Lead Opinion
This is an appeal from an action by Marathon Finance Corporation seeking a declaration that certain restrictive covenants and deed restrictions no longer encumbered a tract of its land on Hilton Head Island known as the Barony Tract. The trial court declared the covenants and deed restrictions to be extinguished, null, void, and of no force or effect whatsoever and further ordered the Register for Mesne Conveyances of Beaufort County to note their extinguishment and cancellation on the pertinent documents. The trial court further held that, with the exception of certain specifically enumerated easements, Westin Resort Hilton Head Limited Partnership (Westin), an adjoining landowner and one of the defendants in the lawsuit, had no rights in or to or concerning Marathon Finance’s property. Westin appeals. We affirm.
FACTS
In 1983, the Hilton Head Company owned three adjacent tracts of land: the Barony Tract, the Hotel Tract, and the Mid-Rise Tract. That same year, the Hilton Head Hotel Company (Hotel Company), an affiliate of the Hilton Head Company, together with Aries Property Holdings and R.H./ A.E. Hotel Company, formed a general partnership known as The Barony Company. In a joint venture agreement dated November 5, 1983, these three entities proposed to develop the three tracts.
On November 5, 1983, pursuant to the joint venture agreement, the Hilton Head Company, conveyed by separate instruments each of the three tracts to The Barony Company. Covenants executed the same day 'restricted the Barony Tract to residential, short-term rental, and limited commercial uses. In February, 1984, these covenants restricting the use of the Barony Tract were recorded with the deed conveying the tract. A number of these covenants were identical to restrictions placed on the Hotel Tract and the Mid-Rise Tract.
On September 4, 1985, as hotel construction on the Hotel Tract neared completion, The Barony Company redeemed all
The deed conveying the Barony Tract from The Barony Company to the Hotel Company contained restrictions limiting the number of dwelling units per acre on the tract, the type of structures to be placed on the tract, and the height of the buildings and structures to be built on the tract. The deed was recorded before Marathon Finance recorded its mortgage from the Hotel Company and further provided that these restrictions were to run with the land.
On December 30, 1985, The Barony Company conveyed the improvements on the Hotel Tract to R-H Hilton Head, Inc. These improvements constituted the present Westin Resort.
Subsequently, on November 24, 1986, the Hotel Company went into bankruptcy. Several months later, on July 27,1987, the trustee in bankruptcy filed a Motion for Approval of Compromise requesting approval of a settlement agreement between the trustee and Marathon Oil Company, a company related to Marathon Finance. The agreement, which was dated June 24,1987, provided for the transfers to “a Marathon entity or entities” of certain properties, including the Barony Tract. The transfers were to be “free and clear of all liens, charges and encumbrances whatsoever,” and subject only to certаin secured real property interests. The settlement was later clarified by the trustee on August 29,1987, in a report in which the trustee specifically stated that “covenants ... [and] restrictions ... shall be treated as provided for under South Carolina law.”
On September 10, 1987, Marathon Oil Company and The Barony Company entered into a settlement agreement that provided for the protection of the ten interests asserted by The Barony Company. The bankruptcy court approved the settlement agreement, filing its order on September 24, 1987.
On September 30, 1987, the trustee recorded a document entitled “Release and Cancellation of Restrictions, Covenants & Encumbrances.” This document referenced the Barony Tract and an adjoining tract now owned by the Town of Hilton Head Island. It expressly waived, relinquished, released, cancelled and forever discharged all covenants, restrictions, and deed restrictions.
After approval by the bankruptcy court of the settlement agreement, the trustee filed a complaint to sell the properties listed in the June 24, 1987 agreement free and clear “of all liens, encumbrances and other interests” except those otherwise defined.
The Barony Company responded by filing an answer on October 5, 1987, in which it requested protection of the same ten recorded easements and access and use agreements listed in its prior objection to the Notice of Sale of Assets. Later, however, The Barony Company withdrew its answer and entered into a second stipulation. The second stipulation provided for the superior status of only the ten recorded easements and access and use agreements.
