Court Opinion

ID: 2974625
Source: CourtListenerOpinion
Date Created: 2015-09-22 17:20:50.036486+00
Date Added: 2024-06-11T15:33:17.394269
License: Public Domain

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
                            File Name: 06a0868n.06
                           Filed: November 29, 2006

                                            No. 06-5063

                            UNITED STATES COURT OF APPEALS
                                 FOR THE SIXTH CIRCUIT

In re: Regal Cinemas, Inc.,                        )
                                                   )
               Debtor,                             )
                                                   )
Queensgate Associates, LLC,                        )   ON APPEAL FROM THE UNITED
                                                   )   STATES DISTRICT COURT FOR THE
               Appellant,                          )   MIDDLE DISTRICT OF TENNESSEE
                                                   )
v.                                                 )
                                                   )
Regal Cinemas, Inc.,                               )
                                                   )
               Appellee.                           )

       Before: MOORE, ROGERS, GIBSON,* Circuit Judges.

       ROGERS, Circuit Judge. Queensgate appeals the judgment of the district court affirming

the bankruptcy court’s decision that Queensgate was not entitled to its damage claim in Regal

Cinemas’ bankruptcy. Queensgate and Regal were parties to a lease that included a provision

requiring Regal to restore the floors to a level condition upon notice by Queensgate. Queensgate was

to provide the notice within six months of termination or expiration of the Lease. The bankruptcy

court ruled that Queensgate failed to provide notice as required under the Lease and the district court

       *
        The Honorable John R. Gibson, Circuit Judge of the United States Court of Appeals for the
Eighth Circuit, sitting by designation.
No. 06-5063
Queensgate Associates, LLC v. Regal Cinemas, Inc.

upheld that decision. Queensgate now appeals the judgment of the district court, arguing that

Queensgate provided the notice required under the Lease or, alternatively, that Queensgate was

excused or prevented from providing more detailed notice. Queensgate also challenges the decision

of the bankruptcy court that its claim for damages is capped by § 502(b)(6) of the Bankruptcy Code,

an issue the district court did not reach. Because Queensgate did not provide the notice required

under the Lease, we affirm without reaching the question of whether Queensgate’s damages are

capped by § 502(b)(6).

                                I. Facts and Procedural History

       A. Initial proceedings in the bankruptcy court

       The dispute between Queensgate as lessor and Regal as a tenant arose when Regal filed for

bankruptcy under Chapter 11. Regal filed a motion to reject the Lease in the Queensgate Shopping

Center, and the bankruptcy court entered an order authorizing the rejection of the Lease as of

November 30, 2001. On November 21, 2001, Queensgate filed a claim against Regal in the amount

of $1,811,811.42. The amount of the claim included 15% of the rent reserved under the Lease

($587,236.80), pre-petition common-area-maintenance charges and taxes ($34,644.62), and damages

to the premises ($1,190,000.00). Regal objected to the claim on February 26, 2002, on the ground

that Queensgate’s claim exceeded the damage cap provided by 11 U.S.C. § 502(b)(6), which

operates to cap a lessor’s damages resulting from a rejection of an unexpired lease in bankruptcy.

Queensgate responded to Regal’s objection on April 3, 2002, stating that the § 502(b)(6) cap did not

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apply to its claim because the claim was for actual physical damages to the premises. Specifically,

Queensgate claimed that Regal “damaged and destroyed the built in theatre seats, the built in

projector equipment, walls, other property permanently affixed to the Leasehold Premises, and

otherwise caused considerable damage to the Leasehold Premises.” Queensgate claimed that these

actions were in direct violation of § 13 of the Lease, which provided that Regal was to “maintain the

Leased Premises in the same good and orderly condition in which it was delivered,” and that §

502(b)(6) did not limit the amount of the claim since it was for physical damages. Regal and

Queensgate filed cross motions for summary judgment. The bankruptcy court held that § 502(b)(6)

applied to, and thus capped, all of Queensgate’s claims. Queensgate appealed (“First Appeal”) and

the district court reversed the decision of the bankruptcy court, holding that the § 502(b)(6) cap did

not apply to Queensgate’s claim for damages to the premises unrelated to the Lease termination.

