Opinion
Case No. 8:16-bk-10036-MGW
12-04-2019
IN RE: JEFFREY L. MILLER INVESTMENTS, INC., Debtor.
Buddy D. Ford, Esq., Jonathan A. Semach, Esq., Heather Reel, Esq., Buddy D. Ford, P.A., Bryant H. Dunivan, Jr. Owen and Dunivan, PLLC, Counsel for Debtor Adam Lawton Alpert, Esq., Kathleen L. DiSanto, Esq., Bush Ross, P.A., Counsel for Premier Realty Advisors, LLC
Buddy D. Ford, Esq., Jonathan A. Semach, Esq., Heather Reel, Esq., Buddy D. Ford, P.A., Bryant H. Dunivan, Jr. Owen and Dunivan, PLLC, Counsel for Debtor
Adam Lawton Alpert, Esq., Kathleen L. DiSanto, Esq., Bush Ross, P.A., Counsel for Premier Realty Advisors, LLC
FINDINGS OF FACT AND CONCLUSIONS OF LAW AND ORDER ON DEBTOR'S OBJECTION TO CLAIM NO. 8
Michael G. Williamson, United States Bankruptcy Judge
Premier Realty Advisors got lucky. Before closing on the purchase of two parcels of income-producing property from the Debtor for $3.75 million, Premier discovered that the Debtor's representations and warranties in the sale contract that the leases for the two parcels had not been modified and were not in default were false. Because Premier discovered the representations and warranties were false before closing, the parties were able to resolve the issues. Normally that would be cause for celebration.
Instead, Premier, which never closed on the sale, seeks to use the Debtor's breach of the representations and warranties as a basis for recovering more than $2 million in lost profits from the Debtor in this bankruptcy case. Under the terms of the parties' contract, however, Premier cannot sue for breach of the representations and warranties unless it closed on the sale. And in any event, because the issues with the leases were resolved before the closing would have taken place, Premier failed to prove that the Debtor's breach of the representations and warranties was material or that it caused Premier's alleged damages. Accordingly, the Court will sustain the Debtor's objection to Premier's proof of claim in this bankruptcy case.
I. Findings of Fact
The Debtor owns four parcels of real property. Only two are relevant here: one parcel leased to a charter school (New Springs) and another leased to a nursing school (Med Prep). The New Springs and Med Prep leases are at the center of this dispute.
A. As of September 2015, the New Springs and Med Prep leases were in place for the next ten years.
The New Springs lease, entered into in 2010, had an initial five-year lease term, with an option for two more five-year terms. Each year under the lease the base monthly rent increased. By the final year of the initial lease term, New Springs' base monthly rent was $28,782.25. In addition to the base monthly rent, New Springs was obligated to pay another $12,335.25 per month during the initial lease term to reimburse the Debtor for tenant improvements it promised to make.
Premier's Ex. 1, § 2.1. The initial New Springs lease term ran from May 7, 2010 through June 30, 2015. Id.
Id. at § 3.1, Ex. B.
Id.
Id. at § 4.3, Ex. C.
Under the lease renewal, New Springs' base monthly rent increased to $29,501.81, though during the renewal period, New Springs was no longer obligated to pay for tenant improvements.
Id. at § 5, Ex. E.
Although the lease required New Springs to pay nearly $30,000 in base monthly rent (plus more than $12,000 per month for tenant allowances during the final year of the initial lease term), New Springs had actually been paying far less since 2014. When New Springs renewed the lease in July 2014, it notified the Debtor that, because of a dispute over whether the Debtor had made certain tenant improvements required under the lease, it was only going to pay two-thirds of the base rent and tenant allowances.
Premier's Ex. 11; 1/9/19 Trial Tr. at p. 56, l. 1 – p. 58, l. 8.
The Debtor never agreed to the proposed rent reduction. Still, New Springs began paying $27,411.67 in base rent and tenant allowances (rather than the $41,117.50 it was contractually obligated to pay) for the 2014–2015 lease year. And when the lease renewed in 2015, New Springs continued paying two-thirds of the base monthly rent ($19,667.14 instead of $29,501.81).
4/2/19 Trial Tr. at p. 88, l. 9 – p. 89, l. 20, p. 113, l. 21 – p. 114, l. 11.
Like the New Springs lease, the Med Prep lease, which was also entered into in 2010, was for an initial five-year term, with an option for two more five-year terms. Unlike the New Springs lease, though, the Med Prep lease renewed automatically unless the Debtor gave notice of its intent not to renew. Because the Debtor hadn't given notice of its intent not to renew, the Med Prep lease was set to renew automatically in December 2015. Under the lease renewal, Med Prep's monthly rent would increase to $10,206.26.
Premier's Ex. 2 at §§ 2.1 & 5. The initial Med Prep lease term ran from October 1, 2010 through November 30, 2015. Id. at § 2.1.
Id. at § 5.
