Valley Educational Foundation, Inc. v. Eldercare Properties Ltd. (In Re Eldercare Properties Ltd.)

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT United States Court of Appeals

Fifth Circuit

FILED

May 13, 2009

No. 07-41057 Charles R. Fulbruge III

Clerk

In the Matter of: ELDERCARE PROPERTIES LTD

Debtor

-----------------------------------------------------------

VALLEY EDUCATIONAL FOUNDATION, INC

Appellant

v.

ELDERCARE PROPERTIES LTD

Appellee

*****************************************

Cons. W/ 08-40244

In the Matter of: ELDERCARE PROPERTIES LTD

Debtor

-----------------------------------------------------------

ELDERCARE PROPERTIES LTD

Appellant

v.

VALLEY EDUCATIONAL FOUNDATION, INC

Appellee

No. 08-40244 Cons. w/ 07-41057

Appeals from the United States District Court

for the Southern District of Texas

Before O’CONNOR, Associate Justice (Ret.),* and WIENER and STEWART,

Circuit Judges.

SANDRA DAY O’CONNOR, Associate Justice (Retired):

These consolidated appeals concern the vitality of the lease of a nursing

home facility, Valley Grand Manor. The lessor, Valley Educational Foundation

(“VEF”), argues that it validly terminated the lease in June 2005, before the

lease’s primary term expired. It also argues that if the lease survived the

attempted termination, the lessee, ElderCare Properties Ltd. (“ElderCare”),

failed effectively to exercise its option to renew the lease for an additional five-

year term and that the lease consequently expired in December 2006. ElderCare

argues that VEF never effectively terminated the lease. As to its failure strictly

to comply with the lease’s renewal terms, ElderCare contends that Texas

common law principles of equitable intervention render its renewal effective.

The dispute has unfolded in the course of ElderCare’s Chapter 11

bankruptcy. The issue whether the lease was validly terminated arose when

ElderCare’s bankruptcy estate moved to assume the lease in order to reorganize

for the sole purpose of continuing to operate the nursing home. The United

States Bankruptcy Court for the Southern District of Texas sided with

ElderCare and allowed it to assume the lease, concluding that the lease had not

been terminated. The court also ordered the parties to mediate certain ongoing

lease terms. While the mediation process unfolded, ElderCare failed to provide

*

The Honorable Sandra Day O’Connor, Associate Justice of the United States Supreme

Court, (Ret.), sitting by designation, pursuant to 28 U.S.C. § 294(a).

2

No. 08-40244 Cons. w/ 07-41057

timely notice of its intent to renew the lease, and VEF later sought to evict

ElderCare, arguing that the lease had expired while the parties were pursuing

mediation. Again the Bankruptcy Court sided with ElderCare, invoking Texas

common law principles of equitable intervention to excuse ElderCare’s technical

omission. The United States District Court for the Southern District of Texas

affirmed the former conclusion, but reversed the latter. It held: (I) the lease was

not terminated in June 2005 and was thus properly assumed; and (ii) Texas

principles of equity could not excuse ElderCare’s failure to provide timely notice

and as a result the lease expired in December 2006.

We agree with the Bankruptcy Court on both questions. We conclude that

VEF failed to terminate the lease and that the lease was properly assumed by

ElderCare’s bankruptcy estate. We further conclude that principles of equitable

intervention under Texas law are properly applied in the unique circumstances

of this case in order to render effective ElderCare’s five-year renewal.

I. PERTINENT FACTS AND PROCEDURAL HISTORY 1

A. Background.

VEF is a non-profit organization owned by the Seventh Day Adventist

Church. When it ran into difficulty operating two nursing homes and a

retirement facility that it owned, it asked Glen Hamel, a member of the Church

and the owner of ElderCare, to join VEF’s board and to offer help. With Hamel’s

assistance, VEF sold one of the nursing homes and the retirement facility. This

dispute involves the remaining nursing home, Valley Grand Manor. Under a

management contract, ElderCare took control of that facility’s operations. In

1995, the parties went a step farther, consummating a lease of the facility to

1

We set forth the facts as found by the Bankruptcy Court in its October 12, 2006, and

April 23, 2007, decisions. The former decision is reported at 2006 WL 4125090 and will be

cited as “Assumption Order, p.__, ¶__.” The latter is reported at 2007 WL 1217891 and will

be cited as “Renewal Order, p.__.”

3

No. 08-40244 Cons. w/ 07-41057

ElderCare. In light of the church’s policy that its members should not litigate

against one another, the lease agreement included several uncommon provisions

requiring good faith negotiations and mediation in certain contexts.

1. Maintenance of minimum insurance coverage.

In two provisions, the lease obliged ElderCare to maintain minimum

insurance coverage. Section 6.07 set minimum coverage levels for “claims for

personal injury or property damage under a policy of general public liability

insurance.” Section 6.08 did so for “claims arising out of malpractice.” Section

6.16 of the lease also provided for renegotiation of the coverage minimums as

follows:

In the event that either party shall at any time deem the

limits of the personal injury or property damage public

liability insurance then carried to be either excessive or

insufficient, the parties shall endeavor to agree on the proper

and reasonable limits for such insurance . . . . If the parties

shall be unable to agree thereon, the proper and reasonable

limits for such insurance to be carried shall be determined by

a mediator jointly selected . . ., provided however that the

terms of the underlying Base Lease shall control the

minimum insurance requirements which [Eldercare] is

required to provide hereunder.

2. Renegotiation of rent terms.

Because the nursing home derived a substantial portion of its revenue

from Medicare/Medicaid reimbursements (more than 85% before 1995), the

parties, in sections 2.07 and 14.09 of the lease, provided for the renegotiation of

the rent terms in the event of substantial changes in those programs:

[VEF] recognizes that the primary source of revenue for the

Facility is derived from residents from whom the payer source

is either Medicaid or Medicare. Thus, should there be

substantive changes and/or reductions in the way that

Medicaid or Medicare and/or their successor programs

reimburse the Facility for providing care, [VEF] at

[Eldercare]’s request will enter into good faith negotiations

with respect to the amount of Basic Rent and/or Additional

4

No. 08-40244 Cons. w/ 07-41057

Rent that is due and payable under the terms of this Lease

Agreement.

....

[VEF and Eldercare] agree that should there be significant

changes in the Medicare and/or Medicaid reimbursement

methodology, [they] will proceed in good faith to amend the

terms of this Agreement in a manner that represents a

reasonable accommodation of the interests of each party.

3. Default by ElderCare and VEF’s right to terminate.

Article 13 of the lease addressed default and termination. Section 13.01(b)

provided that it would be “deemed [an] even[t] of default” by ElderCare if

ElderCare “fail[ed] to comply with any term, provision, or covenant of th[e] Lease

. . . and d[id] not cure the failure within thirty (30) days after written notice.”

Section 13.02(a) gave VEF the option to terminate the lease upon the occurrence

of any default.