       B. Trial in the bankruptcy court

       Following the district court’s remand, the bankruptcy court conducted a trial on the issue of

damages. In the Joint Pretrial Statement filed with the bankruptcy court, Queensgate claimed that

the general provisions of the Lease supported its claim. Specifically, Queensgate referred to § 13(a)

of the Lease, which provided that Regal must “maintain the Leasehold Premises in the same good

and orderly condition in which it was delivered” and return it to Queensgate in the same condition,

excepting ordinary wear and tear; § 14(a) of the Lease, which required Regal to remove “all

alterations and improvements made during the Lease Term”; and § 17(a) of the Lease, which

required Regal to return the premises to Queensgate “in as good order and condition as when

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Queensgate Associates, LLC v. Regal Cinemas, Inc.

received, ordinary wear and tear excepted.” The breach of these Lease provisions, according to

Queensgate, resulted in damages of almost $1.2 million. Finally, Queensgate referred to ¶ 3(G) of

the Addendum to the Lease (“Addendum”), which provides that

          [u]pon the expiration of the Lease Term or the Renewal Terms (or upon any earlier
          termination of the Lease), the Tenant shall, at the option of the Landlord, restore the
          floor of the Leased Premises to the condition of same as of the date of the Lease,
          including, but not limited to, removal of all theater seats, and removal of any elevated
          or graduated flooring . . . . Landlord shall give Tenant written notice if Landlord
          desires Tenant to restore the floor of the Leased Premises . . . within six (6) months
          after any termination of the Lease.
Queensgate stated that the breach of this provision of the Lease caused it damages of “at least

$739,298.00.”

          The hearing in the bankruptcy court included testimony from Michael Arkin, principal of

Queensgate Associates; Jeffrey Packard, a construction estimator; and Matthew Laughlin, an

employee of Regal who was the general manager of the theater located in the Queensgate Shopping

Center.

          Michael Arkin testified that the condition of the premises following Regal’s departure was

one of “intended destruction,” that the seats were removed, wires were pulled out from the wall, and

trash strewn about. He testified regarding his desire to return the premises to a “vanilla box”

condition suitable for general retail use and stated that he requested an estimate from Packard

regarding the costs associated with converting the premises to vanilla box condition. Arkin also

testified that the floors were never leveled because Queensgate was waiting for Regal to pay

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Queensgate’s claims, but also that another theater was currently operating on the premises. On

cross-examination, Arkin stated that there were no receipts for any alleged damages to the premises

because the space was leased to the new tenant in an as-is condition and that the new tenant made

any necessary repairs. Regarding the repair estimate attached to Queensgate’s response to Regal’s

objection filed with the bankruptcy court, Arkin acknowledged that there was nothing in the estimate

to indicate that the cost of leveling the floors was a significant portion of the costs. When asked

whether written notice was provided to Regal regarding the floors, Arkin testified that he did not

send any notice, but that he asked his attorneys to do what was necessary in the bankruptcy case.

When counsel for Regal asked Arkin whether Arkin offered to purchase the theater equipment from

Regal, Arkin answered in the affirmative.

        Packard testified regarding the costs of restoring the leased premises to vanilla box condition.

He detailed the necessary steps in restoring the floors to level condition and the steps taken in

formulating an estimate. When asked about the related costs of restoring the floors, Packard went

into detail about the process, specifically that once the floor elevation is changed, one must also deal

with related repairs, to the walls, for example. On cross-examination by Regal’s attorney, Packard

stated that he was not asked to submit an estimate regarding costs to repair damage or vandalism to

the premises.

        Laughlin testified for Regal regarding Regal’s vacating of the leased premises. He testified

that Regal removed and discarded the seats and the screens and removed the projection equipment.

Laughlin said that wiring was capped-off with wire nuts when the poster cases were removed, and

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that there were holes in the walls where the screws holding up the poster cases had been removed.

