RONNIE ABRAMS, District Judge.
This case concerns the rights to the "Invest.com" domain name. The questions before the Court are (1) whether an agreement to sell that domain name was terminated before the buyer filed for bankruptcy protection and, if not, (2) whether the buyer has retained any rights under that agreement. The Bankruptcy Court answered both questions in the negative.
This Court agrees with the Bankruptcy Court's conclusion that the agreement was not terminated pre-petition. It respectfully disagrees, however, with the Bankruptcy Court's conclusion that the buyer no longer has rights under the agreement. Accordingly, the judgment of the Bankruptcy Court is vacated and this case is remanded for further proceedings consistent with this opinion.
In March 2011, Heath Global, Inc. (the "Debtor") and Jim Magner entered into a Sale Agreement pursuant to which Magner agreed to sell to Debtor the "Invest.com" domain name. (D-13 at 26-34.) Section 4 of the Sale Agreement set forth the parties' agreed-upon payment schedule as follows:
(Id. 27.) The parties therefore agreed that Debtor would pay a total price of $2,000,000 over a two-year period in exchange for the domain name.
In the event Debtor failed to make timely payments under section 4, section 6(b) of the Sale Agreement afforded Magner a "Seller Special Remedy," providing that:
(Id. 29) (underlining in original).
Section 8(r) also addresses Magner's right to terminate in the event of Debtor's failure to make timely payments under section 4. That provision states, in full:
(Id. 33) (underlining in original).
Also in March 2011, the parties executed the Escrow Agreement referred to in section 6(b) of the Sale Agreement. (Id. 38-42; Appellant's Opening Br. 5.) Pursuant to the Escrow Agreement, Magner assigned the domain name to the designated escrow agent, which was also charged with receiving Debtor's payments and disbursing them to Magner. (D-13 at 38-39.) Section 5 of the Escrow Agreement states:
(Id. 40.)
Sections 6(b) and 8(r) of the Sale Agreement, as well as section 5(b) of the Escrow Agreement, therefore each address Magner's right to terminate the parties' transaction in the event of Debtor's default, and each describe a method by which he could do so.
Debtor timely paid the first installment under section 4(a) of the Sale Agreement, clue upon Magner's assignment of the domain name to the escrow agent. (D-9 ¶ 10.) As the October 1, 2011 due date for the second installment approached, however, Debtor advised that it would have to withdraw from the sale unless Magner permitted it to make a lower payment than the $225,000 contemplated in section 4(b). (Id, ¶ 11; D-12 at 26, ¶ 5.) Magner agreed, subject to a charge of interest on the balance of the second installment, which Debtor would be required to pay on February 1, 2012 in addition to the $750,000 third installment due on that date pursuant to section 4(c). (D-12 at 47-48.)
Debtor failed to bring its payments current on February 1, 2012, and failed to pay the third installment as well. (Id. 26, ¶ 7.) The next day, Magner's counsel sent a letter ("February 2 Letter") to Debtor,
(Id. 53-54) (emphasis in original). Later that day, the escrow agent emailed Debtor, copying Magner, stating:
(Id. 56.)
Debtor filed a Chapter 11 petition on February 8, 2012 at 8:26 p.m. (D-19 at 8-9.) On May 22, 2012, Magner commenced an adversary proceeding against Debtor seeking a judgment from the Bankruptcy Court declaring, inter alia, that "the Sale Agreement has now been terminated and the Debtor has no further rights under it." (D-9 at 6.) Debtor moved to dismiss the complaint and Magner cross-moved for summary judgment on June 20, 2012 and July 17, 2012, respectively. (D-11; D-12.) Following oral argument, the Bankruptcy Court issued an October 23, 2012 bench ruling denying Debtor's motion to dismiss and granting Magner's motion for summary judgment. (D-19.)
In its ruling, the Bankruptcy Court framed the issues as follows: "The two narrow issues before the Court are if and when the sale agreement was terminated, and whether the Debtor has any remaining rights under the sale agreement." (Id. 9.)
As to the first issue, the Bankruptcy Court noted that:
(Id. 4-6.) The Bankruptcy Court then proceeded to "reject[ ] [Magner's] argument that termination was effected immediately via Magner's February 2, 2012, notice." (Id. 12.) It explained:
(Id. 11-12.)
The Bankruptcy Court further held that, under any reading of the agreements, the Chapter 11 petition was filed before the expiration of the cure period. It reasoned:
(Id. 14.) Therefore, the Bankruptcy Court concluded, "the sale agreement was not terminated pre-Petition." (Id.)
Turning to the second issue — whether Debtor had any remaining rights under the Sale Agreement — the Bankruptcy Court looked to the "nature of the transaction contemplated by the sale agreement, and accordingly, which provisions of the Bankruptcy Code govern the sale agreement and the Debtor's rights thereunder." (Id.)
