In re Brick House Props., LLC

633 B.R. 410

IN RE: BRICK HOUSE PROPERTIES, LLC, Debtor.

Bankruptcy Number: 20-26250

United States Bankruptcy Court, D. Utah.

Signed June 11, 2021

George B. Hofmann, Timothy E. Nielsen, Jeffrey L. Trousdale, Cohne Kinghorn, PC, Salt Lake City, UT, for Debtor.

MEMORANDUM DECISION DENYING THE DEBTOR'S MOTION TO REJECT REAL ESTATE PURCHASE CONTRACT WITH VESNA CAPITAL, LLC (DOCKET NO. 7)

KEVIN R. ANDERSON, United States Bankruptcy Judge

The growing population in Salt Lake City is making once-sleepy farming suburbs, like Riverton, Utah, desirable areas for residential development, resulting in a steep appreciation of land prices. This economic environment gave rise to the property disputes in this case. In this case, the Debtor failed to void a real estate purchase contract in a state court action and instead became subject to a specific performance order. The Debtor then filed for bankruptcy and is now seeking to reject the real estate contract in bankruptcy under 11 U.S.C. § 365.¹ For the reasons set forth herein, the Court finds that it cannot approve the Debtor's motion to reject the real estate contract.

I. JURISDICTION , VENUE AND NOTICE

The jurisdiction of this Court is properly invoked under 28 U.S.C. § 1334. This is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(A) and (O), and this Court may enter a final order. Venue is proper under the provisions of 28 U.S.C. § 1408. Notice of the hearing is found to be adequate in all respects.

II. PROCEDURAL HISTORY

The Debtor, Brick House Properties, LLC (the "Debtor"), filed its Chapter 11 petition for relief on October 21, 2020. On October 29, 2020, the Debtor filed a Motion to Reject Real Estate Purchase Contract with Vesna Capital, LLC (the "Motion to Reject").² Notice of the Motion to Reject³ is proper. On November 6, 2020, the Debtor filed its plan of reorganization (the "Plan").⁴ On the same date, Vesna Capital, LLC ("Vesna" or the "Buyer") filed an objection to the Motion to Reject.⁵ The Debtor filed its reply to the objection on December 10, 2020.⁶ On January 19, 2021, the parties filed a stipulated scheduling order.⁷ Each party filed supplemental memoranda a week before the final hearing on April 16, 2021.⁸

The Court conducted an evidentiary hearing on the Debtor's motion to reject on April 23, 2021. George Hofmann appeared on behalf of the Debtor-Movant. Kenneth Cannon and Penrod Keith appeared on behalf of the Creditor-Respondent. At the conclusion of the evidentiary hearing, the Court authorized the parties, if they wished, to submit additional briefs on the issue of whether the real estate purchase contract was executory in light of prior rulings entered by the Utah state court.⁹ The Court now issues this Memorandum Decision, which constitutes the Court's findings of fact and conclusions of law under F. R. Civ. P. 52, made applicable to this contested matter by Fed. R. Bk. P. 7052 and 9014(c).

III. FACTS

The Debtor is an LLC, and its sole member is Emily Aune. The Debtor is the titled owner of approximately 3.25 acres of desirable real property located in the growing community of Riverton, Utah—a suburb of Salt Lake City (the "Farm Property"). The Farm Property consists of a historic farmhouse, a barn, a building used for a Montessori School, and about 1.4 acres of pastureland. The Farm Property is subject to a trust deed in favor of Zions Bank in the original amount of $1.181 million and with a balance of $784,098 as of the petition date. Pursuant to an "Evaluation Report" prepared for Zions Bank, the Farm Property had a value of $1.15 million as of March 2017.¹⁰ An updated Evaluation Report lists the Farm Property with a value of $1.59 million as of December 2020,¹¹ which is an increase of $440,000. Based on the updated value, less the Zions Bank and property tax claims, the Court estimates for purposes of this motion that the Farm Property has equity of approximately $788,500.

On August 3, 2016, the Debtor and Vesna entered into a Real Estate Purchase Contract (the "REPC") to sell 1.005 acres of the pastureland for $250,000. Vesna intended to subdivide the land into two residential building lots (the "Lots").¹² Addendum No. 1 to the REPC provides that the deadline to close the sale "shall be 10 days after receiving Riverton City Approval of the Subdivision and Recordation of the Subdivided property."¹³ The REPC also contains a provision giving the purchaser the right to waive clear title as to Zions Bank's lien, and Vesna testified that it is willing to close on the sale even if Zions Bank does not release its lien on the Lots.

