Opinion
Case No. 99-10629-RGM, (Cases administratively and substantively consolidated), Contested Matter
September 9, 2002
MEMORANDUM OPINION
This case is before the court on the motion of Robert O. Tyler, the chapter 7 trustee, seeking to vacate a prior order of this court approving the sale to Nicholas F. Negretti of certain real property situate in the District of Columbia, effectively voiding the contract, and Mr. Negretti's motion for specific performance of the contract.
On August 22, 2001, the trustee and Mr. Negretti (the "buyer") entered into a contract for the purchase and sale of the real property known as 513 U Street, NW, Washington, D.C. for $171,000.00. The contract provides that "The risk of damage or loss to the property by fire . . . remains with the [trustee] until the execution and delivery of the deed of conveyance." Ex. 1, Contract, ¶ 15. The contract also provides that the property was sold and will be delivered in its "as is" physical condition. Ex. 1, Contract Addendum of Clauses, ¶ 14. On October 16, 2001, this court entered an order approving the sale. Later in October, 2001, and before closing could take place, through no fault of either the trustee or the buyer, the property was substantially damaged by fire.
Settlement was postponed while the trustee sought payment from the insurance company that had insured the property. The insurance company ultimately agreed to pay the trustee $58,341.22. The settlement with the insurance company was approved by the court on July 9, 2002, after notice to all creditors and a hearing at which the buyer appeared. The trustee explained that the insurance company resisted paying the full costs of repairing the property but was willing to pay the costs of bringing the property back to the pre-fire condition. In essence, it offered to pay the depreciated value of the damaged improvements. Of course, any repairs would necessarily result in a renovated property because new and updated — rather than old and worn — materials and appliances would be used.
Prior to the hearing on the settlement with the insurance company, the trustee concluded that he could not reach an amicable resolution with the buyer and on June 11, 2002, moved that he be granted relief from the October 16, 2001, order approving the sale on the grounds that he was unable to perform the contract contemplated by the parties and that is would be inequitable for the bankruptcy estate to bear the expense of repairing the property. The buyer objected to the motion and filed his own motion seeking specific performance of the contract. The buyer suggested various alternative remedies. The remedy that he primarily seeks is an order requiring the trustee to repair the property. In the alternative, he requests that the trustee be held responsible for the actual costs of repair, that is, that the purchase price be abated by the actual costs of repairs, which he believes may exceed the insurance recovery. Finally, he argues that at the very least he is entitled to an abatement in the purchase price equal to the insurance recovery.
The parties agree that the substantive law of the District of Columbia applies together with applicable bankruptcy law. Neither party cited any provision of the District of Columbia Code or any District of Columbia case directly on point. The buyer believes that this is a matter of first impression.
At common law, the risk of loss in a real estate contract passed to the buyer upon execution of the contract under the theory of equitable conversion. Equitable conversion holds that upon execution of the contract, the buyer becomes the equitable — and therefore, the real — owner of the property. Consequently, the risk of loss rests on the buyer. However, modern real estate contracts generally expressly address the risk of loss and frequently, especially in contracts for the sale of residential property, shift the risk of loss to the seller until closing or conveyance. The contract in this case does exactly that.
There is also a contract provision relating to the condition of the property. The property is sold in "as is" condition. This does not alter the express contractual clause shifting the risk of loss. It merely sets the standard for the condition of the property at the time of conveyance. It has the effect of placing the buyer in the clear position of caveat emptor, that is, absolving the trustee of any responsibility as to the condition of the property or an appliance. The contract permits a home inspection so that the buyer may make an informed decision as to whether to proceed. It does not, however, negate the risk of loss provision.
There are many cases addressing the situation where a loss occurs after execution of a real estate sales contract but before closing. There are innumerable variations and resolutions. The one that the trustee seeks, effectively rescission of sales contract, is not generally available where the risk of loss rests on the seller and the buyer is ready, willing and able to go forward with the contract. If the buyer is ready, willing and able to go forward, there may be an abatement of the purchase price in light of the loss. The loss of the property does not itself void the contract. The parties have allocated that risk and it falls on the seller. Similarly, the buyer is not permitted to rescind the contract if the seller makes the necessary repairs and is ready, willing and able to go forward.