On October 31,1987, the trustee conveyed the Barony Tract to Marathon Properties, Inc. The deed referenced the prior proceedings in the bankruptcy court and conveyed the proper
On November 4,1987, the bankruptcy court issued an order stating, among other things, “[t]hat all persons or entities who have failed to assert any lien, encumbrаnce, or other interest in [the Barony Tract and other properties], other than Permitted Exceptions, are forever barred from doing so.”
After the trustee conveyed the Barony Tract to Marathon Properties, a dispute arose between Marathon Properties and The Barony Company concerning the enforceability of one of the restrictions. Marathon Properties commenced an adversary proceeding in the bankruptcy court on May 11, 1988, in which it requested “a declaration of [its] rights with respect to the [effect of the] transfer of [t]he Barony Tract free and clear of the restrictive covenants found in the former deed between The Barony Company and [the Hotel Company].”
On January 4,1990, the bankruptcy court determined Marathon Properties held title to the Barony Tract unencumbered by the restriction at issue, holding the prior proceeding had extinguished that restriction.
Marathon Properties subsequently conveyed the Barony Tract to Marathon Finance, its affiliate.
AOKI Carolina Hotel Company acquired the Hotel Tract and its improvements from The Barony Company and R-H Hilton Head Company in October, 1988. The contract documents disclosed to AOKI the pendency of the declaratory judgment action in the bankruptcy court concerning a restrictive covenant on the Barony Tract. Westin Hotel Company, an AOKI affiliate, assisted in the acquisition of the property and continued to manage it after the conveyance. On June 27, 1989, AOKI deeded the Hotel Tract to the Westin Hilton Head Limited Partnership.
I.
Westin first argues the designation of the sale of the Barony Tract as “free and clear” of “encumbrances” did not by its terms eliminate the covenants and restrictions in question. Westin maintains (1) the covenants and restrictions were not “encumbrances”; (2) the covenants and restrictions were not
A.
The trial court correctly concluded as a matter of law the term “encumbrance,” as used in the context of this litigation, included covenants and restrictions. See Morris v. Lain,
B.
Westin also argues that the covenants and restrictions at issue were not “interests” in property that could be extinguished in a bankruptcy sale, and even if they were, none of the conditions of 11 U.S.C. § 363(f), the statute authorizing such a sale, had been met. These arguments, however, were neither presented to nor ruled upon by the trial court; therefore, they are not preserved for appellate review. See Noisette v. Ismail,
A.
We do not agree with Westin’s argument that because The Barony Company, as owner of the Hotel Tract, did not execute the “Release and Cancellation of Restrictions, Covenants & Encumbrances” dated September 30, 1987, that document failed to terminate the covenants and restrictions in question.
What Westin overlooks is that, as we noted above, before the trustee executed the release and cancellation, The Barony Company had agreed to—and the bankruptcy court had approved—the trustee’s conveyance of the Barony Tract free and clear of any express or implied covenants except the ten interests for which The Barony Company had specifically requested protection as part of an overall settlement.
Moreover, after the trustee filed a complaint to sell the Barony Tract, among other properties, free and clear “of all liens, encumbrances and other interests” except as otherwise defined, The Barony Company withdrew the answer it had filed to the trustee’s complaint and then entered into a stipulation in which it sought to protect only ten enumerated interests that did not include the covenants and restrictions at issue. The bankruptcy court, as we mentioned, thеreafter issued an order barring “all persons or entities” from asserting any lien, encumbrance, or other interests in the Barony Tract, other than the ten interests The Barony Company endeavored to protect. These “persons or entities” included The Barony Company, a party over which the bankruptcy court then had jurisdiction and a party with which Westin is in privity. There being no appeal from the bankruptcy court’s order by The Barony Company, its right or the right of any of The Barony Company’s successors-in-interest to challenge any of the order’s provisions no longer exists. See In re Met-L-Wood,
We likewise find no merit to Westin’s contention that the trustee did not record the release and cancellation in such a manner that the doсument would have been discovered by an examination of the Hotel Tract’s chain of title. Even if this were the case, contract documents disclosed to AOKI, Westin’s predecessor-in-interest, the then pending litigation and its potential impact on the use of the Barony Tract. Certainly, then, irrespective of record notice, Westin’s predecessor-in-interest had actual notice of what was taking place. See First Presbyterian Church of York v. York Depository,
III.
