Relating to Real Estate

In Ko v. Messer, Chapter 11 Trustee,No. 20-02866, 2021 WL 4463029 (E.D.N.Y. Sept. 29, 2021), the U.S. District Court for the Eastern District of New York (District Court) rejected a contract purchaser’s argument that the early closing of a bank wire window excused the purchaser’s performance under a contract for the sale of real property. As a result, the District Court affirmed a bankruptcy court decision, granting the motion of a Chapter 11 trustee to allow the trustee to retain a deposit and buyer’s premium totaling $3,822,000.

The purchaser agreed to be a stalking horse under a contract with the Chapter 11 trustee to buy property for $27,300,000 plus a 4% buyer’s premium. The terms of sale were clearly set forth by court orders and in a separate stalking horse purchase agreement. The purchaser paid a 10% deposit, and after the purchaser was the successful bidder at an auction, she paid the 4% buyer’s premium. The terms of sale required that closing be held by June 11, 2020, with time being of the essence. The bankruptcy court order approving the sale to the purchaser authorized the Chapter 11 trustee to agree to a 30-day extension of the closing date if the purchaser paid an additional 10% deposit.

On June 9, just two days prior to the closing date, the purchaser requested a 30-day extension. The Chapter 11 trustee agreed on the condition that the purchaser pay the additional 10% deposit by June 10 and execute an Acknowledgment of the terms of sale with respect to the requested extension.

For reasons unexplained by the decision, the Acknowledgment document was not agreed to by the parties until mid-afternoon on June 10. Although the purchaser had arranged to have her grandson wire the deposit, she delayed authorizing the wire until after 4 p.m. following her receipt of the Acknowledgment. Unfortunately for the purchaser, her grandson’s bank closed its wire window at 4 p.m. even though the bank was open until 5 p.m. As a result, the additional deposit was not wired on June 10. The Chapter 11 trustee declared the purchaser to be in default, and after obtaining the bankruptcy court’s ruling allowing him to retain the deposit and buyer’s premium, the Chapter 11 trustee was able to sell the property to a third party for $28,100,000 plus a buyer’s premium of $1,124,000.

The purchaser appealed the bankruptcy court’s decision to the District Court and argued that:

• The doctrine of impossibility of performance excused the purchaser’s performance,
• The Acknowledgment was a contract of adhesion, and
• The forfeiture of the deposit and buyer’s premium totaling $3,822,000 was an unenforceable penalty as opposed to liquidated damages.

The District Court overruled the purchaser’s arguments. As to impossibility, the District Court initially noted that since payment of the additional deposit was a condition to the extension of the closing date, whether performance was impossible, was “irrelevant.” Moreover, the District Court found that payment of the additional deposit was “neither objectively impossible nor frustrated by an unanticipated event that could not have been reasonably foreseen.” The District Court further concluded that the Acknowledgment was not a contract of adhesion because it only restated the terms of sale. Finally, the District Court dismissed the purchaser’s penalty argument, initially noting that the argument was an impermissible attack on the terms of the bankruptcy court’s order approving the sale, which was not appealed from and became final. Therefore, not only did the Chapter 11 trustee realize an additional $1,924,000 from the resale of the property, but he was permitted to retain the $3,822,000 previously paid by the purchaser as liquidated damages.

Observations: On the surface, the outcome of this decision seems overly generous in favor of the Chapter 11 trustee and unfair to the purchaser. However, the claim arose in the context of a bankruptcy sale where the interests of creditors are paramount. Moreover, the purchaser had no one to blame but herself. As the District Court observed in its opinion, she could have paid the additional deposit into escrow while the Acknowledgment was being negotiated. She also could have approached the Chapter 11 trustee earlier than two days before the closing date. In addition, the purchaser made little effort at trial to prove that the bank’s early closing of its wire window was unexpected or could not have been anticipated. Instead, the purchaser presented the type of “my dog ate it” defense that courts have uniformly rejected.

Lawrence Coppel wrote this article. Larry, former Senior Counsel at Gordon Feinblatt, can be reached at lawrencecoppel@gmail.com. Ed Levin edited this article.