IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
May 13, 2009
No. 07-41057 Charles R. Fulbruge III
Clerk
In the Matter of: ELDERCARE PROPERTIES LTD
Debtor
-----------------------------------------------------------
VALLEY EDUCATIONAL FOUNDATION, INC
Appellant
v.
ELDERCARE PROPERTIES LTD
Appellee
*****************************************
Cons. W/ 08-40244
In the Matter of: ELDERCARE PROPERTIES LTD
Debtor
-----------------------------------------------------------
ELDERCARE PROPERTIES LTD
Appellant
v.
VALLEY EDUCATIONAL FOUNDATION, INC
Appellee
No. 08-40244 Cons. w/ 07-41057
Appeals from the United States District Court
for the Southern District of Texas
Before O’CONNOR, Associate Justice (Ret.),* and WIENER and STEWART,
Circuit Judges.
SANDRA DAY O’CONNOR, Associate Justice (Retired):
These consolidated appeals concern the vitality of the lease of a nursing
home facility, Valley Grand Manor. The lessor, Valley Educational Foundation
(“VEF”), argues that it validly terminated the lease in June 2005, before the
lease’s primary term expired. It also argues that if the lease survived the
attempted termination, the lessee, ElderCare Properties Ltd. (“ElderCare”),
failed effectively to exercise its option to renew the lease for an additional five-
year term and that the lease consequently expired in December 2006. ElderCare
argues that VEF never effectively terminated the lease. As to its failure strictly
to comply with the lease’s renewal terms, ElderCare contends that Texas
common law principles of equitable intervention render its renewal effective.
The dispute has unfolded in the course of ElderCare’s Chapter 11
bankruptcy. The issue whether the lease was validly terminated arose when
ElderCare’s bankruptcy estate moved to assume the lease in order to reorganize
for the sole purpose of continuing to operate the nursing home. The United
States Bankruptcy Court for the Southern District of Texas sided with
ElderCare and allowed it to assume the lease, concluding that the lease had not
been terminated. The court also ordered the parties to mediate certain ongoing
lease terms. While the mediation process unfolded, ElderCare failed to provide
*
The Honorable Sandra Day O’Connor, Associate Justice of the United States Supreme
Court, (Ret.), sitting by designation, pursuant to 28 U.S.C. § 294(a).
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timely notice of its intent to renew the lease, and VEF later sought to evict
ElderCare, arguing that the lease had expired while the parties were pursuing
mediation. Again the Bankruptcy Court sided with ElderCare, invoking Texas
common law principles of equitable intervention to excuse ElderCare’s technical
omission. The United States District Court for the Southern District of Texas
affirmed the former conclusion, but reversed the latter. It held: (I) the lease was
not terminated in June 2005 and was thus properly assumed; and (ii) Texas
principles of equity could not excuse ElderCare’s failure to provide timely notice
and as a result the lease expired in December 2006.
We agree with the Bankruptcy Court on both questions. We conclude that
VEF failed to terminate the lease and that the lease was properly assumed by
ElderCare’s bankruptcy estate. We further conclude that principles of equitable
intervention under Texas law are properly applied in the unique circumstances
of this case in order to render effective ElderCare’s five-year renewal.
I. PERTINENT FACTS AND PROCEDURAL HISTORY 1
A. Background.
VEF is a non-profit organization owned by the Seventh Day Adventist
Church. When it ran into difficulty operating two nursing homes and a
retirement facility that it owned, it asked Glen Hamel, a member of the Church
and the owner of ElderCare, to join VEF’s board and to offer help. With Hamel’s
assistance, VEF sold one of the nursing homes and the retirement facility. This
dispute involves the remaining nursing home, Valley Grand Manor. Under a
management contract, ElderCare took control of that facility’s operations. In
1995, the parties went a step farther, consummating a lease of the facility to
1
We set forth the facts as found by the Bankruptcy Court in its October 12, 2006, and
April 23, 2007, decisions. The former decision is reported at 2006 WL 4125090 and will be
cited as “Assumption Order, p.__, ¶__.” The latter is reported at 2007 WL 1217891 and will
be cited as “Renewal Order, p.__.”
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ElderCare. In light of the church’s policy that its members should not litigate
against one another, the lease agreement included several uncommon provisions
requiring good faith negotiations and mediation in certain contexts.
1. Maintenance of minimum insurance coverage.
In two provisions, the lease obliged ElderCare to maintain minimum
insurance coverage. Section 6.07 set minimum coverage levels for “claims for
personal injury or property damage under a policy of general public liability
insurance.” Section 6.08 did so for “claims arising out of malpractice.” Section
6.16 of the lease also provided for renegotiation of the coverage minimums as
follows:
In the event that either party shall at any time deem the
limits of the personal injury or property damage public
liability insurance then carried to be either excessive or
insufficient, the parties shall endeavor to agree on the proper
and reasonable limits for such insurance . . . . If the parties
shall be unable to agree thereon, the proper and reasonable
limits for such insurance to be carried shall be determined by
a mediator jointly selected . . ., provided however that the
terms of the underlying Base Lease shall control the
minimum insurance requirements which [Eldercare] is
required to provide hereunder.
2. Renegotiation of rent terms.
Because the nursing home derived a substantial portion of its revenue
from Medicare/Medicaid reimbursements (more than 85% before 1995), the
parties, in sections 2.07 and 14.09 of the lease, provided for the renegotiation of
the rent terms in the event of substantial changes in those programs:
[VEF] recognizes that the primary source of revenue for the
Facility is derived from residents from whom the payer source
is either Medicaid or Medicare. Thus, should there be
substantive changes and/or reductions in the way that
Medicaid or Medicare and/or their successor programs
reimburse the Facility for providing care, [VEF] at
[Eldercare]’s request will enter into good faith negotiations
with respect to the amount of Basic Rent and/or Additional
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No. 08-40244 Cons. w/ 07-41057
Rent that is due and payable under the terms of this Lease
Agreement.
....
[VEF and Eldercare] agree that should there be significant
changes in the Medicare and/or Medicaid reimbursement
methodology, [they] will proceed in good faith to amend the
terms of this Agreement in a manner that represents a
reasonable accommodation of the interests of each party.
3. Default by ElderCare and VEF’s right to terminate.
Article 13 of the lease addressed default and termination. Section 13.01(b)
provided that it would be “deemed [an] even[t] of default” by ElderCare if
ElderCare “fail[ed] to comply with any term, provision, or covenant of th[e] Lease
. . . and d[id] not cure the failure within thirty (30) days after written notice.”
Section 13.02(a) gave VEF the option to terminate the lease upon the occurrence
of any default.
4. Term of the Lease.
Article 1 of the lease set December 31, 2006, as the lease’s expiration date.