He stated that Regal left the premises in a clean condition.

       During closing arguments, counsel for Queensgate focused on Regal’s obligation to level the

floors under ¶ 3(G) of the Addendum. He maintained that, because this was a Chapter 11 case, all

Queensgate could do was reduce its claim to money damages, which it did. Counsel argued that

Queensgate provided notice with the estimate attached to Queensgate’s response to Regal’s

objection. Additionally, counsel for Queensgate argued that Regal failed to raise the issue of notice

under ¶ 3(G) of the Addendum and that Regal could not at trial rely on such a defense. Finally,

Queensgate pointed to Regal’s duties under § 14 of the Lease, which required Regal to remove

alterations and improvements made during the Lease term, and Queensgate maintained that its claim

was not capped by § 502(b)(6).

       Regal maintained in its closing argument that the issue of any duty to level the floors was not

brought up until after the district court’s remand and that, in any event, § 502(b)(6) capped

Queensgate’s claim.

       The bankruptcy court again denied Queensgate’s claim. In its memorandum opinion, the

court rejected Queensgate’s argument that the general provisions of the Lease required Regal to

restore the floors to a level condition. The bankruptcy court noted that the general provisions did

not mention leveling the floors. Because ¶ 3(G) of the Addendum dealt specifically with the

condition of the floors, the court reasoned, the general rule of construction that specific provisions

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control general provisions applied. The court stated that it was “undisputed that Queensgate gave

no formal notice of its desire to have the floors leveled,” and rejected Queensgate’s argument that

the proof of claim and response to Regal’s objection provided the required notice. The court pointed

out that Queensgate consistently argued until trial that Queensgate offered to purchase Regal’s

equipment so that Queensgate could continue to operate the premises as a theater and that neither

Regal nor the court was on notice of Queensgate’s claim regarding the floors. Finally, the

bankruptcy court held that Queensgate’s claim regarding the floors was subject to the cap in §

502(b)(6).

       C. The second appeal

       Queensgate again appealed to the district court. Queensgate argued that (1) its proof of claim

and response to Regal’s objection were sufficient to provide Regal with the notice required by ¶ 3(G)

of the Addendum; (2) the automatic stay precluded Queensgate from providing any notice beyond

its proof of claim and response to Regal’s objection; (3) Regal’s rejection of the Lease excused

Queensgate from its obligation to provide notice; (4) Regal waived any objection to the claim based

on the notice provisions of the Lease because Regal relied only on § 502(b)(6) in objecting to

Queensgate’s claim; and (5) the claim was not capped by § 502(b)(6). The district court affirmed

the decision of the bankruptcy court.

       First, the district court held that the bankruptcy court did not err in its determination that

Queensgate failed to give Regal proper notice of its restoration claim as required by ¶ 3(G) of the

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Addendum. The district court found that nothing in Queensgate’s claim was sufficient to put Regal

on notice that Queensgate’s claim had anything to do with the leveling of the floors. The district

court also rejected Queensgate’s argument that the automatic stay prevented it from giving Regal

notice as required by ¶ 3(G) of the Addendum, referring to a number of cases holding that the

automatic stay did not prevent a creditor from giving required notice to a debtor. The court further

held that Queensgate did not present sufficient authority to support its argument that Regal’s

rejection of the Lease excused Queensgate’s failure to give the notice required by ¶ 3(G). Finally,

the court found that Regal did not waive its right to assert lack of notice as a defense to Queensgate’s

claim because Queensgate itself had failed to put Regal on notice of the basis for its claim. The

district court did not reach the question of whether Queensgate’s claim was limited by § 502(b)(6).

        Queensgate now appeals.

                                             II. Analysis

        A. Standard of review

        In reviewing bankruptcy decisions from a district court, the “standard of review is slightly

different from our normal standard of review because district courts are not the triers of fact of

bankruptcy cases.” Investors Credit Corp. v. Batie (In re Batie), 995 F.2d 85, 88 (6th Cir. 1993).

