IN RE: KAISER GROUP INTERNATIONAL INC., Debtor INTERNATIONAL FINANCE CORPORATION v. KAISER GROUP INTERNATIONAL INC., Appellant FRANK J. PERCH, III, Trustee
No. 04-1634
United States Court of Appeals for the Third Circuit
February 25, 2005
399 F.3d 558
Honorable Joseph J. Farnan, Jr.
PRECEDENTIAL. On Appeal from the United States District Court for the District of Delaware (D.C. No. 03-cv-00038). Argued: December 15, 2004. Before: NYGAARD and GARTH, Circuit Judges and POLLAK*, District Judge.
Saul Ewing
1500 Market Street
Centre Square West, 38th Floor
Philadelphia, PA 19102
Counsel for Appellant
Robert J. Stearn, Jr., Esq.
Richards Layton & Finger
One Rodney Square
P. O. Box 551
Wilmington, DE 19899
Warren E. Zirkle, Esq. (Argued)
McGuire Woods
1750 Tysons Boulevard, Suite 1800
McLean, VA 22102
Counsel for Appellee
OPINION
GARTH, Circuit Judge.
Appellant, Kaiser Group International (“International“), appeals from the District Court‘s decision granting International Finance Company‘s (“IFC“)1 Motion to Dismiss International‘s Third Amended Complaint for Lack of Subject Matter Jurisdiction. In doing so, the District Court reversed the Bankruptcy Court to the extent that the bankruptcy decision concluded that International‘s claims were within the scope of the waiver of sovereign immunity by IFC pursuant to
On appeal, International argues that its claims fall within
Accordingly, we will reverse the judgment of the District Court, remand to the District Court, and direct thаt the District Court remand this case to the Bankruptcy Court so that there may be a ruling on the merits of International‘s Third Amended Complaint.
I.
The District Court had jurisdiction over this case as an appeal from the determination of the Bankruptcy Court under
The District Court dismissed the instant action upon IFC‘s Federal Rule of Civil Procedure 12(b)(1) motion for lack of subject matter jurisdiction predicated on sovereign immunity. We exercise plenary review over the District Court‘s dismissal under Rule 12(b)(1). In re Cybergenics Corp., 226 F.3d 237, 239 (3d Cir. 2000). When reviewing a facial challenge to this Court‘s subject matter jurisdiction, we accept all well-plеaded allegations in the complaint as true and view them in the light most favorable to the plaintiff. See Turicentro, S.A. v. Am. Airlines Inc., 303 F.3d 293, 300 (3d Cir. 2002).
II.
As we indicated above, because the present appeal is before us on the District Court‘s order granting IFC‘s 12(b)(1) motion to dismiss, we must accept the allegations of the Third Amended Complaint as true and view them in the light most favorable to International. Consequently, the following factual summary is drawn from the facts as alleged in the Third Amended Complaint.
A.
On July 18, 1994, Kaiser Engineers (“Engineers“)3, a debtor subsidiary of International, entered into a Letter of Intent with Nova Hut, a Czech steel manufacturer (“Nova Hut“), pursuant to which International agreed to provide certain advisory services to Nova Hut in connection with the construction of a continuous caster and reversing rolling mill, also known as a “minimill,” to be located in the Czech Republic. Nova Hut agreed to pay a fee of $1.5 million for those services. In order to assist Nova Hut funding the project, International eventually agreed to defer $510,000 of that fee. According to International, that fee was never paid.
On November 8, 1996, International, Kaiser Netherlands,
On June 27, 1997, Netherlands and Nova Hut entered into a contract for construction of Phase 1 of the minimill (the “Construction Agreement“) pursuant to which Netherlands agreed to design and supply Nova Hut‘s existing steel mill with a “fully constructed, operational Phase 1 of the mini-mill for flat rolled products.” It is undisputed that International was not a party to the Construction Agreement. In order to finance its obligations under the Construction Agreement, Nova Hut obtained a sеcured loan from IFC in the amount of $125 million.
