Opinion ID: 551498
Heading Depth: 1
Heading Rank: 2

Heading: right of first refusal issue

Text: 24 Koch's complaint also sought relief against Sun and Champlin for breach of the Right of First Refusal Agreement (RFRA) entered into between Koch and Sun concurrently with the Acquisition Agreement. The RFRA covered four specific Sun properties about which Koch and Sun had negotiated but had failed to reach an agreement to sell. Sun attempted to sell these properties in 1982 and, pursuant to the RFRA, made a formal offer to sell them to Koch for $38.9 million. Koch declined the offer. In the fall of 1983, the parties discussed the sale of Sun's DeepSea terminal in Corpus Christi, one of the four properties subject to the RFRA. Again, nothing came of the discussions. 25 About this same time, Champlin entered the picture by putting up for sale its Oklahoma crude oil gathering system. Although both Koch and Sun negotiated with Champlin to buy the gathering system, it was Sun that reached an agreement with Champlin. Sun agreed to purchase the gathering system, while Champlin would have the option of purchasing the DeepSea terminal for $9.4 million in cash. Champlin's option was made contingent upon Koch's right of first refusal on DeepSea. Ultimately, Champlin exercised its option to purchase DeepSea, and Sun began the process of activating Koch's right of first refusal. 4 26 On December 22, 1983, Sun sent Koch a formal offer, expressed in a previously agreed-upon format, to sell DeepSea for $9.4 million in cash. Sun sent Koch some additional materials, which were received on January 3, 1984. Although Koch repeatedly complained to Sun about formal defects in the offer, its most important objection to the offer was that it contained at least four substantial differences from Sun's agreement with Champlin, in breach of paragraph 1.9 of the RFRA. Even after a number of discussions in January of 1984, Sun and Koch never resolved their dispute. Sun sold DeepSea to Champlin on February 1, 1984, informing Koch of the sale by letter dated two days later. Koch brought this action for breach of contract a year later, on February 6, 1985. We discuss the issue of breach first, followed by the remedies of specific performance and damages. 5
27 Like a typical right of first refusal agreement, the RFRA ultimately did not restrict the terms on which Sun could sell DeepSea to third parties such as Champlin. Rather, the RFRA required Sun to follow certain procedures before selling DeepSea. Paragraphs 1.1 and 1.2(A) required Sun to offer DeepSea to Koch according to a certain previously drafted agreement of sale. Paragraph 1.2(B) gave Koch thirty days in which to accept the offer; if Koch failed to accept in that time, Paragraph 1.4(A) gave Sun thirteen months to sell DeepSea to a third party at an equivalent price. Paragraph 1.9 contemplated that Sun and the third party might consummate a sale of DeepSea on terms different from the offer to Koch, so long as such modifications, taken as a whole, do not have the effect of reducing the economic value to [Sun] of the transaction offered to the third party to a value less than the economic value to [Sun] of the transaction offered to Koch. 28 The district court concluded that Sun breached paragraph 1.9 because Sun's offer to Champlin had less economic value to Sun--that is, it was worse for Sun and presumably better for Champlin--than Sun's offer to Koch. It based this conclusion on the provision in the offer to Champlin by which Sun promised to amend a terminalling agreement between one of its affiliates and Champlin as the new owner of DeepSea. Under this agreement, Sun paid itself less than market rates to store crude oil at its own terminal. The amendment would force Sun to pay market rates to Champlin for storage. Sun's offer to Koch did not contain this promise. Koch claims that the amendment was worth $679,101 to the buyer of DeepSea. Sun contends for a value of only $151,295 and argues that the amendment affected a Sun affiliate that was not a party to the RFRA. Koch also cites other breaches by Sun of both paragraph 1.9 and other provisions of the RFRA. Without addressing each and every argument, we shall assume for purposes of review that Sun breached the RFRA. We now consider whether Koch is entitled to any remedies for this breach.
29 Prior to trial, the district court granted Sun's motion for partial summary judgment, ruling that specific performance/rescission is not available to [Koch]. Koch argues on appeal that this ruling is incorrect as a matter of law and cites Gochman v. Draper, 389 S.W.2d 571, 579 (Tex.Civ.App.1965), rev'd on other grounds, 400 S.W.2d 545 (Tex.1966), for the proposition that a right of first refusal agreement is a valid contract enforceable through specific performance. This proposition is surely correct, but it is just as surely limited by the subsequent decision in Martin v. Lott, 482 S.W.2d 917 (Tex.Civ.App.1972), which Koch fails to cite.
