Andriukaitis-Woodlands Medical Office, I, LLC. v. Woodlands-North Houston Heart Center, PA

Affirmed and Memorandum Opinion filed September 25, 2014.
In The
Fourteenth Court of Appeals
NO. 14-13-00612-CV
ANDRIUKAITIS-WOODLANDS MEDICAL OFFICE, I, LLC; BARCUS
WOODLANDS MEDICAL OFFICE I, LLC; BEHNKEN WOODLANDS
MEDICAL OFFICE I, LLC; BEUTEL WOODLANDS MEDICAL OFFICE
I, LLC; BOYER WOODLANDS MEDICAL OFFICE I, LLC; CRANE
WOODLANDS MEDICAL OFFICE I, LLC; CHRISTENSEN
WOODLANDS MEDICAL OFFICE I, LLC; COMSTOCK WOODLANDS
MEDICAL OFFICE I, LLC; DOWTY WOODLANDS MEDICAL OFFICE
I, LLC; DULING WOODLANDS MEDICAL OFFICE I, LLC; EDBERG
WOODLANDS MEDICAL OFFICE I, LLC; HABERER WOODLANDS
MEDICAL OFFICE I, LLC; HASHEK WOODLANDS MEDICAL OFFICE
I, LLC; HILL WOODLANDS MEDICAL OFFICE I, LLC; HILL G & M
WOODLANDS MEDICAL OFFICE I, LLC; KESSLER WOODLANDS
MEDICAL OFFICE I, LLC; KUHLMAN WOODLANDS MEDICAL
OFFICE I, LLC; LEASK WOODLANDS MEDICAL OFFICE I, LLC;
LOVELADY WOODLANDS MEDICAL OFFICE I, LLC; OLSON
WOODLANDS MEDICAL OFFICE I, LLC; ROHRBACHER
WOODLANDS MEDICAL OFFICE I, LLC; SKINNER WOODLANDS
MEDICAL OFFICE I, LLC; TIC WOODLANDS MEDICAL, LLC;
TRASKIEWICZ WEBB WOODLANDS MEDICAL OFFICE I, LLC;
URMOSSY WOODLANDS MEDICAL OFFICE I, LLC; Y. SUN
WOODLANDS MEDICAL OFFICE I, LLC; AND H. CHEN WOODLANDS
MEDICAL OFFICE I, LLC, Appellants
V.
WOODLANDS-NORTH HOUSTON HEART CENTER, PA, Appellee
On Appeal from the 269th District Court
Harris County, Texas
Trial Court Cause No. 2010-49955
MEMORANDUM OPINION
Appellants, the TIC Owners,1 challenge a declaratory judgment in favor of
appellee Woodlands-North Houston Heart Center, PA (Heart Center). In this
declaratory judgment, the trial court declared that the lease agreement executed by
the Heart Center’s predecessors-in-interest was terminated by a bankruptcy court
order. In two related issues, the TIC Owners assert that the trial court erred by
(1) declaring the Heart Center lease was terminated by the order of the bankruptcy
court, which granted the bankruptcy debtors the authority to reject certain
1
The TIC Owners are Andriukaitis-Woodlands Medical Office, I, LLC; Barcus
Woodlands Medical Office I, LLC; Behnken Woodlands Medical Office I, LLC; Beutel
Woodlands Medical Office I, LLC; Boyer Woodlands Medical Office I, LLC; Crane Woodlands
Medical Office I, LLC; Christensen Woodlands Medical Office I, LLC; Comstock Woodlands
Medical Office I, LLC; Dowty Woodlands Medical Office I, LLC; Duling Woodlands Medical
Office I, LLC; Edberg Woodlands Medical Office I, LLC; Haberer Woodlands Medical Office I,
LLC; Hashek Woodlands Medical Office I, LLC; Hill Woodlands Medical Office I, LLC; Hill G
& M Woodlands Medical Office I, LLC; Kessler Woodlands Medical Office I, LLC; Kuhlman
Woodlands Medical Office I, LLC; Leask Woodlands Medical Office I, LLC; Lovelady
Woodlands Medical Office I, LLC; Olson Woodlands Medical Office I, LLC; Rohrbacher
Woodlands Medical Office I, LLC; Skinner Woodlands Medical Office I, LLC; TIC Woodlands
Medical, LLC; Traskiewicz Webb Woodlands Medical Office I, LLC; Urmossy Woodlands
Medical Office I, LLC; Y. Sun Woodlands Medical Office I, LLC; and H. Chen Woodlands
Medical Office I, LLC.
