Jenner & Block

"Rejected Contracts That Limit Remedies To Specific Performance May Leave Parties With No Remedy," Jenner & Block Spotlight Newsletter

By: Andrew J. Olejnik and Abraham M. Salander

In In re TOUSA, Inc., 503 B.R. 499 (Bankr. S.D. Fla. 2014) (No. 08-10928), the Bankruptcy Court for the Southern District of Florida held that a claimant could not obtain either specific performance or money damages under a contract rejected under Section 365(g) of the Bankruptcy Code because the contract limited the claimant’s remedies to specific performance.  In the contract, the claimant expressly waived its right to monetary damages, retaining only the right to (a) a return of deposits not applied to the purchase price or (b) equitable relief, including specific performance.  The court first explained that the claimant was not entitled to specific performance because claimants are generally deprived of such a right when a debtor rejects a contract under Section 365.  Therefore, the issue was whether the claimant was entitled to monetary damages notwithstanding the provision limiting remedies.  The court noted that, although Section 502(c)(2) of the Code permits estimation of some equitable claims, it only does so where a right to payment exists in the first place.  Accordingly, the court explained that the threshold question was whether applicable state law permits the claimant to recover monetary damages for breach of contract.  The court concluded that Florida courts would enforce the provision limiting damages, thus eliminating the claimant’s ability to recover monetary damages.  Because Section 365(g) did not allow for specific performance, the claimant was entitled only to a return of its deposit.  In re TOUSA is therefore a reminder to contracting parties that a provision limiting remedies to specific performance might not actually create an enforceable remedy if the breaching party ends up filing for bankruptcy and rejecting the contract.