In matter of Galleria Investments LLC., Case Number A06-62557-PWB (Bankr. N.D. Ga. 4/4/2008), Case Number A06-62557-PWB.
| Decision Date | 04 April 2008 |
| Docket Number | Case Number A06-62557-PWB. |
| Parties | IN THE MATTER OF: GALLERIA INVESTMENTS LLC, IN PROCEEDINGS UNDER CHAPTER 11, OF THE BANKRUPTCY CODE, Debtor. GALLERIA INVESTMENTS, LLC, CONTESTED MATTER, Movant v. HONG DUCK, LLC, and IMEDRA #415 FAMILY LIMITED PARTNERSHIP, Respondents. |
| Court | U.S. Bankruptcy Court — Northern District of Georgia |
Hong Duck LLC ("Hong Duck") agreed to purchase the real property of Galleria Investments LLC (the "Debtor") pursuant to contract terms that the Court approved in two orders. The first authorized bidding procedures for the auction and sale of the property pursuant to 11 U.S.C. § 363(b); the second authorized the sale to Hong Duck at the conclusion of the sale process conducted in accordance with those procedures. The bidding procedures order approved Hong Duck as the "stalking horse" purchaser and committed the Debtor to pay a $75,000 stalking horse fee to Hong Duck if Hong Duck was not approved as the successful bidder. The bidding procedures order provided for the sale of the property to the successful bidder at the auction, subject to the Court's final approval, pursuant to a contract with the same material terms and conditions (with an appropriate adjustment to the purchase price) as the contract that Hong Duck had executed in which it agreed to purchase the property. The contract terms included a provision for the Debtor to retain, as liquidated damages, the $1,000,000 earnest money deposit that Hong Duck made if it failed to close in accordance with the contract.
Hong Duck was the successful bidder at the auction. After a final hearing on the sale, the Court approved the sale to Hong Duck pursuant to a contract executed in accordance with the approved bidding procedures. The Court also approved a back-up contract with Imedra #415 Family Limited Partnership ("Imedra") for $100,000 less than the Hong Duck bid. Hong Duck did not close by the time the contract required, and the Debtor sold the property to Imedra.
In this proceeding, the Debtor seeks determinations that it is entitled to retain the earnest money as liquidated damages and that it is not obligated to pay the stalking horse fee because Hong Duck was the successful bidder but failed to close.1 Hong Duck contends that the Debtor cannot retain the earnest money because the liquidated damages provision is an unenforceable penalty under Georgia law and because, in any event, it was not obligated to close due to the Debtor's failure to comply with certain conditions of the contract. Hong Duck contends that it is entitled to payment of the stalking horse fee because it was not obligated to close and because the Debtor sold the property to Imedra following the Court's approval of Hong Duck as the successful bidder at the auction. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) and (O) over which the District Court has jurisdiction pursuant to 28 U.S.C. § 1334 and which this Court has authority to hear and determine pursuant to 28 U.S.C. § 157(a) and Local Rule 83.7, NDGa.
Both Hong Duck and the Debtor filed motions for summary judgment, but Hong Duck's motion is limited to the legal question of whether the provision for the retention of the earnest money is an unenforceable penalty. The Debtor's motion seeks judgment in its favor on all issues. In the procedural posture of this case and in the context of prior proceedings relating to this dispute, the Court deems it appropriate to decline to consider at this time any issues other than the legal questions relating to the validity of the liquidated damages provision. In this regard, the Court had understood that the parties desired to present legal issues relating to the enforceability of the liquidated damages initially and then to conduct further proceedings, including discovery, with regard to any remaining issues, if the Court's ruling on the liquidated damages issue was not dispositive. The Court accepts Hong Duck's position that, consequently, it has not had a full and fair opportunity to develop the evidence relating to its contentions that it was not obligated to close. Accordingly, the Court will deny the Debtor's motion for summary judgment to the extent that it seeks a ruling that, as a matter of law, Hong Duck was obligated to close.2 This Order, therefore, deals with the limited issue of whether the damages provision of the purchase agreement executed by the Debtor and Hong Duck is an enforceable liquidated damages provision or an unenforceable penalty.
The facts with regard to the liquidated damages issue are either admitted3 or, if not expressly admitted, are a matter of record. The Court's findings of fact consist of those facts that are set forth in the parties' statements of undisputed facts that the opposing party admits in its response and other matters of record as set forth herein.