It also granted ElderCare an option to extend the lease for an additional five-
year term. In order to exercise that option, ElderCare was obliged to provide
VEF written “notice of its intention to do so not later than 30 days prior to the
expiration of the Lease term,” on or before December 1, 2006.
B. VEF’s appeal.
1. ElderCare’s failure to maintain the minimum insurance
coverage and VEF’s purported termination of the lease.
In 1999, medical malpractice rates for Texas nursing homes started to
climb dramatically. The business landscape was further complicated by a series
of major changes to Texas’s Medicare/Medicaid program that began in 2000.
That year, ElderCare made several presentations to the VEF Board to explain
these program changes and their purportedly adverse implications for
ElderCare’s business. The parties subsequently had several discussions on this
issue. In August 2000, ElderCare sought to initiate a renegotiation of the rent
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No. 08-40244 Cons. w/ 07-41057
terms pursuant to §§2.07 and 14.09 of the lease, first at a meeting and then in
writing. VEF responded with a demand that ElderCare agree to a host of
substantive changes to the lease (beyond the scope of rent terms) before VEF
would commence renegotiations. VEF’s preconditional amendments were
memorialized in a VEF Board resolution and a letter to ElderCare. ElderCare
refused to agree to the amendments, and a stalemate ensued.
Facing mounting rates, at the end of 2000 ElderCare reduced its insurance
coverage below the lease minimums. VEF did not object to ElderCare’s coverage
levels for policy years 2001, 2002, or 2003. In 2003, ElderCare was unable to
obtain malpractice insurance. To shield itself from liability, it subleased Valley
Grand Manor to a newly-created corporation. The arrangement mirrored one
VEF had used before leasing the facility to ElderCare. With this sublease in
place, ElderCare terminated its general liability coverage, believing it no longer
faced general liability. ElderCare never sought VEF’s consent and VEF never
objected to the sublease arrangement. From 2003 to 2005, while the sublease
was in effect, more than 50% of nursing homes in Texas carried no malpractice
coverage.
In the summer of 2004, ElderCare made a series of presentations to VEF’s
board and the parties held several other meetings. ElderCare endeavored to
explain its difficulty securing insurance coverage and sought to renegotiate the
lease minimums. VEF refused to negotiate to this end and notified ElderCare
of its position that ElderCare was in default. Nevertheless, the parties
continued to discuss the issue; VEF made no effort to terminate the lease and it
extended the time for ElderCare to comply. At these meetings, ElderCare also
raised again the challenges it faced in light of the changes being made to the
Texas Medicare/Medicaid program. ElderCare sought renegotiation of the rent
and retroactive adjustments for overpayment without success. Again VEF
insisted upon extensive amendments to the lease as a precondition to
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renegotiation and again the issue went nowhere.
On January 3, 2005, ElderCare notified VEF of its below-minimum
general liability coverage and it failed to furnish proof of malpractice coverage
for 2005. VEF sent a purported notice of default on January 11, 2005 (“January
11 letter”). In pertinent part, the letter stated:
We received the [information you] sent to us on January 3,
2005. Thank you for responding by the deadline, but we
have several concerns about it. The amount of coverage for
the general liability does not meet the requirements of the
lease and there was not any coverage for medical
malpractice insurance that is also required by the lease.
These are defaults according to the lease. If you want to ask
the board for a possible reconsideration of the lease
insurance requirements, ElderCare, Inc. will need to submit
letters of denial of coverage and copies of quotes on
insurance that make it cost prohibitive, on or before January
21, 2005. The Valley Educational Board will consider
information you supply and then will give you a response.
ElderCare, Inc. will need to respond to this letter by [blank].
ElderCare responded orally and by scheduling a meeting, which took place
on January 19. At the meeting, Hamel and Errol Eder, VEF’s Vice President,
discussed an extension of the time in which ElderCare could respond with more
information and the possibility of a renegotiation of the insurance minimums.
ElderCare later sent to VEF emails memorializing its understanding that it had
been granted additional time to respond. VEF did not dispute ElderCare’s
characterization of the meeting. Subsequent communications supported
ElderCare’s understanding that it faced no immediate deadline by which to
secure insurance coverage.
On March 1, ElderCare provided an extensive report to VEF’s lawyer,
which it understood to satisfy the informational requirement of the January 11
letter. VEF’s Board never received the report, and ElderCare never received a
response.
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In May, VEF’s Board voted to terminate the lease. On June 10, VEF sent
ElderCare a purported termination letter, which identified ElderCare’s failure
to secure malpractice insurance as the triggering breach. ElderCare continued
to search for insurance and obtained a new (below-minimum) malpractice policy
on June 25.
VEF brought a forcible entry action in county court, and a jury returned
a verdict in its favor. On October 25, while that judgment was on appeal,
ElderCare filed a Chapter 11 bankruptcy petition.
2. Bankruptcy Court proceedings.
Once ElderCare entered bankruptcy, VEF filed a claim against the
bankruptcy estate seeking damages resulting from ElderCare’s purported breach
of the lease’s minimum insurance coverage provisions. ElderCare (as debtor in
possession) countered with a motion to assume the lease in bankruptcy under
11 U.S.C. §365 and with objections to VEF’s claim, demanding offsets and
recoupment in light of VEF’s alleged breach of its obligations to renegotiate the
rent and coverage limits. VEF opposed the motion to assume, arguing that the
lease was validly terminated on June 10 and thus not assumable. The
Bankruptcy Court held a three-day trial, during which more than 10 witnesses
testified and dozens of exhibits were introduced.
(a) The Bankruptcy Court granted ElderCare’s motion to assume the
lease. It held that VEF failed effectively to terminate the lease for three reasons.
First, the court concluded that after sending the January 11 letter, VEF
agreed to an indefinite extension of time for ElderCare to respond, and it never
revoked that agreement. The court found that at the January 19 meeting, “Mr.
Hamel and Mr. Eder discussed ElderCare’s request for more time and to deal
with and document the changing insurance market and as well as changing the
insurance requirements under the Lease” and that “Errol Eder on behalf of VEF
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agreed to indefinitely extend the deadline for ElderCare to obtain malpractice
insurance.” The court further found that this grant of an indefinite extension
was confirmed by the subsequent email exchanges between the parties and by
ElderCare’s ongoing efforts to provide the requested information, without
objection or clarification from VEF. “VEF did not respond to [ElderCare],” the
court found, “but allowed ElderCare to continue to believe that VEF was working
with them on the insurance issue which is what ElderCare continued to believe.”
Second, the court held that VEF’s January 11 letter “was not sufficient
under Texas common law to trigger [VEF’s] right to terminate the Lease with
ElderCare.” The court based this conclusion on its finding that the January 11
letter “did not make a demand for performance upon ElderCare” and “did not
inform ElderCare that the Lease [could] be terminated unless [ElderCare] took
action to obtain insurance as called for by the Lease.”
