Nilhan Developers, LLC v. Westplan Investors Acquisitions, LLC (In re Bay Circle Props., LLC)

Citation: 593 B.R. 14Docket: CASE NO. 15-58440-WLH; ADV. PROC. NO. 18-5193-WLH

Court: United States Bankruptcy Court, N.D. Georgia; November 1, 2018; Us Bankruptcy; United States Bankruptcy Court

SummaryOriginalCytator Case TreatmentBackward CitatorAnalysis

EnglishEspañolSimplified EnglishEspañol Fácil

The Court is addressing a Motion to Dismiss by Westplan Investors Acquisitions, LLC and Accent Cumberland Apartments, LP, collectively referred to as Defendants. Jurisdiction is established under 28 U.S.C. 1334, with the Complaint alleging the matter is core, though the Motion questions its core status under 28 U.S.C. 157. All parties have consented to the issuance of a final order by the Court.

The Debtor filed for Chapter 11 bankruptcy on May 4, 2015, with assets including two properties located at 2800 and 2810 Spring Road in Smyrna, Georgia. The 2800 Spring Road property is a 1.56-acre shopping center, while 2810 Spring Road consists of office suites across 7.14 acres. The properties served as collateral for a loan from Wells Fargo, guaranteed by the Debtor and its affiliates, which led to the bankruptcy filing following threats of foreclosure.

A settlement agreement between Wells Fargo and the Debtor required full debt repayment by April 30, 2017, with the release price for the properties set at $5.2 million, allowing Wells Fargo to initiate foreclosure proceedings if unpaid. Wells Fargo later assigned its claim to Bay Point Capital Partners, LP.

To meet the settlement deadline, the Debtor sought Court approval on April 11, 2017, to sell the properties to Westplan for $7 million, intending to sell free and clear of liens under 11 U.S.C. 363. The motion included a Standard Form Contract of Sale and was supplemented with a site plan and an assignment showing that Westplan had transferred its rights under the contract to Accent as of April 6, 2017. Accent, through this assignment, assumed Westplan's obligations. Additionally, the contract includes a "Buy Back" clause, indicating that the Purchaser plans to rezone the property for a multi-use development and pursue annexation into the City of Smyrna.

The Seller has the right to purchase a portion of the Property designated for a hotel, office, and retail use for $2,500,000 within sixty days after final rezoning and annexation, as indicated in the attached Exhibit B. The Seller's right is contingent upon receiving notice of the final rezoning and annexation and will be void if the purchase does not occur within the specified timeframe. If the Seller acquires the Property, both parties will enter a joint development and master site agreement addressing shared development costs and expenses, which will be based on the acreage of the multi-use project. These costs include engineering, architectural, geotechnical, and infrastructure expenses, with funds escrowed at closing. The Purchaser will select contractors for the project.

Should the Purchaser be denied rezoning and annexation, the Seller can purchase the Property for $7,750,000 plus additional costs, with a ninety-day window from the denial date to complete the purchase. The Seller’s right to purchase will also lapse if not exercised within this period. 

During court hearings held on April 24 and 27, 2017, objections were raised by Bay Point and another creditor regarding the proposed sale. Testimonies were presented about the sale, rezoning, and the Buy Back provision, with an auction allowed where Bay Point offered $7.3 million without the Buy Back option, and Westplan offered $7.2 million including it. The Court faced the decision of whether to sell to Westplan or reject the motion in favor of Bay Point's higher bid. The Court considered minimal claims against the Debtor and the potential value of the Buy Back option, estimating it could exceed $1 million once the Property was rezoned for residential and hotel use.

If the Property was not rezoned, the Buy Back option was deemed to have negligible value, estimated by the Court at no more than $100,000. Mr. Thakkar was ordered to pay this amount to protect the interests of the estate and Bay Point, while retaining the option outlined in the Westplan proposal. Following the sale to Accent on May 1, 2017, Accent submitted a rezoning application with a different site plan, without consulting the Debtor, which the Debtor argued diminished the value of the retained hotel, office, and retail portions of the Property. The Debtor asserted that Accent intended the rezoning request to be denied, which ultimately occurred.