2
unexpired leases and subleases, and (2) failing to find that the TIC Owners are the
current landlords of the Heart Center Lease, which remains valid and enforceable.2
We affirm.
BACKGROUND
This case was submitted for a bench trial on an agreed statement of facts and
exhibits (the Agreed Statement of Facts). These background facts are compiled
from the Agreed Statement of Facts provided to the trial court.
In 2002, Lantern Bend Medical Plaza, Ltd. (LBMP) owned the property at
issue (the Plaza). The Plaza is a building with a total of 48,750 square feet of
office space. On October 17, 2002, LBMP and the predecessors-in-interest to the
Heart Center executed a fifteen-year lease for office space in the Plaza (the Heart
Center Lease). On February 26, 2007, LBMP sold the Plaza to FOR 1031
Woodlands Medical Office I, LLC (FOR 1031). The next day, FOR 1031, as the
new owner, simultaneously leased the Plaza (the Master Lease3) to DBSI
Woodlands Medical Offices I LeaseCo LLC (DBSI Woodlands) and sold its own
interest in the Plaza to appellants, the TIC Owners, who presently own the Plaza.
In November 2008, numerous DBSI entities, including DBSI Woodlands, filed a
petition for Chapter 11 bankruptcy in Delaware. The petitioners requested that the
proceedings be jointly administered. On February 2, 2009, the TIC Owners
2
Appellants also urge that the trial court erred in considering argument about factual
matters outside the agreed case as submitted by the parties. Because our de novo review of this
case is based solely on the agreed statement of facts, the agreed exhibits, and the appropriate
legal authorities, and because the argument of counsel is not evidence, whether the trial court
considered matters outside the record is of no moment to this appeal.
3
This NNN lease is a “triple net” lease wherein the lessee is responsible for all
“operating expenses,” including maintenance, property taxes, and insurance, and the lessor(s) is
not responsible for any of these expenses.
3
entered into an Amended and Restated Master Lease Agreement with TNPPM
Woodlands, LLC.
On February 4, the Delaware Bankruptcy Court entered an “Order
(Omnibus) Granting Authority to Reject Certain Unexpired Leases of Non-
Residential Real Property, Subleases and/or Other Agreements Pertaining to Real
Property and Executory Contracts Effective as of January 30, 2009” (the
Bankruptcy Order). In this order, the bankruptcy court approved the various DBSI
entities’ rejection, effective January 30, 2009, of numerous master leases,
subleases and executory contracts set forth in Exhibits I and II attached to the
order. Exhibit I to the Bankruptcy Order specifically lists “Woodlands Medical
(Lantern Bend)” as a master lease. Exhibit II identifies the Heart Center Lease as a
“Sublease[] to be Rejected.” The bankruptcy court’s order further states that
[n]othing herein shall be construed as a determination, nor as an
acknowledgment or agreement on the part of any party, that (a) the
applicable Debtor[s’] interest in any agreement referred to as a
“sublease” is, in fact, a sublease, (b) that such agreement constitutes
property of the Debtors’ estate, or (c) that rejection of the
Masterleases, Subleases or Contracts hereunder shall have any impact
on any agreement between non-debtor parties, nor shall anything
herein impair, prejudice or affect, in any way, any rights of parties to
such “subleases” from seeking recovery of any obligation arising from
year-end reconciliations from any parties to such “subleases” or
assignees or designees of any such parties.
A dispute arose between the Heart Center and the TIC Owners about the
effect of the Bankruptcy Order. The Heart Center asserted that the Bankruptcy
Order terminated the Heart Center Lease; the TIC Owners contended that the
Bankruptcy Order did not terminate the Heart Center Lease. The Heart Center
filed a petition for declaratory relief in the trial court in August 2010, seeking a
4
declaration that the Bankruptcy Order terminated the Heart Center Lease.4 The
trial court signed a judgment on June 21, 2013, in favor of the Heart Center. In
this judgment, the trial court declared that the Heart Center Lease was terminated
by the Bankruptcy Order as of January 30, 2009. The trial court also signed
findings of fact and conclusions of law, incorporating the agreed statement of facts
into its findings and concluding that the Heart Center Lease was terminated by the
Bankruptcy Order. This appeal timely followed.
ANALYSIS
A. Standard of Review
Although the record in this case contains an agreed statement of facts on
which the parties had a bench trial, the record does not contain an agreed statement
certified by the trial court to be correct. See Tex. R. Civ. P. 263 (requiring a signed
agreed statement to be certified by the trial court to be correct). But strict
compliance with this rule is not required, and when, as here, the record indicates
the trial court heard the case on stipulated facts, we may treat the case as one
involving an agreed statement of facts under Rule 263. Taylor v. First Comm.
Credit Union, 316 S.W.3d 863, 866 (Tex. App.—Houston [14th Dist.] 2010, no
pet.).
We review a case tried on agreed facts de novo. See Panther Creek
Ventures, Ltd. v. Collin Cent. Appraisal Dist., 234 S.W.3d 809, 811 (Tex. App.—
Dallas 2007, pet denied). The agreed stipulations are binding on the parties, the
trial court, and the reviewing court. Id. We presume that the parties have brought
before the court all facts necessary for the presentation and adjudication of the
case. Amaro v. Wilson Cnty., 398 S.W.3d 780, 784 (Tex. App.—San Antonio
4
Pending the outcome of this dispute, the Heart Center has continued to pay rent for the
premises it leased in the Plaza.
5
2011, no pet.). We do not review the legal or factual sufficiency of the evidence.
Id. “In an appeal from a trail court’s judgment on an agreed case, the only issue on
appeal is whether the trial court properly applied the law to the agreed facts.”
Taylor, 316 S.W.3d at 866.
B. Arguments Asserted by the TIC Owners
We begin by narrowing the focus of the issues before this court. First, we
need not decide whether the Bankruptcy Order terminated the Master Lease when
it authorized rejection of that lease because the parties agree that that the
Bankruptcy Order terminated the Master Lease. Therefore, the parties agree that
the Bankruptcy Order ended the relationship between the TIC Owners and DBSI
Woodlands—a relationship created by the Master Lease. The parties further agree
that the Bankruptcy Order ended the relationship between DBSI Woodlands and
the Heart Center—a relationship also created by the Master Lease. The parties
agree that the TIC Owners still own the Plaza, part of which premises are the
subject of the Heart Center Lease. The parties also agree that the Heart Center
Lease is not specifically mentioned in the Master Lease. Even so, the parties agree
that the TIC Owners transferred at least some of their rights in the Heart Center
Lease to DBSI Woodlands pursuant to the terms of the Master Lease. Finally, the
parties agree that the Bankruptcy Order specifically authorized the rejection of the
Heart Center Lease.
Nevertheless, by their issues on appeal, the TIC Owners urge that the
Bankruptcy Order did not terminate the Heart Center Lease. As such, the TIC
Owners contend that the Heart Center Lease remains a valid and enforceable lease
between the TIC Owners, as lessors, and the Heart Center, as lessee. They have
three bases for this proposition, although their arguments are presented in two
separate issues. First, as part of their first issue, the TIC Owners assert that if we
6
construe the provisions of the Master Lease harmoniously, we must conclude that
the parties to that lease contemplated that, in the event of its termination, the TIC
Owners, as successors to FOR 1031, would substitute for DBSI Woodlands as
landlords. Next, also as part of their first issue, they argue that their “reversionary
interest” in the Master Lease was triggered by the Bankruptcy Order’s termination
of the Master Lease, which amounted to a breach of that lease, and thus, the Heart
Center Lease reverted to the TIC Owners because it was not absolutely assigned to
DBSI Woodlands. The TIC Owners contend in their second issue that the Master
Lease actually did not assign the Heart Center Lease to DBSI Woodlands and that
instead, the TIC Owners themselves were the landlords under the Heart Center
Lease. We address each of these arguments in turn.
C. The TIC Owners Did Not Become the Landlords of the Heart Center
When the Master Lease Was Terminated.
Determination of this issue requires us to construe the terms of the Master
Lease. In construing a contract, we must ascertain and give effect to the parties’
intentions as expressed in the document. J.M. Davidson, Inc. v. Webster, 128
S.W.3d 223, 229 (Tex. 2003); NuStar Energy, L.P. v. Diamond Offshore Co., 402
S.W.3d 461, 465 (Tex. App.—Houston [14th Dist.] 2013, no pet.). We consider
the entire contract and try to harmonize and give effect to all its provisions by
analyzing the provisions with reference to the entire agreement. Webster, 128
S.W.3d at 229; NuStar Energy, 402 S.W.3d at 466. We construe contracts “from a
utilitarian standpoint bearing in mind the particular business activity sought to be
served” and “will avoid when possible and proper a construction which is
unreasonable, inequitable, and oppressive.” Frost Nat’l Bank v. L & F. Distribs.,
Ltd., 165 S.W.3d 310, 312 (Tex. 2005) (per curiam) (quoting Reilly v. Rangers
Mgmt., Inc., 727 S.W.2d 527, 530 (Tex.1987)). If, after the appropriate rules of
construction have been applied, the contract can be given a definite or certain legal
7
meaning, it is unambiguous and we construe it as a matter of law. Id. The
interpretation of an unambiguous contract is a question of law we review de novo.
MCI Telecomms. Corp. v. Tex. Utils. Elec. Co., 995 S.W.2d 647, 650 (Tex. 1999).
1. Paragraphs 2 and 19 of the Master Lease do not create a
“reversionary interest” in the Heart Center Lease.
Courts often analogize ownership of real property to a bundle of sticks in
which each stick represents a particular right regarding the property. E.g., Town of
Flower Mound v. Stafford Estates Ltd. P’ship, 135 S.W.3d 620, 634 (Tex. 2004)
(quoting Dolan v. City of Tigard, 512 U.S. 374, 393 (1994)). The right to occupy
all or part of the property is one of the sticks in the bundle. See U.S. v. Gen.
Motors Corp., 323 U.S. 373, 378 (1945) (explaining that “property” denotes the
group of rights “to possess, use and dispose of it”). Although a lease transfers the
right to occupy stick to the tenant/lessee, a right to reenter and repossess the
property on default of rental payments is a landlord’s—or property owner’s—
“contingent reversionary interest.” See 718 Assocs., Ltd. v. Sunwest N.O.P., Inc., 1
S.W.3d 355, 361 (Tex. App.—Waco 1999, pet. denied).
The TIC Owners identify several portions of the Master Lease to support
their claim that they automatically became the landlords of all subleases or
assignments of the Master Lease upon its rejection by the Bankruptcy Order. They
assert that these portions of the Master Lease are “consistent with the right of
reentry and reversionary right contained” in the lease. However, we disagree that
these paragraphs, construed harmoniously, support the TIC Owners’ claim that
they automatically became the landlords of the Heart Center Lease upon the
termination of the Master Lease.
8
From Paragraph 2(a), they quote the following:
Upon termination of the Lease, if all or any part of the Leased
Premises are then assigned or sublet, LESSOR agrees to recognize
such assignment or sublease provided no default or even that, with the
passage of time or giving of notice or both, would constitute a default
then exists under such assignment or sublease.
This language simply requires the TIC Owners, as lessors, to recognize any non-
defaulted assignments or subleases in existence when the Master Lease terminates.
There is nothing in the language that suggests any reversionary right, such as a
right to reenter and repossess the assigned or sublet premises.
From Paragraph 19(b), the TIC Owners quote language concerning the
requirement that any sublease entered into under the terms of the Master Lease
must include provisions requiring the sublessee, in the event of any default or
termination of the Master Lease, to (a) “attorn to and recognize” any new landlord
of the leased premises and (b) waive any provision provided by statute or “rule of
law” that could terminate the sublease or give the sublessee the right to elect to
terminate the sublease. Although this paragraph may provide some reversionary
rights to the TIC Owners, it explicitly applies to a sublease of the premises
“entered into after the date hereof,” i.e., after the “Commencement Date” of the
Master Lease. The Heart Center Lease, however, indisputably predates the Master
Lease. Thus, this paragraph and the language quoted by the TIC Owners do not
apply to the Heart Center. 5
5
The other reversionary rights identified by the TIC Owners in the Master Lease are
rights as between the TIC Owners and DBSI Woodlands, such as the TIC Owners’ remedies in an
event of default. For example, under Paragraph 23(a), the TIC Owners have the right to
terminate the Master Lease and “enter upon and take possession of the Leased Premises” by
force in the event of a default by DBSI Woodlands.
9
Nevertheless, the TIC Owners urge that construing these paragraphs
“harmoniously” operates to extend Paragraph 19(b)(ii) to not only leases entered
into by DBSI Woodlands subsequent to the execution of the Master Lease, but also
to “those leases which were in existence at the time the Masterlease was executed.”
The TIC Owners’ conclusion does not follow from the paragraphs quoted. There
is simply no connection between Paragraph 2’s language and the purported
reversionary interest identified in Paragraph 19, and the TIC Owners do not
explain how the two are connected, other than to state so in a conclusory fashion.
In short, although we consider the entire contract and attempt to harmonize
and give effect to all its provisions, we must not give a contract “a meaning
different from that which its language imports.” NuStar Energy, 402 S.W.3d at
466 (quoting David J. Sacks, P.C. v. Haden, 266 S.W.3d 447, 450 (Tex. 2008) (per
curaim)). Extending Paragraph 19(b)(ii) to the Heart Center Lease would require
us to give the Master Lease a meaning different from what its language imports.
The clear and unequivocal language of the Master Lease indicates that Paragraph
19(b)(ii), the only provision identified by the TIC Owners as providing a
“reversionary” interest to them, does not apply to the Heart Center Lease because
this lease was entered into before the commencement date of the Master Lease.
For the foregoing reasons, we overrule this portion of the TIC Owners’ first
issue.
2. Nature of the Heart Center Lease assignment does not compel
reversion of this lease to the TIC Owners.
The TIC Owners acknowledge that the following language of the Master
Lease at least purports to assign the Heart Center Lease because the Heart Center
Lease was in existence at the time the Master Lease was executed:
10
LESSOR [FOR 1031 and the TIC Owners] grants, conveys, assigns
and transfers to [DBSI Woodlands] any and all right title and interest
of [FOR 1031 and the TIC Owners], as landlord or otherwise, in and
to all leases of the Leased Premises existing as of the Commencement
Date for the remaining term and all extensions thereof and to all the
rents set forth therein relating to the period from and after the
Commencement Date until the expiration or termination of this Lease.
[DBSI Woodlands] hereby accepts, assumes and agrees to perform all
of the terms, covenants and conditions of such leases required to be
performed by landlord from and after the Commencement Date until
the expiration or termination of this Lease.
The TIC Owners assert, and we agree, that the assignments pursuant to this
paragraph are assignments for a term—i.e., until the termination of the Master
Lease. We do not agree, however, that simply because the Heart Center Lease was
assigned to DBSI Woodlands for a term that it necessarily reverted to the TIC
Owners when DBSI Woodlands simultaneously rejected both the Master Lease and
the Heart Center Lease.
We begin by noting that the TIC Owners direct us to Vara-Portofino Tech
Center L.L.C. v. Sandvik Mining & Construction USA, L.L.C., as a case that may
be “informative” to our determination of this dispute. No. H-09-2376, 2009 WL
4263975, at *6–7 (S.D. Tex. Nov. 25, 2009). In that case, which involved the
same bankruptcy proceedings as are involved here and in which standing to sue
was the issue, the Southern District of Texas concluded that, because the plaintiffs
retained a right to reenter and repossess the property on default of rental payment
under the terms of the Master Lease, a lease that purportedly had been assigned to
the DBSI entity did not become a sublease and was not released by a bankruptcy
order releasing the Master Lease. Id. at *7. Importantly, there is nothing in Vara-
Portofino indicating that the sublease at issue had been rejected through the
bankruptcy proceedings, as happened here. See id. at *1–8. Thus, this case is
readily distinguishable: the Heart Center Lease was explicitly listed as a sublease
11
to be rejected as part of the Bankruptcy Order. We therefore do not find the
Southern District of Texas’s determination informative of the issues before us.
The TIC Owners assert that the Master Lease was rejected by the bankruptcy
trustee, which resulted in a pre-petition breach of the Master Lease. See, e.g., 11
U.S.C. § 365(g)(1); Stewart Title Guar. Co. v. Old Republic Nat’l Title Ins. Co., 83
F.3d 735, 741 (5th Cir. 1996). This breach, according to the TIC Owners,
permitted them to exercise any of the remedies for default detailed in the Master
Lease, including termination of the Master Lease. 6 Their argument that they
6
However, there is nothing in the agreed statement of facts that establishes an event of
default under the Master Lease.
In Paragraph 22, the following are “deemed to be events of default” by DBSI Woodlands,
the lessee:
(a) LESSEE shall fail to pay within 5 days of when due any installment of Rent
or any other payment required pursuant to this Lease. . . .
(b) LESSEE shall abandon any substantial portion of the Leased Premises.
(c) LESSEE shall fail to comply with any term, provision or covenant of this
Lease, other than payment of the Rent and obtaining the required policies of
insurance, and the failure is not cured within 60 days after written notice to
LESSEE.
(d) LESSEE shall file a petition or be adjudged bankrupt or insolvent under the
Bankruptcy Code, 110 U.S.C. Section 10.1 et seq., as amended and in effect
from time to time, or any similar law or statute of the United States or any
State; or a receiver or trustee shall be appointed for all or substantially all of
the assets of LESSEE; or LESSEE shall make a transfer in fraud of creditors.
(e) LESSEE shall do or permit to be done an act which results in a lien being filed
against the Leased Premises or any portion of the Leased Premises.
The TIC Owners assert that several “events of default” occurred: “When DBSI [Woodlands]
ceased performing under the DBSI Masterlease a term of default occurred. When DBSI
[Woodlands] filed bankruptcy a term of default occurred.” But there is nothing in the Agreed
Statement of Facts to support the TIC Owners’ claim that DBSI Woodlands “ceased performing”
under the Master Lease (other than the filing for bankruptcy). Regarding subsection (d), such
clauses are referred to as “ipso facto clauses” because they “automatically terminate the contract
or lease, or permit the other contracting party to terminate the contract or lease, in the event of
bankruptcy.” In re Enron Corp., 306 B.R. 465, 462 (Bankr. S.D.N.Y. 2004) (quoting In re
C.A.F. Bindery, Inc., 199 B.R. 828, 832–33 (Bankr. S.D.N.Y. 1996)). Such clauses are generally
unenforceable under the Bankruptcy Code. See id. (citing 11 U.S.C. § 365(e)(1), which prohibits
12
terminated the Master Lease is belied by the Agreed Statement of Facts: On
February 2, 2009, the TIC Owners entered into an “Amended and Restated Master
Lease Agreement with TNPPM Woodlands. This lease explicitly states that the
DBSI Woodlands’ Master Lease “continues in existence as of [February 2, 2009].”
Further, rather than identifying the contractual remedy for default upon which they
rely under the Master Lease, the TIC Owners cite to cases regarding the distinction
between assignments and subleases.7 They assert that because the Heart Center
Lease was a sublease, rather than an assignment, they retained a contingent
reversionary interest in it. But this argument, in turn, relies on the notion that the
Heart Center Lease is subject to Paragraph 19 of the Master Lease, an argument
that we have already rejected. 8
termination of executory contracts or leases after commencement of the bankruptcy proceeding
based on such provisions). Thus, although this contractual “event of default” is supported by the
Agreed Statement of Facts, this clause is unenforceable under the Bankruptcy Code. See id. It
cannot support the TIC Owners’ assertion that an event of default entitling them to the remedies
for default under the Master Lease occurred.
7
These cases stand for the proposition that when a tenant retains a right to renter and
repossess the premises upon default, a sublease is created rather than an assignment. See, e.g.,
718 Assocs., Ltd. v. Sunwest N.O.P., Inc., 1 S.W.3d 355, 360–61 (Tex. App.—Waco 1999, pet.
denied).
8
We note that the TIC Owners cite to numerous cases in their analysis of this issue.
However, their arguments are unclear, repetitive, and conclusory. See Tex. R. App. P. 38.1(i)
(“The brief must contain a clear and concise argument for the contentions made, with
appropriate citations to authorities and to the record.”); see also Canton-Carter v. Baylor Coll. of
Med., 271 S.W.3d 928, 931–32 (Tex. App.—Houston [14th Dist.] 2008, no pet.) (stating that our
briefing requirements are not met by “merely uttering brief, conclusory statements unsupported
by legal citations”; that the failure to provide substantive analysis of the legal issues results in
waiver of the complaint; and that the appellant failed to meet this requirement because her brief
consisted “of a series of disjointed factual assertions and cryptic complaints.”). As an example,
the majority of the argument asserted on pages 21–22 of the TIC Owners’ brief is repeated
verbatim on pages 27–28. Although we have made our best effort to address the contentions
made by the TIC Owners, the nature of their briefing has made our analysis difficult because we
cannot readily determine the relationship between their assertions, their cited authorities, and,
most importantly, their conclusions.