Lastly, the Bankruptcy Court concluded that VEF’s conduct excused
ElderCare’s failure to perform its minimum insurance coverage obligations. The
court held that VEF breached its obligation under §6.16 to negotiate (and
potentially mediate) a reduction in the malpractice insurance limits for policy
year 2004–2005. The court further held that this breach excused ElderCare’s
failure to secure malpractice coverage in policy years 2004 and 2005. Similarly,
the court held that VEF’s failure to object to ElderCare’s coverage levels in policy
years 2000, 2001, 2002, and 2003 constituted a waiver of any breach by
ElderCare in those years.
The court also concluded that ElderCare satisfied §365’s conditions for
assumption. See 11 U.S.C. §365(b)(1) (“If there has been a default,” the lease
cannot be assumed unless the debtor: (a) “cures, or provides adequate assurance
that the trustee will promptly cure, such default;” (b) “compensates, or provides
adequate assurance that [it] will promptly compensate, . . . for any actual
pecuniary loss;” and (c) “provides adequate assurance of future performance.”).
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(b) The court dispensed with VEF’s bankruptcy claim and ElderCare’s
objections and demand for set-off by concluding that “[b]oth ElderCare and VEF
breached the Lease, but failed to prove damages or at best [were] entitled only
to nominal damages for their mutual breaches.”
3. District Court proceedings.
In a brief, oral ruling, the District Court adopted the reasoning of the
Bankruptcy Court and affirmed its judgment.
C. ElderCare’s appeal.
1. The negotiation of the terms of the court-ordered mediation
and ElderCare’s failure to provide timely notice of its intent to
renew the lease.
The Bankruptcy Court’s October 12, 2006, opinion also held that
ElderCare had a right to mediate new insurance coverage minimums with VEF.
To that end, the court’s November 16 judgment “ORDERED that ElderCare and
VEF [were] to promptly arrange and participate in this mediation.” The
judgment also referenced a plan of reorganization that contemplated ElderCare’s
continued operation of the Valley Grand Manor nursing home pursuant to its
lease with VEF. Six days after the Bankruptcy Court issued its opinion, on
October 18, ElderCare wrote to VEF. The letter proposed new insurance
coverage minimums and, in the event they were unacceptable to VEF, requested
mediation and proposed a mediator.
Despite ElderCare’s diligence, the process did not proceed smoothly. VEF
responded over a month later, on December 5. It asserted that the appointment
of ElderCare’s suggested mediator “would not be appropriate,” but did not
propose an alternative candidate. In other respects, VEF’s response fell short
of willing cooperation. For example, VEF insisted that there was “[a] need to
develop procedures which would allow discovery and other traditional litigation
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steps to be implemented as a predicate to the [mediation].” And VEF required
ElderCare to provide extensive information before VEF would even discuss the
procedures and timetable for mediation. Three days after it received this
response, ElderCare indicated that it would file an emergency motion to compel
mediation and for sanctions if VEF continued not to cooperate.
In the following days, extensive negotiations proceeded unsuccessfully.
VEF capitulated to a discussion of the substance of a mediation plan, dropping
its demand for the development of “procedures which would allow discovery and
other traditional litigation steps” and for the provision by ElderCare of extensive
information. However, VEF’s proposed mediation terms were aggressive at best.
For example, VEF proposed to empower the mediator to revisit certain of the
Bankruptcy Court’s critical factual findings and legal conclusions. And it sought
to delay the implementation of mediated coverage minimums until the resolution
of its appeal of the court’s assumption decision. ElderCare ultimately filed an
emergency motion to compel mediation, as promised. The bankruptcy court set
that motion for hearing on December 19. On December 18, the day before that
hearing was to occur, VEF agreed to the process for mediation and ElderCare
withdrew its motion. Under the terms of that agreement, the mediation was to
take place on February 21, 2007.
That plan was short lived. Just over two weeks after the agreement was
reached, on January 3, 2007, VEF informed ElderCare that the lease had
expired on January 1 because ElderCare had failed to provide written notice of
its intent to renew by December 1, 2006, as required by the lease. VEF then
filed a motion to compel ElderCare to vacate the premises.
2. Bankruptcy Court proceedings.
The Bankruptcy Court denied VEF’s motion. It construed Texas law to
provide for equitable intervention to excuse a technical failure in the exercise of
an option “when the delay in fulfilling [the] condition precedent in a lease has
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been slight, the loss to the lessor small, and the failure to grant the relief to the
lessee would resul[t in] such hardship as to make it unconscionable to enforce
literally the condition precedent of the lease.” Renewal Order, p. 2 (citing Jones
v. Gibbs, 130 S.W.2d 265, 271 (Tex. 1939)). The court concluded that all three
factors were met, and it intervened to excuse ElderCare’s technical omission
under this equitable doctrine.
Reviewing the evidence presented, the court found that “[a]lthough it was
not sent written notification . . ., VEF was notified on many occasions of
[ElderCare]’s intent to exercise its option to extend the Lease,” and it found
nothing that “indicated that VEF considered the Lease terminated or that it did
not believe [ElderCare] intended to exercise its option to renew the Lease.” In
reaching this conclusion, the court noted that it had “ordered the Debtor and
VEF to enter into binding mediation for insurance rates and to renegotiate the
Lease rate.” And it stressed that the “[n]egotiations between [ElderCare] and
VEF regarding the terms and conditions of mediation, discovery disputes, and
related procedures continued past” the renewal notice deadline. During these
negotiations, “VEF insisted on terms, provisions, and procedures for mediation
and rent renegotiation without ever mentioning that VEF considered the Lease
terminated;” VEF’s “communications, agreements, court pleadings, [and]
representations to the Court” failed “[to] indicat[e] that VEF considered the
Lease terminated or that it did not believe [ElderCare] intended to exercise its
option to renew the Lease.” In particular, VEF entered into an agreement to
mediate the insurance issue 18 days after the deadline for renewal notice had
passed, scheduling the mediation to take place approximately six weeks after the
renewal term was to commence.
The court held that the delay in providing renewal notice was slight
because ElderCare “gave written notice immediately (one day) after discovering
the oversight and the delay was only 33 days after the deadline” — that is,
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Eldercare gave written notice 33 days after the December 1 renewal deadline
and a mere three days after the lease’s December 31 expiration. It also found
that VEF “failed to demonstrate that it [would] be harmed by allowing equity to
intervene.” “VEF’s loss [was] small, considering it was actively negotiating
terms of the Lease, pursuing its appeal of the Court’s prior order allowing
assumption of the Lease, and behaving in every aspect as if it knew that
[ElderCare] intended to exercise the extension.”
