1617 Westcliff, LLC

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UNITED STATES BANKRUPTCY COURT
CENTRAL DISTRICT OF CALIFORNIA
SANTA ANA DIVISION
In re:
1617 Westcliff, LLC
Debtor(s).
Case No.: 8:12-bk-19326-MW
CHAPTER 11
MEMORANDUM DECISION AND ORDER
Date: June 17, 2013
Time: 2:00 p.m.
Courtroom: 6C
411 West Fourth Street
Santa Ana, CA 92701
This matter comes before the Court on (1) Burnham-Ward Properties, LLC’s
motion for order compelling Debtor’s compliance with court-approved purchase
agreement, directing escrow to return deposited funds to Burnham-Ward Properties,
LLC and awarding attorneys’ fees and costs (the “BW Motion”), (2) Debtor’s emergency
motion for order cancelling escrow, directing title company to hold buyer’s deposit and
permitting debtor to market property and enter into purchase agreement subject to
further court approval (“Debtor’s Motion”), and (3) Debtor’s motion for entry of order
directing title company to release deposit to Debtor (“Debtor’s Supplemental Motion”).
Additionally, Burnham-Ward Properties, LLC (“BW”) has requested that the Court take
FILED & ENTERED
JUN 28 2013
CLERK U.S. BANKRUPTCY COURT
Central District of California
BY DEPUTY CLERK	steinber
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judicial notice of certain matters in support of the BW Motion.
BW’s request for judicial notice is granted.
FINDINGS OF FACT
Debtor filed a voluntary petition under Chapter 11 of Title 11 of the United States
Code on August 2, 2012. Debtor’s only substantial asset is commercial real property
known as 1617 Westcliff Drive, Newport Beach, CA 92660 (the “Property”). The
Property is a single building office complex comprised of 31,364 square feet of rentable
space on 1.56 acres.
Debtor and BW entered into a Standard Offer, Agreement and Escrow
Instructions for Purchase of Real Estate with respect to the Property (the “Purchase
Agreement”) on November 28, 2012. The Purchase Agreement (which was subject to
Court approval) named First American Title Insurance Company (the “Title Company”)
as the escrow agent and provided for a sale of the Property by Debtor to BW for $9.9
million, payable $3.6 million in cash and $6.3 million by the assumption of an existing
note and deed of trust on the Property held by the secured lender, Wells Fargo Bank,
N.A., as trustee (the “Bank”). Section 4.1 of the Purchase Agreement required the
Buyer to pay a deposit of $200,000 to the Escrow Company as earnest money. Section
21 of the Purchase Agreement provided for liquidated damages in favor of the Debtor in
the amount of $200,000 in the event BW failed to perform its obligations under the
Purchase Agreement. Section 10.2 of the Purchase Agreement required Debtor to
deliver certain documents to BW at the closing, such as a grant deed, assignments of
existing leases, a bill of sale and beneficiary statements concerning the existing note.
The Addendum to the Purchase Agreement provides in Section 1.1 thereof
(entitled “Expected Closing Date”) that “in the event the parties have been unable to
obtain Assumption Approval . . . within forty-five (45) days following the Date of
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Agreement [i.e., the date of the Purchase Agreement], either party shall have the right
to terminate this Agreement.” Section 3.1(c) thereof provides that “Buyer and Seller
shall use their commercially reasonable and diligent efforts to promptly apply for Buyer’s
assumption of the Existing Note and Existing Deed of Trust and obtain Assumption
approval. Buyer shall be responsible for the 1% assumption fee and any costs of
assumption, and acknowledges that the lender may require impound or “escrow”
accounts in the approximate amount of $150,000.00, to be paid by Buyer separate and
aside from the Purchase Price.” (italics added by Court).
Section 33 of the Addendum to the Purchase Agreement, entitled “Conditions of
Deposit”, lists the circumstances under which the $200,000 deposit would be refundable
to BW. It provides that “[t]he Deposit shall only be refundable upon the occurrence of
any of the following: . . . (f) If the lender under the Existing Note and Existing Deed of
Trust . . . does not formally approved [sic] the assumption of the Existing Note and
Existing Deed of Trust by Buyer with no additional terms or conditions; provided that
Buyer shall be obligated to pay an assumption fee of no more than 1% of the currently
outstanding principal balance of the Existing Note in connection with such assumption.”
