Opinion
CA 3-96-CV-3367-R
January 5, 1998
MEMORANDUM OPINION AND ORDER
Now before this Court is Plaintiffs' Motion for Summary Judgment, filed on March 12, 1997. Plaintiffs' Motion to Strike and Objections to the Affidavits of Nicholas R. Diguisseppe and Charles W. Spencer, filed on May 14, 1997, is also before this Court. This suit was initially filed in state court, and it was removed to this Court on December 16, 1996. Plaintiffs make numerous claims against both Resolution Trust Corporation (RTC) and Valley Ranch Development Company, Ltd. (VRDC). These claims involve Plaintiffs' purchase, from RTC, of property in which VRDC held an option to repurchase.
In this motion, Plaintiffs request summary judgment solely against VRDC and solely on the questions of 1) whether the repurchase option is unenforceable as a matter of law, and 2) whether they are entitled to attorney's fees. For the reasons stated below, Plaintiffs Motion for Summary Judgment is DENIED. Because the contested affidavits were not necessary to the disposition of Plaintiffs' Motion for Summary Judgment, the Motion to Strike is DENIED as moot.
FACTUAL BACKGROUND
In April of 1986, VRDC conveyed to Bass Development Company a tract of undeveloped real property in Valley Ranch, a subdivision of Irving, Texas, for nearly $10 million. Bass financed the transaction with a mortgage from Sunbelt Savings Association of Texas. Bass defaulted on the Note in 1992, and RTC, acting as receiver for Sunbelt, foreclosed on the property. Pursuant to the foreclosure sale, it was conveyed to RTC for the price of $718,000.
In August of 1994, D-F Fund VIII agreed to purchase the property from RTC for $1,650,000 if RTC provided financing, or $1,485,000 cash. That October, D-F Fund VIII executed a $1,285,000 note, payable to D-F Fund IX, that was secured by a mortgage on the property. D-F Fund VIII then assigned its interest under the purchase agreement to D-F Fund IX, who closed the purchase with RTC on October 18, 1994.
The Special Warranty Deed by which the property was initially conveyed contains a repurchase option. According to the deed, which identifies VRDC as "Grantor" and Bass as "Grantee," the Grantee would not convey any undeveloped portion of the property for a period of 10 years without first giving Grantor a chance to repurchase it. Grantor must exercise its option to repurchase within 60 days of receiving notice of Grantee's intent to convey. If the Grantor did so, the deed provided that the repurchase price would be,
equal to that portion of any outstanding indebtedness secured by the Property which is attributable to such undeveloped portion of the Property as long as such indebtedness on such undeveloped portion of the Property is proportionate to the total value of the Property then secured by such indebtedness (otherwise the proportionate amount) plus the interest paid by Grantee to any holder of such indebtedness attributable to such amount.
After the D-F Fund purchase closed, VRDC informed Plaintiffs that RTC had never notified it of the sale and that VRDC intended to exercise its right to repurchase the property. In a letter dated December 6, 1994, counsel for VRDC wrote:
[I]t appears that there was no outstanding indebtedness secured by the Property immediately prior to the transfer of the Property from Seller to the Purchaser. If this is true, then the cash purchase price required to be paid by VRDC to Purchaser for the repurchase pursuant to [the Deed] is $0.00."
ANALYSIS
A. Standard for Summary JudgmentRule 56(c) of the Federal Rules of Civil Procedure allows summary judgment only when there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c), Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986); Melton v. Teachers Ins. Annuity Assoc. of Am., 114 F.3d 557, 559 (5th Cir. 1997). The court must draw all reasonable inferences in favor of the non-moving party. Melton, 114 F.3d at 559.
B. Ambiguity and Forfeiture
Plaintiffs first argue that the deed's repurchase option is unenforceable because it is ambiguous and would result in forfeiture of real property. It is true that "[f]orfeiture clauses fail in the event that they are ambiguously expressed," Link v. Texas Pharmacal Company, 276 S.W.2d 903, 906 (Tex.Civ.App.-San Antonio 1955, no writ), but this maxim alone does not resolve the question at hand.
Conveyances of property sometimes place restrictions on what may be done with that property. Forfeiture — that is, a loss of the property right initially conveyed — is one way to enforce such a restriction. Injunctive relief or a suit for damages are other remedies. Conditions subsequent are those restrictions that may be enforced by forfeiture. See Humphrey v. C.G. Jung Educ. Ctr. of Houston, 714 F.2d 477, 480 (5th Cir. 1983); Field v. Shaw, 535 S.W.2d 3, 5 (Tex.Civ.App.-Amarillo 1976, no writ). Covenants are those that may only be enforced via injunctive relief or a suit for damages. See Humphrey, 714 F.2d at 483.
Relevant cases seem to address two different types of ambiguity, although courts have yet to explicitly acknowledge the distinction between them. One involves whether the restriction is a covenant or a condition subsequent — that is, whether or not the parties intend that forfeiture be available as a remedy for violations of the restriction. The other involves the content of the restriction itself — that is, whether it is clear what sort of activity would amount to a violation of the restriction.