Id. at §§ 2.1 & 5.
Id. at § 5, Ex. B; 1/9/19 Trial Tr. at p. 105, ll. 11 – 13. The rent during the renewal periods increased by 3% each year. Premier's Ex. 2 at § 5, Ex. B.
B. The Debtor decides to sell the four properties.
All four of the Debtors' parcels, including the New Springs and Med Prep parcels, were encumbered by a mortgage, which had a $3.5 million balloon payment coming due in late 2016 or early 2017. In fall 2015, with the balloon payment on the horizon, the Debtor decided to list its four parcels for sale with Coldwell Banker, which, in turn, listed the property for sale on LoopNet.
4/2/19 Trial Tr. at p. 92, l. 18 – p. 93, 1. 3; 1/9/19 Trial Tr. at p. 73, ll. 10 – 16.
4/2/19 Trial Tr. at p. 83, ll. 15 – 22, p. 92, l. 18 – p. 93, 1. 3. LoopNet is a website that allows prospective buyers to search for commercial real estate for sale.
C. Campus Real Estate Solutions sees an opportunity to make money.
On September 2, 2015, Matt Nine, managing member and part owner of Campus Real Estate Solutions, received an email from LoopNet listing all four parcels for sale. Campus Real Estate is a real estate broker that works with educators, including charter schools. It was a coincidence that Nine received the LoopNet listing.
Debtor's Ex. 1; 2/12/19 Trial Tr. at p. 59, l. 2 – p. 60, l. 5.
1/9/19 Trial Tr. p. 183, l. 21 – p. 184, l. 9.
Debtor's Ex. 2; 2/12/19 Trial Tr. at p. 61, l. 2 – p. 62, l. 8.
Earlier, New Springs had reached out to Anya Bierzynski, who worked with Nine at Campus Real Estate. Because of the dispute New Springs was having with the Debtor over the tenant improvements, it was looking to relocate and wanted Campus Real Estate's help. Nine was aware New Springs was contemplating some sort of real estate project.
1/9/19 Trial Tr. at p. 186, l. 21 – p. 187, l. 3.
1/10/19 Trial Tr. at p. 192, l. 25 – p. 193, l. 7.
2/12/19 Trial Tr. at p. 61, ll. 2 – 8.
So when he saw the September 2nd e-mail listing the Debtor's property for sale, Nine sensed an opportunity: Campus Real Estate could make the needed improvements to the school building and then enter into a new long-term lease with New Springs. That day, he requested more information from Sean Glickman, one of the Coldwell Banker agents handling the sale.
1/10/19 Trial Tr. at p. 184, l. 14 – p. 185, l. :7; 2/12/19 Trial Tr. at p. 63, ll. :1 – 9, 185:12 – 20.
Debtor's Ex. 4.
Within weeks, Glickman sent copies of the New Springs and Med Prep leases to Nine, which Nine reviewed. Alec String (Glickman's associate) then followed up with Nine to confirm that the Med Prep lease had been renewed. String also advised Nine that New Springs had not reimbursed the Debtor for more than $300,000 in tenant improvements.
Debtor's Ex. 7-C; 1/10/19 Trial Tr. at p. 135, ll. 1 – 25, p. 195, ll. 10 – 24, p. 196, ll. 11 – 14; 2/12/19 Trial Tr. at p. 83, ll. 2 – 13, p. 84, ll. 7 – 11.
Debtor's Ex. 7-A.
Id.
Three days later, Glickman sent Nine a confidential offering memorandum. The offering memorandum advertised that the base rent under the Med Prep lease was $9,907.42. The offering memorandum also reflected that the Med Prep lease had two five-year options, with the base rent increasing 3% each year. As for the New Springs lease, the offering memorandum indicated that the current rent was $29,501.81. But it contained the following note: "Verbal rent discount – pays $27,411.67/mo." The $27,411.67 reflected the reduced rent that New Springs started paying in July 2014.
Premier's Ex. 15; 1/10/19 Trial Tr. at p. 136, ll. 8 – 18.
Premier's Ex. 15 at 18; 1/10/19 Trial Tr. at p. 137, l. 16 – p. 138, l. 9.
Premier's Ex. 15 at 18.
Premier Ex. 15 at 19; 1/10/19 Trial Tr. at p. 138, ll. 10 – 22.
D. Campus Real Estate's proposed investment was premised on a new lease with New Springs.
Based on the offering memorandum and leases, Nine put together an investment summary for the other partners at Campus Real Estate. The proposed investment was premised on a special purpose entity (Premier Realty Advisors) acquiring the four parcels, making improvements to the New Springs parcel, and then entering into a new fifteen-year lease with New Springs. Having a new lease in place with New Springs would make the New Springs parcel a more attractive asset to buyers down the road.
Debtor's Ex. 11-A; 2/12/19 Trial Tr. at p. 102, l. 20 – p. 103, l. 18.