The Bankruptcy Court first rejected Debtor's argument that the Sale Agreement constituted "a secured transaction, and that, therefore, Section 1129 of the Bankruptcy Code is applicable regarding how and when Magner, as a secured creditor, can be paid." (Id. 15.) Noting that "[i]t is axiomatic that a debtor cannot provide a security interest in something it does not own," the Bankruptcy Court found there to be "absolutely no language in the sale agreement or escrow agreement granting the Debtor title to the domain name, or granting Magner a security interest in the installment payments or the domain name, nor could there be." (Id. 16.)
The Bankruptcy Court next looked to 11 U.S.C. § 108(b), which, as it summarized, provides "that where an agreement fixes a time period in which the Debtor may cure default, the Debtor may cure before the later of the expiration of the time period, or 60 days after the filing of the Petition." (Id. 18.) The Bankruptcy Court then adopted Magner's characterization of the Sale Agreement as an option contract, explaining:
(Id. 19-20.) Because the sixty-day post-petition period afforded by section 108(b) had expired, the Bankruptcy Court found that the Sale Agreement had terminated "by its terms" and that Debtor no longer had "interest in or rights to the domain name." (Id. 25.)
District courts are vested with appellate jurisdiction over bankruptcy court rulings pursuant to 28 U.S.C. § 158(a)(1). "Congress intended to allow for immediate appeal in bankruptcy cases of orders that finally dispose of discrete disputes within the larger case." In re Fugazy Exp., Inc., 982 F.2d 769, 775 (2d Cir.1992) (internal punctuation and emphasis omitted). A district court reviews a bankruptcy court's legal conclusions de novo and its factual findings for clear error. In re Bennett Funding Grp., 146 F.3d 136, 138 (2d Cir. 1998).
The Court has reviewed, de novo, the Bankruptcy Court's conclusions that: (1) the Sale Agreement was not terminated pre-petition, and (2) Debtor has not retained any rights under the Sale Agreement. The Court addresses each of these conclusions in turn.
The Court agrees with the Bankruptcy Court that the Sale Agreement was not terminated pre-petition.
The focus of the parties' dispute on this issue is whether the notice provided in the February 2 Letter alone was sufficient to terminate Debtor's rights under the Sale Agreement. In the February 2 Letter, Magner expressly invoked the "Seller Special Remedy" described in section 6(b) of the Sale Agreement. By the plain terms of section 6(b), Magner was required to perform two acts to effect the "Seller Special Remedy." He was first required to provide written notice to Debtor and the escrow agent of Debtor's failure to comply with section 4's payment provisions. Once that notice was provided, only following the passing of seven days could Magner "immediately terminate th[e] Agreement on written notice to the Buyer."
The February 2 Letter adequately notified Debtor of Magner's invocation of the "Seller Special Remedy." However, to effect termination, the express terms of section 6(b) required Magner to supply a second written notice following the passage of seven days. Magner was unable to issue the second notice because Debtor filed its Chapter 11 petition prior to the expiration of that seven-day period. Therefore, the Sale Agreement was not, and could not have been, terminated pre-petition.
Magner argues that Debtor's rights to the domain name were extinguished pre-petition by virtue of section 8(r) of the Sale Agreement. Magner contends that the February 2 Letter, "implicitly incorporates" section 8(r) by stating that the Sale Agreement is "being immediately terminated." (Opp'n 22-23 n.12.) But section 6(b), too, speaks of immediate termination, as well as the other remedies — return of the domain name and retention of prior payments — to which the February 2 Letter claims Magner is entitled. The February 2 Letter therefore simply attempts to track the language of 6(b), which explains its reference to immediate termination. Magner's prior counsel apparently simply overlooked section 6(b)'s seven-day notice requirement. They also apparently over-looked
In its bench ruling, the Bankruptcy Court defined an option agreement as "a transaction in which the optionee agrees to pay consideration for the exclusive privilege of purchasing property within a specified time without imposing a binding obligation on the purchaser." (D-19 at 19.) It found that the terms of the Sale Agreement described such an arrangement because "the Debtor paid consideration for the exclusive privilege of purchasing the domain name within a specified period of time," "[t]he Debtor was under no obligation to complete the transaction, and ... that if the transaction did not close, the seller was entitled to keep the payments made." (Id. 20.)
