Aegina Investments, LLC

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF COLUMBIA
In re
AEGINA INVESTMENTS, LLC,
Debtor.
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Case No. 07-00297
(Chapter 11)
Not for Publication in
West’s Bankruptcy Reporter
MEMORANDUM DECISION AND PRELIMINARY ORDER RE
OBJECTION TO CLAIM OF ALTURAS REAL ESTATE INTERESTS, LLC
The conclusions this decision reaches are (1) that the
moment immediately preceding the filing of the debtor’s
bankruptcy petition is the appropriate moment at which to measure
the purchaser’s claim for damages arising upon a bankruptcy
trustee’s rejection of an executory contract to purchase real
property, and (2) that the contract at issue in this case was
indeed an executory contract despite the debtor’s prepetition
breach of the contract. 	The issues arise in this fashion.
Wendell W. Webster, the trustee appointed in this case, has
objected to the proof of claim filed by Alturas Real Estate
Interests, LLC (“Alturas”) which seeks $1.8 million in damages
relating to a contract Alturas had with the debtor, Aegina
Investments, LLC (“Aegina”), to purchase certain real property
The Memorandum Decision and Preliminary Order below
is hereby signed. Dated: September 22, 2008.
_____________________________
S. Martin Teel, Jr.
United States Bankruptcy Judge
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(the “Property”). 	Alturas’s contract called for a purchase price
of $1.7 million, but Aegina refused to perform, and on the
petition date, Alturas estimates, the Property was worth $3.5
million. 	Accordingly, contends Alturas, it has a claim for $1.8
million. 	Webster objects that the damages for any breach by
Aegina (if there was no breach by Alturas) should be based
instead on the difference between the fair market value of the
Property at the time that the conveyance should have been
consummated under the contract (long before the filing of the
debtor’s bankruptcy petition) and the contract price, which he
estimates would result in a claim for only $500,000.
I
The parties do not dispute the basic facts. 	The time for
Aegina to perform under the contract was extended to April 8,
2005, but Aegina refused to perform, and instead Aegina entered
into a contract to sell the Property to another entity. 	(Webster
contends that Aegina was excused from performance by reason of
breaches by Alturas, but that is a different issue, and this
decision addresses what happens if Aegina was not excused from
performance.) 	Alturas sued Aegina in the Superior Court for the
District of Columbia on September 30, 2005. 	Initially, it sued
both for damages and for specific performance, but on October 3,
2006, it withdrew the claim for damages. 	On June 7, 2007, before
the scheduled date for a trial in the Superior Court, Aegina
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filed its petition commencing this bankruptcy case. 	Accordingly,
as of the petition date, Alturas had pending a claim against
Aegina for specific performance. 	Webster has noticed up the
Property for an auction sale with the minimum bid amount set at
$2.75 million (which is $1.05 million more than Alturas was
called upon to pay under its contract). 	For purposes of
preparing for trial on Webster’s objection to Alturas’s proof of
claim, the parties seek a ruling regarding the date for measuring
Alturas’s damages (in the event that Alturas is held to be
entitled to recover damages for breach of the contract).
II
Rejection of an executory contract would leave Alturas with
only a claim for damages. 	Under 11 U.S.C. § 365(g), the
rejection of an executory contract “constitutes a breach of such
contract . . . (1) . . . immediately before the date of the
filing of the petition.” 	In turn, under 11 U.S.C. § 502(g)(1),
“[a] claim arising from the rejection , under section 365 . . .
of an executory contract . . . of the debtor that has not been
assumed shall be determined, and shall be allowed under
subsection (a), (b), or (c) of this section . . . the same as if
such claim had arisen before the date of the filing of the
petition.” 	The plain meaning of §§ 365(g)(1) and 502(g) permits
the party injured by the rejection to assert an unsecured claim
for its resulting damages as though the breach occurred
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1 	Although it will probably be inconsequential in this
case, I add this caveat to the foregoing discussion. 	The term
“date” in the language of § 365(g) (referring to rejection as
occurring “immediately before the date of the filing of the
petition”) means the precise moment before the filing of the
bankruptcy petition, not the calendar day preceding the petition
date. 	See 	In re Barbaran, 365 B.R. 333, 335 (Bankr. D.D.C.
2007), and In re Moore, 359 B.R. 665, 670-72 (Bankr. E.D. Tenn.
2006).
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immediately before the date of the filing of the petition.