The fact that this is a bankruptcy proceeding does not change these obligations once an order has been entered approving a sale. At that time, the contract is as binding on the estate as if the estate were a natural person not before the bankruptcy court. See, In re Frye, 216 B.R. 166 (Bankr.E.D.Va. 1997) (Bostetter, C.J.). While the court does have jurisdiction under F.R.Bankr.P. 9024 which incorporates F.R.Civ.Proc. 60 to grant relief from its orders, Rule 60 relief is not available in this instance. Rule 60(a) permits relief from clerical errors. There has been no clerical error. Rather, the circumstances have changed since the order was entered. There was no mistake made at the time the order was entered. The order accurately reflects the agreement of the parties and the court's ruling. Rule 60(b) permits relief where there has been a mistake, inadvertence, surprise or excusable neglect; where there is newly discovered evidence; where there was fraud, misrepresentation or other misconduct; or where there is any other reason justifying relief. Clearly, if any of those provisions is applicable, it is only the last. As indicated, the only reasons put forward by the trustee that could justify relief under Rule 60(b) are those arising from the fire loss, a loss that occurred after the entry of the order. Those reasons are not sufficient here. While it is true that neither party is at fault for the fire, the contract envisioned the possibility of a loss and allocated that risk between the parties. The trustee, who bore the risk of loss, adequately protected the estate from the possibility of the risk by insuring against that risk. The only question now is the consequence of that allocation. That is not the type of situation that Rule 60(b)(6) envisions.
Having determined that the trustee is bound by the contract and may not avoid it, it is necessary to turn to the buyer's motion for specific performance. Initially it must be noted that the buyer instituted this request by motion under F.R.Bankr.P. 9014 when it should have been initiated by complaint. F.R.Bankr.P. 7001(7) ("a proceeding to obtain an injunction or other equitable relief"). While this is itself an adequate reason to deny the relief, courts have on occasion treated a motion as the functional equivalence of a complaint when to do otherwise would elevate form over substance and potentially disadvantage at least one of the parties. Here the buyer can complain of no prejudice as to form because he initiated the matter in this manner. In addition, the matter was fully argued and briefed. The issues are essentially legal in nature and the facts are undisputed. The insurance on the property recently expired and will not be renewed because the property is vacant and damaged. To require the matter to be refiled as a complaint will only delay the resolution of this matter, potentially to the prejudice of both the parties. The court will, therefore, treat the motion as a complaint.
Specific performance in the form of an order requiring the trustee to rebuilt or repair the property is not a remedy that is available to the buyer in the circumstances of this case. While specific performance is a remedy typically available to enforce the conveyance of real property pursuant to a contract, it is not a remedy typically available to enforce compliance with a construction contract. In a suit to force the conveyance of real property, the buyer is treated as the true owner under the doctrine of equitable conversion. That is, upon execution of a contract, the buyer obtains an equitable ownership in the property. Since equity considers done that which ought to be done, courts order the conveyance of real property so that the equitable ownership will ripen into legal ownership. This was an important remedy because, historically, each parcel of real property was considered unique. The buyer was without a legal remedy because there was no other parcel of real property that was identical to the one he contracted to purchase.
The circumstances of this case are different. The question is not whether the trustee will convey the property to the buyer. He offered to do so. The buyer rejected the offer because the price abatement offered was, in his view, inadequate. The question is solely one of money — the appropriate price abatement. The buyer could go to closing, obtain title to the property and then seek a money judgment for damages. Consequently, he has an adequate remedy at law and is not entitled to equitable relief.
More importantly, however, courts do not generally enforce construction contracts. Specific performance is a discretionary remedy. The work sought here is substantial and would require the ongoing supervision of the court. The work envisioned by the buyer would make the effective enforcement of the court's decree impossible. Courts do not generally supervise such intricate matters. See Specific Performance, 71 Am.Jur.2d § 90. Here the court would not be in a position to supervise the obligation the buyer seeks. Reconstruction of the property involves many subjective questions, such as the quality of materials to be used, and the timing and sequencing of work. The court would simply not be in a position to supervise construction to the contractual "as is" condition without either obtaining a better condition or a lesser condition. It is simply not in the nature of construction work to recreate, at a reasonable expense, the depreciated condition in which the property was in at the time the contract was executed.
The parties disagree as to the extent of the trustee's duty to restore the property, but even if they agreed, it is apparent that the work would necessarily leave the property in better condition than at the time the contract was executed. This clearly provides the buyer with an unanticipated benefit at the expense of the bankruptcy estate and is an inequitable result. This is not a case in which the court should specifically enforce the contract by writing construction standards into a contract that does not contain them and supervise the construction process.