Ms. Aune, as the Debtor's principal, asserts that she did not fully understand or realize the consequence of some of the terms of the REPC (e.g., that it would take years for Vesna to obtain subdivision approval for the Lots or that Vesna would use a related entity to provide title services). However, Ms. Aune signed the contract and its addendums on behalf of the Debtor, and there was no evidence of coercion or misrepresentation. The Debtor also asserts that Vesna has not paid the costs to run a gas line to the Montessori school; however, the addendum provides no deadline for when that is to occur, and there was no evidence that Vesna has refused to pay these costs. The Debtor also asserts that Vesna has failed to pay for utility hook-ups to Farm Property buildings; however, the REPC states that it is "in [Vesna's] discretion to complete [this] work within 12 mos of settlement."¹⁴

Upon execution of the REPC, Vesna immediately moved forward with obtaining Riverton City's approval of its proposed subdivision, but disputes arose between the parties. Ultimately, Vesna commenced an action in the Third Judicial District Court for Salt Lake County, State of Utah, Case No. 180906834 (the "State Court") asserting claims for breach of the REPC, breach of the implied covenant of good faith and fair dealing, injunctive relief, and unjust enrichment.¹⁵ As to the claim for breach of contract, Vesna requested both specific performance and damages. Vesna filed a motion for summary judgment. The Debtor responded with a motion for judgment on the pleadings and a motion to amend its answer to assert the REPC was void due to mistake or illegality—specifically, that it violated Riverton City's building code.¹⁶

The State Court entered its decision on October 11, 2019, finding that the REPC was valid, that Vesna had fully performed to the extent it could, and that the Debtor had breached the REPC by interfering with Vesna's ability to obtain approval of its subdivision.¹⁷ The State Court also denied the Debtor's request to void the REPC because any violation of Riverton City's code could be resolved through a variance. As a result, the State Court ordered specific performance, but it was limited to the Debtor obtaining a variance from Riverton City or giving a power of attorney to Vesna to obtain the variance required for approval of the subdivision (the "Specific Performance Order").¹⁸

As a result of the Specific Performance Order, the parties moved forward with efforts to resolve the variance issue involving the width of driveway access to the Farm Property. But Vesna alleges the Debtor was uncooperative in obtaining approval of the subdivision. After some haggling with Riverton City, the variance issue was resolved in early 2020. However, when the COVID pandemic began, it was difficult, and sometimes impossible, for Vesna to move forward with obtaining the approvals and holographic signatures required for the subdivision plat. Despite these challenges, Vesna was able to secure all but one of the required signatures for plat approval before the Debtor filed for bankruptcy on October 21, 2020.

Since execution of the REPC, Vesna has expended time and resources seeking approval of its subdivision and to close on the Lots. Specifically, Vesna has $250,000 set aside to pay the purchase price; it has bonded at least $80,000 with the sewer district; and it has incurred thousands in attorneys' fees, payroll, and engineering and plat drawing costs. With all the time and resources already devoted to obtaining approval of the subdivision Lots, Vesna testified that it could close on the sale within 60 days – so long as prior city approvals had not lapsed due to the delay from the Debtor's bankruptcy filing.

Due to the COVID pandemic in 2020, the Montessori school experienced a 50-60% decline in enrollment that had a negative impact on the Debtor's cash flow.¹⁹ While the Debtor was current on its mortgage payments as of the petition date,²⁰ it was in default under the mortgage in that its EBITDA (earnings before interest, taxes, depreciation, and amortization) had fallen below the required level.²¹

The filed and scheduled unsecured claims in this case total $286,930.65.²² However, 94% (or $269,620.33) of the unsecured claims are insider claims of Ms. Aune and her husband.²³ Excluding these insider claims, the pool of claims in this case consists of the following: (1) nonpriority unsecured claims of $17,310.32; (2) property taxes of $17,320.83; and (3) the Zions Bank mortgage claim of $784,098.76.²⁴

IV. DISCUSSION

A. The REPC Is Not an Executory Contract.

The parties disagree on whether the REPC is an executory contract that can be rejected under 11 U.S.C. § 365.²⁵ Vesna argues that the State Court's performance order renders the REPC non-executory. Vesna acknowledges that the Specific Performance Order was limited to resolving the variance issue. However, it asserts this is so only because the condition precedent for closing – the recording of the subdivision plat – had not yet occurred. Thus, the State Court could not at that time order the parties to close the sale. Vesna further argues it was the clear intent of the specific performance order that the Debtor "undertake whatever ancillary actions might be necessary"²⁶ to close the sale. Finally, Vesna argues that the REPC is not executory because the Debtor's only obligation thereunder is to...