Because the bankruptcy court makes the initial findings of fact, this court is bound by those findings

of fact unless they are clearly erroneous. Id. Conclusions of law are reviewed de novo. Id. When

a question in the bankruptcy context involves a mixed question of law and fact, the court “must

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break it down into its constituent parts and apply the appropriate standard of review for each part.”

Id.

       The parties dispute whether the holding that Queensgate did not provide notice to Regal as

required under ¶ 3(G) of the Addendum is a finding of fact or conclusion of law. Queensgate

maintains that the holding regarding notice is a conclusion of law and subject to de novo review.

Regal argues that this holding is a finding of fact and subject to the clearly erroneous standard. To

the extent that the question is whether, in light of the undisputed facts, Queensgate provided notice

as required under the Lease, the question is a legal one, subject to de novo review. See Golden v.

Kelsey-Hayes Co. (In re Golden), 73 F.3d 648, 653 (6th Cir. 1996) (“Questions of contract

interpretation are generally considered questions of law subject to de novo review.”).

       B. Sufficiency of the notice provided by Queensgate

       Queensgate failed to provide sufficient notice to Regal of Queensgate’s intent to exercise its

rights under ¶ 3(G) of the Addendum because its actions during the relevant time period served only

to conceal the nature and source of its claim. First, Queensgate’s proof of claim (“POC”) was not

sufficient to provide notice because it merely included a claim for “Damages to the Premises” and

stated that the total cost to “Restore the Premises” was $1,190,000. This was not sufficient notice

because it makes no mention of the Lease or the Addendum, and a claim regarding leveling of the

floors cannot be gleaned from a claim related to “damages” to the premises. Queensgate maintains

that the POC was sufficient because it provided accurate notice of the existence, nature, and amount

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of the claim as well as Queensgate’s intent to hold the estate liable. However, this merely states the

standard for asserting a valid claim. See In re O’Malley, 252 B.R. 451, 456 (Bankr. N.D. Ill. 1999).

Regal does not contest the sufficiency of Queensgate’s POC as a claim, but argues that the POC did

not suffice as notice under the Lease. Although the notice requirement in ¶ 3(G) of the Lease is not

especially detailed and requires only that Queensgate provide written notice, it is apparent that the

two lines in the POC asserting a claim for physical damages to the premises were not sufficient to

put Regal on notice of Queensgate intent to exercise its rights under ¶ 3(G) of the Addendum and

impose an obligation on Regal to level the floors. See LTV Corp. v. Gulf States Steel, Inc., 969 F.2d

1050, 1058 (D.C. Cir. 1992) (holding that Gulf States’ proof of claim was not sufficient notice under

an indemnity agreement with LTV).

       Nor was Queensgate’s response to Regal’s objection, standing alone, sufficient to provide

the required notice. In its response to Regal’s objection, Queensgate claimed that Regal “damaged

and destroyed the built in theatre seats, the built in projector equipment, walls . . . and otherwise

caused considerable damage to the Leasehold Premises,” in violation of § 13(a) of the Lease, which

required Regal to return the premises to Queensgate in a good and orderly condition. Queensgate

also maintained that the estimated cost of repairing the damage allegedly caused by Regal was

$1,190,000. Standing alone, this response did nothing to put Regal on notice of Queensgate’s intent

to invoke its right under ¶ 3(G) of the Addendum because the response invoked an entirely different

Lease provision and stated a claim for physical damages to the premises. The response does not

come close to indicating that the damages claimed would require a leveling of the floors.

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       Finally, the cost estimate prepared for Queensgate by Jeffrey Packard did not suffice as notice

under the Addendum. The repair estimate was for costs associated with restoring the premises to

a “vanilla box” condition suitable for general retail tenants. The estimate included a description of

work regarding the floors. In particular, it specified removal of concrete slabs and steps to

accommodate re-establishment of a four-inch concrete slab at the original floor elevation.