To secure Netherlands’ timely and proper design, manufacture, and construction of the mini-mill, the Construction Agreement required Netherlands to submit a performance letter of credit in the amount of $11.1 million (the “Letter of Credit“). The Construction Agreement provided that Nova Hut could draw down against the Letter of Credit if Netherlands breached the contract or failed to renew the Letter of Credit as required. First Union Bank issued the Letter of Credit on July 8, 1997 (as amended on September 15, 1998).
It is also undisputed that Netherlands, not International, is listed as the “customer” on the Letter of Credit. At the same time, according to the Third Amended Complaint, First Union Bank required International to post collateral as security for the Letter of Credit. To meet this requirement, International deposited $11.1 million in cash with First Union Bank.
To further ensure Netherlands’ performance under the Construction Agreement, International executed a written “Guaranty of the Performance of Kaiser Netherlands” pursuant to the agreement between Nova Hut and Netherlands (the “Performance Guaranty“). This Performance Guaranty provided that if Netherlands failed to prove that the mini-mill passed the requisite performance tests, and if Netherlands was unable to correct that deficiency or pay Nova Hut what it owed, then Nova Hut would have the right to seek liquidated damages from International.
On November 7, 1997, Nova Hut granted IFC a security interest in the Construction Agreement and Performance Guaranty. Nova Hut conditionally assigned its rights under the Construction Contract, but not its obligations, to IFC. Netherlands and International acknowledged and consented to this conditional assignment.
Thereafter, Netherlands commenced construction of the minimill. The Construction Agreement required Netherlands to pass a four week integrated production performance test (the “Performance Test“) in connection with the minimill construction. The four week performance test was run from October 16, 2000 through November 13, 2000. After completing the test, Nova Hut informed Netherlands that it had failed to prove that the mini-mill performed as required by the Construction Agreement. Thus, Nova Hut notified Netherlands that it was in default. International, however, claims that Netherlands passed that test and met all of its other contractual
In January 2001, a dispute arose over the Letter of Credit, which was set to expire on March 7, 2001. International agreed to extend the Letter of Credit in return for Nova Hut‘s and IFC‘s representations that they would not draw on the Letter of Credit if it was extended until July 31, 2001. Despite these representations, on February 16, 2001, Nova Hut drew down on the $11.1 million Letter of Credit and terminated the Construction Agreement (allegedly at the direction of IFC). That draw down, which International alleges was improper and in breach of the Construction Agreement and the additional agreements that it had with Nova Hut аnd IFC, forms the basis of the present litigation.
B.
On June 9, 2000, International and certain subsidiaries filed a petition under
At the same time, IFC stated that it was filing the Proof of Claim under the compulsion of the bar date and that the filing was not a consent by IFC to the jurisdiction of the court with respect to the subject matter of those claims.
On April 9, 2001, after Nova Hut drew down on the Letter of Credit, International filed an amended objection to Nova Hut‘s and IFC‘s proofs of claim and filed claims against IFC and Nova Hut.4 In response, on June 12, 2001, IFC filed a motion for leave to withdraw its proof of claim.
In an order dated January 9, 2002, the Bankruptcy Court granted IFC‘s motion, but only on the conditions that the Bankruptcy Court would retain jurisdiction over International‘s claims and that IFC was barred from asserting other claims against the debtors.
On October 21, 2002, International filed its Third Amended Complaint.
C.
The Third Amended Complaint alleges that at the time Nova Hut drew on the Letter of Credit, Netherlands had passed the Performance Test, had met all of the requirements for final
As against IFC, International asserted both contract and equitable claims. These claims can be summarized as follows:
- First, Nova Hut and IFC are liable for breach of warranty for allegedly false representations and warranties made by Nova Hut at the direction of IFC in connection with the draw on the Letter of Credit.