The Complaint includes several claims: first, a breach of contract by Westplan and Accent for failing to pursue the agreed site plan; second, a breach of good faith and fair dealing; third, fraud in the inducement based on misrepresentations regarding the rezoning process; and a request for attorney's fees and punitive damages. In response, the Defendants filed a Motion to Dismiss, arguing that they had no contractual obligation to pursue the rezoning in a specific manner or to involve the Debtor in the process. 

The standard for dismissal under Fed. R. Civ. P. 12(b)(6) requires the Court to accept the Complaint's factual allegations as true, assessing whether they contain sufficient factual content to suggest a plausible claim for relief. The Court may dismiss claims that only present the possibility of recovery without sufficient factual support.

Both the Debtor and the Defendants have provided additional documentation beyond the original Complaint. The Complaint includes an unsigned Contract, while the Motion to Dismiss contains a signed version of the same Contract and a site plan related to the Debtor's motion to sell. In response to the Motion to Dismiss, the Debtor submitted Westplan marketing materials and another site plan purportedly given to zoning authorities. The Defendants' reply included an excerpt from the transcript of a court hearing from April 27, 2017, which is on record in Case No. 15-58440.

According to Rule 12(d) of the Federal Rules of Civil Procedure, if external matters are presented on a motion under Rule 12(b)(6) or 12(c) and not excluded, the motion must be treated as one for summary judgment, allowing parties to submit relevant materials. However, the court may consider documents outside the pleadings without converting the motion if they are central to the Plaintiff's claim and their authenticity is undisputed. The Court determines that the unsigned Contract, the signed Contract, and the site plan attached to the Motion to Dismiss are central and undisputed materials relating to the Plaintiff's claim. The Court will also consider the full transcript of the April 27 hearing, all of which are part of the record in the main bankruptcy case. The Debtor did not dispute the authenticity of the signed Contract. These documents are crucial as they pertain to the contract approved by the Court, the site plan involved in the approval process, and the hearing transcript that corroborates the sale approval, all contested by the Debtor in the Complaint.

The Court has decided not to consider the Westplan marketing materials and site plan submitted by the Plaintiff in response to the Defendants' objections regarding their authenticity. These documents were intended to support the Debtor's claims that the plan submitted to zoning authorities differed from that presented to the Bankruptcy Court. However, since the Court accepts the Debtor's allegations as true when evaluating a motion to dismiss, a review of these materials is unnecessary.

The Debtor claims the Defendants breached the Contract by not pursuing the agreed-upon site plan for rezoning and annexation with the City of Smyrna and by making unilateral changes to the plan that could adversely affect the Debtor if the modified zoning were approved. Under Georgia law, contract interpretation begins by determining if the contract language is clear and unambiguous. If it is, the court enforces the contract as written.

Paragraph 26 of the Contract indicates that while the Seller acknowledges the Purchaser's intent to apply for rezoning and annexation, it does not obligate the Purchaser to do so in a specific manner. The Complaint asserts that the Purchaser applied for both, which means the Defendants did not violate the Contract’s initial provisions. The subsequent sentence in paragraph 26 grants the Seller a right to repurchase part of the Property for $2.5 million within 60 days of final rezoning and annexation, with the attached site plan serving to identify the relevant portions. Since the zoning and annexation were denied, the Seller's option shifted to repurchasing the entire Property for $7,750,000 plus costs, leading to no issues regarding the Buy Back option. Additionally, the Debtor alleges a breach of Contract due to the Defendants' failure to cooperate or consult on the site plan submitted to the zoning commission.

The Contract does not mandate the Purchaser to cooperate or coordinate with the Debtor on zoning submissions. Even had the zoning and annexation been successful, the contract states that these would only provide guidelines for the Purchaser's development plans. The Debtor's complaints about obligations are unfounded, as the Purchaser is responsible for applying for rezoning, and the Debtor retains an option to repurchase the Property regardless of the zoning outcome. The Contract features a merger clause asserting it embodies the entire agreement, negating any prior or oral agreements not explicitly included. Under Georgia law, such clauses are enforceable and preclude the admission of external evidence that could alter the written agreement. The merger clause clarifies that only the terms within the Contract are binding and that no requirements for particular site plans or collaboration with the Debtor for rezoning are stipulated. Consequently, the claims of breach of contract by the Defendants are unfounded and should be dismissed. Additionally, the Debtor's assertion that the Defendants violated the implied covenant of good faith and fair dealing by not providing an agreed-upon site plan and failing to diligently pursue rezoning approvals lacks merit as it contradicts the terms of the Contract.