Debtor's Ex. 11-A at 3; 2/12/19 Trial Tr. at p. 108, l. 19 – p. 109, l. 5; p. 185, ll. 3 – 20.
2/12/19 Trial Tr. at p. 185, ll. 3 – 20; 1/11/19 Trial Tr. at p. 18, l. 7 – p. 19, l. 1.
After putting together the investment summary, Nine immediately turned his attention to negotiating a letter of intent for the anticipated new lease with New Springs. As part of those negotiations, New Springs was seeking significant money for improvements (upwards of $1 million); Nine, in turn, was asking for higher rent to recoup the costs of those improvements.
2/12/19 Trial Tr. at p. 150, l. 21 – p. 151, l. 1.
Debtor's Ex. 100; 4/1/19 Trial Tr. at p. 40, l. 22 – p. 42, l. 15.
The amount of rent New Springs was willing to pay was crucial to determining whether the proposed investment was a good deal. By this point, Premier (the special purpose entity) had submitted a $3.75 million letter of intent to acquire just the New Springs and Med Prep parcels. Unless New Springs was willing to sign a letter of intent for a new lease, Premier would be unable to move forward with the sale.
4/1/19 Trial Tr. at p. 42, ll. 8 – 15.
1/10/19 Trial Tr. at p. 69, l. 11 – p. 71, l. 5.
E. Premier moves forward with the sale.
On January 30, 2016, New Springs signed a letter of intent for a new fifteen-year lease with Premier that would take effect on September 1, 2016. Under the new lease, Premier agreed to provide $880,000 for tenant improvements. In exchange, New Springs agreed to pay nearly $31,000 per month in rent for the first year, with the rent increasing to more than $40,000 per month in year five (with annual increases each year after that based on the Consumer Price Index). With the letter of intent with New Springs in hand, Premier began negotiating a sale contract with the Debtor over the next month. In an early draft of the sale contract, the Debtor included a provision that assigned the New Springs and Med Prep leases to Premier but carved out from the assignment a $500,000 cause of action the Debtor believed it had against New Springs for unpaid rent:
Debtor's Exs. 75 & 78.
Debtor's Ex. 75 at 2.
Id.
Said assignments shall not include the rights to any cause of action that exists for non-payment of rent as contractually required, that arises prior to the date of closing. Current cause of action is currently estimated to be valued at $500,000.
Debtor's Ex. 101-B at 2 – 3.
Not surprisingly, Premier struck that provision. In Premier's view, allowing the Debtor to sue New Springs for $500,000 in unpaid rent would "ruin" New Springs' ability to pay the $31,000 to $40,000 in monthly rent under the new lease.
Id.
Debtor's Ex. 101-A.
F. Premier agrees to buy the New Springs and Med Prep parcels for $3.75 million.
On February 25, 2016, less than a month after Premier signed the letter of intent with New Springs, Premier and the Debtor agreed on the terms of a sale contract. Under the sale contract, the Debtor agreed to sell the New Springs and Med Prep parcels to Premier for $3.75 million. The sales contract has four provisions that are central to this dispute.
Debtor's Ex. 54.
First, the contract required Premier to put down a $50,000 refundable deposit. Second, the contract contained numerous representations and warranties, most notably that the New Springs and Med Prep leases were in full force and effect and had not been revised, amended, or otherwise modified; and that there had been no event of default under either lease. Third, the contract provided for a 75-day inspection period. At the conclusion of the 75-day inspection period, Premier had the right to move forward with the sale by delivering a notice to proceed to the Debtor and posting an additional (nonrefundable) $50,000 deposit. If Premier failed to deliver the notice to proceed or post the additional $50,000 deposit, then the contract terminated automatically. Fourth, the contract limited Premier's remedies in the event the Debtor breached the contract:
Id. at § 3.1.
Id. at § 8.1(j).
Id. at § 6.1(a).
Id. at § 6.1(b), (d). In fact, not only is the $50,000 additional deposit nonrefundable, but once it is posted, the initial $50,000 refundable deposit is converted into a nonrefundable deposit. Id. at § 6.1(d).
Id. at § 6.1(b).
In the event that Closing fails to occur by reason of breach or default by the Seller, as Purchaser's sole remedies hereunder, Purchaser may, at Purchaser's option: (i) purchase the Property notwithstanding such default pursuant to the remaining terms and provisions of this Contract; (ii) terminate this Contract, in which event Purchaser shall be entitled to return of the Deposit, and neither Seller nor Purchaser shall have any further obligation hereunder; or (iii) enforce specific performance against Seller. Nothing contained in this Paragraph 10.2 limits Seller's liability for a breach by Seller of any representations, covenants, indemnities or obligations that survive the Closing, and Purchaser will have the right to pursue any remedies available at law or in equity against
Seller for a breach of such representations, covenants, indemnities and obligations.
Id. at § 10.2.
