786 Enterprises, Inc. v. Millennium Super Stop II, LLC (In re Millennium Super Stop II, LLC)

Citation: 569 B.R. 331Docket: Case No. 16-41972; Adversary Proceeding No. 16-4094, Adversary Proceeding No. 16-4096

Court: United States Bankruptcy Court, W.D. Missouri; March 7, 2017; Us Bankruptcy; United States Bankruptcy Court

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The memorandum opinion addresses multiple motions and complaints involving Millennium Super Stop II, LLC (the Debtor) and 786 Enterprises, Inc. The Court confirms its jurisdiction under 28 U.S.C. § 1384(b), 157(a), and 157(b)(1), categorizing the proceedings as core under § 157(b)(2)(E) and (N). The Court's ruling includes the denial of the Motion to Approve Contract for Sale, Motion to Reject Executory Contract, and Complaint to Compel Turnover of Property, while granting the Complaint for Declaratory Relief and Specific Performance. The Request to Determine Lease Term is deemed moot.

Factual background reveals a lease agreement from June 2010 between the Debtor and 786 for a gas station and convenience store in Kansas City, which included an exclusive purchase option for 786 at the appraised value. 786 paid a non-refundable deposit of $75,000 towards this option. After a 2012 appraisal valued the property at $1,620,000, the sale could not proceed due to litigation involving the Debtor. Following the settlement of that litigation in November 2014, the lease was amended to allow a month-to-month arrangement and defined conditions for exercising the purchase option, including the return of the deposit if not exercised.

When 786 attempted to exercise the option again in April 2015, interference in the appraisal process led to the initial appraiser withdrawing. The parties amended the option agreement to appoint a new appraiser selected by 786’s lender, with Bliss Associates ultimately appraising the property at $1,400,000.

On October 23, 2015, 786 notified the Debtor of its decision to purchase the Property for $1,400,000, providing a signed purchase agreement as required by the Lease. In response, on October 27, 2015, Debtor's counsel claimed that the purchase agreement would not be executed because Bliss was not the designated appraiser, a claim later determined to be false. Subsequently, on October 30, 2015, the Debtor filed a lawsuit in the Circuit Court of Jackson County, Missouri, challenging the Property's valuation, alleging vagueness in the Lease language, while 786 sought specific performance of the Option. On June 27, 2016, Debtor notified 786 of its intent to terminate the Lease effective August 1, 2016. However, prior to that date, Debtor filed for Chapter 11 relief on July 26, 2016.

Debtor contends that the Option Amendment is ambiguous, arguing that it produces an absurd result since the fair market value of the Property significantly exceeds the appraisal value. Contract interpretation focuses on ascertaining the parties' intentions, often considering external sources such as subsidiary agreements and the context of the contract's execution. Where a contract is unambiguous, intent is derived solely from its language. The court noted that a disagreement on interpretation does not create ambiguity, and ambiguity exists only when terms allow for reasonable divergence. 

The court found the option amendment's language clear and unambiguous, affirming that it explicitly states the parties are bound by the appraisal. Debtor's claim of absurdity regarding the appraisal result was dismissed, as the court deemed the contract's terms straightforward and not subject to challenge based on Debtor's perceived unfairness. The court highlighted that Debtor had previously accepted and edited the terms of the amendment without contesting the appraisal process or defining a mechanism for disputing the appraisal result. Thus, once 786 exercised the Option, the appraisal’s result was binding and could not be contested by Debtor.

Debtor's testimony indicated that he uses consistent language in leases for other properties and estimated the property's value at approximately $3 million based on development plans and local events; however, this opinion was deemed a lay assertion without expert support. Central Bank's 2016 inferred appraised value was based on an 80% loan-to-value policy for a loan of $1,700,000, but the bank's testimony did not aim to appraise the property, and its agent was not qualified to provide valuation. Other appraisals relied upon by Debtor were not admitted into evidence, while an appraisal by Hopkins from December 2016 valued the property at $1,620,000. The two professional appraisals presented at trial (Hopkins and Bliss) were not significantly divergent to warrant an absurd interpretation of the modified Option's language. The only expert testimony was from the Bliss appraiser, who valued the property at $1,400,000. Although this appraisal faced some critique, it met appraisal standards, and the income approach analysis was upheld due to reliable financial information from 786. Debtor's criticisms regarding 786's management of the property were deemed minor. The Court determined that the amendment to the option in the Lease was not ambiguous or absurd. Regarding the enforceability of the contract under Missouri law, Debtor argued that the 2014 amendment, which made the $75,000 option deposit refundable, rendered the Option illusory and without consideration. However, the Court found that 786’s commitments, including the payment towards Debtor’s litigation settlement, satisfied the consideration requirement, and the amendment was enforceable as it included significant terms acknowledged by both parties.