There is no reference to impound or escrow accounts required by the lender in Section
33(f).
On November 30, 2012, Debtor filed a motion for Court approval of the Purchase
Agreement and the sale of the Property to BW. About one week later, on December 7,
2012, BW terminated the Purchase Agreement by a letter personally delivered to the
Debtor’s principal, Dr. Gary Rettig. The letter’s closing sentence held out the possibility
the deal could be salvaged: “We hope to be able to work out a solution with you to
resolve the issues discovered during our due diligence and to attempt to reinstate the
agreement on mutually agreeable terms.”
This optimism proved to be well founded, and on or about December 14, 2012
BW and the Debtor entered into an Amendment to Standard Offer, Agreement and
Escrow Instructions for Purchase of Real Estate, dated as of December 10, 2012 (the
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“Amendment”). The Amendment reduced the purchase price by $500,000 to $9.4
million, continued the Purchase Agreement in full force and effect (except as modified
by the Amendment) and stated various other terms. Numbered paragraph 8 of the
Amendment, entitled “Loan Approval,” provided that “[a]pproval of Buyer’s assumption
of the existing loan encumbering the Property and Buyer’s approval of the conditions to
such approval shall remain a condition of the Closing in favor of both Buyer and Seller.”1
The Court granted Debtor’s motion and approved the Purchase Agreement and
the sale at a hearing on January 7, 2013. The order approving the sale (the “Sale
Order”) was entered on January 18, 2013 and provides in relevant part that “the sale of
the Property is conditioned on the Bank consenting to the assumption of the underlying
indebtedness on terms agreed to by the Parties.” Sale Order at 3. The Sale Order also
provides in numbered paragraph 20 thereof that “[i]n the event that the Buyer breaches
any term of the Agreement, including but not limited to failing to timely close the
purchase, Debtor shall retain the deposit as nonrefundable liquidated damages, subject
to the terms of the Agreement.”
The transaction again began to founder in mid-February 2013. BW
principal Bryon Ward sent a letter dated February 15, 2013 to Dr. Gary Rettig
contending that “income from the property as a whole is significantly less than what was
set forth in the offering materials” (in part because of rent delinquencies on the part of
Property tenants) and noting that “many of the tenant matters stated herein caught us
by surprise.” This was followed up by an email from BW attorney Kim Thompson to
Debtor attorney Sarah Boone, dated March 12, 2013, proposing a reduction in the
purchase price to account for certain lost rents, for a total downward purchase price
adjustment of $201,322. The Debtor was unwilling to accede to this proposal, and on
March 29, 2013, Mr. Thompson sent an email to Ms. Boone indicating that BW was
willing to proceed with the transaction at the current purchase price.
1 Hereinafter, the term “Purchase Agreement” is a reference to the Purchase Agreement, Addendum and
Amendment unless context requires otherwise.
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The initial deadline to close the transaction was in February 2013. Pursuant to
multiple stipulations, the deadline was extended to May 10, 2013.
At some point during the transaction – clearly after the execution of the Purchase
Agreement and clearly before the May 6 email discussed below – the Bank demanded
increased escrow impounds that were approximately double the $150,000 in impounds
required of the Debtor.2 The Bank wanted increased impounds to protect itself against
unpaid leasing commissions (despite BW’s protest that it had business policies and
practices not to pay leasing commissions), unfulfilled tenant improvement allowance
obligations (despite BW’s protest that it had business policies and practices not to agree
to pay tenant improvement allowances), and rights to sweep BW’s account for receiving
rents in the event there was an adverse change in the debt coverage ratio.3 BW found
these demands objectionable and a substantial obstacle to its assumption of the
existing note and deed of trust.
On May 6, 2013 – four days before the closing deadline of May 10, 2013 – BW
attorney Kim Thompson sent an email to Ms. Boone, Marla Berman and Ron Oliner
(attorney for the lender holding the note and deed of trust on the Property) stating that
“the only way in which to make the acquisition pencil out” was to (i) defease the existing
loan and (b) “to acquire the property as part of a tax deferred exchange.” The Court
finds as a fact that the effect of this email was to place the Debtor and Bank on notice
that BW did not desire to assume the note and deed of trust and, consequently, was
dropping all efforts to assume them.