G. Premier discovers issues with the Med Prep lease.
After signing the sale contract, the Debtor provided copies of the original New Springs and Med Prep leases to Premier. By that point, though, both leases had been renewed. And Premier was looking for copies of the lease renewals. On March 10, 2016, just weeks after the parties signed the sale contract, the Debtor sent Premier a copy of a July 22, 2014 letter renewing the New Springs lease, as well as a copy of a December 15, 2015 "Lease Renewal Agreement" for the Med Prep lease.
Premier's Ex. 28.
Premier's Ex. 33.
On its face, the Med Prep "lease renewal" posed several problems. For one thing, the term was for only one year (from July 31, 2015 to July 30, 2016), as opposed to the five years provided for under the original lease. This was a problem because (among other reasons) the shortened renewal period expired one month after the sale was set to close. Putting that aside, the monthly rent under the renewal was only $8,000, which was $2,000 less than it was supposed to be. Not surprisingly, Premier demanded that the Debtor rescind the December 15 Med Prep lease renewal.
Premier's Exs. 19 & 33; Premier's Ex. 2 at § 5.
Premier's Exs. 19 & 33; Premier's Ex. 2 at Schedule B.
1/11/19 Trial Tr. at p. 16, ll. 2 – 16.
H. The Debtor eventually resolves the Med Prep Issues.
Weeks went by without the Debtor rescinding or otherwise fixing the Med Prep lease renewal, leading Premier to notify the Debtor it was in default under the contract. Premier gave the Debtor two days to fix the issue. To fix the issue, the Debtor prepared a new lease renewal agreement. Under the new lease renewal agreement, which went into effect August 1, 2016, the Med Prep lease would renew for a period of five years at the same rate provided for in the original lease, after which the parties would agree to negotiate a new lease.
Premier's Ex. 53.
Debtor's Ex. 109.
Id.
The fix wasn't perfect. The first (though minor) problem was the August 1, 2016 effective date. Because the December 15 lease renewal agreement ended July 30, 2016, there was a one-day gap where no lease was in place. Then there was the fact that the new lease renewal agreement only provided for one five-year renewal (the lease originally provided for two five-year renewal periods). But according to Premier, the fix was good enough to move forward with the closing.
Premier's Ex. 56.
4/2/19 Trial Tr. at p. 115, l. 12 – p. 117, l. 18.
I. The Debtor agrees to extend the inspection period.
By the time the Med Prep lease renewal issues were resolved, expiration of the inspection period was just weeks away. Citing the delays caused by the Med Prep lease renewal issues, Premier asked the Debtor to extend the inspection period by twenty-one days. To keep the closing date the same, Premier also proposed to shorten the closing period by twenty-one days. The Debtor agreed to extend the inspection period to May 31, 2016.
Debtor's Ex. 113.
Id.
Id.
Premier's Ex. 58.
J. Premier claims it discovers New Springs was paying reduced rent.
Once the inspection period was extended, Premier turned its attention to finalizing the new lease with New Springs. As Premier and New Springs went back and forth on the lease, they resolved all outstanding issues but two. One of those issues had to do with rent. Because the new lease didn't take effect until September 1, 2016, two months after the sale was set to close, there was going to be a short period of time where the parties were going to use the rent from the original lease. According to Premier, it thought the rent was $29,501.81 (the rent provided for in the lease), while New Springs kept insisting that it was $19,667 (the amount New Springs had actually been paying under the lease renewal).
Premier's Ex. 63; 1/11/19 Trial Tr. at p. 30, l. 4 – p. 31, l. 2.
Premier's Ex. 63; 1/11/19 Trial Tr. at p. 30, l. 4 – p. 31, l. 2.
Premier's Ex. 63; 1/11/19 Trial Tr. at p. 30, l. 4 – p. 32, l. 18.
Premier's Ex. 63; 1/11/19 Trial Tr. at p. 30, l. 4 – p. 32, l. 18.
Premier says it was at this point, around May 16, 2016, that it learned for the first time that New Springs was paying $10,000 less per month than required under its lease with the Debtor. Although Premier claimed this discovery was "catastrophic" for the deal, it simply meant that in order to close the sale with the Debtor, Premier had to have a new lease with New Springs in place, which had been New Springs' plan from the outset. And that's exactly what happened: Less than two weeks later after Premier supposedly discovered the discrepancy, Premier notified the Debtor that it had come to terms on a new lease with New Springs—one that required New Springs to pay more rent than it was required to pay under the original lease with the Debtor.
The Court is not convinced this was, as Premier claims, the first time it learned that New Springs was paying less than what was required under the lease. At a minimum, it knew two months earlier when the Debtor sent Premier a copy of the July 22, 2014 letter renewing the lease. Premier's Ex. 33. The July 22, 2014 letter specifically stated that New Springs would be paying less than the lease amount going forward. Id.
1/11/19 Trial Tr. at p. 30, l. 15 – p. 33, l. 9.