- Second, Nova Hut and IFC are liable for breach of contract in connection with agreements they had with International concerning the Letter of Credit whereby International agreed to establish the Letter of Credit on behalf of Netherlands and Nova Hut agreed not to draw on the Letter of Credit if International extended the Letter of Credit prior to its expiration.
- Third, as an alternative to its breach of contract claims, Nova Hut and IFC are liable to International under a theory of unjust enrichment for (1) improperly drawing on the Letter of Credit, (2) failing to pay $510,000 in deferred payments allegedly owed to Engineers for financial and engineering services it provided pursuant to the Letter of Intent, and (3) failing to pay $5.25 million allegedly owed to International for engineering and construction goods and services it provided pursuant to the Memorandum of Understanding.
- Fourth, as an alternative to its breach of contract and unjust enrichment claims, Nova Hut and IFC are liable to International under a theory of quantum meruit.
- Fifth, in the event a contract existed between Nova Hut and International or Engineers, IFC is liable for tortious interference with contract.
- Sixth, in thе event no enforceable contract existed, IFC is liable for tortious interference with business relations and prospective economic advantage.
In response, IFC filed a motion to dismiss the Third Amended Complaint for lack of subject matter jurisdiction, claiming sovereign immunity under
The Bankruptcy Court ruled that IFC is a governmental unit under
On appeal to the District Court of Delaware, in addition to the arguments it raised before the Bankruptcy Court, IFC asserted for the first time that even if it had waived its immunity, the claims set forth in the Third Amended Complaint were outside the scope of its waiver pursuant to
With respect to International‘s breach of contract claims in connection with the Letter of Credit, the District Court found that those claims were not “property of the estate.” Specifically, it held that because neither a letter of credit nor its proceeds are “property of the estate” under bankruptcy law, any recourse Internatiоnal might have, would be limited to the underlying Construction Agreement. Such a cause of action could not be “property of the estate” because International was not a party to that contract.
As for International‘s equitable claims, the District Court found that even assuming they were “property of the estate,” they were not within the scope of IFC‘s waiver, because they did not arise from the same transaction or occurrence as IFC‘s Proof of Claim. It so held because International‘s claims were predicated on events that occurrеd subsequent to International‘s filing of its objections to the Proof of Claim and thus had not “matured” within the period of time prescribed by
By order dated February 23, 2004, the District Court dismissed International‘s Third Amended Complaint with prejudice for lack of subject matter jurisdiction. This timely appeal followed.
III.
As an initial matter, International asserts that IFC has waived the issues of: (1) whether its claims were “property of the estate” and (2) whether the claims arose out of the same trаnsaction or occurrence, and therefore, cannot raise these issues on appeal. International relies on the general rule that when a party fails to raise an issue in the bankruptcy court, the issue is waived and may not be considered by the district court on appeal. See Buncher Co. v. Official Comm. of Unsecured Creditors of Genfarm LP IV, 229 F.3d 245, 253 (3d Cir. 2000). Although the general rule of Buncher is correct, International fails to note the exception for subject matter jurisdiction, which
It is well-settled law that subject matter jurisdiction can be challenged at any point before final judgment, even if сhallenged for the first time on appeal. See Grupo Dataflux v. Atlas Global Group, L.P., 124 S.Ct. 1920, 1924 (2004). We have consistently held that the defense of lack of subject matter jurisdiction may be raised at any time. See, e.g., Brown v. Philadelphia Hous. Auth., 350 F.3d 338, 347 (3d Cir. 2003) (citing Sansom Comm. v. Lynn, 735 F.2d 1535, 1538 (3d Cir. 1984) (defense that district court lacked subject matter jurisdiction to enforce consent decree may be raised for the first time on appeal)).
Specifically, we have stated that Courts of Appeals must consider whether sovereign immunity was waived under
IV.
A governmental unit that has filed a proof of claim in the case is deemed to have waived sovereign immunity with respect to a claim against such governmental unit that is property of the estate and that arose out of the same transaction or occurrence out of which the claim of such governmental unit arose.
A.