Queensgate maintains that this cost estimate was sufficient notice under the Lease and that Regal

was thus obligated to restore the floors to a level condition or pay for the costs of doing so.

Queensgate’s argument that the cost estimate constituted sufficient argument fails, however, in light

of the surrounding circumstances. Prior to trial in the bankruptcy court, it appears that Queensgate

was attempting to characterize its claimed remedy as one arising from intentional conduct,

presumably because such a theory would prevent the application of the cap of § 502(b)(6). It was

not until trial in the bankruptcy court following the First Appeal that Queensgate asserted that its

claim actually arose under ¶ 3(G) of the Addendum. Although Queensgate is correct that the

Addendum does not require a specific form of notice or that the notice assert that Queensgate is

seeking its remedy pursuant to the Addendum, it would stretch the bounds of reasonableness to

conclude that Queensgate’s actions prior to trial in the bankruptcy court put Regal on notice of its

intent to exercise its rights under ¶ 3(G).

       The notice provision is presumably in the Addendum so that the parties can be certain of their

obligations within the specified time frame following expiration or termination of the Lease. Such

certainty is not possible where the party required to give notice effectively buries that notice. An

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implied obligation on the part of Queensgate was to give notice that would reasonably inform Regal

of its duties. Cf. Slater v. Pearle Vision Center, Inc., 546 A.2d 676, 679 (Pa. Super. Ct. 1988)

(“[W]here it is clear that an obligation is within the contemplation of the parties at the time of

contracting or is necessary to carry out their intentions, the court will imply it.”). The “notice”

Queensgate provided was buried in a cost estimate attached to a pleading asserting that the estimate

was for costs to repair intentional damages to the premises. The cost estimate was for nearly double

what Queensgate claims is the cost to restore the floors, included no breakdown of costs for

individual repairs, and the reference to the floors consists of a few lines. Furthermore, Queensgate

complained early in the proceedings that it attempted to purchase the theater equipment from Regal

in order to continue operating the premises as a theater, but that Regal refused. Such a position is

arguably inconsistent with the notion that Queensgate was really seeking to have Regal level the

floors so that the premises would be unfit for use as a theater. Queensgate cannot obfuscate the

source of the remedy and the remedy itself in an attempt to achieve a desirable result in the

bankruptcy court and then rely on the same conduct to show that its was propounding a different

theory all along.

       C. The automatic stay

       The automatic stay did not prevent Queensgate from giving sufficient notice because

Queensgate could have provided adequate notice in the bankruptcy proceedings by including in its

POC or in its response to Regal’s objection a reference to the Lease or a clear indication of its intent

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to invoke ¶ 3(G).1 Just as the automatic stay did not prevent Queensgate from asserting in its POC

and in its response to Regal’s objection that the claim was based on intentional damages to the

premises, it did not prevent Queensgate from asserting that its claim was based on the terms of the

Lease.

         D. Waiver

         Because Regal was not put on notice that Queensgate’s claim was premised on ¶ 3(G) of the

Addendum until trial in the bankruptcy court, Regal did not waive its objection based on

Queensgate’s failure to give notice. Queensgate argues that Regal waived any objection to

Queensgate’s claim other than the objection based on § 502(b)(6). As stated by the district court,

this argument is circular and without merit. Queensgate maintained until trial in the bankruptcy

court that its claim was based on alleged damages to the premises caused by Regal. It is hard to

argue that Regal was under an obligation to assert an objection to a claim when Regal was unaware

of the basis for the claim until 2005. See Days Inns Worldwide, Inc. v. Patel, 445 F.3d 899, 905 (6th

Cir. 2006) (“Waiver is the intentional relinquishment or abandonment of a known right.” (quoting

United States v. Osborne, 402 F.3d 626, 630 (6th Cir. 2005))). Queensgate refers the court to In re

Snelson, 305 B.R. 255 (Bankr. N.D. Tex. 2003), for the proposition that an affirmative defense not

pleaded is waived. However, in Snelson, the bankruptcy court found that the debtor was on notice

of the nondebtor’s claim based on a liquidated damages provision of the parties’ lease. 305 B.R. at

         1
       Queensgate argues that a demand to Regal to restore the floors would have violated the
automatic stay. However, the Addendum does not require a demand, but merely written notice.