786 is entitled to specific performance regarding the purchase of the Property under the terms of the Lease and amended Option. Specific performance is an equitable remedy for enforcing a sufficiently definite and complete contract. 786 contends it properly exercised its purchase option, which constitutes a continuing offer until accepted, thus forming a valid agreement supported by mutual promises. The required elements for a valid contract under Missouri law—parties, subject matter, mutual promises, price, and consideration—are met: Debtor and 786 are the parties, Millennium Super Stop is the property, both promised payment at appraised value, the price was established by the agreed appraiser, and consideration is as discussed. Comparisons are drawn to *Venture Stores*, where the court ruled in favor of specific performance despite claims of ambiguity from the other party. Here, the Court finds it inequitable for Debtor to retain $16,500 monthly rent paid by 786 during litigation while not conveying the Property, especially since Debtor's refusal to close appears to stem from bad faith and seller's remorse. Therefore, the purchase price will be reduced by the total rent paid since 30 days after 786 exercised the option.

Regarding whether the Option is executory, Debtor claims it can reject the Option as an executory contract. However, 786 argues that Debtor breached the Option before attempting to reject it, thus excusing 786's performance and rendering the Option non-executory. The Eighth Circuit applies the Countryman test, which considers a contract executory if both parties have unperformed obligations that would lead to material breach if one fails to perform. The Court supports 786's position, citing *In re Orla Enterprises*, where a similar situation involved a tenant exercising a purchase option that the debtor refused to honor.

Litigation began in state court, followed by the debtor's bankruptcy filing and an attempt to reject an option as an executory contract under § 365(a). The court ruled that, based on the Countryman test, the debtor's prior breach of the contract negated its executory status. Since 786 had fully performed under the option despite the debtor's breach, 786 now holds a claim against the debtor and is no longer required to perform. The debtor conceded that rejecting the option constituted a material breach of the contract, yet argued that the Orla case was distinguishable due to the abandonment of the property, a distinction the court found irrelevant. 

The court noted that the lease and option were integrated, with the 'Option to Purchase' explicitly included in the lease. It clarified that even if the option were considered executory and thus subject to rejection, 786 would still be protected under § 365(i), which allows a purchaser in possession of property to retain possession and treat the contract as terminated. The debtor claimed § 365(i) was inapplicable because 786 was a tenant at sufferance, but the court referenced Missouri law establishing that exercising a purchase option grants the lessee equitable title to the property. 

786 exercised the option more than eight months before the debtor's notice of termination, thus acquiring equitable title. The debtor's assertion that 786 failed to accept the offer was deemed meritless, as 786 had acted according to the lease terms and remained prepared to enter into a sale contract, hindered only by the debtor's refusal.

Debtor filed a Motion to Approve a Contract for Sale of property to Alliance Petroleum, LLC for $2,500,000, but did not adequately identify which provisions of 11 U.S.C. § 363(f) would allow the sale free and clear of an existing option. The Court found no evidence of an actual sale contract, noting that the buyer expected the property to be in good condition, despite Debtor's testimony revealing the property was in disrepair and required approximately $550,000 in repairs. Additionally, a sales commission of 5-10% could amount to $125,000-$250,000, further reducing the net proceeds from the sale. The buyer had multiple termination rights, casting doubt on the sale's viability. The Court concluded that after accounting for repair costs and commissions, the net price could fall between $1,700,000 and $1,825,000, which may not provide greater benefit to creditors compared to the option price of $1,400,000.

Debtor also suggested that a sale to 786 Enterprises, Inc. under the option could be a fraudulent conveyance, but failed to substantiate this claim, leading the Court to consider the argument abandoned. The Court ruled against the Motion to Approve the Sale and the Motion to Reject the Executory Contract, granting judgment in favor of 786 Enterprises, Inc. on related complaints and deeming the Request to Determine Lease Term moot. The Court did not address whether a sale free and clear of the lease/option was permissible.