the Landlord’s damages. The Trustee’s interest in those funds
is property of the estate, 11 U.S.C. § 541(a)(1) (2000), and
thus within the bankruptcy court’s jurisdiction. In re Kaiser
Group Int’l Inc., 399 F.3d 558, 566 (3d Cir. 2005); In re Gra-
ham Square, Inc., 126 F.3d 823, 828 (6th Cir. 1997) (“It is
one thing to attempt to prevent the distribution of the proceeds
of a letter of credit, an attempt the doctrine of independence
is designed to prevent; but it is quite another to bring an
action on the underlying contract that created the letter of
credit.”); In re Papio Keno Club, Inc., 247 B.R. 453, 460
(B.A.P. 8th Cir. 2000) (“The fact that Debtor seeks the return
of funds that are proceeds of a letter of credit does not negate
the breach of contract claim on the underlying obligation.”).5
5
The cases cited by the Landlord are not apposite. All involved situa-
tions where a debtor or trustee challenged or sought to enjoin payment by
IN RE: ONECAST MEDIA 1975
Because the bankruptcy court committed clear error in hold-
ing that it had no jurisdiction, its denial of the motion to
reconsider was an abuse of discretion. See McDowell, 197
F.3d at 1255.
CONCLUSION
For the reasons stated, the district court’s order is
AFFIRMED.
the bank to the beneficiary. In re Compton Corp., 831 F.2d 586, 589 (5th
Cir. 1987) (“a bankruptcy trustee is not entitled to enjoin a post-petition
payment of funds under a letter of credit from the issuer to the beneficiary,
because such a payment is not a transfer of debtor’s property”), modified
on reh’g, 835 F.2d 584 (5th Cir. 1988); In re Page, 18 B.R. 713, 716
(D.D.C. 1982); In re Farm Fresh Supermarkets of Md., Inc., 257 B.R. 770,
772 (Bankr. D. Md. 2001) (challenging validity of post-petition draw on
letter of credit); In re Baja Boats, Inc., 203 B.R. 71, 74 (Bankr. N.D. Ohio
1996) (“A trustee cannot enjoin the post-petition payment of a letter of
credit because such a payment is not a transfer of the debtor’s property.”);
In re Ill.-Cal. Express, Inc., 50 B.R. 232, 234-35 (Bankr. D. Colo. 1985)
(arguing that draw on letter of credit violated automatic stay).