ACME Investment v. Southwest Tracor ( 1997 )

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No. 96-1286
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Acme Investment, Inc., a *
Nebraska corporation, *
*
Appellee, *
* Appeal from the United States
v. * District Court for the
* District of Nebraska.
Southwest Tracor, Inc., a *
Texas corporation, *
*
Appellant. *
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Submitted: November 12, 1996
Filed: January 28, 1997
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Before FAGG, BEAM, and HANSEN, Circuit Judges.
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BEAM, Circuit Judge.
Southwest Tracor, Inc. (Southwest) appeals the district court's1
judgment in favor of Acme Investment, Inc. (Acme) in this diversity action
for specific performance of a real estate purchase agreement. We affirm.
I. BACKGROUND
This lawsuit concerns a Best Western hotel located near the Lincoln,
Nebraska, airport. In May of 1986 appellant Southwest, which then owned
the hotel, entered into a lease with Airport Inn, Inc. Airport Inn
operated the hotel under the lease for several
1
The Honorable Richard G. Kopf, United States District Judge
for the District of Nebraska.
years, but in 1992 various disputes arose between Southwest and Airport
Inn. As a result of these disputes, Southwest attempted to terminate the
lease. Claiming that Southwest's termination was invalid under the lease,
Airport Inn refused to vacate the property. Southwest then brought an
ejectment action in Nebraska court. Shortly thereafter, Airport Inn filed
for bankruptcy.
Shortly before Southwest's ejectment action reached trial, the
parties reached a settlement. Under the settlement, Southwest sold the
hotel to appellee Acme, another corporation owned by Airport Inn's parent
company, for $2.65 million. The parties closed on October 26, 1993, and
Acme acquired ownership.
As part of the settlement, the parties agreed that Southwest would
retain an option to repurchase the hotel from Acme. The purchase agreement
stated that:
Any such repurchase shall be for a price of $2,450,000.00 cash
at closing. The option must be exercised by written notice
from [Southwest] to [Acme] within 30 days before the expiration
of the one-year option term.
The option period was to end one year from the closing of Acme's purchase
of the hotel from Southwest, that is, October 26, 1994. An amendment to
the settlement's purchase agreement required that should Southwest exercise
its option to repurchase the hotel, it had to set a date for closing
between November 1, 1994, and January 31, 1995.
On October 14, during the final thirty days of the one-year option
period, Southwest notified Acme that it was exercising its option. By
notice to Acme on October 19, Southwest chose December 15, 1994, as the
target date for closing. Acme, however, refused to honor the option,
claiming that the contract required exercise of the option before the last
30 days of the option year and that the purported exercise was therefore
untimely. Acme offered
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instead to proceed to closing on December 15, placing the purchase price
and title in escrow pending judicial resolution of the dispute.
Southwest did not accept Acme's escrow proposal, and Acme filed a
declaratory judgment action in federal district court in Nebraska, seeking
a declaration that Southwest's option had lapsed. Southwest filed an
action for specific performance in federal court in Missouri. The actions
were consolidated and proceeded to a bench trial in Nebraska. The district
court found that Southwest's exercise of the option was timely, and Acme
has not appealed that finding. The district court also found, however,
that Southwest was not ready, willing, and able to perform by tendering the
$2.45 million purchase price, either at the time of the exercise of the
option or at any time during the three-month window for closing the
transaction. Acme Inv., Inc. v. Southwest Tracor, Inc., 911 F. Supp. 1261,
1275 (D. Neb. 1995). On this basis, the district court entered judgment
for Acme. Southwest appeals.
II. DISCUSSION
The parties agree that Nebraska law applies to the substantive legal
issues presented by this appeal. Nebraska appellate courts review specific
performance actions de novo in regard to both law and facts. III Lounge,
Inc. v. Gaines, 348 N.W.2d 903, 905 (Neb. 1984). In our view, the Nebraska
court's de novo standard is an issue of substantive, rather than procedural
state law, comparable to the standard for reviewing the sufficiency of
evidence to support a jury verdict. See Burke v. Deere & Co., 6 F.3d 497,
511 (8th Cir. 1993) (in diversity actions, state law determines standard
of review for sufficiency of the evidence). We therefore apply state law
and review the district court's judgment de novo. Erie R.R. v. Thompkins,
304 U.S. 64, 78 (1938).
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Noting that Nebraska courts have often followed the Restatement
(Second) of Contracts, the district court grounded its analysis on section
238 of the Restatement. Section 238 provides:
Where all or part of the performances to be exchanged under an
exchange of promises are due simultaneously, it is a condition
of each party's duties to render such performance that the
other party either render or, with manifested present ability
to do so, offer performance of his part of the simultaneous
exchange.
