In Re Shearin Family Investments, LLC
52 Bankr. Ct. Dec. (CRR) 61, 2009 Bankr. LEXIS 3128, 418 B.R. 584 (2009)
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Rule of Law:
A right to the equitable remedy of specific performance for a real estate contract is not a 'claim' under § 101(5) of the Bankruptcy Code if money damages are an inadequate remedy for the breach. Therefore, the debtor's obligation to convey the property is not a dischargeable debt and survives the bankruptcy proceeding.
Facts:
- Shearin Family Investments, LLC ('Shearin') was the developer of a two-building condominium project known as the Nautical Club.
- Beginning in or around 2005, prior to the project's development, Shearin offered to sell condominium units to individual investors to help fund construction costs.
- A number of individuals and entities (the 'purchasers') entered into real estate purchase agreements with Shearin for specific units.
- These purchasers paid the full purchase price for their designated units as set forth in the agreements.
- Shearin also obtained institutional financing from a lender, RBC, to fund the rest of the project.
- Shearin completed construction of one building but had not yet commenced construction on the second building.
Procedural Posture:
- Shearin Family Investments, LLC filed a petition for relief under Chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court.
- Several individuals and entities who had prepaid for condominium units filed proofs of claim against Shearin, asserting their claims were secured.
- Shearin, as the debtor in possession, objected to these claims, arguing they should be treated as general unsecured claims.
- The debtor and the claimants filed cross-motions for summary judgment on the issue of the claims' characterization.
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Issue:
Does a purchaser's right to specific performance for a fully paid real estate contract constitute a 'claim' under § 101(5) of the Bankruptcy Code that can be discharged in bankruptcy?
Opinions:
Majority - J. RICH LEONARD
No. A purchaser's right to specific performance for a real estate contract is not a 'claim' under the Bankruptcy Code because it does not give rise to an alternative right to payment. The court first rejected the purchasers' arguments that their payments created a secured interest through a resulting trust, constructive trust, or equitable lien. However, the court found that under North Carolina law, the purchasers, having paid in full under written contracts, were entitled to the remedy of specific performance. Citing § 101(5) of the Bankruptcy Code, the court explained that an equitable remedy constitutes a 'claim' only if the breach also creates a right to payment. Because money damages are considered an inadequate remedy for the breach of a real estate contract, the right to specific performance does not create an alternative right to payment. Therefore, the obligation is not a 'claim,' not a 'debt,' and is not dischargeable in bankruptcy, meaning the debtor's duty to convey the condos survives the proceeding.
Analysis:
This decision clarifies a critical limit on a debtor's ability to discharge obligations in bankruptcy. It establishes that certain non-monetary obligations, particularly the duty to convey unique property like real estate where specific performance is the appropriate remedy, can pass through bankruptcy unaffected. This protects parties who have fully performed their side of a contract for a specific, non-fungible asset. The ruling forces debtors and creditors to recognize that not all pre-petition obligations can be converted into a monetary claim and discharged, impacting how reorganization plans must treat such equitable interests.