The buyer's second requested remedy is to order specific performance of the contract with the property in its present condition but abate the purchase price by the cost of the anticipated repairs. If the repairs were minor or insubstantial, this might be a reasonable resolution. However, the needed repairs are substantial. They will necessarily leave the property in a better condition than it was when the contract was executed. The actual measure of damages, and the proper abatement of the purchase price, is the cost of returning the property to its depreciated state. While this is not physically possible, the court can make a reasonable estimate of those costs. The actual costs of repair will be more, but the physical condition of the property will be better. The buyer will have received the benefit of the improved condition of the property and will have borne the cost of it. The seller will only have borne the cost of returning the property to its prior depreciated state.
The amount of the abatement is the amount of the insurance recovery achieved by the estate. In a non-bankruptcy case, it could be objected that the amount of the insurance recovery may not be the true measure of damages. In a non-bankruptcy situation, the seller would resolve the matter directly with the insurance company without the necessity of consulting the buyer. The buyer may have a different opinion as to the cost of bringing the property back to the contractual state. The insurance contract may contain different contractual terms than the sales contract. In this situation, the insurance settlement may be higher or lower than required in the sales contract.
This, however, is a bankruptcy case and interested parties have rights within a bankruptcy case that they do not have outside bankruptcy. One obligation of the trustee is to obtain court approval of settlements. Here, the trustee did that. He sought approval of the proposed settlement with the insurance company. Notice was given to the buyer. The buyer had the opportunity to object to the settlement on any appropriate ground, including that the settlement was inadequate. He did not do so and the court found that the settlement was appropriate. The standard that the trustee used in reaching his settlement with the insurance company was the cost to restore the property to its depreciated state. This is the same standard that the buyer is entitled to use under the sales contract. It stands to reason that if the same standard is applicable to both the insurance company and the buyer that the settlement with one should be the same as the settlement with the other. For example, assuming that kitchen appliances were damaged or destroyed in the fire, the insurance company was not willing to pay for new kitchen appliances. It was only willing to compensate the trustee for old and used kitchen appliances. The buyer is, similarly, only entitled to old, used kitchen appliances. He is not entitled to a new refrigerator or stove or dishwasher simply because of the unfortunate occurrence of a fire. Here, where the trustee was required to obtain court approval of the insurance settlement, the buyer had ample notice of the settlement and an opportunity to participate in the hearing on the settlement. In fact, the buyer's motion for specific performance was noticed and argued at the same hearing as the trustee's motion to approve the insurance settlement. The settlement was approved by the court. The amount of the damages is fixed at the insurance recovery. That is the amount of any price abatement.
The trustee suggests that only the net amount of the insurance settlement should be used. The net amount includes the trustee's costs of obtaining the recovery. That misses the point. The amount of the damages is what the trustee and the insurance company agreed upon. That is also the amount of the damages that the buyer may insist upon. The trustee's costs of obtaining the settlement neither increases nor decreases the physical damage to the property. Since the trustee bore the risk of loss, he should bear the risk of recovery from the insurance company. There can be, therefore, no deduction from the gross insurance settlement of $58,341.22. The estate will bear those costs as costs of administering the estate.
The court will not require the buyer to go forward with the contract even with the price abatement because the buyer is not getting exactly what he bargained for. He bargained for a property in a particular condition, not a property in a lesser condition for a lesser price. There is, to be sure, an inconvenience in accepting the property in its present condition. The buyer must contract for the renovations. The actual costs may be more than the buyer is willing or able to spend even though the condition of the renovated property will be better than the one he bargained for. The buyer will, therefore, have the opportunity to walk away from the contract. If he elects to rescind the contract, any deposit will be returned to him.
The trustee has advised both the buyer and the court that the property is no longer insurable because it is vacant and damaged. Time is, therefore, of the essence. In consideration of the unforeseen change in circumstances caused by neither party, the buyer will have until September 12, 2002, at 5:00 p.m. to advise the trustee if he will go forward with the contract with the price abatement of $58,341.22 or will rescind the contract. If he does not timely communicate his choice to the trustee, the contract will stand rescinded and the deposit will be returned to the buyer. Neither party will have any further liability to the other. If the buyer desires to go forward with the contract, settlement must be effective immediately. In the event of any significant uninsured loss not caused by either party, either party may terminate the contract, the deposit will be returned to the buyer and neither party will have any further liability to the other. The equitable remedy granted to the buyer precludes any other claim against the trustee or the estate. The matter will be placed on the court's docket on September18, 2002, at 10:30 a.m. to address any other administrative matters and to establish a settlement date.