Restatement (Second) of Contracts § 238 (1979). The district court
reasoned that in order to bind Acme, Southwest had a simultaneous duty of
performance: it had to either tender the purchase price or show that it
was ready, willing, and able to tender at the time it exercised the option.
The district court held that Southwest's failure to either tender or to
manifest the ability to tender placed Southwest in breach of the contract,
and thus this failure did "not trigger any duty on Acme's part to perform
its end of the deal." 911 F. Supp. at 1271.
Southwest makes two main objections to the district court's analysis.
First, it claims that the district court erred in ruling that Southwest had
a duty to tender $2.45 million at the same time it exercised the option.
Rather, the parties' contract specified that the repurchase would be
consummated by "cash at closing." According to Southwest, this meant that
it had no duty to perform under the contract until closing. Second,
Southwest argues, any duty on its part to perform was discharged when Acme
told Southwest it considered the option untimely exercised and would not
honor it. Therefore, Southwest argues, when Acme repudiated the deal
Southwest had no further duty to seek financing for the purchase, and,
accordingly, had no burden to show that it had the ability to pay at the
time it exercised the option.
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To a certain point, we agree with Southwest. Under Nebraska law, an
option holder has no duty to tender performance upon exercising the option
unless the contract creating the option so provides. III Lounge, 348
N.W.2d at 906 (citing J.R. Kemper, Annotation, Necessity for Payment or
Tender of Purchase Money Within Option Period, 71 A.L.R. 3d 1201, 1205-06
(1976)); Gleeson v. Frahm, 320 N.W.2d 95, 97 (Neb. 1982). The Southwest-
Acme contract provided that Southwest could repurchase the hotel upon its
option "for a price of $2,450,000.00 cash at closing." (emphasis added).
The parties agreed that Southwest could, upon exercising the option, set
a closing date for any time between November 1, 1994, and January 31, 1995.
The contract clearly did not require Southwest to perform its contractual
obligation (that is, tender the purchase price) until closing. Because its
time of performance had not arisen when Acme repudiated the option,
Southwest could not have breached.
Furthermore, Southwest correctly argues that Acme's actions
discharged it of any further duty to perform under the contract. "[A]n
unqualified renunciation of an executory contract before time for
performance by one party excuses tender of performance by the other party
at the time set for performance." In re Estate of Michels, 389 N.W.2d 285,
289 (Neb. 1986) (citations omitted). We disagree with Acme that its offer
to place title and the purchase price in escrow pending litigation
satisfied its contractual duties. Acme's unambiguous position that it did
not consider Southwest's exercise of the option valid was clearly an
"unqualified renunciation" of the contract. Upon Acme's repudiation,
Southwest was discharged of any duty of performance, and could sue
immediately for Acme's breach. Restatement (Second) of Contracts, § 253.2
2
Section 253 provides:
Effect of a Repudiation as a Breach and on Other Party's
Duties
(1) Where an obligor repudiates a duty before he has
committed a breach by non-performance and before he has
received all of the agreed exchange for it, his
repudiation alone gives rise to a claim for damages for
total breach.
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This does not settle the issue, however, because the district court
specifically found that Southwest would have been unable to perform not
only at the time it exercised the option, but at all times thereafter
during the three-month period for closing. 911 F. Supp. at 1271. Although
the district court incorrectly characterized this as a breach by Southwest,
such a finding necessarily precludes any remedy for Southwest. "``The
failure or inability or refusal to carry out the terms of the contract at
the time when performance is due will ordinarily be grounds for refusing
specific performance . . . .'" Tedco Dev. Corp. v. Overland Hills, Inc.,
266 N.W.2d 56, 60 (Neb. 1978) (quoting 71 Am.Jur.2d Specific Performance
§ 60, at 88 (1973)) (emphasis in original); see also Sofio v. Glissmann,
57 N.W.2d 176, 183 (Neb. 1953). Although the parties here vigorously
debate how to properly apply the Restatement (Second) of Contracts, neither
side addresses the most relevant provision. Section 254(1) provides:
A party's duty to pay damages for total breach by repudiation
is discharged if it appears after the breach that there would
have been a total failure by the injured party to perform his
return promise.
Comment (a) to section 254 states:
Non-performance by injured party after repudiation. If the
parties are to exchange performances under an exchange of
promises, each party's duties to render performance are
generally regarded as conditional on the other party's
performance, or at least on his readiness
(2) Where performances are to be exchanged under an
exchange of promises, one party's repudiation of a duty
to render performance discharges the other party's
remaining duties to render performance.