Westin next asserts The Barony Company, as owner of the Mid-Rise Tract, assigned to Marathon Properties in 1989 certain easements, licenses, and agreements benefitting the Mid-Rise Tract, including the covenants and restrictions in question and thus, if it had enforcement rights that could be assignеd to Marathon Properties, then The Barony Company, as owner of the Hotel Tract, had equivalent rights that it could assign to AOKI, a subsequent owner of the Hotel Tract. This argument was neither raised to nor ruled upon by the trial court; therefore, we cannot review it on appeal. Hendrix v. Eastern Distribution, Inc.,
IV.
Westin argues that, as a successor-in-title to The Barony Company, it has the right to enforce the covenants and deed restrictions as negative reciprocal easements. The problem with this argument is that, as we indicated above, these covenants and restrictions no longer exist.
V.
Westin next argues the bankruptcy court’s order of January 4, 1990, was not binding on AOKI, its immediate predecessor-in-interest, because AOKI was an indispensаble party to the litigation insofar as a contract had been executed for its purchase of the Hotel Tract. Because the trial court did not address this argument, we have no authority to decide it on appeal. Hendrix at 218-19,
VI.
Finally, Westin argues the trial court exceeded its authority in holding Westin had “no rights in or to or concerning” the Barony Tract except for the matters set forth in Exhibit A of its order. In support of this argument, Westin notes many of the matters set forth in Exhibit A dealt with properties other than the Barony Tract. Insofar as the trial court confined its holding to Westin’s rights in the Barony Tract, we fail to see how the ruling affected matters not before the trial court.
AFFIRMED.
Notes
. The names "Marathon Finance Company” and "Marathon Finance Corporation” appear to have been used interchangeably. We assume both names refer to the same entity, which we refer to as "Marathon Finance.”
Concurrence Opinion
(Concurring in part and dissenting in part):
I concur with much of the majority opinion, but I respectfully disagrеe that all of the 1985 deed restrictions have been extinguished. I write separately as most of my reasoning and analysis is different from the majority.
Westin argues that it is entitled to enforce the “1983 Restrictions,” which were expressly placed on the Barony Tract in a document entitled “Declarations, Conditions, and Restrictions.” This document was executed by the Hilton Head Company (HHC), and recorded contemporaneously with the deed transferring the Barony Tract to the Barony Company (Barony). These restrictions, by the terms of the document, run with the land and are “binding on all parties having any right, title, or interest in the [Barony Tract] or any part thereof, their heirs, successors, and assigns.” The document further states that the restrictions are entitled to be enforced by HHC (the grantor of the contemporaneous deed), Barony (the grantee of the contemporaneous deed), a property owners’ association (which was to be formed), or “any owner оf any portion of the [Barony Tract].” The document states that the restrictions “shall inure to the benefit of each owner [of the Barony Tract].” The restrictions do not reference any other tract or state that any grantees of HHC in another tract are entitled to enforce the restrictions. Since the 1983 restrictions are outside of Westin’s chain of title to the Hotel Tract, Westin only attempts to enforce these restrictions against Marathon as to the Barony Tract by use of the theory of implied reciprocal negative easements (IRNE). See, e.g., Bomar v. Echols,
The real difficulty with this issue is that Westin attempts to impermissibly expand the IRNE doctrine because it is not a party entitled to enforce the 1983 covenants by the document’s terms. Although Barony is listed as a party entitled to enforce the restrictions, that is solely because it was the grantee of the Barony Tract in the contemporaneously executed 1983 deed, which, as part of the 1983 joint venture agreement, contemplated Barony subsequently selling interests in
In this case, I conclude that the Bomar test for IRNE is not satisfied. The third element required for IRNEs is that there be a general plan or scheme of development for the designated land or tract, which, in this case, would have to be applicable to the three tracts as a whole. See Bomar,
With the exception of the 1983 joint venture agreement, the evidence to which Westin points took place after the execution of the 1983 Restrictions, which does not totally remove its relevance, but which lessens its effect when the case is viewed as a whole. Cf. Edwards v. Surratt,
As has been noted, Belle Haven was developed in stages, the various sections having been created from time to time over a period of many years by the recordation of a numbеr of deeds of dedication and plats. We believe that each of these recordings created a separate and distinct subdivision, with its own set of restrictions benefiting and burdening only the land in that particular subdivision. While the restrictions imposed in each dedication were similar to those applicable to other sections of the development, the course of conduct pursued by the developer did not indicate an intention to establish, as among the owners of lots in different sections, reciprocal benefits and obligations entitling the owner of property in one section to enforce a restriction against the owner of property in another section.
