Northwest Child Development Centers operates a daycare center in Mocksville, North Carolina, and previously operated a separate facility at 2530 Pittsburg Avenue, Winston-Salem, North Carolina (the “Property”). NWDC had acquired the Property from City of Winston-Salem and Forsyth County (collectively "Winston-Salem") in 1998, after leasing it since 1971, subject to a Restrictive Use provision in the deed provided that:
UPON THE CONDITION that the property herein conveyed shall be used only for not-for-profit child day care and related purposes, and provided always that if, subsequent to this conveyance, GRANTEE shall use the property for some purpose other than not-for-profit child day care and related purposes, then GRANTOR at its option may declare a termination in favor of GRANTOR of the title, and of all rights and interests in and to the property herein conveyed, and that such title and all rights and interests of GRANTEE, and his successors and assigns to and in the property, shall revert to GRANTOR.
NWDC had, despite filing certificates of compliance with Winston-Salem from 2015 to 2018, despite ceasing daycare operation at the Property in February 2014, primarily using the property for storage. NWDC also ceased operations of another facility located in Winston-Salem in 2018, leaving only its Mocksville location open.
After filing a Subchapter V bankruptcy, NWDC indicated that to would seek to sell or lease the Property, to which the Winston-Salem first sought relief from stay to allow a state court determination that the NWDC was not utilizing the Property in the manner require by the warranty deed. In a prior decision, the bankruptcy court denied this motion, finding that that the matter could be more efficiently resolved in the bankruptcy court and that a timely determination on ownership of the Property was critical to advancing the subchapter V bankruptcy case.
Winston-Salem then commenced an adversary proceeding to seeking a determination that NWDC had breached a restrictive use condition within the warranty deed, causing the Property to revert back to the Winston-Salem and depriving NWDC of any cognizable interest in the Property. NWDC asserted that the use of the Property was complied with the restrictive use and that Winston-Salem should be estopped or otherwise barred by the Doctrine of Laches from asserting otherwise.
The bankruptcy court began by stating that while it had discretion in deciding whether to consider a declaratory judgment action or abstain from hearing it, a declaratory judgment was warranted based on the following factors:
(1) Whether it will serve a useful purpose in clarifying and settling the legal relations in issue; and
(2) Whether it will terminate and afford relief from the uncertainty, insecurity, and controversy giving rise to the proceeding. See Aetna Cas. & Sur. Co. v. Ind-Com Elec. Co., 139 F.3d 419, 421 (4th Cir. 1998).
Continuing, the bankruptcy court held that NWDC held the Property in fee simple subject to a condition subsequent as the language of the Use Restriction allowed that termination was at the "option" of Winston-Salem and not in fee simple determinable, where any interest would reverted automatically. Fee simple subject to a condition subsequent “does not terminate automatically upon the happening of a stated event,” but instead provides a right of re-entry, requiring the Winston-Salem to “take affirmative action in order to terminate the estate.” Cummings v. United States, 409 F. Supp. 1064, 1068 (M.D.N.C. 1976).
That notwithstanding, the bankruptcy court, after an exhaustive analysis of the language, the history of the Property and intentions of the parties, held that the storage of equipment was not a “Related Purpose” to the operating a daycare as required by the Use Restriction.
For a copy of the opinion, please see: