Business Law

Green Coin v. Khadavi (In re Khadavi), 2023 WL 859668 (9th Cir. Dec 12, 2023)

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The following is a case update written by Hale Andrew Antico, Chief Counsel of Antico Law Firm, analyzing Green Coin v. Khadavi (In re Khadavi), 2023 WL 859668 (9th Cir. Dec 12, 2023), a recent case of interest.

SUMMARY

In Green Coin v. Khadavi (In re Khadavi), 2023 WL 8596681 (9th Cir. Dec 12, 2023), the Ninth Circuit Court of Appeals affirmed the Ninth Circuit Bankruptcy Appellate Panel (BAP) decision [2023 WL 2770982 (9th Cir. BAP April 3, 2023)] and bankruptcy court’s summary judgment that failure to pay a full deposit was a “default” per the contract, resulting in $900,000 of liquidated damages.

To read the full published decision, click here.

FACTS

In his Chapter 11 case, Alex Khadavi (Debtor/Seller) contracted with Green Coin (Buyer), which was to purchase Debtor’s residential property for $85 million. The contract called for Buyer to make a deposit of 3%, which amounted to just over $2.5 million. Buyer made a payment of only a portion of the required deposit, totaling only $900,000.

Chapter 7 Trustee was a successor-in-interest to Seller Khadavi upon conversion. He claimed the failure to pay the full deposit was a “default” which allowed the estate an award of liquidated damages in the amount of the deposit already paid, namely, the $900,000.

Buyer claimed that its failure to pay the full deposit was not a default for purposes of liquidated damages, because the nonpayment wasn’t the reason the sale did not close. With the battle lines clearly drawn, the bankruptcy court held that the failure to make the full deposit payment was a default, which the BAP affirmed, and, here, the Ninth Circuit Court of Appeals also affirmed.

REASONING

In concluding that this case involved a default which invoked the contract’s liquidated damages, the Ninth Circuit started with the contract’s terms and the ordinary meaning of those terms.

The Ninth Circuit focused on the fact that the contract’s “default” clause uses conditional language. The clause reads, “If Buyer fails to complete this purchase because of Buyer’s default, Seller shall retain, as liquidated damages, the deposit actually paid.” (emphasis in original). The Ninth Circuit held that under the plain language of the “default” clause, Buyer’s default leads to a failure to complete the purchase, not the other way around. It also held that Buyer’s interpretation of “default” was far too narrow. Turning to Black’s Law Dictionary, it found the definition is “[t]he omission or failure to perform a legal or contractual duty.” This was echoed in the Ninth Circuit’s own recent ruling when it wrote, “[t]he ordinary meaning of ‘default’ is uncontroversial: it means [a] failure to perform a task or fulfill an obligation.” In re Hawkeye Ent., LLC, 49 F.4th 1232, 1237 (9th Cir. 2022) (cites omitted). Khadavi at *1.

With that resolved, the Ninth Circuit applied the broad “default” standard of “any failure to perform an obligation” to the facts at hand. It noted that timely payment of the full deposit was a contractual obligation, and Buyer failed to timely pay the full amount required. Having found a default, the Ninth Circuit then ruled that the liquidated damages provision was triggered.

Buyer tried to argue that Seller unilaterally canceled the contract. This argument hinged on the claim that Buyer made a declaration to cancel, which would trigger another clause compelling return of the deposit.

However, the Ninth Circuit found the declaration in question didn’t cancel the contract; further, the contract specified the only way Seller could cancel was delivering a notice to buyer to perform. After examining the facts, the Buyer failed to carry his burden and the Ninth Circuit ruled there was no unilateral cancellation when it ruled: “[t]he purchase agreement was therefore never validly cancelled.” Khadavi at *2.

With that, the Ninth Circuit Court of Appeals found that the BAP did not err in concluding that the bankruptcy estate was entitled to retain the $900,000 partial deposit as liquidated damages.

AUTHOR’S COMMENTS

Bankruptcy is a nuanced specialty of law where circumstances may require the practitioner be familiar, if not proficient, in many other areas of law. Frequently this will involve community property, real property, estate planning, or tax law. Sometimes, a matter will require astute counsel to harken back to Contracts law from the first year of law school.

At its most basic, this is a case about contract interpretation. It may seem unusual for a simple contract case in bankruptcy to be escalated and then decided at the Ninth Circuit Court of Appeals. However, when a large sum like a million dollars is at stake, parties may choose to litigate and appeal, no matter how flimsy or insubstantial the argument.

The skilled bankruptcy practitioner should remain cognizant of this. In this case, Debtor and his counsel did not have to spend time and money in litigation, as the Chapter 7 Trustee took over his interests in the contract and subsequent litigation. However, if the facts were slightly different, a large sum of disputed money could easily tempt a litigious party to tie up Debtor’s time and money in court for years as an adversary proceeding gets litigated and appealed. Consequently, wise counsel should assess the risks and advise their clients of potential risks of both time and money before filing the petition.

These materials were written by Hale Andrew Antico, Chief Counsel of Antico Law Firm, representing consumer debtors in the Central District of California, and President of the Central District Consumer Bankruptcy Attorneys Association, and edited by Kathleen A. Cashman-Kramer, Of Counsel, Sullivan Hill Rez & Engel APLC.


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