Butler v. Resident Care Innovation Corp.
| Decision Date | 17 November 1999 |
| Docket Number | No. C.A. 99-14L.,C.A. 99-14L. |
| Parties | Joseph BUTLER and Lateran Partners, Inc., Appellants, v. RESIDENT CARE INNOVATION CORP., Appellee. |
| Court | U.S. District Court — District of Rhode Island |
Linda R. Sloan, Salter, McGowan, Swartz & Sylvia, Providence, RI, Edward J. Fallman, Joseph G. Butler, Barron & Stadfeld, Boston, MA, James F. Wallack, Goulston & Storrs, P.C., Boston, MA, for appellants.
Victor G. Milicone, Peabody & Brown, Boston, MA, Arnold N. Montaquila, Providence, RI, Peter J. Furness, Peabody & Brown, Providence, RI, for appellee.
Sheryl Serreze, Providence, RI, U.S. Trustee.
DECISION AND ORDER
The matter before this Court is an appeal from a final order of the United States Bankruptcy Court for the District of Rhode Island (the "Bankruptcy Court"). This appeal involves a dispute that arose during reorganization proceedings under chapter 11 of 11 U.S.C. § 101, et seq. (The "Bankruptcy Code"). Pursuant to 365 of the Bankruptcy Code, a debtor-in-possession, or a debtor's trustee as is the case here, is allowed to reject or assume any executory contract entered into by the debtor. The dispute between the parties here is whether or not certain Vermont real estate purchase and sale agreements were executory contracts that could be rejected by the Trustee under § 365 of the Bankruptcy Code.
The Bankruptcy Court heard the matter and concluded that three unconsummated real estate purchase and sale agreements between the debtor, Quechee Lakes Corporation ("QLC"), and the non-debtor party, Resident Care Innovation Corporation ("RCI"), were not executory contracts under § 365. As a result, he entered an order denying the Trustee's motion to reject the agreements. The Bankruptcy Judge also concluded that RCI was entitled to specific performance of the agreements.
For the reasons outlined below this Court reverses the decision of the Bankruptcy Court and concludes that the Trustee's motion to reject the purchase and sale agreements must be granted.
This case is largely abut the aesthetic future of a small New England town. The force driving this case is the fact that the opposing parties harbor wholly inconsistent plans for the future of the real estate at issue in this case. QLC is a Delaware corporation and is a wholly-owned subsidiary of NECO Enterprises, Inc. ("NECO"). The assets of QLC include a slew of undeveloped lots of land located in the Quechee Lakes region of Hartford, Vermont. See Appellants' memo., p. 5. On or about March 6, 1997, Appellee, RCI, made an offer to purchase the three lots in controversy, which are located in the Village Green, for $30,000 each. See First RCI memo., p. 1. RCI made a deposit of $500 on each lot at the time of the offer. Id. On or about March 10, 1997, QLC entered into three separate contracts for the sale of the lots. Id. RCI also made an additional deposit of $2500 for each lot on or about March 17, 1997. Id. at 2. Each of the purchase and sale agreements provided that the closings were to take place on June 6, 1997, unless otherwise agreed upon in writing. Id. The agreements required that QLC provide RCI with Vermont Warranty Deeds conveying marketable title to the lots. Id. They also required that if QLC discovered title defects and/or encumbrances on the lots, QLC would remove such defects or encumbrances in order to convey marketable title. See RCI Proof of Claim, para. 6 of Exhibits 1 through 3. RCI is a developer of assisted living facilities. See Rejection Hearing Transcript, p. 51. If successful in this case, RCI planned to build large scale housing units that will be used as assisted living facilities on the three lots in the town center. See Exhibit A.
On or about July 28, 1997, RCI and QLC executed an addendum to each agreement extending the closing date to August 20, 1997, in order to give QLC more time to review the status of the title to the lots. See First RCI memo., p. 2. As of late July, 1997, there remained multiple liens and/or encumbrances on the lots. Id.; Appellants' memo., p. 9. There appears to have been some fifteen liens on the lots still outstanding in July of 1997. Despite the efforts of QLC's real estate attorney to obtain releases from the lien-holders, in late August, 1997, releases still had not been obtained from four of the lien-holders. See Appellants' memo. at 9; Motion for Reconsideration, p. 6. On August 21, 1997, RCI wrote a letter to QLC's attorney, discussing two of the liens on the lots, and enclosed a photocopy of a cashier's check in the amount of $81,000 which would cover the remaining purchase price for the lots. See RCI Proof of Claim, Exhibit 4. Obviously, said check was not cashed.