Auction Co. of Am. v. FDIC, 141 F.3d 1198, 1201 n.3 (D.C. Cir.
1998) (“ . . . rejection of an executory contract by a bankruptcy
trustee is treated as a breach occurring immediately before
filing of bankruptcy petition.”); Bank of Montreal v. American
Homepatient, Inc. (In re American Homepatient, Inc.), 414 F.3d
614 (6th Cir. 2005), cert. denied, 547 U.S. 1019 (2006); Taunton
Municipal Lighting Plant v. Enron Corp. (In re Enron Corp.), 354
B.R. 652 (S.D.N.Y. 2006) (holding that damages stemming from the
rejection of an executory contract are measured from the last
business day before the filing of the petition); Aslan v.
Sycamore Investment Co. (In re Aslan), 909 F.2d 367, 371-72 (9th
Cir. 1990) (date of the breach of rejected executory contract is
the date immediately prior to the filing date for the purpose of
calculating damages); In re Silberkraus, 253 B.R. 890, 907
(Bankr. C.D. Cal. 2000) (damages from rejection at a minimum the
difference between the option price and the fair market value of
the commercial property on the date the petition was filed),
aff’d, 336 F.3d 864 (9th Cir. 2003). 1
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Accordingly, if the contract was an executory contract,
“damages should be fixed as of the time of the deemed breach,
which is ‘immediately before the date of the filing of the
petition.’” In re American Homepatient, 414 F.3d at 618. 	The
damages upon a trustee’s rejection of a contract for the debtor’s
sale of real property, if it was executory on the petition date,
is measured by the difference between the contract sale price and
the fair market value of the real property immediately preceding
the date the seller filed its bankruptcy petition. 	In re Aslan,
909 F.2d at 371-72.
As Webster points out, the long-standing rule in the
District of Columbia when a vendor is in breach of a contract to
sell real property because the vendor does not have good title,
or when the vendee elects only to sue for damages upon the
vendor’s refusal to perform, is that damages are “measured by the
difference between the sales contract price and the fair market
value of the property at the time that the property should have
been conveyed.” 	Basiliko v. Pargo Corp., 532 A.2d 1346, 1348
(D.C. 1987) (citations omitted) (vendor lacked good title). 	See
also Quick v. Pointer, 186 F.2d 355 (D.C. Cir. 1950) (vendor
lacked good title); Phillips & Sager v. Kern, 271 F. 547, 550
(1921) (builder-vendor refused to build house, as required by a
contract of sale, on the lot sold, and vendee sued for damages).
But no case decided under District of Columbia law has addressed
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2 	Cohen v. Lovitz, 255 F.Supp. 302 (D.C. 1966), aff’d sub
nom. Wolf v. Cohen, 379 F.2d 477 (D.C. Cir. 1967), upon which
Webster principally relies, extended the holding of Quick v.
Pointer to a claim for damages pursued by a vendee who obtained
specific performance, and is similarly distinguishable. 	Cohen v.
Lovitz involved a contract of sale at a price of $1,000,000 for
property which had a fair market value of the same amount on the
originally scheduled conveyance date. 	The contract was later
performed (pursuant to a decree of specific performance) on a
date on which the property’s fair market value was $1,445,000.
But prior to the originally scheduled date of conveyance, the
vendee had entered into a contract to sell the property to a
third party for $1,800,000, and, based on losing the benefit of
that contract, it contended that it was entitled to recover delay
damages of $355,000. 	Under Quick v. Pointer, if the vendee had
sued only for damages, the vendee--despite having a contract for
re-sale at $1,800,000–-would have had no damage claim as the
property’s fair market value at the originally scheduled date of
conveyance and the purchase price were both $1,000,000. 	See Wolf
v. Cohen, 379 F.2d at 479-50. 	When, instead of suing for
damages, the vendee sued for both specific performance and delay
damages, the vendee was similarly not entitled to damages based
on the vendee’s losing the benefit of its contract of re-sale.
Id. 	Cohen v. Lovitz did not involve a vendor who took an act
rendering specific performance impossible.
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what date a court should use to determine the fair market value
of property in order to fix the amount of a damage claim where
the purchaser waived the original breach by suing for specific
performance but where the specific performance remedy was later
rendered unavailable by an act of the vendor (such as the
vendor’s rejecting the executory contract in bankruptcy). 2
Under District of Columbia law, one of a vendee’s rights
under a contract to sell real property is the right to obtain
specific performance. 	When specific performance is feasible, but
the vendor undertakes a subsequent act to frustrate that right by
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making specific performance unavailable, it stands to reason that
District of Columbia law would permit the vendee to obtain
damages based on the value of the property as of the date that
the vendor made specific performance unavailable. 	But the court
need not rely on District of Columbia law to determine the date
on which damages are measured, as the Bankruptcy Code supplies
the answer.