4. Term of the Lease.

Article 1 of the lease set December 31, 2006, as the lease’s expiration date.

It also granted ElderCare an option to extend the lease for an additional five-

year term. In order to exercise that option, ElderCare was obliged to provide

VEF written “notice of its intention to do so not later than 30 days prior to the

expiration of the Lease term,” on or before December 1, 2006.

B. VEF’s appeal.

1. ElderCare’s failure to maintain the minimum insurance

coverage and VEF’s purported termination of the lease.

In 1999, medical malpractice rates for Texas nursing homes started to

climb dramatically. The business landscape was further complicated by a series

of major changes to Texas’s Medicare/Medicaid program that began in 2000.

That year, ElderCare made several presentations to the VEF Board to explain

these program changes and their purportedly adverse implications for

ElderCare’s business. The parties subsequently had several discussions on this

issue. In August 2000, ElderCare sought to initiate a renegotiation of the rent

5

No. 08-40244 Cons. w/ 07-41057

terms pursuant to §§2.07 and 14.09 of the lease, first at a meeting and then in

writing. VEF responded with a demand that ElderCare agree to a host of

substantive changes to the lease (beyond the scope of rent terms) before VEF

would commence renegotiations. VEF’s preconditional amendments were

memorialized in a VEF Board resolution and a letter to ElderCare. ElderCare

refused to agree to the amendments, and a stalemate ensued.

Facing mounting rates, at the end of 2000 ElderCare reduced its insurance

coverage below the lease minimums. VEF did not object to ElderCare’s coverage

levels for policy years 2001, 2002, or 2003. In 2003, ElderCare was unable to

obtain malpractice insurance. To shield itself from liability, it subleased Valley

Grand Manor to a newly-created corporation. The arrangement mirrored one

VEF had used before leasing the facility to ElderCare. With this sublease in

place, ElderCare terminated its general liability coverage, believing it no longer

faced general liability. ElderCare never sought VEF’s consent and VEF never

objected to the sublease arrangement. From 2003 to 2005, while the sublease

was in effect, more than 50% of nursing homes in Texas carried no malpractice

coverage.

In the summer of 2004, ElderCare made a series of presentations to VEF’s

board and the parties held several other meetings. ElderCare endeavored to

explain its difficulty securing insurance coverage and sought to renegotiate the

lease minimums. VEF refused to negotiate to this end and notified ElderCare

of its position that ElderCare was in default. Nevertheless, the parties

continued to discuss the issue; VEF made no effort to terminate the lease and it

extended the time for ElderCare to comply. At these meetings, ElderCare also

raised again the challenges it faced in light of the changes being made to the

Texas Medicare/Medicaid program. ElderCare sought renegotiation of the rent

and retroactive adjustments for overpayment without success. Again VEF

insisted upon extensive amendments to the lease as a precondition to

6

No. 08-40244 Cons. w/ 07-41057

renegotiation and again the issue went nowhere.

On January 3, 2005, ElderCare notified VEF of its below-minimum

general liability coverage and it failed to furnish proof of malpractice coverage

for 2005. VEF sent a purported notice of default on January 11, 2005 (“January

11 letter”). In pertinent part, the letter stated:

We received the [information you] sent to us on January 3,

2005. Thank you for responding by the deadline, but we

have several concerns about it. The amount of coverage for

the general liability does not meet the requirements of the

lease and there was not any coverage for medical

malpractice insurance that is also required by the lease.

These are defaults according to the lease. If you want to ask

the board for a possible reconsideration of the lease

insurance requirements, ElderCare, Inc. will need to submit

letters of denial of coverage and copies of quotes on

insurance that make it cost prohibitive, on or before January

21, 2005. The Valley Educational Board will consider

information you supply and then will give you a response.

ElderCare, Inc. will need to respond to this letter by [blank].

ElderCare responded orally and by scheduling a meeting, which took place

on January 19. At the meeting, Hamel and Errol Eder, VEF’s Vice President,

discussed an extension of the time in which ElderCare could respond with more

information and the possibility of a renegotiation of the insurance minimums.

ElderCare later sent to VEF emails memorializing its understanding that it had

been granted additional time to respond. VEF did not dispute ElderCare’s

characterization of the meeting. Subsequent communications supported

ElderCare’s understanding that it faced no immediate deadline by which to

secure insurance coverage.

On March 1, ElderCare provided an extensive report to VEF’s lawyer,

which it understood to satisfy the informational requirement of the January 11

letter. VEF’s Board never received the report, and ElderCare never received a

response.

7

No. 08-40244 Cons. w/ 07-41057

In May, VEF’s Board voted to terminate the lease. On June 10, VEF sent

ElderCare a purported termination letter, which identified ElderCare’s failure

to secure malpractice insurance as the triggering breach. ElderCare continued

to search for insurance and obtained a new (below-minimum) malpractice policy

on June 25.

VEF brought a forcible entry action in county court, and a jury returned

a verdict in its favor. On October 25, while that judgment was on appeal,

ElderCare filed a Chapter 11 bankruptcy petition.

2. Bankruptcy Court proceedings.

Once ElderCare entered bankruptcy, VEF filed a claim against the

bankruptcy estate seeking damages resulting from ElderCare’s purported breach

of the lease’s minimum insurance coverage provisions. ElderCare (as debtor in

possession) countered with a motion to assume the lease in bankruptcy under

11 U.S.C. §365 and with objections to VEF’s claim, demanding offsets and

recoupment in light of VEF’s alleged breach of its obligations to renegotiate the

rent and coverage limits. VEF opposed the motion to assume, arguing that the

lease was validly terminated on June 10 and thus not assumable. The

Bankruptcy Court held a three-day trial, during which more than 10 witnesses

testified and dozens of exhibits were introduced.

(a) The Bankruptcy Court granted ElderCare’s motion to assume the

lease. It held that VEF failed effectively to terminate the lease for three reasons.

First, the court concluded that after sending the January 11 letter, VEF

agreed to an indefinite extension of time for ElderCare to respond, and it never

revoked that agreement. The court found that at the January 19 meeting, “Mr.

Hamel and Mr. Eder discussed ElderCare’s request for more time and to deal

with and document the changing insurance market and as well as changing the

insurance requirements under the Lease” and that “Errol Eder on behalf of VEF

8

No. 08-40244 Cons. w/ 07-41057

agreed to indefinitely extend the deadline for ElderCare to obtain malpractice

insurance.” The court further found that this grant of an indefinite extension

was confirmed by the subsequent email exchanges between the parties and by

ElderCare’s ongoing efforts to provide the requested information, without

objection or clarification from VEF. “VEF did not respond to [ElderCare],” the

court found, “but allowed ElderCare to continue to believe that VEF was working

with them on the insurance issue which is what ElderCare continued to believe.”

Second, the court held that VEF’s January 11 letter “was not sufficient

under Texas common law to trigger [VEF’s] right to terminate the Lease with

ElderCare.” The court based this conclusion on its finding that the January 11

letter “did not make a demand for performance upon ElderCare” and “did not

inform ElderCare that the Lease [could] be terminated unless [ElderCare] took

action to obtain insurance as called for by the Lease.”

