1. INTRODUCTION- Viewpoint Ventures Partnership (VVP) filed a motion to sell about 67 acres in the Potter Creek area in Anchorage to the National Bank of Alaska (NBA) free and clear of encumbrances under 11 USC § 363.

Jo Ann and Robert Miller, the previous owners, objected to the sale on the grounds they had retained a 20% profit sharing interest of the proceeds received from an end-user of the residential lots to be developed by VVP. VVP acknowledges that if there is an encumberance on the land, or even a right to collect a potential profit from a subsequent owner or possessor, the sale to NBA cannot be closed. NBA will not accept title with this type of cloud.

I conclude that either (a) the Millers' claim to an affirmative covenant or servitude running with the land merged in a warranty deed which had no restrictions, or (b) the fact that they had bargained in 1979 to give a deed without restrictions, followed up by fulfillment of that obligation, shows that the profit sharing covenant 5 ABR 168      was intended to be personal to VVP, and not bind its successors in title or possession.

2. FACTS- In 1979, the Millers and VVP entered into two agreements on the same date. One was an option agreement, allowing VVP to purchase property in the Potter Creek area, including the property which is the subject of the debtors' motion to sell, on stated terms. The second was the profit sharing agreement. The profit sharing agreement contains no words indicating that it was to bind subsequent owners or possessors of the property.

At the hearing on the merits on March 17, 1998, the Millers' attorney alluded to a possible memorandum of record that had been recorded giving notice of the existence of the option agreement, but not the profit sharing agreement. Although the document was not submitted, I will assume that fact is established for the purposes of this decision.

The option agreement does not refer to the profit sharing agreement, but the profit sharing agreement refers to the existence of the option agreement. Counsel for the Millers suggested two separate agreements were used to keep the profit sharing agreement hidden from any financial institutions that might finance development of the property. Counsel said the Millers understood the profit sharing agreement was to have been subordinated to development financing. It is a reasonable inference that the Millers and VVP did not want the profit sharing agreement public since it seems to be atypical, and the type of agreement that might cause a bank to shy away from making a development loan. Unlike a standard release clause with clearly identifiable dollar release figures, the profit sharing agreement appeared to be somewhat ambiguous, subject to differing accounting interpretations, and a possible source of problems with closing any sales down the road.

In 1984, to clarify ambiguities in the profit sharing agreement, the Millers and 5 ABR 169      VVP entered into a Memorandum of Understanding which contained a clause that it was binding on successors of the property.

In 1985, a statutory warranty deed without any restrictions or mention of the profit sharing agreement was executed by the Millers and recorded by VVP.

In 1992, a copy of the Memorandum of Understanding, the option agreement, and the profit sharing agreement were recorded by the Millers.

Jo Ann Miller filed a declaration in this matter that the 1979 option agreement and the profit sharing agreement were to be read together, and the parties understood that the profit sharing agreement was to be a charge or lien on the land, binding not only on NBA, but any subsequent owner.

3. ANALYSIS- Whatever the parties intended by the profit sharing agreement when executed in 1979, or clarified in 1984, the statutory warranty deed delivered by the Millers to VVP without any restrictions in 1985, cut off the Millers' rights to treat the profit sharing agreement as running with the land. No covenants are implied. AS 34.15.080. A statutory warranty deed presumes only certain covenants of ownership and quiet possession. AS 34.15.030(b).

The statutory warranty deed merged any agreement to charge the land with the profit sharing obligations into that deed and extinguished the agreement as an equitable servitude, an affirmative covenant and/or a covenant running with the land. Groff v Kohler, 922 P2d 870, 873 (Alaska 1996) ("As a general rule, rights under a contract to convey property are merged into a subsequent deed and thereby extinguished"). See, also, Voss v Brooks, 907 P2d 465 (Alaska 1996) ("Generally, rights under a contract to convey property are said to be merged into a subsequent deed. Thus if a deed is unambiguous and inconsistent with a prior agreement it is the deed that controls").

5 ABR 170      There is no evidence that the Millers delivered to VVP a statutory warranty deed containing no restrictions or reservations in 1985, in error or by mistake. Cf, Groff and Voss. In fact, delivery of such a warranty deed subject only to restriction of record was precisely what they had agreed to do in ¶ 8 of the 1979 option agreement with Viewpoint Ventures.

Two conclusions can be drawn from the Millers' delivery of the unrestricted warranty deed. First, notwithstanding Jo Ann Millers' declaration to the contrary, that the Millers did not intend the profit sharing agreement to run with the land. Second, even if they had, the subsequent warranty deed superceded the profit sharing agreement as an affirmative covenant or servitude running with the land.

The parties filed extensive briefs on the law regarding servitudes and covenants running with the land. VVP argued the traditional view, holding that covenants concerning the payment of money are usually held to be "personal" because they do not "touch and concern" the land, and found not to be "real" covenants or the type which run with the land. The Millers espouse the view of the Restatement of Property 3d (Servitudes) Tentative Draft No. 1 (1989) and proposed § 3.2 (1991) providing that there is no "touch and concern" requirement as a free standing, separate element in order to establish a covenant running with the land.

The Tentative Draft argues for a more modern approach keying on the reasonable expectation of the parties, and promoting actual practice in modern real property development. It found the older cases unduly restrictive and antagonistic to property development. I find the reasoning in the Tentative Draft appealing, but even so, the facts are against the Millers.

In the end, the doctrine of merger overshadows the intricacies of equitable servitudes, affirmative covenants, and covenants running with the land as the key 5 ABR 171      determinant, and the Millers lose on the merger issue. And, even if I adopted the Tentative Draft approach, the facts indicate a personal covenant instead of a real one.

4. CONCLUSION- The Millers have no right to an affirmative covenant running with the land which would obligate NBA or any subsequent owner or possessor to honor the profit sharing agreement.

DATED: March 17, 1998

HERBERT A. ROSS
U.S. Bankruptcy Judge