Lastly, the court held that “[f]ailure to extend the Lease . . . [would]
creat[e] such a hardship to [ElderCare] that it [would be] unconscionable to
enforce the term literally.” ElderCare “invested over $300,000 in fees and costs
alone in proving that VEF did not terminate the Lease pre-petition.” This effort
was “for the sole purpose of assuming the Lease and reorganizing the business
which necessarily depended on the option being exercised and the Lease
extended” because the lease was “the only basis” for ElderCare’s “continu[ation]
as a viable business.” In short, the court explained that “[t]he entire chapter 11
case . . . involved and required preservation of the Lease option period.”
Weighing the equities, the court reasoned that “[a]t best . . . VEF asserted
its termination argument only after it realized there was no written notice sent
to it.” And “[a]t worst, VEF laid behind the log in this case, continuing to
negotiate with [ElderCare] regarding Lease terms and appearing in Court, all
the while not pointing out that the Lease was terminated under its theory.”
Under these circumstances, the court concluded that equitable intervention was
warranted.
Remarking that “what’s sauce for the goose is sauce for the gander,” the
Bankruptcy Court also found that “the notice provision of the Lease [was]
incapable of performance because it require[d] notice to be sent to an address not
[provided].” Finally, as a third basis for denying VEF’s motion, the court held
that it could order the cure of ElderCare’s failure to provide renewal notice
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pursuant to its authority to enforce its automatic bankruptcy stay.
3. District Court proceedings.
On appeal, the District Court reversed the judgment of the Bankruptcy
Court. Its opinion was rendered in a brief, telephonic hearing. As a result, the
court’s reasoning is less than clear. The court “[did not] think that [it] as a Court
[could] . . . rewrite the lease under equitable principles.” And it held that “the
equitable principles here d[id] not, as a matter of law, allow . . . [the court to]
excuse the non-compliance of a very important part of th[e] lease agreement,
which was the renewal notice.” The court “assume[d] these [were] conclusions
of law;” it did not call into question any of the Bankruptcy Court’s factual
findings.
II. DISCUSSION
We have jurisdiction to consider these appeals under 28 U.S.C. §158(d).
We apply the same standards of review to the Bankruptcy Court’s findings of
fact and conclusions of law as applied by the District Court. Nesco Acceptance
Corp. v. Jay (In re Jay), 432 F.3d 323, 325 (5th Cir. 2005). Accordingly, we
review the Bankruptcy Court’s findings of fact for clear error and its conclusions
of law de novo. Id. Clear error review is “especially rigorous” when we review
a lower court’s assessment of trial testimony, “because the trier of fact has seen
and judged the witnesses.” United States v. Casteneda, 951 F.2d 44, 48 (5th Cir.
1992). “[I]n bankruptcy proceedings, courts of appeals look to state law to decide
contract issues.” River Prod. Co. v. Webb (In re Topco, Inc.), 894 F.2d 727, 738
(5th Cir. 1990); see also Butner v. United States, 440 U.S. 48, 55 (1979).
A. VEF’s appeal.
VEF challenges the Bankruptcy Court’s grant of ElderCare’s motion to
assume the lease, arguing that the lease was effectively terminated and thus not
assumable. VEF also argues that the Bankruptcy Court exceeded its authority
by foreclosing VEF’s right to assert in the future claims it was not obliged to join
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in the underlying bankruptcy litigation. We reject both arguments.
1. ElderCare’s assumption of the lease.
Under 11 U.S.C. §365(a), a debtor in bankruptcy, “subject to the court’s
approval, may assume . . . any executory contract or unexpired lease.” However,
the debtor may not assume a lease if it “is of nonresidential real property and
has been terminated under applicable nonbankruptcy law prior to [bankruptcy].”
§365(c)(3) (emphasis added). As VEF’s brief recognizes, “[t]he cardinal issue in
this matter has always been whether the Lease was terminated prior to
ElderCare’s petition for bankruptcy.” The Bankruptcy Court concluded that
VEF failed effectively to terminate the lease for three reasons: First, it concluded
that after the January 11 letter, VEF agreed to an indefinite extension of time
for ElderCare to respond, and VEF never revoked that agreement. Second, the
Bankruptcy Court held that the January 11 letter was insufficient under Texas
common law to provide notice of termination. Third, the court held that
ElderCare’s failure to perform its insurance coverage obligations was excused by
VEF’s breach of its promise to renegotiate the coverage minimums in good faith.
We affirm on the first basis, and we thus do not reach the other two.
As the Bankruptcy Court stressed, the January 11 letter set forth the
information ElderCare would need to provide in order “to ask [VEF] for a
possible reconsideration of the lease insurance requirements.” The letter further
provided that VEF “w[ould] consider [the] information . . . suppl[ied] and then
w[ould] give [ElderCare] a response.” In response to this letter, Hamel promptly
scheduled a meeting with Eder, which took place on January 19. Having heard
testimony from both Hamel and Eder, the Bankruptcy Court found that at their
meeting they “discussed ElderCare’s request for more time . . . to deal with and
document the changing insurance market and as well as changing the insurance
requirements under the Lease.” And “Eder on behalf of VEF agreed to
indefinitely extend the deadline for ElderCare to obtain malpractice insurance.”
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In support of this finding, the Bankruptcy Court discussed Hamel’s follow-
up shortly after the meeting and VEF’s response. On January 27, Hamel sent
Eder an email that stated:
It was a pleasure having lunch with you last Wednesday.
As we discussed there has been a sea of changes in the mal-
practice/professional liability insurance markets over the
last few years. As I promised at our meeting, I have asked
our insurance carrier to provide an outline of these changes
and how it has effected Valley Grande Manor. Also, I am
seeking a way by which Valley Grande Manor can procure
professional liability in accordance to the spirit of the lease
between VEF and VGM.
You indicated a willingness to allow some additional time to
accomplish this beyond the date noted in the letter from
John Page which was dated January 11, 2005. I would
anticipate being back in touch with you regarding this
matter no later than mid next week and would probably like
to schedule a brief meeting with you at that time.
Thank you for the meeting and I appreciate the spirit of
cooperation that was exhibited in our discussions.
Eder responded to the email, “thanx for the update.” Neither “[he], nor
anyone from VEF, responded . . . with any objection, clarification, or denial, as
to the contents of the email or provide[d] any notice that the Lease would
terminate in approximately 20 days.” Assumption Order, p.18, ¶ 125. On
February 2, ElderCare again wrote Mr. Eder at VEF that “our insurance broker
is working diligently on our professional liability coverage.” Eder again
responded “Thanx for the update,” and he promised to forward the
correspondence to John Page, the author of the January 11 letter.
The Bankruptcy Court also stressed that Hamel began to provide the
information requested. In March he “provided Mr. Eder with the reports on
progress in obtaining information by furnishing copies of two letters that he
received from his insurance agents reflecting the work his agents were doing in
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attempting to find professional liability coverage.” Id. p.19, ¶ 130. The letters
Hamel provided “documented over a dozen insurance companies that were being
contacted to provide the malpractice insurance and contained the information
that ElderCare understood was to be furnished to VEF during this search period.