Id.
II. 1985 RESTRICTIONS
Initially, it must be determined whether Westin, as it argues, is entitled to enforce the 1985 restrictions. A restrictive covenant runs with the land, and is thus enforceable by a successor-in-interest, if the covenanting parties intended that the covenant run with the land, and the covenant touches and concerns the land.
First, Westin argues that intent is obvious in that the document states that the covenants are to run with the land, and, indeed, Marathon admits as much in its brief by stating that, “clearly, on the face of the covenants ..., [they] were to run with the land.” Marathon does argue, however, that the evidence is insufficient to show the covenanting parties’ intention that Barony’s successors in the Hotel and Mid-Rise Tracts may enforce the covenants, since the covenants do not refer to any other property as the benefitted dominant estate. Cf. Charping,
Second, with regard to the requirement that the covenant touch and concern the affected properties, Westin argues that it only needs to show that the burden touches and concerns the Barony Tract, and not that the benefit touches and concerns the Hotel Tract. However, the “touch and concern requirement is applied separately to the burden and the benefit of a covenant.” 5 R. Powell & P. Rohan, Powell on Real Property ¶ 673[2], at 60-49 (rev. ed. 1996). Marathon does not attempt to argue that the covenants do not touch and concern the Barony Tract; however, it does contend that the benefit of the covenants does not touch and concern the Hotel
Thus, assuming the trustee’s sale of the Barony Tract was not otherwise free of the 1985 restrictions, then Westin would be entitled to enforce them as covenants running with the land.
III. FREE AND CLEAR BANKRUPTCY SALES
For perspective, I begin with a review of the bankruptcy law applicable to the sale of the debtor’s property by a bankruptcy trustee. Pursuant to 11 U.S.C. 363(b) & (c) (1993 & Supp.1996), the court must give notice and hold a hearing only if a trustee’s proposed sale of the debtor’s property is outside of the ordinary course of the debtor’s business. In either event, 11 U.S.C. 363(f) (1993 & Supp.1996) provides that:
The trustee may sell property under subsection (b) or (c) of this section free and clear of any interest in such property of an entity other than the estate, only if—
(1) applicable nonbankruptcy law permits sale of such property free and clear of such interest;
(2) such entity consents;
(3) such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property;
(4) such interest is in bona fide dispute; or
(5) such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.
None of the bankruptcy orders in the record specifically state which portion of 363(f) justified sale of the Barony Tract free and clear of restrictions, so review of 363(f) is necessary to determine if the restrictions could have been removed pursuant to this subsection.
