AEP Industries, Inc. v. B.G. Properties, Inc. , 533 S.W.3d 674 ( 2017 )

RENDERED: SEPTEMBER 28, 2017
TO BE PUBLISHED
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2014-SC-000512-DG .
· AEP INDUSTRIES, INC. APPELLANT
ON REVIEW FROM COURT OF APPEALS
v. CASE NO. 2Q13-CA-000132 .
WARREN CIRCUIT COURT NO. 12:-CI.:.oo467
B.G. PROPERTIES, INC. APPELLEE
OPINION OF. THE COURT BY JUSTICE VENTERS
VACATING .AND REMANDING
·· AEP Industries, Inc: (AEP) appeals from an opinion of'the Court of
Appeals which vacated a-final order of the Warren Circuit Court granting AEP's
motion for specific performance of a real. estate option contract ·between AEP
filid B.G. Properties, Inc. (BG). The Court of Appeals. held that the circuit court
granted speeific performance of the option contract prematurely because
disputed ·issues of fact material to that form of relief had been left unresolved in
the circuit court. The Court o~ Appeals remande`` the matter for resolution of
·those issues. We granted discretionary review, and upon review we vacate the
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opinion of the Court of Appeals and remand the action· to. the trial court with
dire~tion to dismiss any remaining Glaims. ·
'
I. FACTUAL AND PROCEDURAL BACKGROUND·
BG and its predecessor in interest owned an industrial building located
on a 19.7-acre tract in Bowling
.
Green, Kentucky. The. building had been used
for manufacturing flexible plastic packing products and contained features
uniquely suited to that purpose. AEP leased the property from BG for use in
its business of manufacturing flexible plastic packaging. AEP arid BG were
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mutUally obligated under several agreements concerning the property. Those
agreements provided AEP with an option to purchase the property. 1
The specific terms of .the purchase option are provided in two documents:
the "Consent to Assignment of Lease and Grant of Option fo Purchase" made in
2001 and the "Agreement Modifying Sublease and Option" made iri 2010.
These two documents collectively provide the terms of AEP's option to purchase
·the property. We refer to those documents together as the "Option Agreement" .
or "the Agreement."
The Option Agreement expressly provided the following four-stage ·
process for ascertaining the purchase price if AEP decided to exerci~e its
purchase option. First, the parties would attempt to negotiate a fair pur~hase
price. ·Second, if the negotiation failed to achieve a mutu:ally agreeable 'price,
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then BG would deliver to AEP an appraisal of the property by a qualified
1 More specifically, AEP subleased the property from a primary leaseholder and
certajn of the· agreements were initially executed by the parties' respective
predecessors in interest; however, these details are not relevant to our review.
-,
2
professional appraiser2 with thy app~aisal subject to. special requirements as
· further described below. Third, if AEP declined to purchase at BG's appraised
' . . . '
value, then AEP would obtain its own qualified appraisal a_nd s~brpit it to BQ.
Fourth~ arid finally, if BG rejected_ AEP's appraised value, then AEP's appraiser
. and BG's appraiser .would together select a third appraiser whose independent
valuation of the property would become the final purchase price.
The Option Agreement included two other terms that are significant in
our review: 1) eve·ry appraisal of the property undertaken to determine the
purchase price would ascertain "the fair market value based on its highest and
best use, plus the value of all special features and fixtures located therein for
AEP's use as an extrusion and flexible packaging manufacturing facility;" and
2) the Agreement granted AEP seven days after the final deterrriination of the
. purchase price under stage four to withdraw the exercise of its option to
purchase the property.
In August 2011, AEP informed BG that it .intend~d to exercise the option
to ptirchas~ the property, thereby triggering the four-stage process for ·
determining the price .. Tbe initial attempt to negotiate a purchase price was
unsuccessful.·
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BG then obtained an appraisal by Brantley Appraisal
. /,.
Company,
which valued the property at $7 ,500,000. AEP rejected that price, and as
requfred by the Option Agreement, AEP then obtained its own appraiser,
selecting CBRE, which valued the property at $3,550,000.
2 The· Option Agreement set forth particular .qualifications for the appraisers
used.
3
BG rejected CBRE's valuation. AEP then attempted to initiate the final
stage of the process, the s~lection of the third appraiser, but BG refused to
cooperate. BG claimed that AEP did not properly comply with the third stage of
the pricing process because the. CBRE appraisal tendered by AEP did not meet
. . .
the special conditions of the Option Agreement for a value based upon "the
highest and best use of the property" and for the inclusion of the "special
features arid fixtures located therein for AEP's use as an extrusion and flexible
packaging manufacturing facility." Accordingly,.BG insisted that before moving
. to the fourth stage of the pricing process~ AEP was obligated first to submit an
appraisal that complied with the special conditions of the Option Agreement.
