In re Decker Oaks Development II, Ltd.
| Decision Date | 18 March 2009 |
| Docket Number | Adversary No. 07-3421.,Civil Action No. H-08-2070.,Bankruptcy No. 07-35557. |
| Citation | 415 B.R. 239 |
| Parties | In re DECKER OAKS DEVELOPMENT II, LTD., Debtor. Royce Homes, L.P., Appellant, v. Decker Oaks Development II, Ltd., Robert Weedn Development, Ltd. and Robert Weedn, Individually, Appellees. |
| Court | U.S. District Court — Southern District of Texas |
Dennis M. Dylewski, Dylewski Assoc. PC, Houston, TX, for Debtor.
Royce Homes, L.P. appeals from the bankruptcy court's judgment in this adversary proceeding awarding Decker Oaks Development II, Ltd. $2,309,500 in damages. The damage award was based on the bankruptcy judge's ruling, following a bench trial, that Royce Homes tortiously interfered with a third party's earnest money contract to purchase raw land from Decker Oaks for development and that the tortious interference not only caused the third party to exercise its option to cancel the contract during a 30-day "feasibility period," but also resulted in Decker Oaks's mortgage lenders foreclosing on the property over a year later. The $2.3 million in damages consisted of the profits Decker Oaks would have made had the sale under the contract closed and the deficiency judgment remaining after its lenders foreclosed. The bankruptcy court also concluded that Royce Homes had materially breached a second contract it had with Decker Oaks, to purchase residential lots in a separate development. The court held that Decker Oaks was not required to release $62,000 that Royce Homes had paid as earnest money under that contract.
Royce Homes appeals both rulings, asking this court to reverse the tortious interference damage award and to order Decker Oaks to release the $62,000 in earnest money. Decker Oaks cross-appeals, arguing that if this court concludes that Royce Homes did not tortiously interfere with an existing contract, it should hold that the bankruptcy court erred in finding no tortious interference with a prospective contract.
Based on a careful review of the record and the applicable law, this court reverses the bankruptcy court's rulings that Royce Homes's tortious interference with an earnest money contract Decker Oaks had with a third party proximately caused the loss of that contract and resulted in consequential damages that included the deficiency that remained after foreclosure. This court also reverses the bankruptcy court's ruling that Decker Oaks is entitled to retain the $62,000 of Royce Homes's earnest money. Decker Oaks's cross-appeal is denied as moot.
The reasons for these rulings are explained in detail below.
Decker Oaks owned raw land north of Houston that it intended to develop as a residential subdivision called "Saratoga Springs." On September 22, 2001, David Weber, the CFO and manager of the land-development department at Royce Homes, signed a contract with Decker Oaks for Royce Homes to purchase 196 single-family lots in the Saratoga Springs development. The contract specified that Royce Homes would purchase 55 by 120 foot lots for $23,000 per lot and 65 by 125 foot lots for $27,000 per lot. (Docket Entry No. 7, Ex. 1 § 1.02). The contract stated that the lots were described with greater particularity in an attached "Exhibit A." (Id., Ex. 1 § 1.01). There was no Exhibit A attached to the contract that Weber signed.
Royce Homes's obligation to purchase the lots was to be secured by $25,000 in earnest money. (Id., Ex. 1 § 1.04). The contract stated that Royce Homes would not be obligated to purchase any lot until "Substantial Completion" of the development. "Substantial Completion" included clearing and grading the lots, installing utility connections, and obtaining zoning and government permits. (Id., Ex. 1 § VI). The contract set a time frame for "Substantial Completion," stating that "Seller [Decker Oaks] shall use Seller's good faith efforts to achieve the Substantial Completion requirements by April 1, 2002." (Id.). The contract gave Royce Homes the right, but not the obligation, to extend the period for up to 90 days if Decker Oaks had not achieved "Substantial Completion" by June 1, 2002. The contract stated:
If Seller has not achieved the Substantial Completion Date by June 1, 2002, Purchaser shall have the right, at Purchaser's sole discretion, to terminate the Contract, or Purchaser may extend the date for Seller's achievement of Substantial Completion for one or more periods not exceeding, in the aggregate, ninety (90) days. If Purchaser chooses to terminate the Contract, then the Purchaser shall be entitled to the immediate return of the Earnest Money.
(Id.).