In 363(f), the word “interest” is a broad category which includes “liens” as well as other interests. See In re Taylor,
Of the remaining criteria in 363(f), the trustee’s sale, if free and clear, could only have been accomplished with consent pursuant to 363(f)(2). First, 363(f)(1) is not applicable because state law does not permit a sale free and clear of the 1985 restrictions. As discussed previously, the 1985 restrictive covenants run with the land, and are, at least on their face, enforceable by and against successors. Restrictive covenants generally cannot be extinguished absent a substantial change in the character of the neighborhood which would render the covenant valueless to the covenantee and oppressive to the
Second, the restrictions were not subject to a bona fide dispute involving the debtor, so 363(f)(4) does not apply. Cf, e.g., Missouri v. United States Bankruptcy Court,
Third, Barony, as an entity entitled to enforce the restriction, could not be compelled in a legal or equitable proceeding to accept a money satisfaction for loss of the benefit of the restrictions at issue here. A party seeking a remedy for breach of a restrictive covenant may ask for money damages at law, but the party also may seek an injunction in equity, which affords the best remedy since it prohibits future violаtions. See Gouveia,
IV. BARONY COMPANY’S CONSENT'
The issue of whether Barony consented to sale free and clear of the 1985 restrictions is problematic. On one hand, Barony did file documents objecting to the proposed 1987 sale, but it later withdrew those objections once Marаthon and the Trustee stipulated to the protection of ten very specific easements and license agreements. On the other hand, Barony did not sign the 1987 stipulations or anything else at that time, the 1987 orders do not expressly refer to Barony or its concerns, and Barony was not a party to any of the 1987 settlement agreements. Thus, Barony only could be said to have consented if the withdrawal of its objections after the stipulations regarding the specified interests constituted implied consent to removal of the 1985 restrictions.
A number of cases have held that a creditor who did not file a timely objection impliedly consented to a sale free and clear if the creditor had notice of the proposed sale. See In re Elliot,
V. EFFECT OF LITIGATION IN BANKRUPTCY COURT
Essentially, there are two sets of bankruptcy proceedings which resulted in orders to which Westin may be bound, thus preventing it from seeking enforcement of the 1985 restrictions. First, there is the November 1987 bankruptcy court order authorizing the § 363 sale of the “Port Royal assets,” “free and clear of all liens, encumbrances, or other interests.” This order approved the sale of the Barony Tract to Marathon, “in accordance with ... the Marathon Settlement Agreement.” The bankruptcy judge approved the settlement agreement between Marathon and the Trustee in a September 1987 order, which stated that “the Trustee is authorized and directed when appropriate to transfer the property of the estate under the terms of the Settlement Agreement.”
However, I concur with the majority that Westin is bound by the result in the second bankruptcy • proceeding, which
received and currently has title to the 11.5 acre Barony Tract unencumbered by the restriction stated above as to the number of units per acre and that the proceedings in this case resulted in the extinguishment of that restriction as an encumbrance upon the 11.5 acre Barony Tract (emphasis added).
The judgment that was entered substantially tracked the quoted language.
Generally, of course, a stranger to a proceeding cannot be bound in subsequent litigation by a determination in the former proceeding. Cf. First Nat’l Bank v. USF & G,
A successor in interest of property that is the subject of a pending action to which his transferor is a party is bound byand entitled to the benefits of the rules of res judicata to the same extent as his transferor, unless:
(1) a procedure exists for notifying potential successors in interest of pending actions concerning property, the procedure was not followed, and the successor did not otherwise have knowledge of the action; or
(2) the opposing party in the action knew of the transfer to the successor and knew also that the successor was unaware of the pending action.
Restatement (Second) of Judgments § 44 (1982). The rationale for this rule is as follows:
If property is transferred when an action is pending concerning it, the successor in interest may be aware of the litigation and seasonably join as a party, by intervention or by substitution in place of his transferor. In that circumstance, the successor then becomes bound because he is a party. If he is aware of the litigation but does not join as a party, he acquiesces in the transferor’s continuing, for purposes of the litigation, to be the apparent owner of the interest in the property. His doing so is in effect treating the transferor as his representative in the action.
Restatement (Second) of Judgments § 44 cmt. a (1982). There is no question that Westin had notice of the litigation between Barony and Marathon. Essentially, Westin acquiesced in Barony continuing to litigate the right of the owner of the Hotel Tract to enforce the 1985 deed restrictions against the owner of the Barony Tract. The record does reflect that Marathon requested Westin’s consent to the settlement, and that Westin refused, writing that it did “not believe a settlement can be reached without [Westin’s] consent.” Unfortunately for Westin, it had an obligation, if it was unhappy with Barony’s negotiated settlement, to do more than merely sit on the sidelines. As a purchasing party with notice that litigation was pending which involved an interest it was potentially entitled to enforce, Westin should have intervened, if the parties to the suit failed to join or protect it. Bankr.R. 7024. Thus, Westin is bound, by the principles of res judicata, to the result of the 1990 order. See also 50 C.J.S. Judgments § 810 (1947).
