Phoenix Enterprises, LLC v. Shirley Highway Distribution Center, LLC

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF COLUMBIA
In re
PHOENIX ENTERPRISES, LLC,
Debtors.
____________________________
PHOENIX ENTERPRISES, LLC,
Plaintiff,
v.
SHIRLEY HIGHWAY DISTRIBUTION
CENTER, LLC,
Defendant.
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Case No. 07-00149
(Chapter 11)
Adversary Proceeding No.
07-10011
[Not for Publication in
West Bankruptcy Reporter.]
MEMORANDUM DECISION REGARDING DEFENDANT’S MOTION TO DISMISS
Shirley Highway Distribution Center, LLC (“Shirley”), the
defendant in this adversary proceeding, moves to dismiss the
complaint filed by plaintiff Phoenix Enterprises, LLC
(“Phoenix”), Shirley’s former tenant and a debtor-in-possession
in this case, pursuant to Fed. R. Civ. P. 12(b)(6) (as
incorporated by Fed. R. Bankr. P. 7012). 	For the reasons that
follow, the court will grant Shirley’s motion and dismiss
The decision below is signed as a decision of
the court.
Signed: September 10, 2007.
_____________________________
S. Martin Teel, Jr.
United States Bankruptcy Judge
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1 	The court considered the following documents in preparing
this memorandum decision: the plaintiff’s complaint (D.E. No. 1,
filed March 29, 2007), as well as Exhibit 1 (the “Lease”),
Exhibit 2 (the “Amended Lease”), and Exhibit 3 thereto; the
Defendant’s Fed. R. Bankr. P. 7012(b) Motion to Dismiss Complaint
(D.E. No. 6, filed April 30, 2007) and Defendant’s Memorandum of
Law in Support of Rule 7012(b) Motion to Dismiss (D.E. No. 8,
filed April 30, 2007) (“Def. Mem.”); the Debtor’s Brief in
Opposition to Defendant’s Motion to Dismiss (D.E. No. 11, filed
May 11, 2007) (“Pl. Opp’n”); and Defendant’s Response to
Plaintiff’s Opposition to Defendant’s Motion to Dismiss (D.E. No.
12, filed May 16, 2007) (“Def. Reply”).
2 	“In considering a motion to dismiss [under Rule
12(b)(6)], the claims must be construed in the light most
favorable to the non-moving party and its allegations taken as
true.” 	Jenkins v. McKeithen, 395 U.S. 411, 421-22 (1969).
3 	The phrase “substantially complete[]” is not defined in
the Lease; however, it is defined in the Amended Lease as
completion of all Landlord’s Work “except for ‘punch-list’ items
that do not affect the use of such improvements for their
intended purpose and do not impair Tenant’s full possession of
the Premises.” 	(Amended Lease ¶ 1.)
2
Phoenix’s complaint. 1
I
The following facts are assumed to be true for purposes of
this motion. 2 	On October 21, 2005, Phoenix and Shirley executed
a lease agreement whereby Phoenix would lease 61,500 square feet
of property located at 5650 General Washington Drive, Alexandria,
Virginia, 22312-2415. 	(Lease § 6.) 	The Lease provided that
Shirley would deliver the premises once it had “substantially
completed” various construction obligations designated as
“Landlord’s Work.” 	(Lease § 3.1.) 3 	The Lease required that
Shirley use “commercially reasonable” efforts to complete the
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4 	Paragraph 8 of the Amended Lease provides that “Tenant
hereby acknowledges that Landlord is not in default under the
Lease as of [May 26, 2006], and that it is unaware of any
condition or circumstance which but for the passage of time or
delivery of notice, or both, would constitute a default by
Landlord under the Lease. 	Tenant has no claims, defenses or set-
offs of any kind to the performance of Tenant’s obligations under
the lease.”
3
Landlord’s Work, and then deliver the premises no later than
January 1, 2006. 	(Lease § 2.5.) 	Shirley did not deliver
possession by January 1, 2006, forcing the parties to enter into
the Amended Lease on May 26, 2006. 	(Compl. ¶¶ 10-11.) 	The
Amended Lease states that “Landlord estimates that Landlord’s
Work shall be substantially complete on or before June 30, 2006,
but Landlord shall have no liability if such work is not complete
by such date.” 	(Amended Lease ¶ 1 (emphasis added).) 	In
addition to this “no damages for delay” clause, the Amended Lease
also contains a clause estopping Phoenix from asserting any
claims for breach of contract that allegedly occurred prior to
the signing of the Amended Lease (the “Estoppel Clause”).
