U.S. Bankruptcy Court
Where a debtor entered into a prepetition purchase and sale agreement, the agreement was not terminated prepetition, so the debtor must deliver title in according with the provisions of the agreement, but is relieved of all other obligations to perform under the agreement.
“Before the Court is the Debtor’s Objection to Claim of Manuel Garcia [ECF No. 46] (the ‘Claim Objection’) filed by Paul J. Phillips, Jr. (the ‘Debtor’) objecting to the claim of creditor Manuel Garcia and Garcia’s Motion for Relief from Automatic Stay [ECF No. 36] (the ‘Relief from Stay Motion,’ together with the Claim Objection, the ‘Contested Matters’). Garcia filed a proof of claim (‘Claim No. 3-1’) asserting rights to ‘the entire legal title to and equitable interest in the property’ at 89-91 Whitman Street, Unit 2, East Bridgewater, Massachusetts 02333 (the ‘Property’) based on a purchase and sale agreement executed prepetition by Garcia and Debtor on January 15, 2022 (the ‘Sale Agreement’). The Debtor seeks to have this Court determine that the Sale Agreement terminated prepetition necessitating the disallowance of Garcia’s claim. …
“At the heart of this dispute is whether the Sale Agreement terminated prepetition and, if it did not, what are its terms. …
“The Debtor asserts three arguments as to why the Sale Agreement terminated prepetition. The first two are unsupported by the express terms of the Sale Agreement. First, even assuming Garcia could not have obtained financing, Garcia possessed the exclusive right to terminate the Sale Agreement if he was unable to obtain financing. Nothing in the record establishes that Garcia terminated the Sale Agreement. Second, Garcia had the right to accept the Property and title as could have been delivered by the Debtor in its ‘then current condition.’ To this point, according to the Debtor, his inability to deliver marketable title caused the Debtor and Garcia to renegotiate the purchase price, and ‘if [the purchase price] is part of exercising a contingency or if the parties fail to reach a new agreement on essential terms,’ then such renegotiation ‘leads to termination of the original agreement.’ … Although the parties discussed a potential reduction in price, … such a negotiation, by itself, does not terminate the Sale Agreement.
“The third reason advanced by the Debtor — failure to complete the sale by the stated closing deadline as had been extended by further agreement — similarly does not establish termination. …
“Here, the actions of the parties after February of 2023 not only extended the closing deadline, but also waived the time is of the essence provision until a reasonable time to perform had been re-established. …
“The Sale Agreement was an executory contract as of the petition date subject to the establishment of a new deadline for closing and a formal termination of the contract. Accordingly, because Garcia remains in possession of the Property and the Sale Agreement was an executory contract at the time of petition that the Debtor has stated a clear intent to reject, the Court will approve the Debtor’s rejection, and Debtor ‘shall deliver title to [Garcia] in according with the provisions of [the Sale Agreement], but is relieved of all other obligations to perform under [the Sale Agreement].’ …
“The Debtor shall deliver title ‘in accordance with the provisions of such contract,’ but he is relieved from ‘all other obligations to perform under such contract.’ 11 U.S.C. §365(i)(2)(B). Pursuant to the statute, should Garcia elect to close pursuant to the Sale Agreement, the Debtor shall deliver title to the Property to Garcia ‘as is,’ notwithstanding any nonconformity with certain conditions of the Sale Agreement. …
“The Court directs Garcia to file a statement about his intent to enforce his rights under §365(i) on or before April 14, 2025. If Garcia intends to enforce his rights, the time for performance under the Sale Agreement shall be June 30, 2025, at noon or such other date and time as the parties may agree in writing or as may be ordered by the Court. At closing, Garcia shall pay the Debtor the Reduced Purchase Price, and the Debtor shall deliver title of the Property to Garcia. The Sale Agreement is deemed rejected as of the date of this Order, subject only to the potential election by Garcia under §365(i).”
In re: Phillips, Paul J., Jr. (Lawyers Weekly No. 04-002-25) (23 pages) (Panos, J.) (Chapter 13 Case No. 24-10032-CJP) (March 31, 2025).
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