Id. p.19, ¶ 131. In June Hamel continued to furnish information about Medicaid
reimbursement problems. The Bankruptcy Court found that “no ‘response’ was
ever given by VEF to the information and communications of ElderCare to VEF
concerning insurance and no notice was given that the agreed ‘extension’ of time
to communicate and ‘negotiate’ had expired.” Id. 20, ¶ 137.
In sum, the Bankruptcy Court found: With its January letter, VEF
explicitly invited ElderCare to pursue renegotiation and to provide information
to that end. VEF also agreed to respond to the information provided. In
response, ElderCare promptly arranged a meeting, during which VEF agreed
indefinitely to extend the time for ElderCare to provide the requisite
information. ElderCare “actively and diligently,” id. p.17, ¶ 119, worked to
secure the necessary information, and it provided information as it was obtained.
ElderCare’s communications reflected the parties’ agreement indefinitely to
extend any deadlines, and VEF never made any objections or suggestions to the
contrary. VEF also failed to provide the promised response to the information
submitted by ElderCare.
These factual findings amply support the Bankruptcy Court’s conclusion
that VEF indefinitely extended the time for ElderCare to respond to VEF’s
January letter and that VEF did not revoke that extension before purporting to
terminate the lease five months after it sent the January 11 letter. That
conclusion, in turn, is fatal to VEF’s contention that it effectively terminated the
lease before ElderCare entered bankruptcy. E.g., Smith v. Hues, 540 S.W.2d
485, 488 (Tex. Civ. App.—Houston [14th Dist.] 1976, writ ref’d n.r.e.) (“[E]ven
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where time is of the essence, [a] stipulated time limit may be extended . . . by
agreement[.]”).
We are not persuaded by VEF’s contention that the Bankruptcy Court’s
factual findings were clearly erroneous. VEF makes two arguments to this
effect. First, it argues that “there was no evidence at the Trial that VEF ever
agreed to indefinitely extend the deadline for ElderCare to obtain malpractice
insurance.” This argument is at best without merit. It ignores the entirety of
the Bankruptcy Court’s analysis. As described above, the Bankruptcy Court
explicitly referenced testimony and exhibits that directly supported its factual
findings.
Second, VEF argues that “[ElderCare] admit[ted] that no indefinite
extension was granted.” VEF premises this purported concession on short
excerpts of Hamel’s trial testimony and his January 27 email. VEF cites the
following exchange during Hamel’s testimony:
Q: [D]id you discuss whether or not the deadline in the
January 11 letter was important to Mr. Eder to enforce, or
anything to that effect?
A: I don’t believe it was discussed in those terms, but I—
Q: How was it discussed?
A: I indicated that I would like to sit down, where we had
the decision makers present, get whatever documents we
need, that they need, the financial information. He asked me,
“Will you bring your financial information?” I said, “Yes.” I
said, “Let’s schedule a meeting and get this taken care of.”
And as we left the meeting, I remember shaking his hand,
and said, “Errol, you know my number. Give me a call. Let’s
get a meeting set up.”
Q: Now, with respect to the time within which to do this,
what was the agreement that was reached?
A: There was no specific time.
Q: All right. Was it some sort of open-ended—
A: I did not believe it was open-ended. It was my hope
and impression that this would happen sooner rather than
later. (emphasis in brief).
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As to the January 27 email, VEF harps on Hamel’s statement that he “would
anticipate being back in touch . . . regarding th[e] matter no later than mid next
week and would probably like to schedule a brief meeting . . . at that time.”
VEF’s reliance on these excerpts is misplaced. We think the trial
testimony undermines its position. It reflects that Hamel and Eder did not
“discuss whether or not the deadline in the January 11 letter was important to
Mr. Eder to enforce, or anything to that effect.” To the contrary, the parties
discussed that Hamel would “[g]et whatever documents . . . they need[ed]” and
then they would “schedule a meeting and get [the issue] taken care of.” Despite
this testimony, VEF understands Hamel’s statements that he “did not believe
[the extension of time] was open-ended” and that it was his “hope and
impression that this would happen sooner rather than later,” as a concession
that there was no agreement to extend discussions. This understanding strains
credulity. It is clear that Hamel meant only to acknowledge that VEF’s
willingness to continue discussions would expire at some point and his related
hope that the matter would be resolved expeditiously, in the “spirit of
cooperation.” He recognized that the extension was not “open-ended,” but did
not suggest that a deadline was ever established. This is consistent with the
Bankruptcy Court’s finding that the parties agreed indefinitely to extend
ElderCare’s deadline, especially when the testimony is considered in light of the
substantial evidence described above. Certainly, we cannot conclude that the
Bankruptcy Court clearly erred by declining to adopt VEF’s understanding of
Hamel’s testimony.
The excerpt from Hamel’s January 27 email is similarly unavailing.
Hamel wrote that he “anticipate[d] being back in touch . . . regarding this matter
no later than” a week after sending the email. VEF insists that this anticipation
amounted to a concession that there was no indefinite extension of time. We fail
to see how Hamel’s estimation of the time required to compile certain
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No. 08-40244 Cons. w/ 07-41057
information could reflect a belief that he would not be accorded that time. And
we find significantly more illuminating the facts that Hamel corrected his
optimistic anticipation by writing to Eder within a week to inform Eder that
Hamel’s team was “working diligently” to respond; that Eder did not object to
Hamel’s tardiness; and that Hamel ultimately provided the information
approximately one month late. If anything, the parties’ behavior, despite
Hamel’s anticipation, bolsters the Bankruptcy Court’s conclusion that the
parties agreed to an indefinite extension of time, especially when considered in
light of the substantial evidence described above. We cannot conclude that the
Bankruptcy Court clearly erred by declining to adopt VEF’s understanding of
Hamel’s email.
We find no error in the Bankruptcy Court’s conclusion that VEF granted
ElderCare an indefinite extension of time in which to respond to VEF’s January
11 letter and that VEF never revoked that extension. On this basis, we affirm
the decision of the District Court sustaining the Bankruptcy Court’s judgment
of November 14, 2006, allowing ElderCare to assume the lease.