The Defendants' Motion to Dismiss asserts that the allegations do not establish a valid claim due to the absence of contractual obligations requiring a specific site plan submission, the inclusion of the Debtor in planning, or the necessity of obtaining rezoning and annexation. The implied covenant of good faith and fair dealing is recognized in both statutory and common law, with the Uniform Commercial Code mandating good faith performance and generally requiring substantial adherence to the contract's intent. However, the failure to act in good faith does not, in itself, constitute an independent cause of action under UCC-governed contracts. Similarly, the common law duty of good faith is not a standalone claim apart from a breach of contract. Allegations of breach of good faith must relate to a contractual provision. Relevant case law, including Stuart Enters. Int'l, Inc. v. Peykan, Inc. and Sheppard v. Bank of Am. NA, emphasizes that without a specific breach of contract claim, allegations of breach of the implied covenant cannot stand. The Court concluded that the Debtor's claims lack support from the Contract's terms, which do not impose obligations regarding rezoning or site plans, leading to the determination that Count II of the Complaint should be dismissed due to the absence of a valid breach of contract claim.

Count III of the Complaint alleges that the Defendants fraudulently induced the Debtor to enter into a Contract and obtain court approval for the sale of a Property. The Debtor claims that the Defendants assured both the Debtor and the Court of their commitment to pursue rezoning and annexation to enhance the repurchase option's value. However, the Defendants allegedly submitted an alternative site plan for rezoning without the Debtor's consent. The Complaint asserts that the Debtor and the Court relied on the agreed site plan and the potential value it offered when approving the sale, resulting in detrimental reliance.

The Debtor has two options in cases of fraudulent inducement: affirm the contract and seek damages or rescind the contract and sue for fraud. Here, the Debtor seeks damages for fraud and breach but does not pursue rescission, acknowledging that doing so would require reversing a Bankruptcy Court-approved sale. The Contract includes a merger clause, which precludes claims based on representations outside its terms. Consequently, the Debtor's fraud claim hinges on proving that misrepresentations by the Defendants are included in the Contract, which the Complaint fails to do.

Regarding allegations that the Court was fraudulently induced to approve the sale, the Complaint does not request the Court to set aside or reconsider its approval, missing the necessary specific pleading requirements under 11 U.S.C. § 363(n) or Fed. R. Civ. P. 60. Therefore, the claim of fraudulent inducement lacks a legal basis and will be dismissed.

Additionally, the Debtor claims entitlement to attorney's fees and punitive damages; however, since the underlying claims do not state a valid cause of action, these related claims are also subject to dismissal.

The court dismissed the Complaint in McFarland v. BAC Home Loans Servicing due to the Plaintiff's failure to state a plausible claim for breach of contract, breach of the duty of good faith and fair dealing, or fraud in the inducement. As a result, claims for attorney's fees and punitive damages were also rejected. The court emphasized that the Debtor did not seek necessary authority from the Bankruptcy Court to exercise the repurchase option or to borrow funds for this purpose. The Debtor acknowledged the repurchase in a separate hearing, and the court confirmed that it was not misled about the transaction. Testimony from the Purchaser's representative indicated that the Purchaser would handle the rezoning of the Property independently, without the Debtor’s involvement. The court did not assign a specific value to the Buy Back option, noting it could be worth up to $1 million contingent on successful rezoning. The court found that if Mr. Thakkar wanted to preserve the Buy Back option, he could pay an additional $100,000 to equalize two competing bids, ultimately favoring the contract that allowed for potential future value if rezoning succeeded. The Debtor's claims about the court relying on specific representations regarding the Buy Back option's value were deemed inaccurate.