When a vendee has elected not to treat the vendor’s refusal
to perform as terminating the contract of sale and has instead
sued for specific performance, the Bankruptcy Code treats
rejection of the executory contract as replacing the equitable
remedy of specific performance with a monetary claim, and treats
the petition date as the date of breach and the date on which to
measure the damages arising from specific performance being lost
as a remedy, not the earlier date on which the debtor-vendor
initially refused to perform. 	In re Aslan, 909 F.2d at 371-72.
See also Beard v. S/E Joint Venture, 581 A.2d 1275, 1284 (Md.
1990) (“Where, as here, the purchaser sues for specific
performance upon breach of a contract to convey realty, and
specific performance becomes unavailable during the pendency of
the action, the loss of the bargain damages, awarded in
substitution for specific performance, may properly be computed
by valuing the property at the time specific performance becomes
unavailable.”), motion for reconsideration denied, 587 A.2d 239
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(Md. 1991); 	Dunning v. Alfred H. Mayer Co., 483 S.W.2d 423, 428
(Mo. App. 1972) (damages awarded as of date that court ruled that
specific performance would be denied). 	In other words, upon
rejection of an executory contract, it is loss of the right of
specific performance that is to be compensated, with damages to
be measured by the value of the property as of the petition date.
Beard fully supports the view that the date of a debtor’s
earlier refusal to perform is not the date of breach for purposes
of calculating damages when the vendor has sued for specific
performance. 	The suggestion in the decision on reconsideration
in Beard, 587 A.2d at 242-45, that the date of rejection is the
date on which specific performance becomes unavailable is off the
mark: as decisions such as In re American Homepatient, 414 F.3d
at 614, and In re Enron Corp., 354 B.R. at 652, demonstrate, §§
365(g) and 502(g)(1), as a matter of federal law, set the date of
the filing of the petition as the date on which the executory
contract is deemed breached and set the moment preceding the
filing of the petition as the point at which the claim, as
required by § 502(g)(1), “shall be determined.” 	Moreover, in
this case, Alturas’s right to specific performance has been
stymied since the petition was filed, with rejection an almost
foregone conclusion, and it makes sense as a practical matter to
view the petition date as the date on which the contract became
no longer enforceable by way of specific performance, and as the
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date on which damages should be calculated.
III
Webster, however, contends that the contract was no longer
an executory contract once Aegina defaulted on the contract. 	But
a seller’s default on a contract for the sale of real property
does not by itself terminate the contract. 	A contract for the
sale of real property, which, on the facts presented so far in
this case, validly was the subject of a pending specific
performance lawsuit at the commencement of a bankruptcy case, is
an executory contract under 11 U.S.C. § 365. 	In re Aslan, 909
F.2d at 371; In re Sundial Asphalt Co., 147 B.R. 72, 80 (E.D.N.Y.
1992); TKO Properties, LLC v. Young (In re Young), 214 B.R. 905,
910 (Bankr. D. Idaho 1997); In re RLR Celestial Homes, Inc., 108
B.R. 36, 46 (Bankr. S.D.N.Y. 1989). 	As stated in RLR Celestial
Homes, “a contract is not deemed terminated and no longer
executory simply because the debtor has defaulted or breached the
contract before the commencement of a bankruptcy case.” 	108 B.R.
at 45. 	See also In re Alexander, 670 F.2d 885, 887 n.1 (9th Cir.
1982) (“In fact, [debtor] may have breached the contract by
refusing to convey, but the fact of breach does not somehow
convert the executory contract into an executed contract.”).
