On January 16, 2014, the US Bankruptcy Court for the Southern District of Florida, in In re TOUSA, Inc., held that the non-debtor party to executory contracts rejected in bankruptcy was not entitled to monetary damages or specific performance when the contracts explicitly limited remedies for breach to specific performance (503 B.R. 499 (Bankr. S.D. Fla. 2014)).

In 2003, TOUSA, Inc. (TOUSA) entered into two contracts (Contracts) to build and sell homes directly to Superior Homes and Investments, Inc. (Superior). The remedies provision of the Contracts (Limitation Provision) stated that Superior waived its right to monetary damages and that, in the event of a default or breach by TOUSA, its sole and exclusive remedy was to seek either:

TOUSA filed for bankruptcy protection in 2008. During the proceeding, TOUSA filed motions to reject certain executory contracts and leases, including the Contracts, which the Court approved. In response, Superior filed a proof of claim seeking rejection damages. TOUSA objected, arguing that Superior was not entitled to any monetary relief because it expressly waived this right in the Contracts. Superior argued that because it has a right to monetary damages under Florida law, it has a claim for monetary damages against TOUSA, notwithstanding the express waiver contained in the Limitation Provision.

The Court first explained that the rejection of an executory contract under section 365(g) of the Bankruptcy Code deprives the non-debtor party of specific performance, even if the nondebtor would otherwise be entitled to specific performance under applicable nonbankruptcy law for breach of contract. Because TOUSA rejected the Contracts, Superior was deprived of its specific performance remedy.

The Court then considered whether it could estimate equitable claims under section 502(c) of the Bankruptcy Code. Section 502(c) authorizes a court to estimate equitable claims if the claim involves a right to payment "arising from a right to an equitable remedy for breach of performance." Section 101(5)(B) of the Bankruptcy Code defines a "claim" as the "right to an equitable remedy for breach of performance if such breach gives rise to a right to payment."

A right to payment arises either contractually or under applicable state law. Because the Limitation Provision made it clear that no contractual right to payment existed, the Court addressed Superior's argument that a right to payment existed under state law. Superior claimed that Florida law creates an exception to a contractual waiver of monetary remedies in certain instances where specific performance is impossible and remedies are contractually limited. This exception exists where a seller profits by breaching a contract to take advantage of a higher offer from a third party, allowing the buyer to recover damages in the amount of the difference between the original offer and the third party's offer. The Court rejected this argument, finding that, in this case, because TOUSA did not profit by selling the property at a higher price to a third party, the exception did not apply.

Next, Superior argued that the Limitation Provision should be voided because it was both unconscionable and illusory, relying first on Article 2 of the Uniform Commercial Code (UCC). The Court rejected this argument because Article 2 of the UCC applies only to the sale of goods and not at all to contracts for the sale of real property. Even by analogy to the UCC, the Court found that the Limitation Provision was neither procedurally nor substantively unconscionable. Further, the Court found that the Limitation Provision was not illusory because it only served to limit Superior's remedies as opposed to rendering TOUSA's performance optional.

Finally, the Court noted that Superior could have prevented the perceived unjust result by objecting to the sale of the properties at issue. Superior was properly served with the sale motion, a hearing occurred and the Court approved the sale. By failing to object to the sale motion or seek relief from the sale order, Superior waived its argument that the Limitation Provision was unjust. Had Superior wanted to preserve its right to specific performance, it should have objected to the sale when it had the opportunity. However, it is unclear why the Court even entertained this argument, as it previously held that rejection of a contract generally deprives the non-debtor party from its specific performance remedy.

This case serves as a reminder that limiting remedies in a contract solely to specific performance may leave the non-debtor party without any enforceable remedy if the defaulting party ends up in bankruptcy and rejects the contract.

For more information on executory contracts, see Practice Notes, Executory Contracts and Leases: Overview and Executory Contracts and Leases in Bankruptcy: Strategies for Non-Debtors.