13
In short, the TIC Owners have failed to explain how the terms and
provisions of the Master Lease compel the reversion of the Heart Center Lease to
them. Cf. Chatlos Sys., Inc. v. Kaplan, 147 B.R. 96, 100 (Bankr. D. Del. 1992)
(explaining that when a primary lease is rejected by the bankruptcy court, any
underlying subleases are likewise rejected because “the sublessee’s rights in the
property extinguish with those of the sublessor”). Accordingly, we overrule the
entirety of the TIC Owners’ first issue.
D. Heart Center Lease Was Assigned to DBSI Woodlands
In their final issue, the TIC Owners assert that the trial court erred in
declaring the Heart Center Lease terminated because they, not DBSI Woodlands,
were the landlords of this lease based on the chain of conveyances of the property.
They base their arguments on cases holding that a deed passes whatever interest
the grantor has in the land, unless it contains language showing the intention to
grant a lesser estate. E.g., Eastin v. Dial, 288 S.W.3d 491, 500 (Tex. App.—San
Antonio 2009, no pet.) (“A deed must be construed to confer upon the grantee the
greatest estate that the terms of the instrument will permit. A deed will pass
whatever interest the grantor has in the land, unless it contains language showing
the intention to grant a lesser estate.” (citations omitted)).
But the TIC Owners ignore the fact that, as lessors/owners of the Plaza, they
assigned their interest in the Heart Center Lease to DBSI Woodlands. The Master
Lease recites FOR 1031’s intent to sell tenant-in-common interests in the Plaza
property. And the Master Lease defines “Lessor” as:
FOR 1031 Woodlands MedicalOffice I, LLC, a Delaware limited liability
company (LLC), the current owner or contract buyer of the Leased Premises
(as defined below), and all future owners of tenant in common interests in
the Lease Premises.
14
(emphasis added). The Master Lease further provides, “All references to
‘LESSOR’ herein shall mean, collectively, [FOR 1031], each Purchaser of the
Leased Premises and their successors and assigns.”
As noted above, the lessors—both FOR 1031 and the TIC Owners—under
the Master Lease assigned, conveyed, and granted to DBSI Woodlands “any and
all right, title, and interest . . . as landlord or otherwise . . . in and to all leases” of
the Plaza existing as of its commencement date (emphasis added). DBSI
Woodlands accepted and agreed to the assignment of these leases. It is undisputed
that the Heart Center Lease was one of the leases that existed as of the
commencement date of the Master Lease; thus, under the plain language of the
Master Lease, DBSI Woodlands was assigned the Heart Center Lease by both FOR
1031 and the TIC Owners. See NuStar Energy, L.P., 402 S.W.3d at 465–66. As
such, we cannot agree that the TIC Owners remained the lessors under the Heart
Center Lease. Through the clear and unambiguous terms of the Master Lease, the
TIC Owners assigned this lease to DBSI Woodlands, regardless of whether the
Heart Center is deemed a sublessee or a lessee of DBSI Woodlands. 9
Under these circumstances, we overrule the TIC Owners second issue.
E. Effect of the Bankruptcy Order on the Heart Center Lease
As previously outlined, the Delaware Bankruptcy Court entered the
Bankruptcy Order, approving the rejection of numerous master leases, subleases,
and executory contracts, including the Master Lease and the Heart Center Lease.
We have already discussed and rejected the TIC Owners’ various arguments
regarding why the Bankruptcy Order did not end the contractual relationship
9
We note that, during oral argument, the TIC Owners conceded that, if there had been no
bankruptcy proceedings, DBSI Woodlands—and only DBSI Woodlands—would have had the
right to terminate the Heart Center Lease if it so chose.
15
between them and the Heart Center. Now, we consider whether the bankruptcy
court’s approval of the rejection of the Heart Center Lease permitted the Heart
Center to terminate this lease. See Taylor, 316 S.W.3d at 866 (providing that, in an
appeal from a case with agreed facts, the only issue is whether the trial court
properly applied the law to the agreed facts). We conclude that it does for the
following reasons.