Lastly, the Bankruptcy Court concluded that VEF’s conduct excused

ElderCare’s failure to perform its minimum insurance coverage obligations. The

court held that VEF breached its obligation under §6.16 to negotiate (and

potentially mediate) a reduction in the malpractice insurance limits for policy

year 2004–2005. The court further held that this breach excused ElderCare’s

failure to secure malpractice coverage in policy years 2004 and 2005. Similarly,

the court held that VEF’s failure to object to ElderCare’s coverage levels in policy

years 2000, 2001, 2002, and 2003 constituted a waiver of any breach by

ElderCare in those years.

The court also concluded that ElderCare satisfied §365’s conditions for

assumption. See 11 U.S.C. §365(b)(1) (“If there has been a default,” the lease

cannot be assumed unless the debtor: (a) “cures, or provides adequate assurance

that the trustee will promptly cure, such default;” (b) “compensates, or provides

adequate assurance that [it] will promptly compensate, . . . for any actual

pecuniary loss;” and (c) “provides adequate assurance of future performance.”).

9

No. 08-40244 Cons. w/ 07-41057

(b) The court dispensed with VEF’s bankruptcy claim and ElderCare’s

objections and demand for set-off by concluding that “[b]oth ElderCare and VEF

breached the Lease, but failed to prove damages or at best [were] entitled only

to nominal damages for their mutual breaches.”

3. District Court proceedings.

In a brief, oral ruling, the District Court adopted the reasoning of the

Bankruptcy Court and affirmed its judgment.

C. ElderCare’s appeal.

1. The negotiation of the terms of the court-ordered mediation

and ElderCare’s failure to provide timely notice of its intent to

renew the lease.

The Bankruptcy Court’s October 12, 2006, opinion also held that

ElderCare had a right to mediate new insurance coverage minimums with VEF.

To that end, the court’s November 16 judgment “ORDERED that ElderCare and

VEF [were] to promptly arrange and participate in this mediation.” The

judgment also referenced a plan of reorganization that contemplated ElderCare’s

continued operation of the Valley Grand Manor nursing home pursuant to its

lease with VEF. Six days after the Bankruptcy Court issued its opinion, on

October 18, ElderCare wrote to VEF. The letter proposed new insurance

coverage minimums and, in the event they were unacceptable to VEF, requested

mediation and proposed a mediator.

Despite ElderCare’s diligence, the process did not proceed smoothly. VEF

responded over a month later, on December 5. It asserted that the appointment

of ElderCare’s suggested mediator “would not be appropriate,” but did not

propose an alternative candidate. In other respects, VEF’s response fell short

of willing cooperation. For example, VEF insisted that there was “[a] need to

develop procedures which would allow discovery and other traditional litigation

10

No. 08-40244 Cons. w/ 07-41057

steps to be implemented as a predicate to the [mediation].” And VEF required

ElderCare to provide extensive information before VEF would even discuss the

procedures and timetable for mediation. Three days after it received this

response, ElderCare indicated that it would file an emergency motion to compel

mediation and for sanctions if VEF continued not to cooperate.

In the following days, extensive negotiations proceeded unsuccessfully.

VEF capitulated to a discussion of the substance of a mediation plan, dropping

its demand for the development of “procedures which would allow discovery and

other traditional litigation steps” and for the provision by ElderCare of extensive

information. However, VEF’s proposed mediation terms were aggressive at best.

For example, VEF proposed to empower the mediator to revisit certain of the

Bankruptcy Court’s critical factual findings and legal conclusions. And it sought

to delay the implementation of mediated coverage minimums until the resolution

of its appeal of the court’s assumption decision. ElderCare ultimately filed an

emergency motion to compel mediation, as promised. The bankruptcy court set

that motion for hearing on December 19. On December 18, the day before that

hearing was to occur, VEF agreed to the process for mediation and ElderCare

withdrew its motion. Under the terms of that agreement, the mediation was to

take place on February 21, 2007.

That plan was short lived. Just over two weeks after the agreement was

reached, on January 3, 2007, VEF informed ElderCare that the lease had

expired on January 1 because ElderCare had failed to provide written notice of

its intent to renew by December 1, 2006, as required by the lease. VEF then

filed a motion to compel ElderCare to vacate the premises.

2. Bankruptcy Court proceedings.

The Bankruptcy Court denied VEF’s motion. It construed Texas law to

provide for equitable intervention to excuse a technical failure in the exercise of

an option “when the delay in fulfilling [the] condition precedent in a lease has

11

No. 08-40244 Cons. w/ 07-41057

been slight, the loss to the lessor small, and the failure to grant the relief to the

lessee would resul[t in] such hardship as to make it unconscionable to enforce

literally the condition precedent of the lease.” Renewal Order, p. 2 (citing Jones

v. Gibbs, 130 S.W.2d 265, 271 (Tex. 1939)). The court concluded that all three

factors were met, and it intervened to excuse ElderCare’s technical omission

under this equitable doctrine.

Reviewing the evidence presented, the court found that “[a]lthough it was

not sent written notification . . ., VEF was notified on many occasions of

[ElderCare]’s intent to exercise its option to extend the Lease,” and it found

nothing that “indicated that VEF considered the Lease terminated or that it did

not believe [ElderCare] intended to exercise its option to renew the Lease.” In

reaching this conclusion, the court noted that it had “ordered the Debtor and

VEF to enter into binding mediation for insurance rates and to renegotiate the

Lease rate.” And it stressed that the “[n]egotiations between [ElderCare] and

VEF regarding the terms and conditions of mediation, discovery disputes, and

related procedures continued past” the renewal notice deadline. During these

negotiations, “VEF insisted on terms, provisions, and procedures for mediation

and rent renegotiation without ever mentioning that VEF considered the Lease

terminated;” VEF’s “communications, agreements, court pleadings, [and]

representations to the Court” failed “[to] indicat[e] that VEF considered the

Lease terminated or that it did not believe [ElderCare] intended to exercise its

option to renew the Lease.” In particular, VEF entered into an agreement to

mediate the insurance issue 18 days after the deadline for renewal notice had

passed, scheduling the mediation to take place approximately six weeks after the

renewal term was to commence.

The court held that the delay in providing renewal notice was slight

because ElderCare “gave written notice immediately (one day) after discovering

the oversight and the delay was only 33 days after the deadline” — that is,

12

No. 08-40244 Cons. w/ 07-41057

Eldercare gave written notice 33 days after the December 1 renewal deadline

and a mere three days after the lease’s December 31 expiration. It also found

that VEF “failed to demonstrate that it [would] be harmed by allowing equity to

intervene.” “VEF’s loss [was] small, considering it was actively negotiating

terms of the Lease, pursuing its appeal of the Court’s prior order allowing

assumption of the Lease, and behaving in every aspect as if it knew that

[ElderCare] intended to exercise the extension.”