Instead of acceding to BG's demand to submit a different appraisal, AEP
filed a.n'-action in the Warren Circuit Court alleging that BG was in breach of
the Option Agreement for failing to proceed with the selection of the third
. appraiser . .AEP sought a court order compelling BG to participate in the
appointment of a third appraiser.
BG responded to the suit with an answer and co~nterclaim. BG invoked
the well-settled equitable principle that specific performance of a contract will
only be granted when the party seeking the _specific performance has itself
complied with all terms of the contract. To be granted specific performance of
'an agreement for the sale of real property, all conditions precedent to the sale
must have been complied with by the party seeking such specific performance. 3
3 See 25 Williston on Contracts§ 67:73 (4th ed. 2013) ("The performance of all
conditions precedent is generally required before specific performance will be
4
BG asserted that AEP's failure to submit a proper appraisal at the third stage
., of the pricing process was a breach of the Option Agreement by AEP that
barred its claim for specific performance. BG .also claimed that in addition .to
the disagreement about the CBRE appraisal, AEP had also breached the
provision of the lease agreement requiring it to keep the roof of the building in
good repair. BG contended that the appraisals used to determine the purchase
price should not be discounted by the .deteriorated condition of the roof that
AEP had failed to maintain.
Eve:r;itually, upon motions for summaryjudgment, the circuit court
· determined that CBRE's appraisal complied with ~he conditions of the Option ·
Agreement. The court directed BG to proceed with the fourth stage of the
, appraisal process, the selection of the third and final appraiser. The circuit·
~ourt fixed a deadline for obtaining that appraisal and held the remainder of
the action in abeyance pending its completion. :Iri compliance with the circuit
court's order, BG and AEP selected G. Herbert Pritchett as the third appraiser.
Pritchett valued the property at ·$3~834,000.
AEP was satisfied with that price, but BG refused to transfer the
· property, claiming that Prit.chett's appraisal suffered the same deficiency as
CBRE's appraisal: it failed to account for "the highest and best use of the
property" as defined in the Option Agre~ment and it failed to factor in the
special features that made the property uniquely suited to AEP's
granted."); WestKy. Coal Co. v. J.D. Nourse, 320 S.W.2d·311 (Ky. 1959); Puritan
Homes, Inc. v. AbeU, 432 S.W.2d 632 (Ky. 1968).
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manufacturing process, as set forth in the Option Agreement. BG also
complained
. .
that
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Pritchett's
..
appraisal
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unfairly diminished the value of the . .
property due to the poor condition of the roof that AEP had failed to maintain.
AEP then moved the circuit court for an order compellin~ specific
performance of the Option Agreement by" d}recting BG to convey the property at
Pritchett's apprais~d value of $3,834,000. In addition, AEP demanded a credit
against the purchase· pnce of $407, 987 .37 for the additional rent. payments. it
had incurred under the lease due· to BG's failure to voluntarily cooperate in the
selection of the third appraiser iri a timely manner.4· BG.responded by
reiterating its position that AEP had initia).ly breached the agreement by failing
to tender a qualifying appraisal and for that reason it could not demand
specific performance of the very contract it had breached.
By order dated December 19, 2012, the circuit court rejected BG's
arguments.· It determined that Pritchett's appraisal of the fair market yalue of
property at $3,834,000 prop~rly accounted for the ~ite's "special features and
fixt:ures" and was consistent with the terms of the Option Agreement and that
court's previous order. The circuit court also concluded that the Pritchett
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appraisal properly accounted for the "roof issu~" a,nd, therefore,. no variance
, from the app~aised value was required to accommodate that concern .. The .
4 But for BG's opposition to the appraisals, tlie transfer of property pursuant to
the parties' Option Agreement, and th~ corresponding cessation of AEP's· rez:it ·
obligation under the lease, would have occurred by June l; 2012. The rent credit was
calculated to compensate AEP for the additional rent paid between June 1, 2012 and
the eventual transfer of the property on December 31, 2012.
6 .
circuit court also granted AEP's demand for a credit for the additional rental
· payments incurred due to BG;s delaying the transfer ()f the property during the
dispute. 'The December i9, 2012 order directed BG-to convey the property to
AEP for the price fixed.by Pi-itchett's appraisal, $3,834,000.00. The circuit
·court also awarded AEP claimed rent credit of $407,987.37, for a net payment ·
· obligation of $3,426,012.63 due to BG.
Rathe.r than seeking immediate relief to abate the· enforcement of the
order and thereby avofd transferring the property for what it. regarded as
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inadequate consideration, and rather than tendering a conciitional deed stating
the involuntary nature of the conve~a:n.ce and reserving its objection to the ·
forced sale at an inadequate price, BG filed with the circuit court a "Motion ~or .
. Approval of Deed Form and an Order ~reserving Claims," tendering a · .
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conventional general warranty deed for the unconditional transfer of the
pr~perty to AEP in fee ·simple for the stated consideration of $3A26,012.63~ s
AEP responded to' BG's motfon, voicing no objection to the form of the
deed but vigorously opposing the entry of an order that would sanction the
transfer of title while l798 S.W.2d 141, 143-144 (Ky. 1990) (citing
Crady v. Cranfill,. 371 S.W.2d 640 (Ky. 1963)). In summary, BG sought none of
the available remedies· that would have enabled it to avoid the immediate
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enforcement of the trial court's order and defer, at least temporarily, the
conveyance of the property for what it regarded as an .improperly determined
pnce.
While not dispositive, the opinions of our predecessor Court in Rose v,
Cox, 179 S.W.2d 871(Ky.1944), and Sedley V .. Louisville 'Trust Co., 419 s.w.2ci
531, 532 (Ky. 1967), are instructive even though they contain important factual
differences. Those cases establish that when property is sold to a third party
pursuant to a judicial sale ordered by the trial court, in the absence of a
supersedeas bond or other stay of execution, a subsequent determination by
an appellate court that the order directing the sale was erroneous does not void
the sale. "Where the court has jurisdiction qf the parties and the subject
matter of the suit, and has statutory authority to decree the sale, a subsequent
reversal of the judgment decreeing the sale is a mere declaration that the
judgment is erroneous, but does not render it void." Rose, 179 S.W.2d at 872.
"The fact that the judgment ordering the sale ·of the property was not
superseded prevents us from granting [the Appellant] the relief to which she is
allegedly entitled" and the case is thereby moot. Sedley, 419 S.W.2d at 533.
Obviously, the instant case does not involve a sale to a third party.
However, upon review of authority from other jurisdictions that have more
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precisely addressed the issue before us, we are persuaded that the same result·
. ' . . .
is compelled under the circumstances that confront us. here.
For .example, in Dahlin v. Amoco Oil Corp., 567 N.E.2d 806 (Irid. App.
1991), the Dahlins leased a parcel of land to Amoco Oil. The lease also gave
Amoco the option to purchase the property tinder certain conditions. Amoco
exercised its option to ·purchase the Dahlins' land. Wheri the Dahlins refused.
to convey the land, Amoco filed an action for specific per.formance; The
Dahlins counterdaimed for breach of contract and unjust enrichment. The
trial court granted surrimary judgment for Amoco on its specific performance
claim; thereafter, the Pahlins sold the real estate to Amoco. Addressing the
Dahlins' argument on appeal that the trial court erred by granting summary
judgment on Amoco's specific performance claim, the Indiana Court of Appeals
stated as follows:
If a party to a judgment voluntarily acquiesces in or recognizes the
validity of such judgment or otherwise takes a position which would be
inconsistent with any theozy other than the validity of the judgment, he
has impliedly waived his right to contest the validitY of the judgment on
appeal.
Id. at 809.
The Dahlins' conveyance of the property· to Amoco was inconsistent with
their appellate positic~n that the order compelling specific performance was
erroneous. "By electing instead to sell the property, they have waived th.eir
right to argue on appeal that the specific performance decree was invalid and
unenforceable, and therefore their appeal on this issue is moot." Id. at 810.
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. .
Siniilarly,.in Schuppener v. Bruno, 395 So. 2d 1234 (Fla. Dist. App. 1981),
·the contractual purchasers of land. sued for and obtained a judgment ordering_ .
specific performance of the contract directing the sale of the prope~ty. The
sellers appealed, but while the .appeal' was pending, th.e sellers a~cepted the
. purchase price and recorded the purchaser's mortgage on the ·property in
question. The Florida court held that "[u]nder these circl.imstances, the issues
· in [this] appeal ... appear to u.s to be moot." Id. at 1235.
·our review of the unusual circum~tances of this case i~ also guided and
influenced by the strong principles oflaw that accord a measure of sanctity to
the language of deeds and other written and recorded instruments of title. "As
. . .
the deed was acknowledged and lodged for record the day it bears date, it was
constructive notice to the whole world in whom th~ legal title was vested.'' Ott
. . .
.v. Ott's Administrator, 2 Ky. Op. 114 (1867); 7 see Haven v...Wallace, 160 S.W.2d ·
619, 622 (Ky. 1942) ("This deed was of record and constituted constructive
notice to the world that appellant had retained this right _or reservation in and
to.the rentals on the land."); Wells Fargo Financial Kentucky, Irie. v. Thomer,
315 S.W.3d 335, 338-339 (Ky. App. 2010) ("A recorded mortgage serves the·
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".ptirpose of establishing the lender's "interest in the land that secures the debt
and notice to the world of the lien created thereby."). ~ignificant legal
consequences flow from the language used to convey interests in real property,
7 1867· WL 3569 at *1 (Ky. Nov. 21, 1867).
and because the deed gives "notice to the world," its effects extend beyond the
limited interests of the parties .
. The words of the deed are so important that, upon its delivery and ·
acceptance, the deed "extinguishe~ or supersedes the provisions of the
underlying contract for the conveyance of the realty.". ·Drees Co. v. Osburg, 144
S.W.3d 831, 832 (Ky. App. 2003) (citation omitted). Borden v. Litchford, 619
S.W.2d 715, 717 (Ky. App. 1981) reflects the nearly-universal principle that the
"merger doctrine holds that all prior statements and agreements, both written
and oral, are ·merged into the deed and the parties are bound by that.
instrument." Subject to limited exceptions which are not applicable here,
the acceptance of a deed tendered in performance of an agreement
to convey merges the written or _oral agreement to convey in the
deed, ~d, thereafter, the provisions. of the underlying contract
governing the transfer of the property are extinguished and th·e
deed regulates the rights and liabilities of the parties.
77 Am. Jut. 2d Vendor and Purchaser§ 227 (2017). As there is a presumption
of merger upon the delivery and acceptance of the deed, contrary intentions of
·the parties must be clear and manifest and may be shown from the terms of
the deed itself. See Vernon v. Vernon, 277 S.W·. 248, 248 (Ky. 1925) ..
There is no doubt that the merger doctrine would control the· issue if BG
had simply transferred the property pursuant to the _terms of the Option
Agreement without the intervention of the circuit court order. We see no
reason for departing from the doctrine when the transfer resulted from a court
order enforcing the terms of the Option Agreement. In either case, any
unresolved conditions ansing from the contract or the court order could be
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preserved by incorporation into the deed. In that respect, it is significant that
the circuit col'.lrt did not dictate the terms of the deed. Although at BG's ·
request the·
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circuit court approved
.
the form of the deed, BG prepared the deed .
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and completeiy controlled its terms and conditions. BG c~uld have .preserved ·
its objection to the consideration by referencing that fact, along with the
pending litigation, in the deed. Iristead, the deed contains no limitation or
reservationabout the consideration to be paid for the proper.ty; and it contains
. no reference to the terms· of the option contract for est8:blishing the fair market
value of the property. Most significantly, it incorporates no language to signify·
that the transact1on is anything-other than,a completed, arm's length
transaction between a willing buyer and willing seller for a mutually agreed~
.. .
upon consideratiop. Consistent with the merger doctrine, all else outside of the
four corners of the deed relating to the purchase price of the property was ·
mergedinto the deed.
The Court of Appeals substantiaily based its deCision on Dreamers LLC v.
Don's Lumber & Hardware, Inc., 366 S.W.3d 381 (Ky. 2011). We said in
Dreamers:
It has long been the law in Kentucky that 'a party .... does not
need to post a supersedeas bond to take ari appeal from a ·
judgment,' though '[t]he failure to· post a bond ... leaves the party
who obtained the judgment free to execute on it.'·
Id: at 384 (quotingElkHqm Coal Corp. v. Cheyenne Resources, Inc., 163 S.W.3d
408, 419-420 (Ky. 2005)). We held that the judgment-debtor did not forfeit its
right tQ ·appeal by paying the money to the plaintiff in lieu of posting a
supersedeas bond ~r suffering an exe~ution on the judgment pending appeal.
15
BG contends that its compliance with the judgment compelling specific
performance of tbe real estate option contract should be treated the same.
BG's. position is if it successfully established on . appeal that AEP was
. not
entitled to specific performance
.
of the. Option
.
Agreement, then all that would· be
required is another round of appraisals to determine the purchase price. That
·interpretation, however, is incorrect. It overlooks the fact that reversing the·
order that ~ompelled specific performance of the Option Agreement must also
invalidate the deed conveying title because the need to re-determine the
purchase price also revives AEP's contractual right to decline the purchase if it
dislikes the final price.
Dreamers involved a monetary judgment; the res awarded by the
judgment was a fungible sum of money. As to that res Dreamers holds that a
defendant subject to an adverse money judgment may; instead of purchasing a
supersedeas bond to cover the payment of his debt and avoid attachment or .
garnishment of his property, as well as the accrual of expensive post-judgm.ent
· interest, simply pay the judgment without forfeiting his right of appeal. Of
course, by doing so·, the defendant accepts the risk that, upon reversal of the
judgment, the. plaintiff may have disbursed the money and be unable to refund
it. Either way, the parties are generally indifferent to the specific cash that
funds the payment and re-payment; and in most situations, the exchange ·
ihvolves no tangible _money at all, b_ut simply checks or electronic transfers
from one account to another.
16
In-contrast, however, here the res subject to the order compelling specific ,
performance is real estate. The res in dispute is not a fungible quantity of
money; it is uniquely tangible land. Historically, ·laws governing the transfer
and exchange of land differ fundamentally from the laws governing the
exchange of cash or its electronic equivalent. See, for example, Baroi v.
Platinum Condominium Development, LLC, 874 F. Supp. 2d, 980, 984 (Nev. Dist.
2012) (~Nevada will enforce contractual obligations through the remedy of
specific performance where appropriate, partieularly in real estate transactions
because real property is 'unique,' and damages therefore may be an inadequate
remedy;"); In re Arnold and Baker Farms, 177 B.R. 648, 661 (Bankr. App. 9th
Cir. 1994) ("each parcel of real property is unique"); Consolidated Rail Corp. v.
Michigan, 976 F. Supp. 1085, 1089· (W.D. Mich. 1996) ("[I]nterferenc;e with the
enjoyment or possessiOn of land is considered 'irreparable' since land is viewed
as -a unique commodity for which monetary compensation is an inadequate
substitute."). -The merger doctrine is itself an example of how the law applies
. . . . . . . .
special precautions to the conveyance of land that ·are not appli``ble to the
transfer of money. These differences are reason enough to_ distinguish the rule
as stated in Dreamers from the situation before us iri this case.
We further reject the notion implied by the Court of Appeals that
requiring the posting of a supersedeas bo:r:id to stay a court-ordered conveyance
of land would deprive a litigant of the right guaranteed by Section 115 of the
17
Kentucky Constitution to appeal from ari adverse judgment. s The prospective
appellant in any case may pursue the constitutionally-mandated right to
appeal without posting a supersedeas bond. The bond does not impinge upon
the right of appeal; the bond, when posted by an appellant, stands as a
collateral obligation, acknowledging the dignity of the judgment in recognition
of the fact that the appellant is depriving the appellee _of the benefits of the
judgment pending the finality of the appellate process.·
· III. · CONCLUSION
For the foregoing reasons, the opinion of the Court of Appeals is vacated~
BG's counterclaim and amended counterclaim asserted claims that a price
adju~tment was warranted as a result of AEP's alleged primary and continuing .
br~ach of the. Option Agreement, the allegedly faulty appraisal of CBRE, AEP's
alleged failure to maintain the roof of the building, and AEP;s alleged· breach of
the duty of good faith and fair dealing. We are satisfied that BG's faih.:tre to
preserve its objections·· to the Circuit court's final order by superseding it with
an appropriate bond or obtaining a stay of its enforcement, coupled with the
completion of the transaction and the applicatiori of the merger doctrine, ·
precludes any further relief sought by BG. Accordingly, we remand this action
s Kentucky Constitution Section 115 provides, in pertinent part:. "In ·all cases,·
civil and criminal, there $hall be allowed as a matter of right at least one appeal to
.another court . . ... "
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to the, Warren Circuit Court with directions to dismiss the counterclaim, and·
amended counterclaim .. ·
· · All sitting. All concur.
. COUNSEL FOR APPELLANT:
Glenn Alan Cohen
Seiller Waterman, LLC
Meidinger Tower, 22nd Floor
462 S. Fourth Street
Louisville, KY 40202
Paul Joseph Hershberg
Gray & White
713 E. Market Street ·
2nd Floor
Louisville~ KY 40202 .
Jason Conti
Foley & Lardner, LLP
500 Woodward Avenue, Suite 2700
Detroit, MI 48226 ·
.COUNSEL FOR APPELLEE:
David W. Anderson ·
Michael Scott Vitale .
English,, Lucas,:Priest & Owsley, LLP
1101 College Street
P.O. Box 770
Bowling Green, KY 42102:-0770
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