2. The scope of the Bankruptcy Court’s Judgment.
VEF also challenges the scope of the Bankruptcy Court’s judgment,
arguing that it erroneously “prohibited VEF from bringing against ElderCare
any permissive counterclaims or any unrelated claims it might have but which
were not then before the Court.” We find it difficult to conceive a claim VEF
might assert in the future that would not qualify as a mandatory counterclaim
“aris[ing] out of the transaction or occurrence that [was] the subject matter”
before the Bankruptcy Court. F ED. R. C IV. P. 13(a)(1)(a); see, e.g., Incas &
Monterey Printing & Packaging, Ltd. v. M/V SANG JIN, 747 F.2d 958, 964 (5th
Cir. 1984) (“Under the broad test for Rule 13(a) adopted by this Circuit, a
counterclaim is compulsory when there is any ‘logical relationship’ between the
claim and the counterclaim.” (citation omitted)). Certainly, VEF fails to describe
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No. 08-40244 Cons. w/ 07-41057
such a claim. We thus consider VEF’s argument largely theoretical.
Nonetheless, we reject it. VEF’s construction of the judgment is flawed.
The judgment provides: “All relief requested in the Motion or relief that could or
should have been requested . . ., and not herein granted, is denied.” We
understand the phrase “relief that could or should have been requested” to refer
to the relief related to the claims the parties actually asserted, as evidenced by
the court’s reference to “relief requested in the Motion.” That is, the Bankruptcy
Court did not deny relief stemming from claims that could have been asserted.
Rather, it denied the relief that could have been requested in the dispute
presented. Properly construed, the judgment reflects no error.
B. ElderCare’s appeal.
As described supra, the Bankruptcy Court concluded that ElderCare’s
failure strictly to comply with the renewal provisions of the lease should be
excused under Texas common law principles of equitable intervention. The
District Court reversed that judgment, concluding that equitable intervention
is not available under Texas law. ElderCare challenges this conclusion. We hold
that the District Court’s legal determination was erroneous, and we agree with
the Bankruptcy Court that equitable intervention is appropriate in this
exceptional case.
1. Equitable intervention under Texas law.
Texas law generally gives effect to a party’s exercise of an option only if the
exercise is “unqualified, unambiguous, and strictly in accordance with the terms
of agreement.” Atterbury v. Brison, 871 S.W.2d 824, 829 (Tex. App.—Texarkana
1994, writ denied); see Casa El Sol-Acapulco, S.A. v. Fontenot, 919 S.W.2d 709,
714 (Tex. App.—Houston [14th Dist.] 1996, writ dism’d) (“[T]o extend the power
[to exercise an option] for a day is to compel the giving of something for nothing.”
(citation omitted)); see also Jones v. Gibbs, 130 S.W.2d 265, 271 (Tex. 1939).
There is no question that ElderCare failed to meet this exacting standard.
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Because ElderCare did not provide timely notice of its intent to extend the lease,
as required by the contract, it did not exercise its option “strictly in accordance
with the terms of agreement.”
However, in Jones, the Texas Supreme Court explained that the rule of
strict compliance in the exercise of an option “is not an absolutely inflexible one”
and it described the narrow circumstances in which the “failure of the optionee
to comply strictly with the terms or conditions of the option will be excused.”
Jones, 130 S.W.2d at 272. Jones concerned the grant of a deed to Gibbs Brothers
& Company to cut and remove pine timber on a parcel of land owned by Helen
M. Jones. The deed was for ten years, with a five-year extension period at Gibbs
Brothers & Company’s option, exercisable by the company’s payment of an
additional fee. After the deed was executed, Jones obtained a loan from G. A.
Wynne that was secured by the property. Under the terms of that loan, when
Jones fell behind on her tax liability for the property, Wynne paid the taxes and
accordingly adjusted the amount owed by Jones. Jones then died, and the
property entered her probate estate. Later, in an effort to exercise its option to
extend its timber deed, Gibbs Brothers & Company paid the required renewal
fee directly to Wynne. Jones’s estate subsequently sought to have the timber
deed declared inoperative, arguing that Gibbs Brothers & Company failed
strictly to comply with the deed’s requirement that payment of the renewal fee
be made directly to Jones or her heirs.
Rejecting that argument, the Jones court adopted the test set forth by the
Connecticut Supreme Court in F. B. Fountain Co. v. Stein, 118 A. 47, 50 (Conn.
1922). Like this case, F. B. Fountain Co. concerned “a requirement of [a] lease
that [the lessee] give notice thirty days before the expiration of the term of [its]
desire to extend the lease.” Jones, 130 S.W.2d at 272. The F. B. Fountain Co.
court recognized that the notice requirement was “a condition precedent which
[had to be] performed before the extended or renewed term could begin and held
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No. 08-40244 Cons. w/ 07-41057
that the lessee, not having given the notice within the stipulated time, had no
right to relief unless it could establish . . . such facts as would bring it within the
power of equity to relieve.” Id. As the Jones court wrote:
In prescribing the conditions for the granting of relief upon
equitable grounds, the [F. B. Fountain Co.] court said in
substance that, while relief cannot be afforded if the failure to
give notice has been due to willful or gross neglect, equity will
relieve, in the absence of such neglect, when the failure
results from fraud, surprise, accident or mistake. It said
further: “In cases of mere neglect in fulfilling a condition
precedent of a lease, which do not fall within accident or
mistake, equity will relieve when [(1)] the delay has been
slight, [(2)] the loss to the lessor small, and [(3)] when not to
grant relief would result in such hardship to the tenant as to
make it unconscionable to enforce literally the condition
precedent of the lease.” Id. (quoting F.B. Fountain Co., 118 A.
at 50) (emphasis added).
See also id. (discussing with approval Xanthakey v. Hayes, 140 A. 808 (Conn.
1928), another case of equitable intervention to excuse the failure to provide
notice of a lease extension, where “[t]he gist of the decision [was] that it would
be unconscionable to enforce literally the condition for the extension when to do
so would cause the lessee, who had not been grossly negligent, to lose the value
of . . . improvements and the good will of [its] established business”). Applying
the rule of F. B. Fountain Co. and similar precedents from other States, the
Jones court concluded that “overruling equitable rules” excused Gibbs Brothers
& Company’s failure to adhere to the deed’s strict requirements for extension.
Id. at 273.
VEF presents a very different view of Texas common law. It advances two
arguments, both of which we reject. First, VEF suggests that Texas law does not
recognize any equitable exception to the requirement of strict compliance with
the terms of an option contract. But our discussion of Jones makes clear that the
contention is without merit: In certain circumstances, the “failure of the
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No. 08-40244 Cons. w/ 07-41057
optionee to comply strictly with the terms or conditions of the option will be
excused.” Id. at 272.
VEF’s second argument is more nuanced and worthy of greater attention.