Lastly, the court held that “[f]ailure to extend the Lease . . . [would]

creat[e] such a hardship to [ElderCare] that it [would be] unconscionable to

enforce the term literally.” ElderCare “invested over $300,000 in fees and costs

alone in proving that VEF did not terminate the Lease pre-petition.” This effort

was “for the sole purpose of assuming the Lease and reorganizing the business

which necessarily depended on the option being exercised and the Lease

extended” because the lease was “the only basis” for ElderCare’s “continu[ation]

as a viable business.” In short, the court explained that “[t]he entire chapter 11

case . . . involved and required preservation of the Lease option period.”

Weighing the equities, the court reasoned that “[a]t best . . . VEF asserted

its termination argument only after it realized there was no written notice sent

to it.” And “[a]t worst, VEF laid behind the log in this case, continuing to

negotiate with [ElderCare] regarding Lease terms and appearing in Court, all

the while not pointing out that the Lease was terminated under its theory.”

Under these circumstances, the court concluded that equitable intervention was

warranted.

Remarking that “what’s sauce for the goose is sauce for the gander,” the

Bankruptcy Court also found that “the notice provision of the Lease [was]

incapable of performance because it require[d] notice to be sent to an address not

[provided].” Finally, as a third basis for denying VEF’s motion, the court held

that it could order the cure of ElderCare’s failure to provide renewal notice

13

No. 08-40244 Cons. w/ 07-41057

pursuant to its authority to enforce its automatic bankruptcy stay.

3. District Court proceedings.

On appeal, the District Court reversed the judgment of the Bankruptcy

Court. Its opinion was rendered in a brief, telephonic hearing. As a result, the

court’s reasoning is less than clear. The court “[did not] think that [it] as a Court

[could] . . . rewrite the lease under equitable principles.” And it held that “the

equitable principles here d[id] not, as a matter of law, allow . . . [the court to]

excuse the non-compliance of a very important part of th[e] lease agreement,

which was the renewal notice.” The court “assume[d] these [were] conclusions

of law;” it did not call into question any of the Bankruptcy Court’s factual

findings.

II. DISCUSSION

We have jurisdiction to consider these appeals under 28 U.S.C. §158(d).

We apply the same standards of review to the Bankruptcy Court’s findings of

fact and conclusions of law as applied by the District Court. Nesco Acceptance

Corp. v. Jay (In re Jay), 432 F.3d 323, 325 (5th Cir. 2005). Accordingly, we

review the Bankruptcy Court’s findings of fact for clear error and its conclusions

of law de novo. Id. Clear error review is “especially rigorous” when we review

a lower court’s assessment of trial testimony, “because the trier of fact has seen

and judged the witnesses.” United States v. Casteneda, 951 F.2d 44, 48 (5th Cir.

1992). “[I]n bankruptcy proceedings, courts of appeals look to state law to decide

contract issues.” River Prod. Co. v. Webb (In re Topco, Inc.), 894 F.2d 727, 738

(5th Cir. 1990); see also Butner v. United States, 440 U.S. 48, 55 (1979).

A. VEF’s appeal.

VEF challenges the Bankruptcy Court’s grant of ElderCare’s motion to

assume the lease, arguing that the lease was effectively terminated and thus not

assumable. VEF also argues that the Bankruptcy Court exceeded its authority

by foreclosing VEF’s right to assert in the future claims it was not obliged to join

14

No. 08-40244 Cons. w/ 07-41057

in the underlying bankruptcy litigation. We reject both arguments.

1. ElderCare’s assumption of the lease.

Under 11 U.S.C. §365(a), a debtor in bankruptcy, “subject to the court’s

approval, may assume . . . any executory contract or unexpired lease.” However,

the debtor may not assume a lease if it “is of nonresidential real property and

has been terminated under applicable nonbankruptcy law prior to [bankruptcy].”

§365(c)(3) (emphasis added). As VEF’s brief recognizes, “[t]he cardinal issue in

this matter has always been whether the Lease was terminated prior to

ElderCare’s petition for bankruptcy.” The Bankruptcy Court concluded that

VEF failed effectively to terminate the lease for three reasons: First, it concluded

that after the January 11 letter, VEF agreed to an indefinite extension of time

for ElderCare to respond, and VEF never revoked that agreement. Second, the

Bankruptcy Court held that the January 11 letter was insufficient under Texas

common law to provide notice of termination. Third, the court held that

ElderCare’s failure to perform its insurance coverage obligations was excused by

VEF’s breach of its promise to renegotiate the coverage minimums in good faith.

We affirm on the first basis, and we thus do not reach the other two.

As the Bankruptcy Court stressed, the January 11 letter set forth the

information ElderCare would need to provide in order “to ask [VEF] for a

possible reconsideration of the lease insurance requirements.” The letter further

provided that VEF “w[ould] consider [the] information . . . suppl[ied] and then

w[ould] give [ElderCare] a response.” In response to this letter, Hamel promptly

scheduled a meeting with Eder, which took place on January 19. Having heard

testimony from both Hamel and Eder, the Bankruptcy Court found that at their

meeting they “discussed ElderCare’s request for more time . . . to deal with and

document the changing insurance market and as well as changing the insurance

requirements under the Lease.” And “Eder on behalf of VEF agreed to

indefinitely extend the deadline for ElderCare to obtain malpractice insurance.”

15

No. 08-40244 Cons. w/ 07-41057

In support of this finding, the Bankruptcy Court discussed Hamel’s follow-

up shortly after the meeting and VEF’s response. On January 27, Hamel sent

Eder an email that stated:

It was a pleasure having lunch with you last Wednesday.

As we discussed there has been a sea of changes in the mal-

practice/professional liability insurance markets over the

last few years. As I promised at our meeting, I have asked

our insurance carrier to provide an outline of these changes

and how it has effected Valley Grande Manor. Also, I am

seeking a way by which Valley Grande Manor can procure

professional liability in accordance to the spirit of the lease

between VEF and VGM.

You indicated a willingness to allow some additional time to

accomplish this beyond the date noted in the letter from

John Page which was dated January 11, 2005. I would

anticipate being back in touch with you regarding this

matter no later than mid next week and would probably like

to schedule a brief meeting with you at that time.

Thank you for the meeting and I appreciate the spirit of

cooperation that was exhibited in our discussions.

Eder responded to the email, “thanx for the update.” Neither “[he], nor

anyone from VEF, responded . . . with any objection, clarification, or denial, as

to the contents of the email or provide[d] any notice that the Lease would

terminate in approximately 20 days.” Assumption Order, p.18, ¶ 125. On

February 2, ElderCare again wrote Mr. Eder at VEF that “our insurance broker

is working diligently on our professional liability coverage.” Eder again

responded “Thanx for the update,” and he promised to forward the

correspondence to John Page, the author of the January 11 letter.

The Bankruptcy Court also stressed that Hamel began to provide the

information requested. In March he “provided Mr. Eder with the reports on

progress in obtaining information by furnishing copies of two letters that he

received from his insurance agents reflecting the work his agents were doing in

16

No. 08-40244 Cons. w/ 07-41057

attempting to find professional liability coverage.” Id. p.19, ¶ 130. The letters

Hamel provided “documented over a dozen insurance companies that were being

contacted to provide the malpractice insurance and contained the information

that ElderCare understood was to be furnished to VEF during this search period.

Id. p.19, ¶ 131. In June Hamel continued to furnish information about Medicaid

reimbursement problems. The Bankruptcy Court found that “no ‘response’ was

ever given by VEF to the information and communications of ElderCare to VEF

concerning insurance and no notice was given that the agreed ‘extension’ of time

to communicate and ‘negotiate’ had expired.” Id. 20, ¶ 137.

In sum, the Bankruptcy Court found: With its January letter, VEF

explicitly invited ElderCare to pursue renegotiation and to provide information

to that end. VEF also agreed to respond to the information provided. In

response, ElderCare promptly arranged a meeting, during which VEF agreed

indefinitely to extend the time for ElderCare to provide the requisite

information. ElderCare “actively and diligently,” id. p.17, ¶ 119, worked to

secure the necessary information, and it provided information as it was obtained.

ElderCare’s communications reflected the parties’ agreement indefinitely to

extend any deadlines, and VEF never made any objections or suggestions to the

contrary. VEF also failed to provide the promised response to the information

submitted by ElderCare.

These factual findings amply support the Bankruptcy Court’s conclusion

that VEF indefinitely extended the time for ElderCare to respond to VEF’s

January letter and that VEF did not revoke that extension before purporting to

terminate the lease five months after it sent the January 11 letter. That

conclusion, in turn, is fatal to VEF’s contention that it effectively terminated the

lease before ElderCare entered bankruptcy. E.g., Smith v. Hues, 540 S.W.2d

485, 488 (Tex. Civ. App.—Houston [14th Dist.] 1976, writ ref’d n.r.e.) (“[E]ven

17

No. 08-40244 Cons. w/ 07-41057

where time is of the essence, [a] stipulated time limit may be extended . . . by

agreement[.]”).

We are not persuaded by VEF’s contention that the Bankruptcy Court’s

factual findings were clearly erroneous. VEF makes two arguments to this

effect. First, it argues that “there was no evidence at the Trial that VEF ever

agreed to indefinitely extend the deadline for ElderCare to obtain malpractice

insurance.” This argument is at best without merit. It ignores the entirety of

the Bankruptcy Court’s analysis. As described above, the Bankruptcy Court

explicitly referenced testimony and exhibits that directly supported its factual

findings.

Second, VEF argues that “[ElderCare] admit[ted] that no indefinite

extension was granted.” VEF premises this purported concession on short

excerpts of Hamel’s trial testimony and his January 27 email. VEF cites the

following exchange during Hamel’s testimony:

Q: [D]id you discuss whether or not the deadline in the

January 11 letter was important to Mr. Eder to enforce, or

anything to that effect?

A: I don’t believe it was discussed in those terms, but I—

Q: How was it discussed?

A: I indicated that I would like to sit down, where we had

the decision makers present, get whatever documents we

need, that they need, the financial information. He asked me,

“Will you bring your financial information?” I said, “Yes.” I

said, “Let’s schedule a meeting and get this taken care of.”

And as we left the meeting, I remember shaking his hand,

and said, “Errol, you know my number. Give me a call. Let’s

get a meeting set up.”

Q: Now, with respect to the time within which to do this,

what was the agreement that was reached?

A: There was no specific time.

Q: All right. Was it some sort of open-ended—

A: I did not believe it was open-ended. It was my hope

and impression that this would happen sooner rather than

later. (emphasis in brief).

18

No. 08-40244 Cons. w/ 07-41057

As to the January 27 email, VEF harps on Hamel’s statement that he “would

anticipate being back in touch . . . regarding th[e] matter no later than mid next

week and would probably like to schedule a brief meeting . . . at that time.”

VEF’s reliance on these excerpts is misplaced. We think the trial

testimony undermines its position. It reflects that Hamel and Eder did not

“discuss whether or not the deadline in the January 11 letter was important to

Mr. Eder to enforce, or anything to that effect.” To the contrary, the parties

discussed that Hamel would “[g]et whatever documents . . . they need[ed]” and

then they would “schedule a meeting and get [the issue] taken care of.” Despite

this testimony, VEF understands Hamel’s statements that he “did not believe

[the extension of time] was open-ended” and that it was his “hope and

impression that this would happen sooner rather than later,” as a concession

that there was no agreement to extend discussions. This understanding strains

credulity. It is clear that Hamel meant only to acknowledge that VEF’s

willingness to continue discussions would expire at some point and his related

hope that the matter would be resolved expeditiously, in the “spirit of

cooperation.” He recognized that the extension was not “open-ended,” but did

not suggest that a deadline was ever established. This is consistent with the

Bankruptcy Court’s finding that the parties agreed indefinitely to extend

ElderCare’s deadline, especially when the testimony is considered in light of the

substantial evidence described above. Certainly, we cannot conclude that the

Bankruptcy Court clearly erred by declining to adopt VEF’s understanding of

Hamel’s testimony.

The excerpt from Hamel’s January 27 email is similarly unavailing.

Hamel wrote that he “anticipate[d] being back in touch . . . regarding this matter

no later than” a week after sending the email. VEF insists that this anticipation

amounted to a concession that there was no indefinite extension of time. We fail

to see how Hamel’s estimation of the time required to compile certain

19

No. 08-40244 Cons. w/ 07-41057

information could reflect a belief that he would not be accorded that time. And

we find significantly more illuminating the facts that Hamel corrected his

optimistic anticipation by writing to Eder within a week to inform Eder that

Hamel’s team was “working diligently” to respond; that Eder did not object to

Hamel’s tardiness; and that Hamel ultimately provided the information

approximately one month late. If anything, the parties’ behavior, despite

Hamel’s anticipation, bolsters the Bankruptcy Court’s conclusion that the

parties agreed to an indefinite extension of time, especially when considered in

light of the substantial evidence described above. We cannot conclude that the

Bankruptcy Court clearly erred by declining to adopt VEF’s understanding of

Hamel’s email.

We find no error in the Bankruptcy Court’s conclusion that VEF granted

ElderCare an indefinite extension of time in which to respond to VEF’s January

11 letter and that VEF never revoked that extension. On this basis, we affirm

the decision of the District Court sustaining the Bankruptcy Court’s judgment

of November 14, 2006, allowing ElderCare to assume the lease.