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261-62. Unlike the lessor in Snelson, Queensgate did not put Regal on notice of its claim under ¶

3(G) of the Addendum, so Regal was not in position to waive a defense to such a claim. In re Enjet,

Inc., 220 B.R. 312 (E.D. La. 1998), is also inapposite. In Enjet, the district court reversed the

bankruptcy court’s decision allowing the debtor to amend its objection to a claim after the deadline

for asserting objections had passed. The district court held that the amendment did not relate back

because the debtor’s later objection (challenging the validity of the claim) was inconsistent with its

earlier, timely objection (objecting to a claimed set-off). 220 B.R. at 315. In Enjet, the debtor was

clearly on notice of the source of the creditor’s claim and merely waited too long to assert its rights,

resulting in waiver. Because Regal was not put on notice of Queensgate’s claim under ¶ 3(G) of the

Addendum, it cannot be said that Regal knowingly waived its right to rely on the notice provision

of ¶ 3(G).

        E. Excuse of Queensgate’s obligation to provide notice

        We do not decide whether Queensgate was excused from giving notice because of Regal’s

breach of the Lease. Queensgate did not raise this argument in the bankruptcy court and “[t]his court

has repeatedly held that it will not consider arguments raised for the first time on appeal unless our

failure to consider the issue will result in a plain miscarriage of justice.” United States v.

Ninety-Three Firearms, 330 F.3d 414, 424 (6th Cir. 2003) (internal quotation marks omitted).

        To avoid a finding that this argument was waived, Queensgate argues that the argument was

presented to the bankruptcy court. Queensgate asserts that because it has consistently maintained

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that whatever notice it provided was sufficient in light of Regal’s rejection of the Lease, “[i]t

necessarily follows . . . that any further performance by Queensgate is excused,” and that this

argument was thus before the bankruptcy court. Queensgate bases its argument on this court’s

decision in Nicely v. McBrayer, McGinnis, Leslie & Kirkland, 163 F.3d 376 (6th Cir. 1998). In

Nicely, this court held that specific presentation in the district court of an argument related to

damages in a malpractice case was unnecessary where the relevant statute and other evidence made

the lower court aware of a basis for a claim of injury resulting from the malpractice. 163 F.3d at 381.

Based on Nicely, Queensgate argues that the obvious implications of Regal’s rejection of the Lease

was that Queensgate’s obligation to provide notice was excused and that, as in Nicely, the issue was

clearly before the bankruptcy court. Queensgate refers to its Memorandum of Law Regarding Notice

Requirements Under the Addendum to Lease (Memorandum of Law), filed with the bankruptcy

court, in arguing that the issue was squarely before the bankruptcy court.              However, the

Memorandum of Law does not present any argument from which Queensgate’s new argument—that

it was entirely relieved of providing notice—can be discerned. In fact, in the Memorandum of Law,

Queensgate effectively conceded that it was required to provide notice when it stated that “[t]he only

prerequisite that the contract imposes on Queensgate’s rights under this provision is that it provide

the Tenant with a written notice of its ‘restoration’ obligation.” Queensgate also argued in the

Memorandum of Law that it fully complied with the orders of the bankruptcy court and that this

satisfied the notice requirement under the Lease. It is difficult, if not impossible, to conclude that

the argument that Regal’s rejection of the Lease excused Queensgate’s duty to provide notice

“necessarily follows” from Queensgate’s Memorandum of Law, in which Queensgate conceded that

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notice was required and argued that notice was provided. Thus, this case is unlike Nicely and this

court will not consider the argument for the first time on appeal.

                                          III. Conclusion

       Because we conclude that Queensgate did not provide notice to Regal as required by the

Lease, we do not reach the issue of whether Queensgate’s claim is capped by § 502(b)(6). The

judgment of the district court is affirmed.

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