Webster contends that "when the debtor has not only failed
to perform but has breached the contract pre-petition with the
result that the other party has no further duty to perform but
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rather holds a claim against the debtor, the contract is no
longer executory." 	Tr’s Mem. in Further Support of Obj. (Docket
Entry (“DE”) No. 183) (quoting In re Murtishi, 55 B.R. 564, 567
(Bankr. N.D. Ill. 1985)). 	In In re Murtishi, the court was of
the view that “[t]o allow a debtor to reject a contract breached
pre-petition would be tantamount to sanctioning the operation of
section 365 as a treasure trove for such a rejecting debtor.” 	55
B.R. at 568 (citation omitted). 	Moreover, it was of the view
that the “vendees had materially performed.” 	Id. 	It thus held
that the contract was no longer executory. 	Here, however, it
would be the debtor’s estate that would reap a “treasure trove”
if the contract were treated as no longer executory. 	Alturas was
still pressing for performance by both sides the moment before
the petition was filed, and its damages should be measured by
what it suffered at the moment the bankruptcy petition was filed
and resulted in Alturas losing its right to specific performance.
Moreover, In re Murtishi is wrong in its premise that a
prepetition breach by the debtor destroys the other party’s
obligation to perform. 	A debtor has a right to cure defaults
under 11 U.S.C. § 365(b) and assume an executory contract that
was not terminated prepetition in order to enjoy its benefits
(including enforcing the obligations of the other party). 	See In
re RLR Celestial Homes, Inc., 108 B.R. at 45. 	Such an executory
contract thus continues in existence, despite the debtor’s
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prepetition breach, and can be either assumed or rejected. 	See
also In re Nickels Pier, LLC, 372 B.R. 218, 222-23 (D.N.J. 2007)
(executory contract is not terminated by debtor’s material
breach).
Upon a seller breaching a real property sale contract by
failing to convey title, the purchaser has two remedies
available. 	It may terminate the contract and its duty to
perform, and seek damages, in which case the contract is no
longer executory. 	Alternatively, it can leave the contract
intact and seek specific performance, in which case the contract
remains executory. 	See In re Aslan, 909 F.2d at 370. 	By filing
a specific performance action, a purchaser effectively waives the
vendor’s prepetition breach and the contract remains executory.
Id.; In re Young, 214 B.R. at 910 (“By seeking specific
performance of the contract, TKO essentially waived the breach
and treated the contract as though it was still in effect.”).
Webster also cites In re C & S Grain Co., 47 F.3d 233, 237
(7th Cir. 1995), as supporting the view of In re Murtishi that
prepetition breach results in relieving the other party of a duty
to perform, but C & S Grain does not stand for that broad a
proposition and is readily distinguishable. 	There the court held
that a contract for the purchase of grain must have been
completed or terminated prepetition in order not to be executory.
The debtor’s loss of its license to engage in the purchase of
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grain resulted in the contract being void, as a matter of state
law, insofar as further enforcement by the debtor was concerned.
This resulted in the seller’s obligations under the contract
being at an end as it could not sell grain to an unlicensed
entity. 	Here, in contrast, there never came a point that the
debtor was barred by law from enforcing the contract.
Alturas pursued specific performance from the outset of its
lawsuit in the Superior Court. 	Although it initially sued as
well for damages, it later withdrew that claim, clarifying that
it was electing to pursue only specific performance to the extent
that the two remedies were inconsistent. 	Webster does not
contend that Alturas waived the right to pursue specific
performance by initially including a claim for damages in its
complaint in the Superior Court, and the law of the District of
Columbia is that ”a prayer for damages as an additional remedy
due to delay in performance is not a contradiction of a prayer
for specific performance.” 	Clay v. Faison, 583 A.2d 1388, 1391-
92 (D.C. 1990) (footnote omitted); Bacmo Assocs. v. Strange, 388
A.2d 487, 489 (D.C. 1978). 	In any event, Alturas was allowed to
amend its complaint to elect only to pursue specific performance,
treating the contract as still in place, and to drop any claim
for damages that would have arguably inconsistently treated
Alturas’s obligations under the contract as terminated. 	Any
issue of waiver was thereby eliminated.
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13	O:\TEEL\Judge Temp Docs\Aegina - Mem Decsn re Objn to Alturas Claim v6.wpd
IV
In accordance with the foregoing, it is
ORDERED with respect to the trustee’s objection (DE No. 127)
to Alturas’s claim (1) that the debtor’s contract of sale with
Alturas was an executory contract at the time of the filing of
the debtor’s bankruptcy petition, and (2) that any damages for
rejection of the executory contract to which Alturas may be
determined to be entitled will be measured by the value of the
property at the moment preceding the filing of the bankruptcy
petition.
[Signed and dated above.]
Copies to: 	Debtor; debtor's attorney; Linda Correia, Esq.;
Jeffrey L. Tarkenton, Esq.; Office of U.S. Trustee.
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