2. The scope of the Bankruptcy Court’s Judgment.

VEF also challenges the scope of the Bankruptcy Court’s judgment,

arguing that it erroneously “prohibited VEF from bringing against ElderCare

any permissive counterclaims or any unrelated claims it might have but which

were not then before the Court.” We find it difficult to conceive a claim VEF

might assert in the future that would not qualify as a mandatory counterclaim

“aris[ing] out of the transaction or occurrence that [was] the subject matter”

before the Bankruptcy Court. F ED. R. C IV. P. 13(a)(1)(a); see, e.g., Incas &

Monterey Printing & Packaging, Ltd. v. M/V SANG JIN, 747 F.2d 958, 964 (5th

Cir. 1984) (“Under the broad test for Rule 13(a) adopted by this Circuit, a

counterclaim is compulsory when there is any ‘logical relationship’ between the

claim and the counterclaim.” (citation omitted)). Certainly, VEF fails to describe

20

No. 08-40244 Cons. w/ 07-41057

such a claim. We thus consider VEF’s argument largely theoretical.

Nonetheless, we reject it. VEF’s construction of the judgment is flawed.

The judgment provides: “All relief requested in the Motion or relief that could or

should have been requested . . ., and not herein granted, is denied.” We

understand the phrase “relief that could or should have been requested” to refer

to the relief related to the claims the parties actually asserted, as evidenced by

the court’s reference to “relief requested in the Motion.” That is, the Bankruptcy

Court did not deny relief stemming from claims that could have been asserted.

Rather, it denied the relief that could have been requested in the dispute

presented. Properly construed, the judgment reflects no error.

B. ElderCare’s appeal.

As described supra, the Bankruptcy Court concluded that ElderCare’s

failure strictly to comply with the renewal provisions of the lease should be

excused under Texas common law principles of equitable intervention. The

District Court reversed that judgment, concluding that equitable intervention

is not available under Texas law. ElderCare challenges this conclusion. We hold

that the District Court’s legal determination was erroneous, and we agree with

the Bankruptcy Court that equitable intervention is appropriate in this

exceptional case.

1. Equitable intervention under Texas law.

Texas law generally gives effect to a party’s exercise of an option only if the

exercise is “unqualified, unambiguous, and strictly in accordance with the terms

of agreement.” Atterbury v. Brison, 871 S.W.2d 824, 829 (Tex. App.—Texarkana

1994, writ denied); see Casa El Sol-Acapulco, S.A. v. Fontenot, 919 S.W.2d 709,

714 (Tex. App.—Houston [14th Dist.] 1996, writ dism’d) (“[T]o extend the power

[to exercise an option] for a day is to compel the giving of something for nothing.”

(citation omitted)); see also Jones v. Gibbs, 130 S.W.2d 265, 271 (Tex. 1939).

There is no question that ElderCare failed to meet this exacting standard.

21

No. 08-40244 Cons. w/ 07-41057

Because ElderCare did not provide timely notice of its intent to extend the lease,

as required by the contract, it did not exercise its option “strictly in accordance

with the terms of agreement.”

However, in Jones, the Texas Supreme Court explained that the rule of

strict compliance in the exercise of an option “is not an absolutely inflexible one”

and it described the narrow circumstances in which the “failure of the optionee

to comply strictly with the terms or conditions of the option will be excused.”

Jones, 130 S.W.2d at 272. Jones concerned the grant of a deed to Gibbs Brothers

& Company to cut and remove pine timber on a parcel of land owned by Helen

M. Jones. The deed was for ten years, with a five-year extension period at Gibbs

Brothers & Company’s option, exercisable by the company’s payment of an

additional fee. After the deed was executed, Jones obtained a loan from G. A.

Wynne that was secured by the property. Under the terms of that loan, when

Jones fell behind on her tax liability for the property, Wynne paid the taxes and

accordingly adjusted the amount owed by Jones. Jones then died, and the

property entered her probate estate. Later, in an effort to exercise its option to

extend its timber deed, Gibbs Brothers & Company paid the required renewal

fee directly to Wynne. Jones’s estate subsequently sought to have the timber

deed declared inoperative, arguing that Gibbs Brothers & Company failed

strictly to comply with the deed’s requirement that payment of the renewal fee

be made directly to Jones or her heirs.

Rejecting that argument, the Jones court adopted the test set forth by the

Connecticut Supreme Court in F. B. Fountain Co. v. Stein, 118 A. 47, 50 (Conn.

1922). Like this case, F. B. Fountain Co. concerned “a requirement of [a] lease

that [the lessee] give notice thirty days before the expiration of the term of [its]

desire to extend the lease.” Jones, 130 S.W.2d at 272. The F. B. Fountain Co.

court recognized that the notice requirement was “a condition precedent which

[had to be] performed before the extended or renewed term could begin and held

22

No. 08-40244 Cons. w/ 07-41057

that the lessee, not having given the notice within the stipulated time, had no

right to relief unless it could establish . . . such facts as would bring it within the

power of equity to relieve.” Id. As the Jones court wrote:

In prescribing the conditions for the granting of relief upon

equitable grounds, the [F. B. Fountain Co.] court said in

substance that, while relief cannot be afforded if the failure to

give notice has been due to willful or gross neglect, equity will

relieve, in the absence of such neglect, when the failure

results from fraud, surprise, accident or mistake. It said

further: “In cases of mere neglect in fulfilling a condition

precedent of a lease, which do not fall within accident or

mistake, equity will relieve when [(1)] the delay has been

slight, [(2)] the loss to the lessor small, and [(3)] when not to

grant relief would result in such hardship to the tenant as to

make it unconscionable to enforce literally the condition

precedent of the lease.” Id. (quoting F.B. Fountain Co., 118 A.

at 50) (emphasis added).

See also id. (discussing with approval Xanthakey v. Hayes, 140 A. 808 (Conn.

1928), another case of equitable intervention to excuse the failure to provide

notice of a lease extension, where “[t]he gist of the decision [was] that it would

be unconscionable to enforce literally the condition for the extension when to do

so would cause the lessee, who had not been grossly negligent, to lose the value

of . . . improvements and the good will of [its] established business”). Applying

the rule of F. B. Fountain Co. and similar precedents from other States, the

Jones court concluded that “overruling equitable rules” excused Gibbs Brothers

& Company’s failure to adhere to the deed’s strict requirements for extension.

Id. at 273.

VEF presents a very different view of Texas common law. It advances two

arguments, both of which we reject. First, VEF suggests that Texas law does not

recognize any equitable exception to the requirement of strict compliance with

the terms of an option contract. But our discussion of Jones makes clear that the

contention is without merit: In certain circumstances, the “failure of the

23

No. 08-40244 Cons. w/ 07-41057

optionee to comply strictly with the terms or conditions of the option will be

excused.” Id. at 272.

VEF’s second argument is more nuanced and worthy of greater attention.