30 In Martin, the court held that breach of a right of first refusal agreement both created an enforceable option in the rightholder and also required the rightholder to choose between exercising that option or acquiescing in the transfer of the property to the third party: 31 In a suit for specific performance of an agreement not to sell or transfer without first making an offer to the plaintiff, such a transfer [in violation of the right of first refusal agreement] is considered equivalent to the offer which the owner has failed to make and gives the plaintiff an election to accept or reject, that is, to purchase or decline to purchase. As in the case of any other offer specifying no time for acceptance, the power of acceptance does not continue indefinitely but terminates on expiration of a reasonable time or by express rejection, or by conduct clearly inconsistent with an intention to purchase. 32 Id. at 922 (footnotes omitted). This election requirement is consistent with the right actually conferred by a right of first refusal agreement, that is, the right to have an enforceable option to purchase the subject property upon the happening of a specified event. The holder of an option must exercise it in order to purchase the property. If he chooses not to exercise his option, he cannot complain later that the owner sold the property to a third party. 33 In its opinion granting partial summary judgment for Sun, the district court found that Koch never evinced an intention ... to accept the 'offer' made by [Sun] when [it] sold the property. As Sun points out in its reply brief, it informed Koch on February 3, 1984, of the sale of DeepSea to Champlin. Koch, however, made no mention of the sale in its June 28, 1984, letter to Sun concerning other properties covered by the RFRA, and Koch made its first post-sale objection to the transfer of DeepSea only on November 27, 1984, nearly ten months after learning of it. Koch filed this lawsuit on February 6, 1985, seeking to have the sale of DeepSea to Champlin rescinded and set aside, but it did not seek or offer to buy DeepSea for itself. Finally, in response to Sun's request for admissions, Koch admitted that it has not since December 1983 made an offer to Sun to purchase the Deep Sea Terminal. Given these facts, the district court's finding that Koch never evinced an intention to purchase DeepSea on the terms offered to Champlin is not clearly erroneous.
34 In making a remedy of specific performance contingent upon the rightholder's contemporaneous election to purchase the subject property on the terms offered to the third party, Martin v. Lott described this election as a matter of intention, logically established only if the rightholder knew about his inconsistent rights and intended to choose between them. 482 S.W.2d at 923. Without citing Martin, Koch essentially argues that it did not know about its rights and therefore cannot be deemed to have chosen between them. Koch does not specifically dispute the district court's finding that it did not elect to purchase DeepSea, but argues instead that Koch in fact could not have accepted the 'offer' of Sun's property on the same terms as Sun sold to Champlin, because Koch did not know these terms, and because Sun breached its duty to provide them. We find this proposition untenable both in law and in fact. 35 In its opinion after a bench trial, the district court concluded as a matter of law that Sun failed to prove that [Koch] knowingly and intentionally abandoned its right to purchase the DeepSea Terminal on the same terms as were offered to Champlin. The court erred in so framing the issue. Under Martin v. Lott, the issue is whether Koch had enough information about the terms of the Champlin deal to make an informed choice about purchasing DeepSea on those terms. The court also erred in imposing on Sun the burden of proving this fact. Texas law, sparse but binding upon us, indicates that the owner has an initial duty to make a reasonable disclosure of the offer's terms, and the rightholder has a subsequent duty to undertake a reasonable investigation of any terms unclear to him. Further, this issue is governed by the established rule that the plaintiff (here Koch) has the burden to prove all predicates to the contractual liability of the defendant. See Incorporated Carriers, Ltd. v. Crocker, 639 S.W.2d 338, 340 (Tex.Ct.App.1982); Howell v. Kelly, 534 S.W.2d 737, 740 (Tex.Civ.App.1976). 36 In Ellis v. Waldrop, 656 S.W.2d 902, 903 (Tex.1983), the owner had notified the rightholder by letter of the terms of the deal with the third party, and the rightholder had replied by letter with his objections to the offer. The opinion does not reveal any other communication between the parties. Finding probative evidence in the record, the court upheld a jury's finding that the owner substantially performed his duties under a right of first refusal agreement. Id. at 904. In Foster v. Bullard, 496 S.W.2d 724, 736 (Tex.Civ.App.1972), the court overruled a contention that the rightholder was estopped to assert his right of first refusal because he did not bring suit seeking conveyence of the subject property for more than six months after the owner sold the property to a third party. The court found that the owner made no attempt to give the rightholder the opportunity to exercise his option to purchase. Id. The court also found that the rightholder made diligent and prompt investigation ... to ascertain the facts surrounding the sale and that his [a]ttempts to reach [the owner] by telephone and mail were fruitless. Id. at 737. Finally, the court noted that [a]s soon as [the rightholder] was alerted to the fact that the [property] had been sold he initiated a search for the facts, an endeavor in which he was aided not at all by [the owner and the third party]. Id. 37 The cases cited by Koch are not to the contrary. Sanchez v. Dickinson, 551 S.W.2d 481, 486 (Tex.Civ.App.1977), contains the statement that the owner is obligated to offer the holder of such [right of first refusal] an opportunity to buy the subject property on the terms offered by a bona fide purchaser. Until such time, [the rightholder] was under no duty to act. Gochman v. Draper, 389 S.W.2d at 579, placed the burden on [the owner] to offer [the rightholder] a 'first refusal,' and, of course, to disclose the amount required for him to be substituted as the purchaser. Until [the rightholder] was apprised of these matters, he was under no duty to act. Koch, of course, cannot assert an utter lack of notice so as to make Sanchez or Gochman relevant. These opinions say no more than that the rightholder's duty to investigate does not arise until the owner makes reasonable disclosure of the offer. 