1/11/19 Trial Tr. at p. 36, ll. 3 – 5; 2/13/19 Trial Tr. at p. 80, ll. 4 – 12; Premier's Ex. 64.
K. The contract terminates by its own terms.
Once Premier and New Springs agreed on the terms of a new lease, all the major obstacles to closing appeared to have been out of the way, and Premier was moving toward a closing. But, with the extended inspection just days from expiring, Premier still had not completed its due diligence. Needing more time to do so, Premier asked the Debtor to extend the inspection period a second time. This time, though, the Debtor did not respond before the extended inspection period expired. Without an extension in hand, Premier faced a dilemma: It had to either hope the Debtor would agree to another extension or, assuming the Debtor would not agree, it had to deliver the notice to proceed, along with the nonrefundable $50,000 deposit, to the Debtor as required under the sale contract, otherwise the sale contract would terminate. In retrospect, this was the critical juncture in the parties' dispute.
4/1/19 Trial Tr. at p. 108 l. 18 – p. 109, l. 1.
Premier's Ex. 64; 1/11/19 Trial Tr. at p. 33, l. 23 – p. 35, l. 4; 2/14/19 Trial Tr. at p. 100, l. 19 – p. 101, l. :5; 4/1/19 Trial Tr. at 89:9-18; Debtor's Ex. 121.
For reasons that aren't clear entirely, Premier chose not to deliver the notice to proceed or post the additional $50,000 deposit. Perhaps it was because Premier was miffed. When Premier sought the first extension, the Debtor tried to condition it on Premier posting an additional $50,000 refundable deposit. Given that the Debtor was responsible for the delays, Premier was insulted by the request and refused to entertain it. Or perhaps it was because the $50,000 deposit required under the sale contract was nonrefundable, and Premier, which by that point had not secured financing, did not want to risk losing the $50,000. Whatever the reason, Premier did not deliver the notice to proceed or post the $50,000 deposit.
Premier's Ex. 60; 1/11/19 Trial Tr. at p. 27, ll. 10 – 16.
Premier's Ex. 60; 1/11/19 Trial Tr. at p. 27, l. 17 – p. 28, l. 5.
In actuality, Premier would have lost $100,000 because under § 6.1(d) of the sale contract, the initial refundable $50,000 deposit also became nonrefundable once the second $50,000 deposit was made.
And the Debtor refused to extend the inspection period. On June 3, 2016, three days after the inspection period expired, the Debtor responded to Premier's request for an extension by saying that the contract had terminated by its own terms.
Debtor's Ex. 122.
L. Premier forces the Debtor into bankruptcy by suing for specific performance.
On July 20, 2016, Premier sued the Debtor in state court for specific performance. With the action for specific performance pending, the Debtor was unable to sell the property or refinance it before the balloon payment became due. The Debtor was left with no choice but to file for chapter 11 bankruptcy.
Debtor's Ex. 135-F.
4/2/19 Trial Tr. at p. 111, ll. 7 – 18.
Once the Debtor filed for bankruptcy, Premier effectively abandoned its specific performance claim. Premier never sought stay relief to pursue its claim for specific performance in state court. Nor did it seek to remove the specific performance action to this Court. Instead, when the Debtor moved to auction off the New Springs and Med Prep parcels in bankruptcy, Premier did not object.
As it turns out, the reason Premier didn't object was because two of its investors (Matt Nine and Steven Stenmark) formed New Campus Advisors to acquire the parcels at the auction. Nine's newly formed entity bid on both parcels. Although he was outbid on the Med Prep parcel (the bid for the Med Prep parcel "just got too high"), Nine (and his newly formed entity) was the high bidder on the New Springs parcel at $2.9 million. Campus Real Estate currently provides property management and brokerage services for New Campus Advisors.
4/1/19 Trial Tr. at p. 170, l. 14 – p. 171, l. 8; p. 179, ll. 16 – 17; Debtor's Ex. 150.
4/1/19 Trial Tr. at p. 172, ll. 10 – 17.
Id . at p. 172, ll. 10 – 17; p. 176, l. 13 – p. 177, l. 5; p. 177, ll. 22 – 25; p. 178, ll. 20 – p. 179, l. 3; Debtor's Ex. 157.
1/10/19 Trial Tr. at p. 126, l. 8 – p. 127, l. 18; 4/2/19 Trial Tr. at p. 71, l. 23 – p. 72, l. 17; p. 75, l. 23 – p. 76, l. 5.
M. Premier files its proof of claim for fraudulent inducement and breach of contract.
On January 12, 2018, Premier filed its amended proof of claim in this case. In support of its proof of claim, Premier attached its second amended complaint from the state court action. Premier's second amended complaint included causes of action for breach of contract (both specific performance and damages) and fraudulent inducement.
Claim No. 8-2.
Id. at Ex. A.
Id.