The Debtor is a Georgia Limited Liability Company formed in February 2004 for the purpose of acquiring and developing a retail shopping center located at 1291 Old Peachtree Road, Duluth, Georgia (the "Property"). The Debtor filed a voluntary petition under Chapter 11 of the Bankruptcy Code on March 6, 2006. The Debtor continues as debtor in possession in this case.
The bankruptcy filing stayed a scheduled foreclosure sale by Georgian Bank (the "Bank"), holder of a note and senior security deed on the Property. The Bank's claim — later paid from the proceeds of the sale to Imedra — was for approximately $17,243,000.4 In addition, the Bank claimed an entitlement to statutory attorney fees of approximately $1,700,000 and default interest of approximately $250,000, claims that the Bank ultimately waived because the Debtor satisfied certain conditions including payment of the Bank's remaining claim in full within an agreed-upon deadline. Timely payment of the Bank, of course, required sale of the Property on or before the payment deadline.
Other significant parties in interest in this case include Ordner Construction Co., Inc. ("Ordner"), which asserted a claim for $1,527,000 based on a materialman's lien on the Property and which had disputes with the Bank that exposed the Bank to potential liability or reduction of its recovery from the Property; Continental Development Group, LLC ("Continental"), which asserted a claim for approximately $1,200,000, secured by a recorded deed to secure debt; and Assiplaza Sugarloaf, Inc. ("Assiplaza"), the shopping center's major tenant under a prepetition lease with terms some have characterized as unfavorable to the Debtor.
At the time the bankruptcy case was filed, Glass Ratner Management and Realty Advisors, LLC ("Glass Ratner"), was the receiver for the Property pursuant to an order entered by the Superior Court of Gwinnett County, Georgia. On March 15, 2006, this Court entered an Order that provided for the receiver, as a custodian, to continue to manage the Property while the Debtor sought to effect its sale.
From the early stages of this case, the Debtor, in consultation with the Bank, solicited offers for the sale of the Property. In April 2006 the Debtor negotiated and signed a term sheet for the sale of the Property to Shatto Corporation ("Shatto") for $20,300,000, free and clear of all liens and encumbrances. The term sheet contemplated (1) a $1 million earnest money deposit; (2) termination of the Assiplaza lease and a sale free and clear of Assiplaza's leasehold interest pursuant to 11 U.S.C. § 363(f); (3) an option for Shatto to acquire the Bank's note and security deed so that it could conduct a foreclosure sale and negotiate new leases with all lessees that were subordinate to the Bank's lien; (4) creation of a $600,000 escrow for fees incurred by Shatto to remove Assiplaza from its premises in the Property; and (5) approval of Shatto as a stalking horse bidder with a stalking horse fee of $75,000. The term sheet was not to be treated as a final offer until execution of a purchase and sale agreement.
Prior to the execution of a purchase and sale agreement with Shatto, Karen Chong, an interest holder in the Debtor, and Linda Kim, the Property's project manager, began negotiations with John Kim and Ivy Chong, who had expressed an interest in the Property. John Kim and Ivy Chong eventually formed Hong Duck as the acquisition vehicle.
Karen Chong and Linda Kim, on behalf of the Debtor, and John Kim and Ivy Chong, on behalf of Hong Duck, negotiated a term sheet containing the same terms as the Shatto term sheet, but with a purchase price of $21.1 million and a proposed earnest money deposit of $500,000. Further negotiations resulted in Hong Duck increasing its gross purchase price to $21.5 million. Debtor's counsel circulated the proposed Hong Duck term sheet to counsel for the Bank, who indicated that the Bank was inclined to support the Shatto bid and that earnest money of $1 million was important. After the Debtor's counsel informed Hong Duck's counsel of the Bank's position, on May 5, 2006, Hong Duck submitted a revised term sheet that increased the earnest money deposit to $1 million.
After further negotiations, the Debtor and Hong Duck executed a Purchase and Sale Agreement (the "Stalking Horse Agreement")5 on May 11, 2006. In connection with execution of the Stalking Horse Agreement, Hong Duck submitted a deposit in the amount of $1 million to be held in trust by the Debtor's attorney.
With respect to earnest money, paragraph 2 of the Stalking Horse Agreement provides:
2. EARNEST MONEY. Within three (3) business days after the execution by Seller and Purchaser of this Agreement, Purchaser shall deposit One Million Dollars ($1,000,000.00) (the" Earnest Money") with Lamberth, Cifelli, Stokes & Stout, P.A., ("Escrow Agent") to be placed in an interest bearing account. The Earnest Money shall be refunded to Purchaser in full, together with all accrued interest thereon, if (i) the Bankruptcy Court for the Northern...
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