Rudolph J. DiMassa Jr., left, and Malcom Bates, right, of Duane Morris.

Introduction

In In re Brick House Properties, Bk. No. 20-26250, (Bankr. D. Utah June 11, 2021), the U.S. States Bankruptcy Court for the District of Utah denied a debtor's motion to reject its prepetition contract for the sale of real property under Section 365 of the Bankruptcy Code. The bankruptcy court found that because the debtor was already subject to a state court-specific performance order compelling it to take the ancillary steps necessary to close the sale, the contract was no longer executory and could not be rejected.

Background

The debtor in this case, Brick House Properties, LLC, owned real property and improvements in Riverton, Utah worth approximately $1.59 million as of December 2020. Included among the real property were about 1.4 acres of pastureland. On Aug. 3, 2016, Brick House entered into a real estate purchase contract to sell 1.005 acres of the pastureland to Vesna Capital, LLC for $250,000. The pastureland was located in a desirable suburb of Salt Lake City, and Vesna intended to subdivide the land into two residential building lots. The parties' contract provided that the deadline to close the sale "shall be 10 days after receiving Riverton City approval of the subdivision and recordation of the subdivided property."

Upon execution of the contract, Vesna immediately moved forward with the necessary applications for Riverton City's approval of its proposed subdivision, but disputes arose between Vesna and Brick House. Ultimately, Vesna commenced a state court action against Brick House asserting claims for, among other things, breach of contract. Vesna filed a motion for summary judgment, and Brick House responded with a motion for judgment on the pleadings. Brick House also moved to amend its answer to assert that the contract was void because it violated Riverton City's building code. The state court entered an order finding that the contract was valid, that Vesna had substantially performed its obligations under the contract, and that Brick House had breached the contract by interfering with Vesna's ability to obtain approval of its subdivision application. The state court denied Brick House's request to void the contract, finding that any violation of Riverton City's code could be resolved through the issuance of a variance. Accordingly, the state court ordered specific performance requiring Brick House to obtain a variance from Riverton City or, in the alternative, giving Vesna power of attorney to obtain the variance required for approval of the subdivision.