Whatever the contours of equitable intervention under Texas law, VEF asserts,

the State has not recognized an exception to the rule of strict compliance in cases

of “mere neglect.” Id. (quotation omitted). The discussion in Jones of the three-

factor test for the intervention of equity in cases of mere neglect, VEF asserts,

was dicta, and it has not been subsequently adopted. VEF relies on Reynolds-

Penland Co. v. Hexter & Lobello, 567 S.W.2d 237 (Tex. Civ. App.—Dallas 1978,

writ dism’d) for this contention. The Reynolds-Penland majority read Jones to

conclude that Gibbs Brothers & Company’s payment to Wynne was authorized

by Jones’s estate and that the payment consequently complied with the strict

terms of the lease. On this reading, the majority characterized the three-factor

equitable test in Jones for cases of mere neglect as “dicta [that] . . . was not

essential to the decision.” Id. at 240. In dissent, Chief Judge Guittard concluded

that Jones “was expressly decided on the . . . ground of equitable relief from

unconscionable hardship stated by the Connecticut court in [F.B. Fountain Co.]”

Id. at 243 (Guittard, C.J., dissenting). He reasoned that “[a]lthough the [Jones]

court said that the grantee had shown that he had not paid the wrong party,

that [was] not the main ground on which the decision rest[ed].” Id.

We conclude that the dissent in Reynolds-Penland presented the better

reading of Jones. The Jones court determined that resolution of the case did not

require submission to a jury of the disputed question whether Gibbs Brothers &

Company’s payment to Wynne was authorized by Jones’s estate. It explained:

“If the undisputed evidence does not establish, as we believe it does, the fact that

[the payment was authorized], it conclusively proves at least that [Gibbs

Brothers & Company] . . . acted under the honest and justifiable, if mistaken,

belief that [the payment was authorized].” Jones, 130 S.W.2d at 271. Put

24

No. 08-40244 Cons. w/ 07-41057

another way, “if the payment [was authorized], there was compliance . . . with

the provisions of the deed for extension of the time for removal,” but if the

payment was not authorized, “there was no such compliance and the time was

not extended, unless by reason of the peculiar facts and special circumstances

equity [could] grant relief from a literal enforcement of the conditions prescribed

by the deed.” Id. (emphasis added). Having so framed the question, the court

proceeded to a lengthy discussion in which it based its reasoning on the three-

factor test of F. B. Fountain Co. and held that Gibbs Brothers & Company’s

failure to comply with the strict terms of the lease would be excused by

“overruling equitable rules.” Id. at 273. In our estimation, the Jones court

clearly intended to reach the issue of equitable intervention, and to base its

disposition on that ground. In so doing, it adopted the three-factor F. B.

Fountain Co. test for cases of mere neglect.

We are not alone in this view. The Texas Supreme Court has twice

referred to Jones’s discussion of equitable intervention as law, and we are aware

of no case in which the court characterized that discussion as dicta or otherwise

called into question the vitality of the Jones rule. Sirtex Oil Indus., Inc. v.

Erigan, 403 S.W.2d 784, 788 (Tex. 1966) (considering when “equity should afford

relief” and quoting Jones’s statement of the three-factor test for cases of

negligence); Zeidman v. Davis, 342 S.W.2d 555, 558 (Tex. 1961) (discussing “the

equitable rule approved by th[e] court in Jones”). VEF urges us to ignore these

cases because neither rested its holding on an application of Jones. See

Reynolds-Penland Co., 567 S.W.2d at 241 (“Sirtex [was] . . . not authority” for the

applicability of equitable intervention in cases of mere neglect because “that

discussion was not essential to the decision.”). This argument misses the point.

These cases may not rest on the rule announced in Jones, but they assume that

rule is part of Texas common law. E.g., Zeidman, 342 S.W.2d at 557; see also

Reynolds-Penland Co., 567 S.W.2d at 242 (Guittard, C.J., dissenting) (The rule

25

No. 08-40244 Cons. w/ 07-41057

of intervention in cases of mere neglect “has been adopted by the Supreme Court

of Texas in . . . Sirtex.”).

Many Texas intermediate courts have done the same. E.g., Besteman v.

Pitcock, 272 S.W.3d 777, 790 (Tex. App.—Texarkana 2008, no pet.) (Jones is the

“touchstone case” for equitable intervention); Moosavideen v. Garrett, ___ S.W.3d

___, 2008 WL 4965165, at *15–16 (Tex. App.—Houston [1st Dist.] 2008, no pet.)

(citing as binding authority Jones’s test for equitable intervention); Abraham

Inv. Co. v. Payne Ranch, Inc., 968 S.W.2d 518, 527 (Tex. App.—Amarillo 1998,

pet. denied) (“In the Jones case, the court explicated the general rule regarding

equitable relief[.]”); Buffalo Pipeline Co. v. Bell, 694 S.W.2d 592, 598–99 (Tex.

App.—Corpus Christi 1985, writ ref’d n.r.e.) (“The equitable considerations set

forth in [Jones] are similar to those in this case and these ‘overruling equitable

rules’ prevent the limitation of appellant’s lease.” (citation omitted)). And some

have expressly rejected the reasoning of Reynolds-Penland. For example, in

Crown Construrction Co. v. Huddleston, the court noted that Reynolds-Penland

“held the language in Jones to be dicta and refused to apply the doctrine in

situations in which a lessee simply neglected to exercise its renewal option on

time.” 961 S.W.2d 552, 558 (Tex. App.—San Antonio 1997, no pet.). The Crown

Construction Co. court disagreed; it concluded that “[t]he doctrine of

unconscionable, inequitable, or disproportionate forfeiture was established in

[Jones].” Id. at 558; see also, e.g., Inn of the Hills, Ltd. v. Schulgen & Kaiser, 723

S.W.2d 299, 301 (Tex. App.—San Antonio 1987, writ ref’d n.r.e.). (“We adopt the

view of Chief Justice Guittard, expressed in his dissenting opinion in Reynolds-

Penland[.]”).

Our review of these cases bolsters our conclusion that the Jones court

adopted the three-factor test for equitable intervention in cases of mere neglect.

We proceed to apply that test to the facts of this case.

26

No. 08-40244 Cons. w/ 07-41057

2. ElderCare’s failure to comply with the strict renewal terms was

properly excused by equitable intervention.

On the basis of the Bankruptcy Court’s factual findings, we agree with its

conclusion that ElderCare’s failure to provide notice was mere neglect that

should be excused under Texas’s narrow equitable exception to the rule of strict

enforcement. First, ElderCare’s delay in exercising its option was relatively

slight. It provided written notice approximately one month late, one day after

it was informed of its negligent omission. We consider this a relatively minor

delay when compared to the lease’s original ten-year term and its five-year

renewal term. Arguing to the contrary, VEF relies on a single case, Scott-Burr

Stores Corp. v. Wilcox, 194 F.2d 989, 991 (5th Cir. 1952), in which we sustained

a judgment against a lessee that delivered its renewal notice ten hours late.

That reliance is misplaced. Scott-Burr Stores Corp. concerned the question

whether the notice of renewal was in fact late. The court noted “the argument

. . . that [its] judgment [was] harsh and inequitable” Id. at 991. However, there

was “no basis for determination by [the court] of the respective equities of the

parties” because “no grounds for equitable relief from the lapse were urged in the

trial Court.” Id. at 991. To the contrary, here all recognize that the notice was

late, and we are called upon to assess that tardiness in light of “the respective

equities of the parties.” Scott-Burr Stores Corp. offers no instruction on this

question.