The email’s reference to making the transaction “pencil out” indicates that BW
was unhappy with the overall expected profitability of the transaction to BW, that it was
looking for a way to make the transaction a bit richer, and that the way to make the
transaction richer was to abandon the current straight-up sale structure and to convert
it, in Mr. Thompson’s words, to a “tax deferred exchange.”4 Although the parties had
2 Reporter’s Transcript at page 8.
3 Reporter’s Transcript at pages 8-9.
4 It is difficult to know precisely what BW had in mind when it wanted to restructure the transaction as a tax
deferred exchange. A tax deferred exchange is generally sought by a seller of property (who desires to avoid paying
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previously agreed to a straight up sale with a down payment and an assumption of an
existing liability, BW now wanted to convert the transaction into a tax deferred exchange
and, instead of assuming the note, to defease it.
Ms. Boone responded to Mr. Thompson’s email on the following day, May 7,
2013. She informed him that the proposed restructuring of the transaction was
unacceptable to the Debtor5 and demanded that BW complete the assumption and
close the sale. On May 9, Mr. Thompson sent an email to Ms. Boone pointing out that
the transaction was not going to close on May 10 but nevertheless reaffirming BW’s
interest in acquiring the Property through a defeasance and tax deferred exchange.
As Mr. Thompson correctly predicted, Friday, May 10, 2013 came and went
without a closing. On the following Monday Ms. Boone sent an email demanding that
the Title Company not release the $200,000 deposit “absent written agreement of the
parties or Court order.” The Title Company has complied with this request.
Ultimately, BW terminated the Purchase Agreement. Declaration of Kim D.
Thompson at numbered paragraph 5. No date is given for the termination, but it
presumably occurred sometime after May 10, 2013 and before the date of Mr.
Thompson’s declaration, May 23, 2013.
BW made no effort to obtain the Bank’s agreement to the assumption of the
existing note and deed of trust between the time Mr. Thompson’s May 6 email was
transmitted to Ms. Boone and the May 10 closing date. BW did not ask the Bank to
reconsider its position with regard to the impound accounts during this time period nor
taxes on the sale), not by a buyer who is paying cash and assuming existing debt. A buyer generally does not pay
federal income tax in such a transaction. The reference to a tax deferred exchange may have envisioned a Starker-
type exchange under section 1031 of the Internal Revenue Code in which a qualified intermediary would have used
cash and securities furnished by BW (for purpose of defeasing the loan) to acquire the Property free and clear of the
existing deed of trust and then to acquire replacement real property held by an unidentified third party by trading the
Property for such replacement property, with the replacement property being conveyed to BW. The tax benefit from
such a transaction would be realized only by the unidentified third party, but possibly a quid pro quo for the saved
tax dollars would have made the overall transaction richer for BW. Suffice it to say that whether or not this was
what BW intended, Debtor did not bargain for a complicated tax deferred exchange when it entered into the
Purchase Agreement, and the Purchase Agreement does not envision or provide for such a transaction.
5 It also proved to be unacceptable to the Bank. In an email from Bank attorney Ron Oliner to BW attorney
Penelope Parmes and others, dated June 4, 2013, Mr. Oliner wrote: “No to defeasance. We have been crystal clear
on this from the May 6 announcement that your client wanted to go this route.”
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did it attempt to negotiate a modification in the Bank’s position (for a release of the
additional impounds relating to a leasing commission or tenant improvement allowances
upon tender of proof that no amounts were payable) that may have taken the sting out
of the impounds and made the transaction acceptable to BW. Nor did BW negotiate
with the Bank over the Bank’s cash sweep rights. There is no evidence before the
Court indicating that the Bank’s position on any of these issues was nonnegotiable.6
CONCLUSIONS OF LAW
BW’s renunciation on May 6, 2013 of an assumption and its demand to
restructure the transaction as a tax deferred exchange coupled with a defeasance was
a material breach of its obligations under section 3.1(c) of the Addendum to the
Purchase Agreement to use commercially reasonable and diligent efforts to obtain the
Bank’s approval of an assumption of the note and deed of trust. The Purchase
Agreement required BW to keep working in good faith for an assumption until the close
of business on May 10, 2013, not to throw up its hands and to propose – at the eleventh
hour – a wholesale restructuring of the purchase transaction in a manner completely
foreign to the Purchase Agreement. On May 6 there were still four days left to reach
agreement with the Bank, but BW chose (five months into the deal) to abandon the
assumption. It was not commercially reasonable nor was it diligent for BW to cease
negotiations with the Bank relating to the assumption of the loan under these
circumstances.7
The May 6 email does not merely propose an alternative form of transaction with
the caveat that BW is still working for, and will continue to work for, an assumption.
