585 B.R. 373
Bankr. N.D. Tex.2018Background
- Baerg Real Property Trust (seller/debtor) entered an Earnest Money Contract (Feb 28, 2014) to sell four Dallas‑area apartment complexes to Garland Solution, LLC (buyer). The purchase price included cash, payoff of existing M&T/Fannie Mae loans, forgiveness of a construction Draw Down Note (up to $898,500), and a $90,000 settlement amount.
- Parties structured a delayed closing with three escrow accounts (Escrow I–III) and related Construction Contract, Loan Agreement, Draw Down Note, and a Purchase & Sale Agreement (Garland acquired a 1% trust interest for $25,000). Class A Management (C. Fontana) was the escrow agent/manager.
- Garland funded operations and rehabs, procured Greystone loan commitments and Fannie Mae delivery commitments in June–July 2016; Garland attempted lender-required technical changes (an Addendum) to permit closing via single‑purpose LLCs.
- Seller Hal Baerg refused to sign the Addendum, asserted defaults, cut Garland off from accounts, and declared the contract terminated before the outer closing date (30 days after M&T loan maturity of July 1, 2016). Litigation followed; Baerg filed Chapter 11 Sept. 29, 2016.
- The bankruptcy court found Garland did not breach and that Baerg anticipatorily breached and blocked closing; Garland had substantially performed and incurred large expenditures. Court ordered specific performance (transfer to Garland) with adjustments (escrow credits, forgiveness of Draw Down Note principal, allowance for certain fees) and set a 60‑day closing period.
Issues
| Issue | Plaintiff's Argument (Baerg) | Defendant's Argument (Garland) | Held |
|---|---|---|---|
| Whether Garland breached or anticipatorily breached the Contract | Addendum and financing characterization ("refinance", "equity infusion") altered the deal and showed inability to finance, constituting breach | Garland had valid lender commitments (Greystone/Fannie Mae), Addendum was technical to satisfy lender; Garland ready to close | Garland did not breach or anticipatorily repudiate; Baerg's actions prevented closing |
| Whether Baerg anticipatorily breached / repudiated by refusing to close and blocking access | Baerg claimed defaults and refused to sign Addendum; treated as seller exercising remedies | Garland: Baerg's refusal and interference before outside closing was anticipatory breach and hindered performance | Court: Baerg repudiated/anticipatorily breached and failed to cooperate; duty not to hinder applies |
| Whether specific performance is available in bankruptcy (or must be converted to a §101(5)(B) monetary claim) | Baerg: equitable remedy can be treated as a dischargeable "claim" and thus specific performance unavailable | Garland: contract not executory, two‑party dispute, real property unique, damages inadequate; specific performance appropriate | Court ordered specific performance: contract not treated as executory; specific performance appropriate despite bankruptcy because two‑party single‑asset dispute and fairness favors enforcement |
| Escrow/accounting breaches and remedies (Escrow I/II/III, Draw Down Note) | Baerg alleged escrow breaches and sought relief/offsets | Garland argued escrow funds used consistent with agreements and it provided substantial additional funds; requested credits and forgiveness of Draw Down Note principal | Court granted partial summary judgment to Garland on escrow breach/anticipatory breach claims; found no damages to Baerg from escrow accounting; forgave Draw Down Note principal and allowed escrow/fee credits against cash portion |
Key Cases Cited
- Bank One, Tex., N.A. v. Stewart, 967 S.W.2d 419 (Tex. App.-Houston [14th Dist.] 1998, pet. denied) (look to contract language; courts avoid implying covenants unless necessary)
- English v. Fischer, 660 S.W.2d 521 (Tex. 1983) (Texas rejects general covenant of good faith and fair dealing)
- Davis (In re Davis), 3 F.3d 113 (5th Cir. 1993) (narrow approach to §101(5)(B); certain equitable remedies may not be dischargeable claims)
- Haber Oil Co. (In re Haber Oil Co.), 12 F.3d 426 (5th Cir. 1994) (state law remedies such as constructive trust may be enforced against debtor in bankruptcy)
- Butner v. United States, 440 U.S. 48 (1979) (property rights defined by state law; federal law governs enforcement in bankruptcy)
- Horner v. Bourland, 724 F.2d 1142 (5th Cir. 1984) (specific performance appropriate where buyer substantially performed and seller revoked to avoid adverse tax consequences)