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to perform (§§ 237, 238, 251, 253). This principle applies
even though one party is already in breach by repudiation. His
duty to pay damages is discharged if it subsequently appears
that there would have been a total failure of performance by
the injured party. . . . The result follows even if it appears
that the failure [by the injured party] would have been
justified and not a breach.
(emphasis added). As section 254 makes clear, while an anticipatory
repudiation releases the nonbreaching party of any duty to perform,
repudiation does not relieve the nonbreaching party of showing its ability
to perform in order to obtain a remedy. See also Gibbs, Nathaniel
(Canada) Ltd. v. International Multifoods Corp., 804 F.2d 450, 452 (8th
Cir. 1986) (Section 254 bars remedy for anticipatory repudiation when
nonbreaching party could not have performed); Record Club of America, Inc.
v. United Artists Records, Inc., 890 F.2d 1264, 1275 (2d Cir. 1989) (same);
5 Williston on Contracts § 699, at 352-53 (3d ed. 1961); 4 Corbin on
Contracts § 978, at 924-25 (1951). To obtain a remedy, Southwest had to
show that it would have been able to tender $2.45 million at closing. This
is true even though Acme, not Southwest, was in breach and Southwest had
no obligation to proceed to closing. Furthermore, the district court
properly placed on Southwest the burden to prove that it would have been
able to perform when that performance came due. Panhandle Rehabilitation
Ctr., Inc. v. Larson, 288 N.W.2d 743, 746 (Neb. 1980); Tedco, 266 N.W.2d
at 60-61; 5 Williston § 699, at 353.
Our de novo review of the record convinces us that Southwest failed
to prove its ability to perform. Southwest's general manager, Jeffrey
Freeman, testified that Southwest had made some preliminary financing
plans, including obtaining a loan commitment from a Colorado loan broker,
First United Financial Corporation. However, Freeman testified that by the
time Southwest attempted to exercise its option, he "didn't like the way
. . . the deal was structured," Tr. at 211, with First United and thought
that there
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were "better opportunities" for financing. Tr. at 210. Furthermore, First
United's president testified that First United had a corporate existence
of only six to eight months, was never capitalized in excess of $10,000,
brokered no real estate loans during its existence, and never obtained any
written commitments from potential lenders regarding Southwest's purchase
of the Lincoln hotel.
Jeffrey Freeman also testified that Gencom Acquisition Corp., the
buyer of a Kansas City hotel owned by Southwest's principals, was
interested in partially financing the Lincoln hotel purchase. Southwest,
however, introduced no evidence that Gencom's "interest" proceeded beyond
mere discussion. Furthermore, Gencom brought suit against Southwest for
specific performance of the Kansas City transaction in December of 1994,
during the closing period for the Southwest-Acme repurchase contract.
Freeman also testified that "if push came to shove," Southwest would
have been able to secure a loan from Stanley Bank, a Kansas bank with which
Southwest had done business. Tr. at 210. Yet Southwest never actually
approached Stanley Bank for financing, and Freeman testified that Southwest
had primarily used Stanley Bank as a line of credit for operational
expenses and "not so much [as] a huge lender of big real estate
transactions." Tr. at 244. Another company owned by Southwest's
principals, Southwest Tracor of Nebraska, ultimately did obtain a loan
commitment from Stanley Bank for purchase of the Lincoln hotel. This
commitment did not come, however, until October of 1995. There is no
evidence that Stanley Bank did or would have extended such a loan to
Southwest Tracor during the three-month closing period between November 1,
1994 and January 31, 1995.
To prevail in this action, Southwest had, of course, no obligation
to continue seeking financing or to actually obtain financing after Acme
breached. Nevertheless, Southwest must still
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prove that it could by some means have tendered to Acme $2.45 million by
January 31, 1995. In light of further evidence that Southwest was either
insolvent or nearly so during this period, Southwest's evidence of its
ability to close is not persuasive. Finally, we note that the district
court properly declined to consider the financial resources of Southwest's
principals and their other businesses. "``A proposed purchaser is not able
to perform when he is depending upon third parties to make the purchase,
which funds such persons are in no way bound to furnish.'" Tedco, 266
N.W.2d at 61 (quoting 71 Am.Jur.2d Specific Performance § 61, at 89);
Sofio, 57 N.W.2d at 183. Southwest did not prove its ability to tender the
purchase price if it had gone to closing, and is not entitled to specific
performance despite Acme's breach of the contract.
III. CONCLUSION
For the foregoing reasons, we affirm the judgment of the district
court.
A true copy.
Attest:
CLERK, U. S. COURT OF APPEALS, EIGHTH CIRCUIT.
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