The contract also set out remedies for Royce Homes in the event Decker Oaks defaulted under the contract:
If Seller defaults in performing Seller's obligations hereunder ... Purchaser shall be entitled, as Purchaser's sole and exclusive remedy, to (i) waive the contractual obligations of Seller in writing; (ii) extend the time for performance by such period of time as may be mutually agreed upon in writing by the Parties hereto; (iii) terminate this Contract and receive a return of the Earnest Money then on deposit; or (iv) enforce specific performance of this Contract as Purchaser's sole remedy at law.
(Id., Ex. 1 § 5.02).
The contract stated that an "Initial Closing" would occur no later than 30 days after "Substantial Completion." (Id., Ex. 1 § 3.01). Royce Homes was obligated to purchase 10 lots at the Initial Closing, an additional 10 lots no later than 120 days thereafter, and at least 10 lots every 90 days thereafter until it had purchased 196 lots. (Id., Ex. 1 § 3.02). The contract provided that Royce Homes would pay interest in the amount of 8% per annum on each lot between the Initial Closing and the closing on the particular lot. Weber crossed out the "8%" and wrote in "7%," initialing the change. (Id., Ex. 1 § 1.03).
On November 16, 2001, Decker Oaks's principal, Robert Weedn, signed the copy of the Saratoga Springs contract that Weber had signed. Weedn made a handwritten, initialed modification increasing the purchase price on the 55 by 120-foot lots from $23,000 to $23,500. (Id., Ex. 1 § 1.02). Weedn did not initial Weber's handwritten modification to the interest rate. (Id., Ex. 1 § 1.03). No one from Royce Homes initialed or signed the contract after Weedn's modification. (Id., Ex. 1 at 18). There was no Exhibit A describing the land attached to the copy that Weedn signed.
Also on November 16, 2001, the parties signed a side agreement that gave Decker Oaks the right to enforce purchase of the first 25 lots by specific performance. (Id., Ex. 2). On January 16, 2002, under the contract, Royce Homes deposited $25,000 in earnest money with the Stewart Title Company. (Id., Ex. 4).
Decker Oaks did not achieve "Substantial Completion" by April 1, 2002, by June 1, 2002, or by 90 days thereafter. Decker Oaks did not obtain approval from the City of Tomball for the Saratoga Springs subdivision, a required condition for "Substantial Completion," until late 2005 due to delays in obtaining permits and problems in meeting the City's infrastructure requirements. (Id., Exs. 11, 13). During this time, Royce Homes took no action to terminate the contract and did not seek to recover its earnest money. There is no evidence in the record that Royce Homes and Decker Oaks discussed extending the period for "Substantial Completion."
Royce Homes assisted Decker Oaks in 2003 when it sought financing for the Saratoga Springs development. On February 11, 2003, Royce Homes gave Decker Oaks a letter to give to prospective lenders. The letter stated that Royce Homes had a "continued interest in the Saratoga residential development" and "look[ed] forward to the delivery of lots and the ability to continue sales in this market segment." (Id., Ex. 7). On June 4, 2003, at Decker Oaks's request, Royce Homes provided a copy of its liability insurance policy for Decker Oaks to show to lenders. (Id., Exs. 8, 9; Bkrtcy Rec., Ex. 13 at 93-94).
Royce Homes followed the progress of the Saratoga Springs development. An internal note dated July 11, 2003 stated that Decker Oaks was "having loan problems, construction setbacks, and permit delays." (Docket Entry No. 7, Ex. 17). Royce Homes was aware of the fact that in March 2004, Weedn learned that the City of Tomball would not provide Decker Oaks with $630,000 in funds needed to bring the Saratoga Springs development into regulatory compliance. (Id., Ex. 11).
In 2004, Royce Homes asked Stewart Title to file in the real property records a Memorandum of Contract describing Royce Homes's 2001 contract with Decker Oaks. On April 21, 2004, Stewart Title filed a Memorandum of Contract in the real property records of Montgomery County. The Memorandum of Contract described the property that was the subject of the 2001 contract: "196 single family residential lots out of the property described on Exhibit `A' attached hereto and made a part hereof." The stated purpose of the Memorandum was to "give[ ] to evidence of public record Purchaser's right to acquire the Property pursuant to the terms of a Contract of Sale by and between Purchaser and Seller dated effective November 16, 2001." (Id., Ex. 12). There was an Exhibit A attached to the Memorandum of Contract. The parties agree that this document was not attached to the 2001 contract between Decker Oaks and Royce Homes. Exhibit A attached to the Memorandum of Contract described the entire acreage of the Saratoga Springs subdivision as the subject of the Royce Homes contract with Decker Oaks. Exhibit A did not describe the individual lots within that acreage or indicate which lots Royce Homes had contracted to...
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