In late August, 1997, RCI intervened in a lawsuit between QLC and one of its lien-holders, the Rhode Island Depositors Economic Protection Corporation ("DEPCO") that was pending in Windsor County Superior Court in Vermont. See First RCI memo., p. 3. On December 26, 1997, an order was issued by that Court allowing the sale of the lots to RCI pursuant to the agreements free of DEPCO's lien. Id. This order did not address any of the other liens on the lots still outstanding. See Motion for Reconsideration, p. 6. Additionally, this order was not for specific performance of the agreements because RCI did not seek such relief when it intervened in the suit. See Appellee's memo., p. 8. QLC did not transfer title to the lots because of the bankruptcy proceedings involving its parent company NECO. See Rejection Hearing Transcript, p. 53.
On December 23, 1997, an involuntary bankruptcy case was commenced against NECO in the Bankruptcy Court for the District of Rhode Island. On February 13, 1998, that Court entered an order for relief against NECO under Chapter 11 and authorized Joseph G. Butler to be the permanent Chapter 11 Trustee of NECO. On February 3, 1998, QLC had voluntarily filed for bankruptcy under Chapter 11 in the Bankruptcy Court for the District of Vermont. On April 14, 1998, QLC's bankruptcy case was transferred to the Bankruptcy Court for the District of Rhode Island. On May 1, 1998, the Bankruptcy Court here ordered that the bankruptcy cases of NECO and QLC (collectively, the "Debtors") be jointly administered. See Appellants' memo., p. 6.
The Trustee and Lateran Partners, Inc. ("Lateran") filed the First Amended Plan of Reorganization for All Debtors Proposed by Joseph G. Butler, Trustee of NECO Enterprises, Quechee Service Co., Rock Realty, Inc., Quechee Water Company, QLC and Lateran Partners, Inc. dated August 24, 1998 (the "Joint Plan"). The Joint Plan for NECO and all of its subsidiaries, provided the Trustee with a plan funding payment by Lateran in the amount of $2,820,000 which would be used by the Trustee to pay claims against the Debtors. See Joint Plan, Art. V, pp. 40-48 and Art. I, p. 10. In exchange for this funding, Lateran would receive all of the real estate and assets of NECO as well as NECO's subsidiaries, which included QLC. The plan of reorganization funded by Lateran specifically called for Lateran's acquisition of the lots at issue in this matter. See Joint Plan, Art. V, §§ 5.2, 5.3, p. 41.
Under the Joint Plan, in addition to the three lots at issue here, Lateran acquired a large amount of land from QLC, which it planned to develop into a vacation resort area. See Disclosure Statement, p. 7. With respect to the three lots at issue, Lateran stated that it intended to turn one of the lots over to the town of Hartford. See Appellants' memo., p. 24. Lateran planned to develop the other two lots in a manner consistent with the vacation resort plans intended for the additional real estate that Lateran acquired under the Joint Plan. Id. It is obviously clear that Lateran's plan for a vacation resort in Hartford would be greatly disrupted by RCI's plan to develop large apartment type buildings in the town center.
As of February 3, 1998, the date on which QLC filed its petition for relief under Chapter 11 of the Bankruptcy Code, the sale of the lots had not been consummated, and the agreements remained unperformed. See First RCI memo., p. 3. QLC had yet to deliver a Warranty Deed to RCI free and clear of the outstanding multiple liens, and there had been no payment by RCI of the remaining purchase price for the lots. Id.
The Trustee, in his capacity as sole shareholder of QLC, sought to reject the purchase and sale agreements between QLC and RCI as executory contracts under § 365 of the Bankruptcy Code. See Trustee's Rejection Motion, Bankruptcy Court Case No. 98-11741, Document No. 71-1. The Trustee argued that the agreements were executory because they had not been performed, and that performance of the agreements would not be beneficial to the Debtors' estate. See Trustee's Rejection Motion, p. 2. In response, RCI asserted that the contracts were not executory because RCI had performed all of its obligations thereunder. See First RCI memo., pp. 4-7. RCI also asserted that QLC was deceptive in its dealings with RCI, and that rejection of the agreements would not benefit the Debtors' estate. Id. at 4, 8-9.
On September 28, 1998, at the hearing, the Bankruptcy Court denied the Trustee's Rejection Motion. The Bankruptcy Judge made an implicit factual finding that the decision to reject the agreements was properly within the business judgment of the Trustee, since he stated that the only issue in the case was whether or not the agreements were executory. See Rejection Hearing Transcript, pp. 59-60. The Bankruptcy Court then held that the agreements were not executory and that equitable principles weighed in favor of granting RCI specific performance. See Id. at 65-66. The Trustee filed a motion for reconsideration of the Bankruptcy Court's determination with respect to the agreements and RCI filed an objection to that motion. On November 9, 1998, the Bankruptcy Court denied the Trustee's motion for reconsideration. A...
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