Both causes of action are premised on the same central allegations:
• the Debtor represented that the New Springs and Med Prep leases were in effect and that those leases had not been modified;
• the Debtor had modified the Med Prep lease before entering into the sale contract but failed to disclose the modification to Premier;
• the Debtor knew New Springs had been in default under its lease for nearly five years but failed to disclose that to Premier.
Id.
In all, Premier's proof of claim sought roughly $3.4 million in lost profits for the Debtor's alleged breach of the contract's representations and warranties, as well as for fraudulent inducement.
Claim No. 8-2.
The Debtor objected to Premier's claim. The Court tried the Debtor's claim objection over nine days. At trial, Premier abandoned its fraudulent inducement claim. But it put on expert testimony that it lost $2,005,231.16 in profits because of the Debtor's breach of the sale contract's representations and warranties.
Doc. No. 214.
During the fourth day of trial, the Court asked Premier's counsel if Premier was moving forward on its contract claim, fraud claim, or both. Although Premier's counsel did not formally abandon the fraud claim, he did acknowledge "the main thrust of [Premier's case] is the breach of contract." 2/12/19 Trial Tr. at p. 55, ll. 5 – 16. In its written closing argument, however, Premier did not address its fraud claim. Under the circumstances, the Court will treat Premier's failure to address the fraud claim as an abandonment of that claim.
2/12/19 Trial Tr. at p. 26, ll. 12 – 15.
II. Conclusions of Law
A proof of claim is prima facie evidence of the validity and amount of the claim. Unless objected to, a proof of claim is deemed allowed. Once an objection is filed, however, the burden shifts to the objecting party to present evidence rebutting the validity and amount of the claim. If, as is the case here, the objecting party rebuts the prima facie validity of a claim, the claimant bears the burden of proving its claim by a preponderance of the evidence. Premier failed to meet its burden of proof. Under the parties' contract, Premier could sue for breach of the representations and warranties only if it first closed on the sale of the property. Here, of course, there was no closing. So Premier had no right to sue for breach of the representations and warranties. But even if it could sue for breach of the representations and warranties, Premier still failed to prove the elements of its contract claim by a preponderance of the evidence.
11 U.S.C. § 502.
In re Winn-Dixie Stores, Inc. , 418 B.R. 475, 476 (Bankr. M.D. Fla. 2009).
Id.
A. Premier is barred from asserting its contract claim.
Section 10.2 of the contract—which limits Premier's remedies in the event of a breach by the Debtor—is unambiguous. If the Debtor breaches the contract, Premier's remedies are limited to buying the property despite the breach; terminating the contract and recovering its deposit; or suing for specific performance:
In the event that Closing fails to occur by reason of breach or default by the Seller, as Purchaser's sole remedies hereunder, Purchaser may, at Purchaser's option: (i) purchase the Property notwithstanding such default pursuant to the remaining terms and provisions of this Contract; (ii) terminate this Contract, in which event Purchaser shall be entitled to return of the Deposit, and neither Seller nor Purchaser shall have any further obligation hereunder; or (iii) enforce specific performance against Seller.
Debtor's Ex. 54 at 11.
Premier initially chose the third option: it sued for specific performance in state court, although it later abandoned that claim in favor of a damages claim, noting that a breach of contract under Florida law gives rise to alternative remedies of specific performance or damages. Had Premier wanted to pursue a damages claim, it could have.
But that would have required Premier to close on the sale of the property first. Under section 10.2 of the parties' contract, the Debtor remained liable for only those representations and warranties that survived the closing :
Nothing contained in this Paragraph 10.2 limits Seller's liability for a breach by Seller of any representations, covenants, indemnities or obligations that survive the Closing, and Purchaser will have the right to pursue any remedies available at law or in equity against Seller for a breach of such representations, covenants, indemnities and obligations.
Id.
Here, of course, there was no closing.
And absent a closing, Premier had no right to sue for breach of the representations and warranties. By attempting to sue for breach of the representations and warranties without having closed on the sale of the property, Premier is, in effect, reading into the contract a remedy that doesn't exist. When a contract is clear and unambiguous, it is this Court's duty to enforce the contract as written—not rewrite it to make it more reasonable for one of the parties. For that reason alone, the Debtor's claim objection should be sustained.
Snyder v. Florida Prepaid College Board , 269 So. 3d 586, 592 (Fla. 3d DCA 2019).
B. Premier failed to prove all the required elements of its contract claim.
Even if it could sue for breach of the representations and warranties, the Debtor's claim objection should still be sustained. For Premier to prevail on its breach of contract claim, it was required to prove the existence of a contract; a material breach of the contract; and damages flowing from the breach. Here, Premier failed to prove the second and third elements: a material breach; and damages flowing from that breach.
Grove Isle Ass'n, Inc. v. Grove Isle Assocs., LLLP , 137 So. 3d 1081, 1095 (Fla. 3d DCA 2014).