The law in Texas is clear that where this first type of ambiguity is present — where it is unclear what remedy the parties intended — courts will treat the restriction as a covenant. Hearne v. Bradshaw, 312 S.W.2d 948, 951 (Tex. 1958). "Conditions subsequent are not favored by the courts, and the promise or obligation of the grantee will be construed as a covenant unless an intention to create a conditional estate is clearly and unequivocally revealed by the language of the instrument." Id. However, such an ambiguity does not render the restriction unenforceable. It simply bars forfeiture as a remedy. Id. Damages or injunctive relief are still available. See Humphrey, 714 F.2d at 483.
Plaintiffs seem to focus on the second type of ambiguity, however. They argue that the restriction's content is ambiguous, because it fails to specify who is covered by the restriction and what the price would be if VRDC were to exercise its option. This was the sort of ambiguity addressed by Link, in which the court held that "[f]orfeiture clauses fail in the event that they are ambiguously expressed." Link, 276 S.W.2d at 906.
Defendants argue that the repurchase option is not a "forfeiture clause," but rather a covenant for which forfeiture is not an available remedy. Therefore the rule in Link would not even apply. Plaintiffs insist that the option is by definition a condition subsequent, and thus it "fails" under Link. Although they produce no Texas authority, Plaintiffs cite several cases from other jurisdictions holding that an option to repurchase contained in a deed is a condition subsequent. See, e.g., Wilkins v. Ferguson, 310 So.2d 879, 882 (Ala. 1975).
Plaintiffs' argument is somewhat compelling. A true forfeiture provision and a repurchase option are similar in many ways. In either case, upon the occurrence of an event described in the deed, the grantor should recover the property. Any repurchase option could be phrased just as easily as a forfeiture provision. In light of these similarities, it may make sense to cut through the semantics and treat both situations as a condition subsequent, enforceable by forfeiture.
Let us call the triggering event "E" and the repurchase price "P." The covenant version would read, "If E happens, Grantee shall convey the property to the Grantor for the price of P." The condition subsequent version would read, "If E happens and Grantor pays P to the Grantee, Grantee's property right shall terminate."
Texas law counsels against such reasoning, however. What is truly important, after all, is whether the deed demonstrates "an intention to create a conditional estate." Hearne, 312 S.W.2d at 951. Such "semantics" are prime indicia of whether such an estate is intended, and an agreement to sell may suggest something very different than an agreement that the property right terminate.
Whether Texas courts would adopt this reasoning this Court need not speculate, because the question at hand is not whether the option is enforceable by forfeiture, but whether it is enforceable at all. Let us assume arguendo that as a matter of general principle, repurchase clauses are enforceable by forfeiture. Would content ambiguity render such an option completely unenforceable? Although Link commands that an ambiguous forfeiture clause must "fail," it need not leave the grantor with no means of enforcing the restriction. It simply denies the grantor the remedy of forfeiture. Injunctive relief or damages may still be sought, or at least such relief is not precluded merely by dint of ambiguity.
Indeed, VRDC concedes that it could not enforce the option by forfeiture.
Although Link never addresses this question, it is suggested by the underlying rationale for the rule voiding ambiguous forfeitures. Ambiguous forfeiture provisions are not to be enforced because "[f]orfeitures are harsh and punitive in their operation." Decker v. Kirlicks, 216 S.W. 386 (Tex. 1919). For that reason, "[t]he authority to forfeit a vested right or estate should not rest in provisions whose meaning is uncertain and obscure." Id. The Court's concern is with basing the harsh remedy of forfeiture on ambiguous restrictions, not with the enforcement of such restrictions through other means. Indeed, the Texas Supreme Court has held that even where a restriction is so "uncertain and obscure" as to invoke Decker, an action for damages or a suit in equity is still available. See W.T. Waggoner Estate v. Sigler Oil Co., 19 S.W.2d 27 (Tex. 1929).
The Link court concluded that the restriction was not ambiguous, so it never discussed whether ambiguity would render the restriction completely unenforceable or would simply bar forfeiture as an available remedy.
It should be noted that the Decker case was the foundation for the Link holding. Link, 276 S.W.2d at 906.
Admittedly, the restriction in Sigler involved an implied obligation, as opposed to a express restriction. It is nonetheless instructive, however, because the court's refusal to treat it as a forfeiture-enabling condition subsequent was based on the fact that the obligation was ambiguous, and not the fact that it was implied rather than express.
In short, the goal of avoiding ambiguous forfeitures is not served by denying a grantor other remedies. Our legal system has ways of interpreting ambiguous language, and unless the threat of forfeiture looms, arbiters of law and fact should strive to make sense of the property restriction and to apply it accordingly. This reasoning has the added benefit of unifying the two types of ambiguity identified previously. Whether a restriction is ambiguous in content or in remedy, it will be treated as a covenant, enforceable by injunctive relief or a suit for damages. Thus this Court concludes that even if the repurchase option were ambiguous, it would nonetheless be enforceable, although not by forfeiture.
