XX Investment Company v. XX Real Estate Company and XX Asset Management Company – Housing Sales Contract Dispute Case 
Keywords: bankruptcy; liquidation; priority of payment; mortgage right 
Counseling Attorneys: Wang Chen, Jin Lu 
Facts of the Case: In 2013, the Investment Company and the Real Estate Company entered into a “Project Cooperation Contract,” agreeing to jointly develop Phase II and Phase III of the project. The total contract price was RMB 160 million. According to the payment schedule, the Investment Company was required to pay RMB 60 million by April 30, 2013. If the Real Estate Company pledged the subject matter of the contract as collateral for a bank loan, it was obligated to issue to the Investment Company, within five business days after obtaining approval for the mortgage loan, a statement designed to mitigate the risk of the Real Estate Company’s default in delivering the contracted subject matter. By the end of June 2013, the Real Estate Company was required to obtain the “Pre-sale Permit for Commercial Housing,” at which point the two parties would sign the “Commercial Housing Sales Contract.” The Investment Company was required to pay RMB 40 million to the Real Estate Company by September 30, 2013; upon receipt of this payment, the Real Estate Company had 20 business days to complete the filing procedures for the “Commercial Housing Sales Contract.” After the Real Estate Company obtained the “Pre-sale Permit for Commercial Housing” and the contract was duly filed, the Investment Company was required to pay RMB 30 million by June 30, 2014. Once the Real Estate Company had completed the property registration for Phase II of the project, the Investment Company was required to pay another RMB 30 million by December 31, 2014. After the contract was signed, the Investment Company paid RMB 40 million by April 30, 2013, and had paid a total of RMB 75 million by April 29, 2014. 
In July 2013, the real estate company notified the investment company that it intended to mortgage Phase II of the project to an asset management company. In August 2013, the real estate company and the asset management company signed a “Mortgage Agreement,” mortgaging Phase II of the project to the asset management company. In September 2013, the real estate company delivered Phase II of the project to the investment company, which then leased it out to third parties and began collecting rents. Phase III of the project remained undelivered. The investment company filed a lawsuit in court, requesting: 1) confirmation that the Mortgage Agreement is invalid; 2) continued performance of the contract terms for Phase II, including completion of the transfer registration procedures; 3) payment of liquidated damages; 4) termination of the contract for Phase III; and 5) that the real estate company and the asset management company bear the litigation costs. The real estate company filed a counterclaim, requesting: 1) that the investment company pay the contract price of 85 million yuan plus liquidated damages; 2) that the investment company pay the applicable taxes; and 3) that the investment company bear the litigation costs. After the provincial court issued a retrial judgment, just before the Supreme Court’s second-instance hearing, the court ruled to accept the real estate company’s bankruptcy liquidation application. The lawyer handling the case, acting as the bankruptcy administrator, represented the real estate company in court. 
Key points of contention: the validity of the mortgage contract; whether to continue performing the second phase of the project and whether to terminate the third phase; and the allocation of liability for breach of contract among the parties. 
Judgment Outcome: First-instance Court: This case involves a dispute over a house purchase and sale contract; whether the validity and priority of the "Mortgage Agreement" should be addressed in a separate case. The "Project Cooperation Contract" shall continue to be performed; all other claims filed by both parties are dismissed. Second-instance Court: The first-instance judgment is reversed; the "Project Cooperation Contract" is terminated; the real estate company shall refund the 75 million yuan already received, together with interest; the investment company shall return the houses from Phase II of the project. The investment company may not obtain individual satisfaction under this judgment and must file a claim for resolution in accordance with the law within the bankruptcy proceedings; all other claims are dismissed. 
Key highlights of the case: 1. The investment company’s claim includes both a declaratory action and a payment action. The payment action encompasses specific performance, generic performance, and performance in the form of an act. In the event that the real estate company is ruled by the court to enter bankruptcy liquidation proceedings, its debts should be cleared in accordance with the law. During the bankruptcy process, the administrator shall legally identify various categories of priority claims and ordinary claims, and the creditors’ meeting shall verify these claims. The investment company must, through the bankruptcy claim review and confirmation procedure and any related litigation arising therefrom, determine whether its claim is valid and the order in which its claim will be satisfied. 2. The real estate company’s entry into bankruptcy liquidation proceedings constitutes a new fact occurring after the first-instance judgment but before the second-instance judgment. Therefore, any claims asserted by creditors must be converted into monetary claims, with the specific amount of each claim clearly determined. Given that the bankruptcy proceedings will implement a unified debt-clearing process, supporting the investment company’s claim for non-monetary obligations would undermine the fair satisfaction rights of other creditors and might also jeopardize the investment company’s exercise of its procedural rights within the bankruptcy proceedings. 3. After the real estate company entered bankruptcy liquidation proceedings, the administrator did not propose continuing to perform the contract; thus, the Project Cooperation Contract has essentially been terminated in its entirety, leaving no basis for either party to continue performing the contract. 4. The investment company’s claimed expectancy rights in property and its associated interests take precedence over the asset company’s mortgage rights. The investment company may file a separate lawsuit or raise objections during the bankruptcy proceedings or bring a claim for confirmation of bankruptcy claims. Accordingly, this case should be dismissed. 5. During the performance of the Project Cooperation Contract, the real estate company did not commit any serious breach of contract and therefore should not bear liability for breach damages. Rather, it is the investment company that committed a breach of contract and should bear contractual liability accordingly. 
Typical significance: In cases where a real estate company has been ruled by the court to enter bankruptcy liquidation proceedings, the company’s debts should be cleared in accordance with the law. During the bankruptcy process, the administrator shall legally identify various priority claims and ordinary claims, and these claims shall be verified by the creditors’ meeting. The investment company should determine whether its claims are valid and the order in which its claims will be satisfied through the bankruptcy claim review and confirmation procedure as well as any related litigation arising therefrom.