6 38 Applying these decisions, we conclude that Sun made a reasonable disclosure of the terms of the Champlin deal. Furthermore, because Koch did not undertake a reasonable investigation of the terms that it now alleges were unclear, Koch cannot complain that it lacked sufficient information to make an informed choice about whether to buy DeepSea on those terms. The most important reason for our conclusion is the district court's finding that on January 6, 1984, Sun sent Koch copies of the proposed Agreement of Sale and Terminal Option Agreement between Sun and Champlin. The former document, some forty-three pages with twelve exhibits, constituted in law the offer that, according to Martin v. Lott, Koch was required to accept or reject within a reasonable time. Despite having received this documentary notification, Koch argues vigorously that it did not and could not know the 'price in fact' at which Sun offered DeepSea to Champlin and that it never knew the specific terms of Sun's sale to Champlin. We cannot accept this argument. 39 First, paragraph 2.3 of the Agreement of Sale clearly called for a cash purchase price for DeepSea of $9.4 million. Second, Koch's knowledge of the other relevant terms is revealed in Koch's letter to Sun of January 13, 1984, the next written communication between the parties. The letter objected to Sun's proposed deal with Champlin on various procedural and substantive grounds. Koch complained that this deal, in contrast to Sun's offer to Koch, required no upward adjustment in purchase price for the cost of Sun's subsequent improvements at DeepSea; that it contained a number of warranties, guarantees, and representations by Sun; that it required no down payment of the purchase price; and that it allocated to Sun the costs of obtaining a title binder and providing a special warranty deed. What more was there to say about those terms? Admittedly, they were different from the terms of Sun's offer to Koch, but that fact makes them no less specific. 7 40 The one bit of information about the Champlin offer that Koch conceivably lacked involved the rates that a Sun affiliate would continue to pay the owner of DeepSea for storage of crude oil. Koch's January 13, 1984, letter further argued: Sun agreed with Champlin to obtain an unspecified amendment to the Terminalling and Storage Agreement between [two Sun affiliates]; our agreement makes no such requirement on Sun. As described by the district court, the amendment would bring those rates, which were set somewhere below 'market' rates, up to market. Koch realized the amendment's potential significance as a price term of Sun's agreement with Champlin. 8 Even so, Koch did not ask in the letter for additional information from Sun. Indeed, Koch did not initiate any further communication with Sun until June, 28, 1984. 41 In its brief, Koch now argues that it wrote two separate letters detailing its objections to Sun's proposed sale, in effect inviting a response to clarify the offer. The letter quoted above, however, simply objected to the sale on various legal grounds, not on grounds that the offer was vague or ambiguous. As for the other letter, which also asked for additional information, Koch addressed it to Champlin, not to Sun. Koch's duty to make a reasonable investigation required more than sending an elliptical invitation to respond: it required an actual request for information. 42 Two other facts are significant on this point. First, a 1982 memorandum prepared by Koch's Chief Economic Analyst in response to a previous opportunity to buy DeepSea showed that Sun's affiliate was paying only $.15 per barrel to store crude oil at DeepSea, while two unaffiliated companies were paying $.18 and $.21, amounts greater by 20% and 40%, respectively. 9 From this fact, we infer that Koch knew, or could have closely estimated, the amount of any upward adjustment in the rate paid by the Sun affiliate to store crude oil at DeepSea after Champlin took over. Second, Koch states in its brief that it never conducted an evaluation of whether to purchase DeepSea on the terms offered to Champlin. Those terms, however, were the measure of Koch's rights against Sun. If Koch was not interested in evaluating a DeepSea purchase under those terms, perhaps it was uninterested in any purchase of DeepSea. 43 On these facts, evaluated under the proper legal standard, we conclude that Sun made a reasonable disclosure of the terms of the Champlin offer and that having received this disclosure, Koch did not undertake a reasonable investigation to clarify any terms it considered unclear or ambiguous. Koch had sufficient information upon which to base a reasoned choice whether or not to exercise its option and demand to purchase DeepSea on the terms offered to Champlin. Because Koch failed to exercise its rights within a reasonable time, specific performance or rescission is not available to Koch, either from Sun or from Champlin. Thus, we affirm the district court's denial of these remedies.