As we observed earlier, the District Court found that International‘s breach of contract claims concerning the Letter of Credit were not “property of the estate.” It based this conclusion on the “well-established” rule of bankruptcy law that “a letter of credit and the proceeds therefrom arе not property of the debtor‘s estate.” Matter of Compton Corp., 831 F.2d 586, 589 (5th Cir. 1987) (citations omitted); see also In re Hechinger Inv. Co. of Del., Inc., 282 B.R. 149, 161 (D. Del. 2002). Instead, a debtor seeking to remedy an improper draw on a letter of credit is limited to a cause of action on the underlying contract. See In re Graham Square, Inc., 126 F.3d 823, 827 (6th Cir. 1997). Because the District Court found that International was not a party to the Construction Agreement upon which the Letter of Credit was based, it found that International‘s claim for $11.1 million predicated on Nova Hut‘s improper draw down was not “property of the [International] estate” and could not be recovered by International.
On appeal, International argues that the general “well established” rule of letter of credit jurisprudence relied upon by the District Court is not applicable in this case. In the typical case, a debtor either seeks to enjoin5 a bank‘s distribution of the proceeds of a letter of credit or to recover the bank‘s distribution as a voidable preference or unauthorized postpetition transfer.6 See, e.g., In re Hechinger Inv. Co. of Del., Inc., No. 99-2261 (Bankr. D. Del. 2001). Such challenges to the distribution of proceeds of a letter of credit are barred in the routine letter of credit case. See In re Graham Square, Inc., 126 F.3d at 827.
Here, however, International is not seeking to enjoin First Union Bank‘s distribution of the Letter of Credit proceeds, nor is it alleging that there was a preferential payment to Nova Hut. Rather, International seeks damages against Nova Hut and IFC for the resultant loss of the collateral that International posted and subsequently lost as a result of Nova Hut‘s allegedly impropеr draw down on the Letter of Credit. As International argues explicitly in its opening brief, “[i]t is this $11.1 million in collateral, which was posted by Kaiser International, a Debtor, that was property of the estate.” Kaiser Br. at 23 n.2.
Several courts, including the Fifth, Ninth and Eleventh Circuits, have held that the collateral posted to secure a Letter of Credit is property of the estate. In Matter of Compton, the Fifth Circuit held expressly: “Overall, the letter of credit itself and the payments thereunder may not be property of [the] debtor, but the collateral pledged as a security interest for the letter of credit is.” 831 F.2d at 590-91; see also In re Mayan Networks Corp., 306 B.R. 295, 299 (9th Cir. B.A.P. 2004); In re Air Conditioning, Inc., 845 F.2d 293, 296 (11th Cir. 1988); In re Metro Comms., Inc., 115 B.R. 849, 854 (W.D. Pa. 1990). Thus, as the Ninth Circuit Bankruptcy Appellate Panel noted in In re Mayan Networks, where the claim centers around the collateral pledged to the bank and not the distribution of the proceeds themselves, “the fact that letters of credit themselves are not property of the estate is a red herring.” 306 B.R. at 299.
The logic and reasoning of the Fifth Circuit in Matter of Compton is compelling and has direct application here. Applying the “collateral” analysis of Compton, therefore, we hold that the District Court erred in disposing of International‘s claims concerning the Letter of Credit and holding that they were not “property of the estate.” Taking as truе the Third Amended Complaint‘s allegation that International, not Netherlands, posted the collateral to secure the Letter of Credit, it is evident that International‘s claim predicated on posting its own $11.1 million collateral constitutes “property of the estate” for purposes of
Indeed, the Third Amended Complaint‘s further alleges that International had independent agreements with Nova Hut and IFC whereby International (1) agreed to post the collateral for the Letter of Credit and (2) agreed to extend the Letter of Credit in exchange for Nova Hut‘s representation that it would not draw down on the Letter of Credit. Thus, International has alleged causes of action predicated on its own – not Netherlands’ – agreements that it had with Nova Hut. International‘s claims are therefore “property of the estate” and assets to which its creditors in bankruptcy can look. As such, they are within the scope of IFC‘s sovereign immunity waiver under
B.