The Court takes no issue with the Bankruptcy Court's definition of an option agreement, which is clearly established and uncontroversial under the law. See Restatement (Second) of Contracts § 25 (1981) ("An option contract is a promise which meets the requirements for the formation of a contract and limits the promisor's power to revoke an offer."); Leives Inv. Co. v. Estate of Graves, Civ. A. No. 2893-VCG, 2013 WL 508486, at *1 (Del.Ch. Feb. 12, 2013) (An option contract "permit[s] the buyer to walk away from the transaction."); Julian v. Julian, No. 1892-VCP, 2010 WL 1068192, at *8 (Del.Ch. Mar. 22, 2010) ("[A]n option contract to purchase ... merely grants its holder the right to purchase property under the conditions established in that contract, which right the holder may or may not exercise.") (emphasis in original); Equitable Trust Co. v. Delaware Trust Co., 54 A.2d 733, 736 (Del.Ch.1947) ("The grant of an option to purchase is neither a sale nor an agreement to sell property.").
The Court respectfully disagrees, however, with the Bankruptcy Court that the express language of the Sale Agreement evinces the parties' intent to enter into an option contract. Paul v. Deloitte & Touche, LLP, 974 A.2d 140, 145 (Del.2009) ("In analyzing disputes over the language of a contract, we give priority to the intention of the parties. We start by looking to the four corners of the contract to conclude whether the intent of the parties can be determined from its express language."). Contrary to the Bankruptcy Court's finding, the express language of the Section 4 of the Sale Agreement — as it is titled — does impose a binding obligation on Debtor. Section 4 provides that Debtor is "obligated to deliver or cause to be delivered to the Seller" the payments set forth in the schedule "[a]s consideration for purchase of the Domain Name." That language indicates that Debtor promised to pay the consideration set forth in Section 4 in exchange for Magner's promise to sell the domain name.
That the parties intended the Sale Agreement to bind both Magner and Debtor
(Oral Arg. Tr. 9.) The Court agrees that the language of section 6(b) indicates not only an objective understanding that Magner would be entitled to "retain any amounts already paid" in the event of Debtor's default, but that his exercise of this "Special Remedy" would not prejudice his right to seek "any remedy available to [him] by law," presumably including expectation damages flowing from Debtor's breach. See Pringle v. Taylor, 12A-04-002 (RBY), 2012 WL 6845692, at *4 (Del.Super. Dec. 20, 2012) ("The standard remedy for breach of contract is expectation damages, meaning the amount of money that would put the promisee in the same position as if the promisor has performed the contract."); Martin v. Toll, 196 Iowa 388, 192 N.W. 806, 807 (1923) ("The contract, therefore, was not a mere option. The forfeiture provision was not inconsistent with such express promise. It was simply a special remedy provided for the benefit of the vendors. They were not bound to pursue such remedy. They had a right to elect the remedy of ... damages."). The parties' use of the word "Special" to describe the remedy available through section 6(b) presupposes the availability of a distinct and more customary remedy through a civil action for damages.
Accordingly, contrary to Magner's counsel's assertion at oral argument that Debtor could "walk away from this contract at any time," (Oral Arg. Tr. 24), the Sale Agreement's express language indicates that Debtor was "obligated" to comply with section 4's terms.
The Bankruptcy Court's finding that the Sale Agreement is an option contract led it to conclude that the Sale Agreement "terminated by its terms when the Debtor did not make the payments owed before the expiration of the cure period." (D-19 at 23.) This Court's conclusion that the Sale Agreement is not an option contract leads it to conclude that the Sale Agreement has not terminated post-petition.
As discussed above, the parties contemplated that termination by way of section 6(b) could be accomplished only if and when Magner supplied written notice of termination "upon 7 days written notice." The second notice required under section 6(b) was therefore a condition subsequent — i.e., "[a] condition that, if it occurs, will bring something else to an end" or "an event the existence of which, by agreement of the parties, discharges a duty of performance that has arisen." Black's Law Dictionary (9th ed. 2009).
Id. at 39. Parsing the relevant contractual language, Judge McMahon determined that "the Partnership Agreement's removal scheme work[ed] as a condition subsequent." Id. at 38. She therefore "conclude[d] that [the limited partner] was required to send an additional notice to the Debtor after the ten day notice of removal period expired in order to effect the Debtor's removal." Id. She explained:
Id. at 38-39. The scheme contemplated by section 6(b) of the Sale Agreement required Magner to provide notice and wait at least seven days. The Sale Agreement did not automatically terminate at that point. Rather, termination would be effectuated only when Magner sent a second written termination notice (which he was "entitled," but not obligated, to do).
In St. Casimir, Judge McMahon concluded that the debtor was not served with a valid removal letter prior to the debtor's Chapter 11 filing and that "the automatic stay ... prevented] [the limited partner]
Based on the foregoing, the Court finds that the Sale Agreement was not terminated pre- or post-petition. Accordingly, the Bankruptcy Court's decision denying Debtor's motion to dismiss and granting Magner's motion for summary judgment is vacated and this case is remanded for further proceedings consistent with this opinion. The Clerk of Court is respectfully directed to terminate this appeal.
SO ORDERED.