Whatever the contours of equitable intervention under Texas law, VEF asserts,
the State has not recognized an exception to the rule of strict compliance in cases
of “mere neglect.” Id. (quotation omitted). The discussion in Jones of the three-
factor test for the intervention of equity in cases of mere neglect, VEF asserts,
was dicta, and it has not been subsequently adopted. VEF relies on Reynolds-
Penland Co. v. Hexter & Lobello, 567 S.W.2d 237 (Tex. Civ. App.—Dallas 1978,
writ dism’d) for this contention. The Reynolds-Penland majority read Jones to
conclude that Gibbs Brothers & Company’s payment to Wynne was authorized
by Jones’s estate and that the payment consequently complied with the strict
terms of the lease. On this reading, the majority characterized the three-factor
equitable test in Jones for cases of mere neglect as “dicta [that] . . . was not
essential to the decision.” Id. at 240. In dissent, Chief Judge Guittard concluded
that Jones “was expressly decided on the . . . ground of equitable relief from
unconscionable hardship stated by the Connecticut court in [F.B. Fountain Co.]”
Id. at 243 (Guittard, C.J., dissenting). He reasoned that “[a]lthough the [Jones]
court said that the grantee had shown that he had not paid the wrong party,
that [was] not the main ground on which the decision rest[ed].” Id.
We conclude that the dissent in Reynolds-Penland presented the better
reading of Jones. The Jones court determined that resolution of the case did not
require submission to a jury of the disputed question whether Gibbs Brothers &
Company’s payment to Wynne was authorized by Jones’s estate. It explained:
“If the undisputed evidence does not establish, as we believe it does, the fact that
[the payment was authorized], it conclusively proves at least that [Gibbs
Brothers & Company] . . . acted under the honest and justifiable, if mistaken,
belief that [the payment was authorized].” Jones, 130 S.W.2d at 271. Put
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No. 08-40244 Cons. w/ 07-41057
another way, “if the payment [was authorized], there was compliance . . . with
the provisions of the deed for extension of the time for removal,” but if the
payment was not authorized, “there was no such compliance and the time was
not extended, unless by reason of the peculiar facts and special circumstances
equity [could] grant relief from a literal enforcement of the conditions prescribed
by the deed.” Id. (emphasis added). Having so framed the question, the court
proceeded to a lengthy discussion in which it based its reasoning on the three-
factor test of F. B. Fountain Co. and held that Gibbs Brothers & Company’s
failure to comply with the strict terms of the lease would be excused by
“overruling equitable rules.” Id. at 273. In our estimation, the Jones court
clearly intended to reach the issue of equitable intervention, and to base its
disposition on that ground. In so doing, it adopted the three-factor F. B.
Fountain Co. test for cases of mere neglect.
We are not alone in this view. The Texas Supreme Court has twice
referred to Jones’s discussion of equitable intervention as law, and we are aware
of no case in which the court characterized that discussion as dicta or otherwise
called into question the vitality of the Jones rule. Sirtex Oil Indus., Inc. v.
Erigan, 403 S.W.2d 784, 788 (Tex. 1966) (considering when “equity should afford
relief” and quoting Jones’s statement of the three-factor test for cases of
negligence); Zeidman v. Davis, 342 S.W.2d 555, 558 (Tex. 1961) (discussing “the
equitable rule approved by th[e] court in Jones”). VEF urges us to ignore these
cases because neither rested its holding on an application of Jones. See
Reynolds-Penland Co., 567 S.W.2d at 241 (“Sirtex [was] . . . not authority” for the
applicability of equitable intervention in cases of mere neglect because “that
discussion was not essential to the decision.”). This argument misses the point.
These cases may not rest on the rule announced in Jones, but they assume that
rule is part of Texas common law. E.g., Zeidman, 342 S.W.2d at 557; see also
Reynolds-Penland Co., 567 S.W.2d at 242 (Guittard, C.J., dissenting) (The rule
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No. 08-40244 Cons. w/ 07-41057
of intervention in cases of mere neglect “has been adopted by the Supreme Court
of Texas in . . . Sirtex.”).
Many Texas intermediate courts have done the same. E.g., Besteman v.
Pitcock, 272 S.W.3d 777, 790 (Tex. App.—Texarkana 2008, no pet.) (Jones is the
“touchstone case” for equitable intervention); Moosavideen v. Garrett, ___ S.W.3d
___, 2008 WL 4965165, at *15–16 (Tex. App.—Houston [1st Dist.] 2008, no pet.)
(citing as binding authority Jones’s test for equitable intervention); Abraham
Inv. Co. v. Payne Ranch, Inc., 968 S.W.2d 518, 527 (Tex. App.—Amarillo 1998,
pet. denied) (“In the Jones case, the court explicated the general rule regarding
equitable relief[.]”); Buffalo Pipeline Co. v. Bell, 694 S.W.2d 592, 598–99 (Tex.
App.—Corpus Christi 1985, writ ref’d n.r.e.) (“The equitable considerations set
forth in [Jones] are similar to those in this case and these ‘overruling equitable
rules’ prevent the limitation of appellant’s lease.” (citation omitted)). And some
have expressly rejected the reasoning of Reynolds-Penland. For example, in
Crown Construrction Co. v. Huddleston, the court noted that Reynolds-Penland
“held the language in Jones to be dicta and refused to apply the doctrine in
situations in which a lessee simply neglected to exercise its renewal option on
time.” 961 S.W.2d 552, 558 (Tex. App.—San Antonio 1997, no pet.). The Crown
Construction Co. court disagreed; it concluded that “[t]he doctrine of
unconscionable, inequitable, or disproportionate forfeiture was established in
[Jones].” Id. at 558; see also, e.g., Inn of the Hills, Ltd. v. Schulgen & Kaiser, 723
S.W.2d 299, 301 (Tex. App.—San Antonio 1987, writ ref’d n.r.e.). (“We adopt the
view of Chief Justice Guittard, expressed in his dissenting opinion in Reynolds-
Penland[.]”).
Our review of these cases bolsters our conclusion that the Jones court
adopted the three-factor test for equitable intervention in cases of mere neglect.
We proceed to apply that test to the facts of this case.
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2. ElderCare’s failure to comply with the strict renewal terms was
properly excused by equitable intervention.
On the basis of the Bankruptcy Court’s factual findings, we agree with its
conclusion that ElderCare’s failure to provide notice was mere neglect that
should be excused under Texas’s narrow equitable exception to the rule of strict
enforcement. First, ElderCare’s delay in exercising its option was relatively
slight. It provided written notice approximately one month late, one day after
it was informed of its negligent omission. We consider this a relatively minor
delay when compared to the lease’s original ten-year term and its five-year
renewal term. Arguing to the contrary, VEF relies on a single case, Scott-Burr
Stores Corp. v. Wilcox, 194 F.2d 989, 991 (5th Cir. 1952), in which we sustained
a judgment against a lessee that delivered its renewal notice ten hours late.
That reliance is misplaced. Scott-Burr Stores Corp. concerned the question
whether the notice of renewal was in fact late. The court noted “the argument
. . . that [its] judgment [was] harsh and inequitable” Id. at 991. However, there
was “no basis for determination by [the court] of the respective equities of the
parties” because “no grounds for equitable relief from the lapse were urged in the
trial Court.” Id. at 991. To the contrary, here all recognize that the notice was
late, and we are called upon to assess that tardiness in light of “the respective
equities of the parties.” Scott-Burr Stores Corp. offers no instruction on this
question.