The District Court also dismissed the Third Amended Complaint‘s claims, advanced by International, because it found that they did not satisfy the “same transaction or occurrence” requirement of
The legislative history of
The District Court never reached the issue of whether International‘s claims bore a logical relationship to IFC‘s claims. Instead, it relied on the fact that International‘s claims, as set forth in the Third Amended Complaint, matured after it filed objections to IFC‘s Proof of Claim. Based on that finding, the District Court concluded that the claims were not compulsory counterclaims as defined in
While the District Court correctly noted a significant policy concern in rendering its decision, it ignored the equally, if not more, сompelling consideration that the Bankruptcy Code is intended to be both remedial and quasi-equitable. Furthermore, in imposing Rule 13(a)‘s maturity requirement on International‘s claims, the District Court failed to accord proper weight to both the language of
As we set forth above,
A governmental unit that has filed a proof of claim in the case is deemed to have waived sovereign immunity with respect to a claim against such governmental unit that is property of the estate and that arose out of the same transaction or occurrence out of which the claim of such governmental unit arose.
On the other hand,
A pleading shall state as a counterclaim any claim which at the time of serving the pleading the pleader has against any opposing party, if it arises out of the transaction or occurrence that is the subject matter of the opposing party‘s claim and does not require for its adjudication the presence of third parties of whom the court cannot acquire jurisdiction.
A comparison of the two provisions reveals that there is no basis in the statutory language for requiring “maturity” of claims in the context of
The plain language of
Furthermore, the notes to
[T]he filing of a proof of claim against the estate by a governmental unit is a waiver by that governmental unit of sovereign immunity with respect to compulsory counterclaims, as defined in the Federal Rules of Civil Procedure . . . that is, counterclaims arising out of the same transaction or occurrence.
In reaching its holding, the Distriсt Court relied on a single bankruptcy court case, In re Pullman Const. Indus., Inc., 142 B.R. 280, 282-83 (Bankr. N.D. Ill. 1992), which held a counterclaim must exist at the time of the pleading for purposes of
Instead of examining all of Rule 13(a) requirements, the Seventh Circuit, as well as all of the other circuits that have analyzed
Turning to the “same transaction or occurrence” test, we are instructed that the logical relationship standard should be construed liberally. See In re Price, 42 F.3d at 1073. Thus, to determine whether a logical relationship exists under
On appeal, IFC cites to In re William Ross, Inc., 199 B.R. 551 (W.D. Pa. 1996) and In re Sacred Heart Hospital, 204 B.R. 132 (E.D. Pa. 1997), both of which are non-binding and inapposite. Those lower court cases, involved claims by debtors that were asserted against different government agencies than the agency that filed the proof of claim. See In re William Ross, 199 B.R. at 554-55; In re Sacred Heart Hosp., 204 B.R. at 141.
Here, however, International asserted its claims against IFC – the same entity that filed the Proof of Claim. Thus, IFC‘s attempt to demonstrate that there is no logical relationship between its claims and those of International, is unpersuasive.
Instead, applying the flexible logical relationship standard enunciated above, we hold that International‘s claims satisfy the “same transaction or occurrence” test. Both IFC‘s Proof of Claim and International‘s counterclaims arise out of the construction of the Nova Hut minimill. That fact alone – that all of the claims and counterclaims arise out of that one complex transaction – is sufficient to dеmonstrate a logical relationship between the claims.8
VI.
The District Court properly addressed, for the first time on appeal, the scope of IFC‘s waiver of sovereign immunity under
Accordingly, we will reverse the District Court‘s order of February 24, 2004, and remand to the District Court with the direction that the case be remanded to the Bankruptcy Court so that the Bankruptcy Court may rule оn International‘s Third Amended Complaint, and for further proceedings consistent with this opinion.