(Amended Lease ¶ 8.) 4
Shirley did not deliver the premises until December 18,
2006--almost six months after its anticipated completion date.
(Compl. ¶ 15; Ex. 3.) 	This caused Phoenix to, inter alia, lose
the deposits it had paid to construction vendors to modify the
property to fit Phoenix’s needs. 	(Compl. ¶ 20.) 	Phoenix also
lost potential profits that its alterations would have generated.
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4
(Compl. ¶ 20.)
Phoenix filed its petition for chapter 11 relief on March
22, 2007 (D.E. No. 1). 	Just seven days later, Phoenix initiated
this adversary proceeding by filing its complaint. 	On April 9,
2007, Shirley filed a proof of claim in the total amount of
$619,961.79 (Claim No. 2). 	Shirley subsequently amended its
claim, asserting that it was actually owed $1,257,553.13.
Shirley responded to Phoenix’s complaint by filing its motion to
dismiss on April 30, 2007.
II
Before turning to the merits of Shirley’s motion, the court
must first consider the basis for and scope of its jurisdiction
in this proceeding. 	“Federal courts are courts of limited
jurisdiction. 	They possess only the power authorized by
Constitution and statute.” 	Kokkonen v. Guardian Life Ins. Co. of
Am., 511 U.S. 375, 377 (1994). 	“[T]he determination of whether a
bankruptcy court has jurisdiction over a matter involves a two-
part analysis: [f]irst, [whether] federal jurisdiction over the
bankruptcy case or proceeding [] exist[s] pursuant to 28 U.S.C.
§ 1334,” In re U.S. Office Products Co. Sec. Litig., 313 B.R. 73,
79 (D.D.C. 2004), and “[s]econd, whether a bankruptcy court
rather than a district court can adjudicate a matter [] pursuant
to 28 U.S.C. § 157.” 	Id.
There is no question that the outcome of this proceeding
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5
“‘could conceivably have any effect on the estate being
administered in bankruptcy,’” Premium of Am., LLC v. Sanchez (In
re Premium Escrow Services, Inc.), 342 B.R. 390, 396 (Bankr.
D.D.C. 2006) (quoting In re U.S. Office Products Co. Sec. Litig.,
313 B.R. at 80) (internal quotation omitted), thereby bringing
this action within the ambit of § 1334(b). 	Id. 	The sole
question is whether the court is authorized to enter a final
judgment in this proceeding pursuant to 28 U.S.C. § 157 and
Article III of the Constitution. 	Phoenix asserts that the court
has such authority, (Compl. ¶ 1); Shirley contends that it does
not. 	(Def. Mem. 1 n.2.)
Ordinarily, a matter that falls within a bankruptcy court’s
jurisdiction only because it is “related to” the debtor’s case
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5 	“Section 1334 confers two types of jurisdiction: (1)
‘original and exclusive jurisdiction of all cases under title
11,’ 11 U.S.C. § 1334(a); and (2) ‘original but not exclusive
jurisdiction of all civil proceedings arising under title 11, or
arising in or related to cases under title 11.’” In re Premium
Escrow Services, Inc., 342 B.R. at 396 (quoting 28 U.S.C.
§ 1334). 	“‘The first category [of jurisdiction] refers to the
bankruptcy petition itself.’” Id. (quoting U.S. Brass Corp. v.
Travelers Ins. Group (In re U.S. Brass Corp.), 301 F.3d 296, 303-
04 (5th Cir. 2002)). 	“‘A claim “arises under” title 11 [for
purposes of § 1334(b)] if the claim is made pursuant to a
provision of title 11,’” id. (quoting In re U.S. Office Products
Co. Sec. Litig., 313 B.R. at 79), while “‘[c]laims “arising in” a
case under title 11 are limited to administrative matters that
arising only in bankruptcy cases and have no existence outside of
the bankruptcy proceeding.’” Id. (quoting In re U.S. Office
Products Co. Sec. Litig., 313 B.R. at 79) (internal quotation
omitted). 	Phoenix’s suit is for breach of contract--a cause of
action in no way unique to the bankruptcy process. 	The court
only has jurisdiction over this case because the matter
“relate[s] to” the debtor’s case.
