560 B.R. 358
Bankr. D.N.M.2016Background
- Debtor developed a 260-acre residential subdivision (San Pedro Overlook) and completed Phase I (≈50 lots). Debtor promised to convey common areas to the HOA under restrictive covenants but delayed performance.
- The HOA sued in state court (2014) to compel conveyance; parties signed a 2015 settlement agreement requiring Debtor to convey common areas (Exhibit A) and dismiss the suit.
- A dispute arose whether Tract D (an undeveloped parcel abutting a highway) was included in the common areas described in Exhibit A; Debtor contended it never intended to convey Tract D.
- State court conducted a short hearing and orally ordered specific performance in favor of the HOA; no final written order was entered before Debtor filed bankruptcy in November 2015.
- This Court found the settlement agreement to be an executory contract; Debtor moved to reject it to retain and develop Tract D as a primary asset for reorganization.
Issues
| Issue | HOA's Argument | Debtor's Argument | Held |
|---|---|---|---|
| Whether rejecting the settlement under §365 is permissible (business judgment) | Rejection would be improper because the settlement should be enforced | Debtor acted within business judgment to reject a burdensome executory contract to benefit the estate | Court approved rejection under the deferential business-judgment test; rejection likely benefits the estate |
| Whether HOA can obtain specific performance post-rejection (futility) | Rejection is futile because state-law entitles HOA to specific performance of the settlement | Specific performance is an equitable remedy that can be monetized as a "claim" under §101(5)(B); rejection converts remedy to money damages | Court held specific performance would not necessarily survive rejection; HOA would have a monetary claim, not guaranteed specific performance |
| Whether the state-court oral order forecloses rejection (preclusion/comity) | State court already ordered specific performance; bankruptcy cannot defeat that order | The state hearing did not produce a final specific-performance judgment after full litigation | Court held the short oral ruling did not convert the agreement into a final non-executory judgment; rejection not barred by that order |
| Whether Debtor filed in bad faith solely to avoid the settlement | Filing bankruptcy to escape the settlement is bad faith and should be denied | Filing to reject an executory contract is not per se bad faith; §365 contemplates such use | Court found no bad faith; using bankruptcy to reject the contract was permissible |
Key Cases Cited
- In re Tilco, Inc., 558 F.2d 1369 (10th Cir. 1977) (business-judgment test for rejection of executory contracts)
- N.L.R.B. v. Bildisco & Bildisco, 465 U.S. 513 (U.S. 1984) (applying business-judgment standard to reject contracts)
- In re Mile Hi Metal Sys., Inc., 899 F.2d 887 (10th Cir. 1990) (deferential standard for business judgment)
- Lubrizol Enters., Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043 (4th Cir. 1985) ("benefit to the estate" articulation)
- Ohio v. Kovacs, 469 U.S. 274 (U.S. 1985) (§101(5)(B) legislative history on monetizing equitable remedies)
- In re Sabine Oil & Gas Corp., 550 B.R. 59 (Bankr. S.D.N.Y. 2016) (court will defer to debtor unless rejection is product of bad faith, whim, or caprice)