6 The “no to defeasance” email of Mr. Oliner referenced in footnote 2 tends to show that the Bank was not shy about
saying no when it encountered an unacceptable term that was essentially nonnegotiable or a “deal breaker.” The
absence in the record of emails or other communications from the Bank drawing a line in the sand on the impound
and cash sweep issues is instructive in this regard.
7 It might be different if the Bank had drawn a line in the sand and told BW that no way, no how, would it retreat
from its demands with respect to the impound accounts and the cash sweep. However, as pointed out earlier, there is
no evidence before the Court indicating this degree of intransigency on the part of the Bank.
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Rather, it makes it clear that an assumption transaction is off the table.
Additionally, it is significant that this email was transmitted to the Bank’s counsel,
Mr. Oliner. BW wanted the Bank to know that an assumption was off the table.
There is no doubt that BW’s interest in an assumption transaction vanished on
May 6 nor is there any doubt that BW still wanted to acquire the Property on that date
(albeit in a transaction not contemplated by the Purchase Agreement). The duty of
exercising commercially reasonable and diligent efforts was a continuing duty, arising at
the inception of the contract and remaining in existence up until the close of business on
the May 10 closing date or at least until the point when it became clear that further
efforts to obtain the Bank’s agreement to acceptable terms would be futile. The point of
futility was never reached in this transaction because there is no evidence before the
Court indicating BW negotiated with the Bank between May 6 and May 10 with respect
to the impounds or cash sweep or that the Bank had previously made it clear that all
provisions relating to the impounds and cash sweep were nonnegotiable.
Section 1.1 of the Addendum to the Purchase Agreement gave BW the right to
terminate the Purchase Agreement if the parties were unable to obtain the Bank’s
approval of the assumption within 45 days of the date of the Purchase Agreement. BW
argues that section 1.1 supports its contention that it rightfully terminated the Purchase
Agreement and therefore is entitled to the return of its deposit.
Section 1.1 is unhelpful to BW because it did not terminate the Purchase
Agreement in the May 6 email (or prior to May 6). To the contrary, BW was eager to
keep the Purchase Agreement in force (on terms other than those agreed to) so that it
could acquire the Property. The termination of the Purchase Agreement came later,
after BW had already materially breached during the May 6 through May 10 timeframe.
An effective termination of the Purchase Agreement by BW prior to May 6 would have
eliminated its duties of diligence and commercial reasonability concerning the
assumption (on a going forward basis, not on a retroactive basis), but the termination
came too late for this.
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Section 33 of the Addendum to the Purchase Agreement does not alter the
Court’s analysis. Although BW was entitled to a return of its deposit if the Bank failed to
agree to an assumption with no additional terms or conditions other than the 1%
assumption fee, this entitlement presupposes that BW honored its obligation to use
commercially reasonable and diligent efforts to obtain assumption approval. As
discussed above, BW failed to fully satisfy this obligation and materially breached it on
May 6, 2013.
Under the doctrine of constructive conditions, BW’s material breach of the
Purchase Agreement on May 6 entitled the Debtor to suspend performance of its
various duties under the Purchase Agreement, such as the duty to deliver closing
documents to BW. Sanchez v. San Bernardino, 176 Cal. App. 4th 516, 530 (2009).
Pursuant to numbered paragraph 20 of the Sale Order, BW’s breach of the
provision of the Purchase Agreement requiring commercially reasonable and diligent
efforts by it to assume the existing note and existing deed of trust and its subsequent
failure to timely close the purchase entitles Debtor to retain the deposit as
nonrefundable liquidated damages.