6
(as is the case here) 5 “means that it must also be a non-core
proceeding for purposes of § 157.” 	Id. at 407. 	As this court
explained in Premium Escrow Services:
The 	statutory 	distinction 	drawn 	between 	core
and 	non-core 	proceedings 	in 	§ 	157 	is 	the
product 	of 	the 	Supreme 	Court’s 	ruling 	in
Northern 	Pipeline 	Co. 	v. 	Marathon 	Pipe 	Line
Co., 	458 	U.S. 	50, 	102 	S.Ct. 	2858, 	73 	L.Ed.2d
598 (1982) (“Marathon”), where the Court held
that the broad grant of jurisdiction extended
to bankruptcy courts in the Bankruptcy Reform
Act 	of 	1978, 	Pub.L. 	No. 	95-598 	(1979),
violated Article III, § 1 of the Constitution.
See 	id. 	at 	87, 	102 	S.Ct. 	2858. 	The 	Court
concluded that Congress could not confer “‘the
essential 	attributes 	of 	the 	judicial 	power’
from 	the 	Art[icle] 	III 	district 	court[s]” 	to
federal 	bankruptcy 	courts, 	which 	are 	created
under Article I of the Constitution. 	Id. 	The
Court 	distinguished 	“state-created 	private
rights,” 	which 	require 	Article 	III
adjudication, from “public rights” that “arise
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7
‘between the government and others,’” which do
not. Id. at 67-72, 102 S.Ct. 2858.
In response to Marathon, Congress amended the
Bankruptcy 	Code 	to 	provide 	that 	bankruptcy
courts 	could 	enter 	final 	judgments 	in 	“core”
proceedings 	that 	involved 	public 	rights, 	28
U.S.C. 	§ 	157(b), 	but 	that 	bankruptcy 	courts
could only hear and enter recommended findings
of fact and conclusions of law with respect to
private 	law, 	“non-core” 	matters. 	Id. 	at
§ 	157(c)(1). 	As 	a 	matter 	subject 	only 	to 	a
court’s “related to” jurisdiction under § 1334
by 	definition 	does 	not 	involve 	public 	rights
created 	by 	Congress 	(if 	that 	were 	the 	case,
the 	matter 	would 	fall 	within 	the 	court’s
“arising under” or “arising in” jurisdiction),
such a matter must be non-core as well.
Id. at 407 n.20.
The court’s reasoning in Premium Escrow Services is as valid
now as it was then, but it does not apply to the instant
situation because Shirley has filed a proof of claim for unpaid
rent, interest, and late fees allegedly owed to it by virtue of
the Amended Lease. 	In so doing, Shirley has “trigger[ed] the
process of ‘allowance and disallowance of claims,’ thereby
subjecting [it]self to the bankruptcy court’s equitable
jurisdiction.” 	Langenkamp v. Culp, 498 U.S. 42, 44 (1990). 	In
other words, the court can enter a final judgment in this case,
not because an action for breach of contract is a “core”
proceeding in the abstract, but because Shirley’s actions turned
this particular breach of contract action into one.
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6 	Shirley attempts to evade the apparent bar imposed by the
“no damages for delay” clause in the Amended Lease by arguing
that the general limitation of liability provision in the
original Lease governs this action, (Pl. Opp’n 5-9), and that a
“no damages for delay” clause cannot bar recovery for delay
damages caused by a party’s gross negligence. 	(Pl. Opp’n 5-6.)
Either way, the minimum showing of scienter necessary for Phoenix
to surmount the restrictions on contractual liability imposed by
the Lease and the Amended Lease is gross negligence.
8
III
The parties devote the bulk of their respective briefs to
arguments concerning which provision of the Lease or Amended
Lease governs this dispute and whether the “no damages for delay”
clause in the Amended Lease can be enforced if Shirley acted in a
grossly negligent manner. 	(Def. Mem. 5-11; Pl. Opp’n 5-9; Def.
Reply 3-8.) 	They need not have bothered. 	Even if one assumes
that Phoenix is correct that it need only plead gross negligence
on the part of Shirley to proceed on its claim for breach for
contract, 6 its complaint is still fatally defective because the
facts pled in the complaint do not remotely support a finding of
gross negligence.
“A Rule 12(b)(6) motion is intended to test the legal
sufficiency of the complaint.” 	Kingman Park Civic Ass’n v.