1. Premier failed to prove a material breach.
Under Florida law, the failure to perform a minor contractual duty is not a material breach. A breach is material only if it goes to the essence of the contract. Whether a breach goes to the essence of the contract is a question of fact.
Covelli Family, LP v. ABG5, LLC , 977 So. 2d 749, 752 (Fla. 4th DCA 2008).
Id.
Id.
At first glance, it's tempting to conclude that the breach here is material. After all, the Debtor represented that the Med Prep and New Springs leases had not been modified and were not in default even though (1) the Debtor had modified the Med Prep lease to reduce the renewal term from five years to one year and the monthly rent from $10,000 to $8,000; and (2) the Debtor knew that New Springs was only paying $19,667 per month in rent—one-third less than the amount required under the New Springs lease. According to Premier, this breach was material because the $3.75 million purchase price was a function of the expected rental income.
If this were the typical case, where the buyer doesn't discover that the seller's representations and warranties are false until after closing on the sale of the property, there would be little question that the Debtor's breach would be material. But this is not the typical case. Here, unlike in the typical case, Premier discovered the issues with the Med Prep lease renewal and the New Springs rent before the sale closed.
Because Premier discovered the Med Prep lease renewal issue before the sale closed, the Debtor was able to remedy the breach by entering into a new lease renewal agreement with Med Prep that effectively reinstated the two five-year renewal periods and increased the rent for the first renewal period to what had been provided for under the original lease. Although the rent for the second renewal was now negotiable (it had not been under the original lease), Premier was still willing to move forward on the sale with the new Med Prep lease renewal in place.
How about the failure to disclose that New Springs was only paying two-thirds of the required monthly rent under the New Springs lease? Premier says it was "catastrophic" to the deal. Not so.
1/1/19 Trial Tr. at p. 31, l. 4 – p. 33, l. 9.
From the very beginning, Premier was planning on entering into a new lease with New Springs because the longer term made it a more valuable asset to prospective buyers down the road. In fact, Premier wouldn't even sign a sale contract until New Springs signed a letter of intent for a new fifteen-year lease that required New Springs to pay $31,000 per month in rent for the first year (and more than $40,000 in year five). The disclosure that New Springs was only paying $19,667 per month in rent just meant that Premier had to move forward on its "Plan A"—i.e., entering into a new lease with New Springs—which had been the plan all along.
1/11/19 Trial Tr. at p. 32, l. 20 – p. 33, l. 9.
And that's precisely what Premier did. Within ten days of Premier learning New Springs was only paying two-thirds of the required rent, Premier and New Springs reached an agreement on the terms of a new lease. The agreement, which resolved all the existing defaults under the New Springs lease and brought the monthly rent up to an acceptable amount, was in place before the end of the inspection period and well before any closing was scheduled to take place.
There's no question that, as a technical matter, the representations and warranties regarding the Med Prep and New Springs leases were false. As a practical matter, though, the Med Prep lease was essentially renewed on its original terms, and there was an agreement in place for New Springs to pay more rent than the Debtor represented New Springs had been paying under the lease. Because the issues with the Med Prep and New Springs leases had been resolved well before closing, any breach of the representations and warranties became minor technical issues—as evidenced by the fact that Premier still wanted to close on the sale of both parcels for the same $3.75 million purchase price. Given those facts, Premier failed to prove that the Debtor's breach went to the essence of the sale contract.
2. Premier failed to prove damages.
Premier's breach of contract claim is premised on the allegation that the Debtor breached the representations and warranties regarding the Med Prep and New Springs leases. The typical measure of damages for breach of the representations and warranties in a contract for the sale of land is the difference between either the purchase price or the value of the property as represented, on the one hand, and the actual value of the property as of the closing date, on the other.
USB Acquisition Co., Inc. v. Stamm , 660 So. 2d 1075, 1079 (Fla. 4th DCA 1995) (citing Perlman v. Ferman Corp. , 611 So. 2d 1340 (Fla. 4th DCA 1993) ).
Here's how that measure of damages would have played out had this been the typical case: Premier would have closed on the sale of the New Springs and Med Prep parcels for $3.75 million. It wouldn't have been until after the closing that Premier would have discovered that the Med Prep renewal period was for only one year (and expired one month after the closing) and that New Springs was paying only $19,667 per month instead of nearly $30,000 per month. In that case, Premier would have received (by the Court's back-of-the-envelope calculation) $1.2 million less in rent than expected over five years, which would have meant the property was worth significantly less than Premier had paid. Had that been the case, Premier would have been entitled to that difference in value as its damages.