Based upon the foregoing, the Court will grant the Debtor’s Motion and the
Debtor’s Supplemental Motion. The BW Motion is denied with prejudice.
No attorneys’ fees will be awarded to any party in this matter. Numbered
paragraph 20 of the Sale Order makes the forfeiture “subject to the terms of the
Agreement.” The term “Agreement” is defined in numbered paragraph 2 of the Sale
Order to mean the Purchase Agreement and Amendment. Section 21 of the Purchase
Agreement provides that upon payment of the deposit to the Debtor, BW “shall be
released from any further liability to [Debtor] . . .” There is no carve-out in Section 21 for
Section 16, which provides for an award of attorneys’ fees to a prevailing party in the
event an action is brought to enforce the terms of the Purchase Agreement. The
entirety of Section 21 is in boldfaced upper case letters, whereas Section 16 is in upper
and lower case letters and generally is not in boldface. This would seem to suggest the
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parties regarded Section 21 as of more relative importance than Section 16 and that it
controls over Section 16 should a conflict in interpretation arise .For these reasons, the
Court concludes that the release of liability includes a release of any right of the Debtor
to obtain attorneys’ fees following payment of the deposit to Debtor. BW is not entitled
to attorneys’ fees for the obvious reason that it is a breaching party, not a prevailing
party.
It is ordered as follows:
1. Debtor is entitled to and shall retain, as the unencumbered property of
Debtor’s bankruptcy Estate, the $200,000 deposit paid by BW in connection with BW’s
proposed purchase of 1617 Westcliff Drive, Newport Beach CA, as Debtor’s liquidated
damages pursuant to the Purchase Agreement, Addendum, and Amendment thereto
between Debtor and BW;
2. The Title Company shall immediately release the $200,000 deposit to
Debtor;
3. First American Title Company Escrow No. 4245219 between Debtor and
Burnham Ward is hereby cancelled; and
4. Debtor’s request for attorneys’ fees is denied.
5. Burnham Ward’s request for Judicial Notice in support of the Motion is
granted; and
6. Burnham Ward’s request for attorneys’ fees is denied.
###
Date: June 28, 2013
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NOTICE OF ENTERED ORDER AND SERVICE LIST
Notice is given by the court that a judgment or order entitled (specify): MEMORANDUM DECISION AND
ORDER was entered on the date indicated as AEntered@ on the first page of this judgment or order and
will be served in the manner stated below:
1. SERVED BY THE COURT VIA NOTICE OF ELECTRONIC FILING (NEF) B Pursuant to controlling
General Orders and LBRs, the foregoing document was served on the following persons by the court via
NEF and hyperlink to the judgment or order. As of 6/24/13, the following persons are currently on the
Electronic Mail Notice List for this bankruptcy case or adversary proceeding to receive NEF transmission
at the email addresses stated below.
Sarah C Boone sboone@marshackhays.com, ecfmarshackhays@gmail.com
Michael J Hauser michael.hauser@usdoj.gov
D Edward Hays ehays@marshackhays.com, ecfmarshackhays@gmail.com
Aron M Oliner roliner@duanemorris.com
Penelope Parmes pparmes@rutan.com
Leonard M Shulman lshulman@shbllp.com
United States Trustee (SA) ustpregion16.sa.ecf@usdoj.gov
Service information continued on attached page
2. SERVED BY THE COURT VIA UNITED STATES MAIL: A copy of this notice and a true copy of this
judgment or order was sent by United States mail, first class, postage prepaid, to the following persons
and/or entities at the addresses indicated below:
Debtor
1617 Westcliff, LLC
2651 Waverly Dr
Newport Beach, CA 92663
Service information continued on attached page
3. TO BE SERVED BY THE LODGING PARTY: Within 72 hours after receipt of a copy of this judgment
or order which bears an AEntered@ stamp, the party lodging the judgment or order will serve a complete
copy bearing an AEntered@ stamp by United States mail, overnight mail, facsimile transmission or email
and file a proof of service of the entered order on the following persons and/or entities at the addresses,
facsimile transmission numbers, and/or email addresses stated below:
Service information continued on attached page
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