With the bankruptcy court’s approval, a trustee of a bankruptcy debtor or a
debtor in possession “may assume or reject any . . . unexpired lease of the debtor.”
11 U.S.C. § 365(a).10
“This provision allows a trustee to relieve the bankruptcy estate of
burdensome agreements which have not been completely performed.”
In re Murexco Petroleum, Inc., 15 F.3d 60, 62 (5th Cir. 1994). The
Code states that, except in certain narrowly circumscribed instances,
rejection of an executory contract or lease constitutes a material
breach. 11 U.S.C. § 365(g). As a legal fiction, such a breach is
deemed to have occurred on the day immediately prior to the
commencement of the bankruptcy so rejection claims are treated as
prepetition claims, 11 U.S.C. §§ 365(g)(1) & 502(g), and because the
parties’ rights are deemed prepetition, state law governs the rights
stemming from the breach.
Stewart Title Guar. Co. v. Old Republic Nat’l Title Ins. Co., 83 F.3d 735, 741 (5th
Cir. 1996). In Texas, “[i]t is a fundamental principle of contract law that when one
party to a contract commits a material breach of that contract, the other party is
discharged or excused from further performance.” Mustang Pipeline Co. v. Driver
Pipeline Co., 134 S.W.3d 195, 196 (Tex. 2004) (per curiam). Additionally, a party
to a contract may elect to terminate it and be excused from performance of any
10
Although this section speaks only of a trustee, a debtor in possession is given the same
powers pursuant to section 1107 of the Bankruptcy Code. See 11 U.S.C. § 1107.
16
executory obligation if the other party commits a material breach. See A.G.E., Inc.
v. Buford, 105 S.W.3d 667, 676 (Tex. App.—Austin 2003, pet. denied).
It is undisputed that the Heart Center Lease was rejected by the bankruptcy
court. This rejection, in turn, constituted a prepetition material breach of the Heart
Center Lease by DBSI Woodlands. See 11 U.S.C. § 365(g)(1); Stewart Title, 83
F.3d at 741. Because of this material breach, the Heart Center, as lessee under the
Heart Center Lease, was entitled to treat the lease as terminated. 11 See 11 U.S.C.
§ 365(h)(1)(A)(i) (permitting a lessee to treat a debtor’s lease that has been rejected
by a bankruptcy trustee as terminated); Stewart Title, 83 F.3d at 741; see also
A.G.E., Inc., 105 S.W.3d 676; Giddings Petroleum Corp. v. Peterson Food Mart,
Inc., 859 S.W.2d 89, 93 (Tex. App.—Austin 1993, no writ) (“The weight of federal
authority holds that the trustee’s rejection of an executory contract or lease
effectively terminates the contract or lease.”). There is no such similar provision
entitling a lessor to terminate a lease based on a bankruptcy court’s rejection of a
lease. Further, as discussed above, the TIC Owners had not terminated the Master
Lease in this case as of February 2, 2009, when they entered into an amended and
restated master lease with a different lessee. We thus conclude that, although both
leases were rejected at the same time pursuant to the Bankruptcy Order, the Heart
Center Lease terminated before the TIC Owners terminated the Master Lease. See
11 U.S.C. § 365(h)(1)(A)(i); Stewart Title, 83 F.3d at 741; see also A.G.E., Inc.,
105 S.W.3d 676; Giddings Petroleum Corp., 859 S.W.2d at 93.
11
The parties’ agreed facts show that the Heart Center, as lessee, treated the Heart Center
Lease as terminated. The Heart Center (a) refused to execute the attornment agreement by which
the lease would contractually continue; (b) sought declaratory judgment that the lease was
terminated; and (c) continued to make monthly rental payments “subject to” its right to its
declaratory judgment action.
17
Based upon the Agreed Statement of Facts and the appellate issues presented
by the TIC Owners, we conclude that the trial court properly declared that the
Heart Center Lease was terminated.
CONCLUSION
The TIC Owners have failed to establish any basis for reversing the trial
court’s judgment. Having overruled each of the TIC Owners issues on appeal, we
therefore affirm the trial court’s judgment.
/s/ Sharon McCally
Justice
Panel consists of Justices Christopher, Jamison, and McCally
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