Second, VEF “failed to demonstrate that it [would] be harmed by allowing

equity to intervene in this case [to] extend the lease.” Renewal Order, p. 3. On

appeal, it has advanced only general arguments about the sanctity of property

rights, e.g., reliance on “the most basic elements of property law that repeatedly

affirm the importance of property rights.” At best, these contentions establish

only abstract, de minimis harm.

We find most compelling the third and final factor: “[N]ot to grant

27

No. 08-40244 Cons. w/ 07-41057

[ElderCare] relief would result in such hardship . . . as to make it unconscionable

to enforce literally the condition precedent of the lease.” Jones, 130 S.W.2d at

641 (internal quotation omitted). As the Bankruptcy Court stressed, the lease

is “the only basis” upon which ElderCare “can continue as a viable business.”

Renewal Order, p. 3. For this reason, ElderCare “invested over $300,000 in fees

and costs alone in proving that VEF did not terminate the Lease pre-petition.”

Id.; see Part II(A), supra. It did so “for the sole purpose of . . . reorganizing the

business[,] which necessarily depended on the option being exercised and the

Lease extended.” Renewal Order, p.3. In short, “[t]he entire chapter 11 case and

the litigation . . . involved and required preservation of the Lease option period.”

Id.

The Bankruptcy Court’s October 18 order allowing ElderCare to take on

the lease in bankruptcy at least implicitly assumed the lease would be renewed.

That order was issued in furtherance of ElderCare’s plan of reorganization,

which contemplated the lease of Valley Grand Manor as ElderCare’s only

significant ongoing asset. And it was issued two and one half months before the

lease’s initial ten-year term was set to terminate. Surely, when on November 16

the court ordered the parties to mediate new insurance coverage limits (two

weeks before the renewal notice was due), it had in mind more than the

remaining six weeks of the lease’s primary term.

Subsequent events suggest that the parties so understood the order. It

took ElderCare more than two months to secure VEF’s cooperation in carrying

out the mediation, from early October to mid-December. Only ElderCare’s resort

to the Bankruptcy Court for an order compelling the mediation proved effective

in gaining VEF’s “voluntary” agreement to the terms of the mediation. Cf.

Assumption Order, pp. 7–8, ¶45, ¶50 (“In response to [ElderCare’s] multiple

requests to negotiate the rent amount, the VEF Board” demanded that new

provisions “be included in a new Lease or amendment before it would negotiate

28

No. 08-40244 Cons. w/ 07-41057

the rent amount.”). That agreement was given in the middle of December, only

one day before the hearing on ElderCare’s motion to compel was to occur and 17

days after the deadline for ElderCare’s renewal notice had passed. And the

agreement scheduled the parties’ mediation for February, more than a month

after the renewal period was set to commence. But mediation of the coverage

limits would have been an exercise of absurdity if ElderCare was to be held to

the renewal deadline, which, again, had already passed when the parties agreed

to schedule the mediation. Less than two weeks after that agreement was

reached, two days after the renewal term was to commence and more than a

month before the mediation was to occur, VEF notified ElderCare of its failure

to comply with the renewal notice requirement.

As did the Bankruptcy Court, “[a]t best [we] assum[e] that VEF asserted

its termination argument only after it realized there was no written notice sent

to it.” Renewal Order, p. 3. Until that realization, VEF “behav[ed] in every

aspect as if it knew that [ElderCare] intended to exercise the extension.” Id.

That VEF’s realization occurred so late in the game, while the parties were in

frequent contact negotiating the ongoing terms of the lease, lends much credence

to the idea that ElderCare’s omission is best understood in light of the unique

circumstances leading up to, and following, the renewal date. See, e.g., Buffalo

Pipeline Co., 694 S.W.2d at 599 (granting equitable intervention and stressing

that after the purported failure effectively to renew, the lessor sent the lessee a

letter in which it “did not state that the lease had been terminated” and that in

ongoing communications the lessor “did not notify [the lessee]” of the technical

defect in the renewal).

Conscious of these circumstances, we cannot ascribe ElderCare’s omission

to simple “forgetfulness.” Nor do we understand ElderCare to argue that VEF

was under some obligation to alert ElderCare about the Option and the need to

exercise it. Rather, ElderCare suggests, and we agree, that VEF’s failure to

29

No. 08-40244 Cons. w/ 07-41057

raise the issue of renewal during the parties’ ongoing, extensive discussions is

a factor in the analysis of unconscionability. Cf. Renewal Order, p. 3 (“At worst,

VEF laid behind the log in this case, continuing to negotiate with the Debtor

regarding Lease terms and appearing in Court, all the while not pointing out

that the Lease was terminated under its theory.”); Assumption Order, p. 19,

¶132 (“VEF did not respond to [ElderCare’s provision of information pertaining

to its insurance coverage], but allowed ElderCare to continue to believe that VEF

was working with them on the insurance issue which is what ElderCare

continued to believe.”). Relatedly, the parties were not engaged in “ongoing

negotiations” as to the extension of the lease, as VEF argues, but negotiations

as to the terms of a court-ordered mediation in the context of a Chapter 11

reorganization that rested on the perpetuation of the lease. VEF’s reliance on

Hillhaven, Inc. v. Care One, Inc., 620 S.W.2d 788 (Tex. Civ. App.—Fort Worth

1981, writ ref’d n.r.e.), is thus misplaced. See id. at 793 (“[The lessor] did

nothing more than express interest in the receipt of the payment to which it was

entitled[.]”). Lastly, we find too clever by half VEF’s argument that ElderCare

would suffer no harm upon termination of the lease because “[ElderCare’s]

unexercised option [was] not a present right in the property.” That argument

proves too much; it would apply in every case. And it is no answer to the years

of litigation and more than $300,000 in costs and fees that ElderCare has

undertaken in order to reorganize as an ongoing business.

We conclude it would be unconscionable to deprive ElderCare of the

extended term of the lease. And in the absence of countervailing considerations,

we hold that in this extraordinary case Texas law sanctions the intervention of

equity to excuse ElderCare’s failure to provide timely notice. Because we reverse

the judgment of the District Court on this basis, adopting the Bankruptcy

Court’s disposition of the dispute, we need not reach the Bankruptcy Court’s

alternative holdings that the renewal notice requirement was incapable of being

30

No. 08-40244 Cons. w/ 07-41057

performed or that its judgment could be sustained on the basis of its broad

authority under the Bankruptcy Code.

III. CONCLUSION

For the foregoing reasons, the District Court’s September 27, 2007 order

affirming the Bankruptcy Court’s assumption order is AFFIRMED. The

District Court’s February 25, 2008, judgment reversing the Bankruptcy Court’s

order that denied VEF’s motion to compel ElderCare to vacate the premises is

REVERSED.

31