Second, VEF “failed to demonstrate that it [would] be harmed by allowing
equity to intervene in this case [to] extend the lease.” Renewal Order, p. 3. On
appeal, it has advanced only general arguments about the sanctity of property
rights, e.g., reliance on “the most basic elements of property law that repeatedly
affirm the importance of property rights.” At best, these contentions establish
only abstract, de minimis harm.
We find most compelling the third and final factor: “[N]ot to grant
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[ElderCare] relief would result in such hardship . . . as to make it unconscionable
to enforce literally the condition precedent of the lease.” Jones, 130 S.W.2d at
641 (internal quotation omitted). As the Bankruptcy Court stressed, the lease
is “the only basis” upon which ElderCare “can continue as a viable business.”
Renewal Order, p. 3. For this reason, ElderCare “invested over $300,000 in fees
and costs alone in proving that VEF did not terminate the Lease pre-petition.”
Id.; see Part II(A), supra. It did so “for the sole purpose of . . . reorganizing the
business[,] which necessarily depended on the option being exercised and the
Lease extended.” Renewal Order, p.3. In short, “[t]he entire chapter 11 case and
the litigation . . . involved and required preservation of the Lease option period.”
Id.
The Bankruptcy Court’s October 18 order allowing ElderCare to take on
the lease in bankruptcy at least implicitly assumed the lease would be renewed.
That order was issued in furtherance of ElderCare’s plan of reorganization,
which contemplated the lease of Valley Grand Manor as ElderCare’s only
significant ongoing asset. And it was issued two and one half months before the
lease’s initial ten-year term was set to terminate. Surely, when on November 16
the court ordered the parties to mediate new insurance coverage limits (two
weeks before the renewal notice was due), it had in mind more than the
remaining six weeks of the lease’s primary term.
Subsequent events suggest that the parties so understood the order. It
took ElderCare more than two months to secure VEF’s cooperation in carrying
out the mediation, from early October to mid-December. Only ElderCare’s resort
to the Bankruptcy Court for an order compelling the mediation proved effective
in gaining VEF’s “voluntary” agreement to the terms of the mediation. Cf.
Assumption Order, pp. 7–8, ¶45, ¶50 (“In response to [ElderCare’s] multiple
requests to negotiate the rent amount, the VEF Board” demanded that new
provisions “be included in a new Lease or amendment before it would negotiate
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No. 08-40244 Cons. w/ 07-41057
the rent amount.”). That agreement was given in the middle of December, only
one day before the hearing on ElderCare’s motion to compel was to occur and 17
days after the deadline for ElderCare’s renewal notice had passed. And the
agreement scheduled the parties’ mediation for February, more than a month
after the renewal period was set to commence. But mediation of the coverage
limits would have been an exercise of absurdity if ElderCare was to be held to
the renewal deadline, which, again, had already passed when the parties agreed
to schedule the mediation. Less than two weeks after that agreement was
reached, two days after the renewal term was to commence and more than a
month before the mediation was to occur, VEF notified ElderCare of its failure
to comply with the renewal notice requirement.
As did the Bankruptcy Court, “[a]t best [we] assum[e] that VEF asserted
its termination argument only after it realized there was no written notice sent
to it.” Renewal Order, p. 3. Until that realization, VEF “behav[ed] in every
aspect as if it knew that [ElderCare] intended to exercise the extension.” Id.
That VEF’s realization occurred so late in the game, while the parties were in
frequent contact negotiating the ongoing terms of the lease, lends much credence
to the idea that ElderCare’s omission is best understood in light of the unique
circumstances leading up to, and following, the renewal date. See, e.g., Buffalo
Pipeline Co., 694 S.W.2d at 599 (granting equitable intervention and stressing
that after the purported failure effectively to renew, the lessor sent the lessee a
letter in which it “did not state that the lease had been terminated” and that in
ongoing communications the lessor “did not notify [the lessee]” of the technical
defect in the renewal).
Conscious of these circumstances, we cannot ascribe ElderCare’s omission
to simple “forgetfulness.” Nor do we understand ElderCare to argue that VEF
was under some obligation to alert ElderCare about the Option and the need to
exercise it. Rather, ElderCare suggests, and we agree, that VEF’s failure to
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raise the issue of renewal during the parties’ ongoing, extensive discussions is
a factor in the analysis of unconscionability. Cf. Renewal Order, p. 3 (“At worst,
VEF laid behind the log in this case, continuing to negotiate with the Debtor
regarding Lease terms and appearing in Court, all the while not pointing out
that the Lease was terminated under its theory.”); Assumption Order, p. 19,
¶132 (“VEF did not respond to [ElderCare’s provision of information pertaining
to its insurance coverage], but allowed ElderCare to continue to believe that VEF
was working with them on the insurance issue which is what ElderCare
continued to believe.”). Relatedly, the parties were not engaged in “ongoing
negotiations” as to the extension of the lease, as VEF argues, but negotiations
as to the terms of a court-ordered mediation in the context of a Chapter 11
reorganization that rested on the perpetuation of the lease. VEF’s reliance on
Hillhaven, Inc. v. Care One, Inc., 620 S.W.2d 788 (Tex. Civ. App.—Fort Worth
1981, writ ref’d n.r.e.), is thus misplaced. See id. at 793 (“[The lessor] did
nothing more than express interest in the receipt of the payment to which it was
entitled[.]”). Lastly, we find too clever by half VEF’s argument that ElderCare
would suffer no harm upon termination of the lease because “[ElderCare’s]
unexercised option [was] not a present right in the property.” That argument
proves too much; it would apply in every case. And it is no answer to the years
of litigation and more than $300,000 in costs and fees that ElderCare has
undertaken in order to reorganize as an ongoing business.
We conclude it would be unconscionable to deprive ElderCare of the
extended term of the lease. And in the absence of countervailing considerations,
we hold that in this extraordinary case Texas law sanctions the intervention of
equity to excuse ElderCare’s failure to provide timely notice. Because we reverse
the judgment of the District Court on this basis, adopting the Bankruptcy
Court’s disposition of the dispute, we need not reach the Bankruptcy Court’s
alternative holdings that the renewal notice requirement was incapable of being
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performed or that its judgment could be sustained on the basis of its broad
authority under the Bankruptcy Code.
III. CONCLUSION
For the foregoing reasons, the District Court’s September 27, 2007 order
affirming the Bankruptcy Court’s assumption order is AFFIRMED. The
District Court’s February 25, 2008, judgment reversing the Bankruptcy Court’s
order that denied VEF’s motion to compel ElderCare to vacate the premises is
REVERSED.
31