44 Although it refused to grant Koch any equitable remedies, the district court nevertheless entered judgment against Sun and in favor of Koch in the amount of $717,085 in damages for breach of contract, plus pre- and post-judgment interest. Sun asserts that the damage award was erroneous because Koch did not fulfill its legal obligation to offer to purchase DeepSea on the terms of Sun's agreement with Champlin. Our reading of Texas law leads us to approach this issue in terms of the measure of damages. 45 We start our analysis of the damage award with the following basic proposition of contract law: An award of damages for breach of contract is supposed to place the injured party as nearly as possible in the position that he would have occupied had the defaulting party performed the contract. Thomas C. Cook, Inc. v. Rowhanian, 774 S.W.2d 679, 686 (Tex.Ct.App.1989) (citing Stewart v. Basey, 150 Tex. 666, 669-70, 245 S.W.2d 484, 486 (1952)). The position that a rightholder would have occupied had the owner performed his duties under the right of first refusal agreement is that of the holder of an enforceable option to purchase the subject property on the terms of the third party's offer. In this case, had Sun complied with the RFRA, it would have offered to sell DeepSea to Koch on terms economically equivalent to the agreement between Sun and Champlin. Koch would then have had an enforceable option to elect to purchase DeepSea on those terms within thirty days. Koch's rights are thus governed by the rule that an option holder need not tender performance of the contract, but he must plead and prove that he was ready, willing, and able to perform in order to recover damages. Olson v. Bayland Publishing, Inc., 781 S.W.2d 659, 664 (Tex.Ct.App.1989) (citing Whitney Properties Corp. v. Moran, 494 S.W.2d 587, 590 (Tex.Civ.App.1973)). 46 Courts often apply this rule to bar recovery to option holders who cannot prove that they had the financial ability to pay for the subject property at the time of the owner's breach. See, e.g., Kanavos v. Hancock Bank & Trust Co., 395 Mass. 199, 479 N.E.2d 168 (1985). Likewise, an option holder who is not willing to perform--one who simply would have declined to exercise his option--suffers no legal damage from breach of the option contract. For the reasons discussed above in connection with Koch's knowledge of the terms of the Champlin offer, we conclude that Koch was this type of unwilling option holder who may not recover damages. 47 We rely principally on the district court's finding, approved above, that as of April 6, 1988, Koch has never evinced an intention ... to accept the 'offer' made by [Sun] when [it] sold [DeepSea]. Further, as we have noted, Koch had, or should have had, enough information upon which to make an informed choice about exercising its implied-in-law option to purchase DeepSea. Two additional facts reinforce these conclusions. First, as the district court found, Koch's head of planning and development thoroughly analyzed Sun's December 22, 1983, offer but advised against purchasing DeepSea for $9.4 million. 48 Second, although Sun's opening brief asserts pointedly that Koch did not want Deepsea, Koch's answering brief never contradicts this assertion. When pressed at oral argument to refer us to any evidence to the contrary, Koch cited only the direct-examination testimony of Mr. Sterling Varner, Koch's then-President, that it would have been [his] recommendation to purchase DeepSea at any price between $8.4 and $9.4 million. On cross-examination, however, Mr. Varner admitted that he never voiced his opinion to Koch's owner or to the Koch employee whose memo advised against purchasing DeepSea. Mr. Varner explained by saying that Koch was never at the point to ever deciding to buy this until we got all the legal angles straightened out. 10 49 Koch has not pled and proved that it was ready and willing to exercise its option, as required by Texas law. Accordingly, we must reverse the district court's award of damages for breach of the RFRA. 50 The judgment of the district court is AFFIRMED in part and REVERSED in part.