Even if ambiguity could render such a restriction completely unenforceable, courts must confine their inquiry to ambiguity present at the time the contract was entered into. See U.S. Life Title Co. of Dallas v. Andreen, 644 S.W.2d 185, 191 (Tex.Civ.App.-San Antonio 1982). When a repurchase price is based on the payment of an amount equal to outstanding debt, any ambiguity that results from extinguishing that debt is a subsequent event, not to be considered by a court undertaking an ambiguity analysis. Id.
C. Invalid Restraint on Alienation
Plaintiffs also argue that the repurchase option is an invalid restraint on alienation. Such options can operate as indirect restraints on alienation. Proctor v. Foxmeyer Drug Co., 884 S.W.2d 853, 861 (Tex.Civ.App.-Dallas 1994, no writ), citing Mattern v. Herzog, 367 S.W.2d 312, 319 (Tex. 1963). When evaluating such options, however, the Texas Supreme Court has warned that courts should not "mechanically apply the rule applicable to disabling restraints and thus inhibit the employment of desirable contractual and testamentary provisions and unnecessarily circumscribe the freedom of contract." Mattern, 367 S.W.2d at 320.
A repurchase option that is a true "right of first refusal" — one that gives the grantor the right "to buy the burdened property on the terms offered by a bona fide purchaser" — is generally permissible. See Proctor, 884 S.W.2d at 859. However, the option in this case is not a true "right of first refusal," because the price to be paid is not that offered by a third party, but the amount of outstanding debt. See id.
The duration of the option period is relevant to whether such an option is valid, Mattern, 367 S.W.2d at 320, and Plaintiffs argue that the 10-year option period is unreasonably long. It is true that repurchase options that are unlimited in duration may be unreasonable. Proctor at 862. However, Texas courts have upheld a repurchase option designed to last for the lifetime of the grantor. Randolph v. Terrell, 768 S.W.2d 736, 739-40 (Tex.Civ.App.-Tyler 1987, writ denied). In Randolph, the vendees agreed that if they sold their interest at any point during the vendors' lifetime, the vendors would have the option to buy the land at the original purchase price. Id. The court upheld the option even though that price had been set 30 years earlier. Id.
As for the adequacy of the purchase price, Plaintiffs insist that the current option allows VRDC to repurchase at a price of $0.00, and therefore it must be unreasonable. However, they fail to provide sufficient summary judgment evidence that, as a matter of law, $0.00 would be the repurchase price required by the deed. Their only evidence is that representatives of VRDC told them that $0.00 would be the repurchase price, and such a claim does not bind this court. Also, the repurchase provision suggests that 1) that the portion of outstanding indebtedness (on which the repurchase price is based) must be "proportionate to the total value of the Property then secured by such indebtedness"; and 2) that the "interest paid by Grantee to any holder of such indebtedness" is to be added to the repurchase price. It is unclear from the current filings before this court how those clauses ultimately affect the repurchase price, because neither side addresses them. In any event, they raise an inference that the repurchase price might not be $0.00, even if the "portion of outstanding indebtedness" is $0.00. This uncertainty renders summary judgment for the Plaintiffs inappropriate at this time.
Furthermore, there is precedent for upholding such repurchase options against restraint on alienation challenges, even where the debt has been paid off before the option is exercised. In U.S. Life Title Co. of Dallas v. Andreen, 644 S.W.2d 185, 190 (Tex.Civ.App.-San Antonio 1982, writ ref'd n.r.e.), the grantor sold property to the grantee for $25,000. The grantor retained an option to repurchase the property upon payment of the outstanding principal on the property's mortgage, plus a "bonus" of $500 for each six month period between the agreement and the exercise of the repurchase option. Id. at 191. The debt was paid off, after which the grantor attempted to exercise its repurchase option. Id. The appellate court found that such facts provided sufficient evidence to sustain a jury verdict that the restriction did not amount to an invalid restraint on alienation. Id.
Although the repurchase price in Andreen included a $500 compounding bonus in addition to the amount of outstanding debt, that alone does not meaningfully distinguish it from this case. The facts of that case suggests that the value of the bonus amounted to at most $5,000, a fraction of the $25,000 purchase price. See Andreen, 644 S.W.2d 188, 191 ($500 bonus to be paid for each six month period from the beginning of the contract until the option is exercised or the expiration of the 5-year option period, whichever comes first).
The evidence provided by the Plaintiffs fails to demonstrate that, as a matter of law, the repurchase option was an invalid restraint on alienation. Thus, summary judgment is denied.
D. Attorney's Fees
Because Plaintiffs have not prevailed on their Motion for Summary Judgment, they are not entitled to attorneys' fees at this time.
CONCLUSION
For the reasons stated above, Plaintiffs have failed to prove at this stage that the repurchase option is unenforceable as a matter of law. Their Motion for Summary Judgment is DENIED.
It is so ORDERED.