Williams, 348 F.3d 1033, 1040 (D.C. Cir. 2003). 	To survive such
a motion, “a complaint need only set forth ‘a short and plain
statement of the claim,’ Fed. R. Civ. P. 8(a)(2), giving the
defendant fair notice of the claim and the grounds upon which it
rests.” 	Id. at 1040. 	“However, the court need not accept
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7 	Phoenix attempts to supplement its factual allegations in
its opposition to Shirley’s motion to dismiss. 	(Pl. Opp’n 8.)
Unfortunately for Phoenix, “the court must limit its inquiry to
the four corners of the [c]omplaint itself, as well as any
documents incorporated by reference in the [c]omplaint or facts
subject to judicial notice.” 	Alberts v. Tuft (In re Greater
Southeast Cmty. Hosp. Corp. I), 333 B.R. 506, 523 (Bankr. D.D.C.
2005).
9
inferences drawn by plaintiffs if such inferences are unsupported
by the facts set out in the complaint. 	Nor must the court accept
legal conclusions cast in the form of factual allegations.”
Kowal v. MCI Communications Corp., 16 F.3d 1271, 1276 (D.C. Cir.
1994). 	Moreover, the complaint must plead “enough facts to state
a claim to relief that is plausible on its face.” 	Bell Atl.
Corp. v. Twombly, 127 S. Ct. 1955, 1974 (2007).
Reading the complaint and its exhibits together, Phoenix
alleges at best the following pertinent facts: (1) the parties
entered into the Lease and then the Amended Lease, under which
rent would commence when the “Landlord’s Work” was “substantially
complete,” (Amended Lease ¶ 1); (2) Shirley “estimate[d]” that
its “Work” would be “substantially complete on or before June 30,
2006,” (Amended Lease ¶ 1); (3) Phoenix could not occupy the
property until December 18, 2006, (Compl. ¶ 15, Ex. 3); and
Phoenix attempted “to do the construction work as cheaply as
possible . . . .” 	(Compl. ¶ 16.) 7 	This conduct does not
demonstrate an “indifference to others” or a “disregard[] [for]
prudence to the level that the safety of others is completely
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8 	Harris defined gross negligence in the context of tort
law, but the court has no reason to think that these definitions
would differ where contracts are concerned. 	See Stuart Title
Guar. Co. v. Linowes and Blocher, 42 F.3d 1386, 1994 WL 689122,
*3 (4th Cir. Dec. 12, 1994) (applying Virginia law) (unpublished
opinion) (employing definition of “gross negligence” identical to
that in Harris in determining applicability of exculpatory
provision in contract).
10
neglected,” as Virginia courts require for gross negligence to be
found. 	Harris v. Harman, 486 S.E.2d 99, 101 (Va. 1997). 8
Indeed, Phoenix does not allege that Shirley’s desire “to do the
construction work as cheaply as possible” affected the quality of
the work at all; rather, Phoenix asserts that this desire caused
a six-month delay in the onset of its tenancy. 	A six-month delay
in the completion of construction work is doubtless frustrating,
and may not be “commercially reasonable,” (Compl. ¶ 16), but it
is hardly the sort of thing that “shocks fairminded people.”
Harris, 486 S.E.2d at 101 (citing Griffin v. Shively, 315 S.E.2d
210, 212-13 (Va. 1984)).
At the very least, Phoenix must plead facts suggesting that
Shirley acted in a manner outrageous enough to warrant a finding
of gross negligence if it wishes to succeed in its breach of
contract action. 	Bell Atl. Corp., 127 S. Ct. at 1966 n.5. 	“[A]
bare assertion of [gross negligence] will not suffice.” 	Id. at
1966. 	Regardless of which provision in the Lease or Amended
Lease controls in this case, or whether the “no damages for
delay” clause in the Amended Lease can be applied where the
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11	O:\Andrew Fausett Temp Docs\Decisions with Related Orders\decision_motion to dismiss_Phoenix v. Shirley_v3.wpd
breaching party acts in a grossly negligent manner, the complaint
as it is currently written does not state a claim for which
relief could be granted.
IV
For the foregoing reasons, the court will enter an order
granting Shirley’s motion and dismissing Phoenix’s complaint.
The court will grant Phoenix a brief respite in which to decide
whether to renew its efforts by filing an amended complaint, but
Phoenix will need to file a motion for leave to amend its
complaint if it wishes to persevere in this case because the
court is not convinced that Phoenix will be able to plead facts
that would permit the court to conclude that Shirley’s conduct
was grossly negligent.
An order follows.
[Signed and dated above.]
Copies to: All counsel of record.
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