But, it bears repeating, this is not the typical case. As the Court explained above, because Premier discovered the representations and warranties regarding the Med Prep and New Springs leases were false during the inspection period, those breaches were able to be cured before any closing took place. By the end of the inspection period, the Med Prep lease had two five-year lease renewals remaining at the same monthly rent as stated in the original lease (at least for the first renewal period), and there was an agreement in place for New Springs to pay more rent than the Debtor represented New Springs had been paying under the New Springs lease. Indeed, in calculating Premier's lost profits, Premier's expert assumed Med Prep would be paying between $10,206.26 and $11,487.24 per month on its first lease renewal term and that New Springs would be paying at least $31,000 per month on the new lease it negotiated with Premier. That was, in fact, the state of affairs as of the end of the inspection period.
So had Premier closed on the sale, it would have received as much rental income from the leases as the Debtor had represented. Put another way, as of the end of the inspection period, the property was not worth less than it was represented to be. Thus, to the extent Premier has been damaged, it's not because the representations and warranties in the contract were false—it's because Premier didn't close on the sale of the property.
But Premier doesn't have a breach of contract claim against the Debtor for failing to close on the sale of the property. For one thing, Premier never alleged the Debtor's refusal to close as the basis of its breach of contract claim. For another, to have a breach of contract claim against the Debtor for failing to close, Premier would have had to prove that it provided the notice to proceed and the additional $50,000 deposit, which it failed to do.
To be sure, Premier claims its obligation to deliver the notice to proceed and post the additional $50,000 was excused because the Debtor breached the representations and warranties in the sale contract. In support of that proposition, Premier cites case law for the proposition that a material breach by one party to a contract excuses performance by the other party. That's true so far as it goes.
See Branch Banking & Trust Co. v. S&S Dev., Inc. , No. 8:13-cv-2776-T-35MAP, 2012 WL 12683834, at *3 (M.D. Fla. June 30, 2015) (citing Colucci v. Kar Kare Auto. Group, Inc. , 918 So. 2d 431, 437 (Fla. 4th DCA 2006) ); Burlington & Rockenbach, P.A. v. Law Offices of E. Clay Parker , 160 So. 3d 955, 960 (Fla. 5th DCA 2015) ; Nacoochee Corp. v. Pickett , 948 So. 2d 26, 30 (Fla. 1st DCA 2007) ("A material breach by one party may be considered a discharge of the other party's obligations thereunder.").
If the Debtor materially breached the sale contract, Premier would, of course, be excused from paying the purchase price and closing on the sale. In that scenario, the Debtor could not sue Premier for refusing to pay the purchase price if the Debtor had materially breached its obligations. But, here, Premier cannot take the position that the Debtor's breach excused Premier from providing the notice to proceed and additional deposit but then recover, as damages, the profits it would have earned had it closed on the sale of the property.
The Third District Court of Appeals' decision in Arvesu v. Blancom Properties, N.V. is instructive on this point. There, a land trust contracted to buy an office building from Blancom Properties. The day after Blancom signed the contract, it modified the leases for one of the building's tenants by limiting the amount that the rent increased during the renewal period and waiving the tenant's rent for several months after the closing. Claiming that the lease modification materially impaired the parties' bargain, the land trust demanded that Blancom rescind it. Blancom refused, prompting the land trust to sue for specific performance and damages.
913 So. 2d 1231 (Fla. 3d DCA 2005).
Id. at 1231.
Id.
After a trial before a general master, the general master denied the land trust the relief it sought because the land trust had failed to comply with its material obligations under the contract—i.e., the land trust failed to tender an initial $10,000 deposit and a second deposit of $90,000. In denying the relief sought, the general master specifically rejected the land trust's argument that Blancom's breach of the contract (i.e., improper modification of the lease) excused its obligation to post the deposits. The general master's finding that the improper lease modifications did not excuse the land trust's obligations to make the two deposits was adopted by the trial court and upheld on appeal by the Third District Court of Appeals.
Id. at 1232.
Id.
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As in Blancom Properties , the Debtor's breach of the representations and warranties here did not excuse Premier's obligation to deliver the notice to proceed and post the additional $50,000 deposit. So even if Premier did have a claim against the Debtor for refusing to close, it still can't prove it is entitled to lost profits because it failed to prove that its obligation to deliver the notice to proceed and post the additional $50,000 deposit were excused. Premier's claim fails here for the same reason the land trust's claim failed in Blancom Properties .
III. Conclusion
Normally, the buyer under a contract for the sale of real estate doesn't discover that a seller's representations and warranties are false until after the sale closes. Here, Premier discovered that the Debtor's representations and warranties regarding the New Springs and Med Prep leases were false before closing on the sale.
At that point, Premier had three options: close on the sale; terminate the contract and receive its deposit back; or sue for specific performance. It opted for specific performance. Having refused to close on the sale, it cannot now sue for breach of the representations and warranties. Even if Premier could sue, it cannot recover lost profits because the lost profits it seeks were caused by Premier's failure to close on the sale—not the Debtor's breach of the representations and warranties.
Accordingly, it is
ORDERED :
1. The Debtor's objection to Premier's Claim No. 8-2 is SUSTAINED.
2. Premier's Claim No. 8-2 is DISALLOWED.