VI. CONCLUSION
I agree that Westin cannot attempt to enforce the 1983 restrictions under the theory of implied reciprocal negative easements. However, I would hold that portions of the 1985 restrictions are still enforceable, because, in my view, the 1987 orders did not affect the validity of the 1985 deed restrictions, and the 1990 order, to which Westin is bound, only extinguished the density restriction.
. I note that the Texas Supreme Court reversed the cited opinion and rejected the proposition in the parenthetical in a limited fashion, by stating that "we attach no significance to the fact that two lots were sold without restrictions before the owners formulated their general scheme or plan of development.” See Evans v. Pollock,
. Unlike the document memorializing the restrictions on the Barony Tract, the 1983 deeds from HHC to Barony passing title to the Hotel Tract and the adjacent Mid-Rise Tract only state that their сovenants "inure to the benefit of and are enforceable by [HHC].” No provision in either of those deeds gives a right of enforcement to the owner of a different tract.
. The first Restatement of Property requires privity for a covenant to run with the land at law. First, horizontal privity is required for the burden to run, which means that the two covenanting parties must have transferred some interest in the lands burdened or benefitted at the time they entered into the covenant. Restatement of Property § 534 (1944). Leighton v. Leonard,
Second, vertical privity, of course, is required. A successor of the covenantor must hold the entire durational interest in order to be bound. However, the benefit runs to any succeeding possessory estate. Restatement of Property § 535 (1944). These elements are also satisfied in this case.
Third, notice to a grantee of the covenantor is required in order for a covenant to run with the land. See Harbison Community Ass’n v. Mueller,
. Admittedly, the deed does not expressly refer to the Hotel Tract and the Mid-Rise Tract as the dominant estate. However, I believe the obvious intention is that Barony plaсed the 1985 restrictions on the Barony Tract in order to benefit the Hotel and Mid-Rise Tracts, which Barony retained. Thus, the enforceability issue is different here than in the 1983 restrictions. In this situation, Westin stands in the shoes of Barony as the grantor, who clearly executed these restrictions for the benefit of the parcel which Westin now owns. Accordingly, I would hold that the benefit ran with the Hotel Tract and the Mid-Rise Tract.
. The majority states that this issue is not preserved for review because the special circuit judge did not rule upon it. I would hold, nevertheless, that the question of the bankruptcy trustee’s statutory authority to sell property free of a state law interest is jurisdictional.
. Real covenants may be extinguished under state law by operation of doctrines similar to consent, such as modification, release, waiver, estoppel, and acquiescence. See generally 20 Am.Jur.2d Covenants, Conditions, and Restrictions §§ 234-250 (1995). Other grounds for extinguishment, such as merger, also exist. Id.
. Marathon asserted that sale could have been justified рursuant to 11 U.S.C. § 365 (1993 and Supp.1996), which addresses unexpired leases and executory contracts. However, restrictive covenants are not executory contracts, and § 365 is inapplicable. Gouveia,
. On September 30, 1987, HHC, HHHC, and other parties executed and recorded a release of all covenants and other interests in Grasslawn Subdivision No. 1, of which the Barony Tract is a part. Barony, which owned the Hotel Tract at this time and was entitled to enforce the 1985 restrictions on the Barony Tract, was not a party to this release, which was purported to be executed by "all of the parties in interest in and to the Rights affecting Grasslawn Subdivision No. 1.” I disagree with the majority that Barony’s substantial interest could be so casually disregarded when it was not made a party to the release as were all other parties in interest.
. Admittedly, the applicable documents in Oyster Bay and Badine expressly stated that the property was sold "as is” and subject to covenants of record; however, here, an analogous statement existed in the Trustee’s report, as it states that “covenants ... shall be treated as provided for under South Carolina law.”