In re W. & L. Associates, Inc.

• Decision Date: 18 June 1987
• Docket Number: Bankruptcy No. 86-04999S.
• Citation: 71 BR 962
• Parties: In re W. & L. ASSOCIATES, INC., Debtor.
• Court: U.S. Bankruptcy Court — Eastern District of Pennsylvania

71 B.R. 962 (1987)

In re W. & L. ASSOCIATES, INC., Debtor.

Bankruptcy No. 86-04999S.

United States Bankruptcy Court, E.D. Pennsylvania.

April 6, 1987.

Extension of Time for Appeal Denied June 18, 1987.

Jonathan A. Ganz, Gary R. Kozik, Philadelphia, Pa., for debtor.

Mark I. Bernstein, Norman S. Berson, Philadelphia, Pa., for the buyer.

OPINION

DAVID A. SCHOLL, Bankruptcy Judge.

Resolution of the Motion before us causes us to consider some of the most basic issues relevant to 11 U.S.C. § 365, that section of the Code addressing "Executory contracts and unexpired leases," which we have also touched upon in our two recently-filed Opinions, In re Grant Broadcasting of Philadelphia, Inc. (Fourth Opinion), 71 B.R. 891 (Bankr. E.D.Pa.1987); and In re Sudler, Sudler v. Chester Housing Authority, 71 B.R. 780 (Bankr.E.D.Pa.1987).

We are inclined to interpret § 365 broadly, at least in a debtor's behalf, and therefore decline the non-debtor party's invitation to classify this contract as one wholly performed on one side, and hence not "executory." We also hold that the applicable "business judgment" rule allows the debtor wide latitude in determining what in fact serves its best interest and when to reject an executory contract. We also fail to find that the Debtor here has acted in "bad faith," which we believe is a concept which should not be used as a license to moralize on the conduct of, or second-guess, a debtor.

Therefore, we hold that the Agreement of Sale of the realty of the Debtor in issue here is an "executory contract," despite the Buyer's arguments that he (the Buyer) fully performed his obligations prior to the bankruptcy filing. We also hold that the Debtor's bankruptcy filing, even if primarily to extricate itself from this contract, was not in "bad faith," such that dismissal of either this Motion or the case is in order. Finally, the very fact that the Buyer so vigorously seeks to hold the Debtor to this contract convinces us that it is a wise "business judgment" of the Debtor to attempt to reject the Agreement of Sale contract.

On October 28, 1986, the corporate Debtor, which lists as its sole business the ownership of a parcel of vacant land located at 616-24 South 7th Street, Philadelphia, Pennsylvania 19147, filed this Chapter 11 corporate reorganization. The Debtor's principal, William Cicalese, testified that this parcel of land is contiguous to a family-owned business, Chick's Bar and Backroom Cafe, and is used for parking for patrons of this establishment and neighboring businesses.

Shortly after the bankruptcy filing, on November 10, 1986, the Debtor filed the "Motion to Reject Agreement of Sale with Richard Zoghibe sic" which is before us for decision. On December 2, 1986, Richard Zeghibe (hereinafter referred to as "the Buyer") answered and opposed the Motion.

After two continuances by agreement of the parties of the hearing on this Motion, the matter came before us for trial on January 28, 1987. Unfortunately, on that date, we had an extremely long list of cases, and we were unable to try the case that day despite the wish of both parties that we do so. We therefore rescheduled the trial for February 12, 1987, and issued a Pre-Trial Order of February 2, 1987, which we hoped would assist both the parties and us in making a record and honing in on the pertinent legal issues. Although we must express some disappointment with counsel for the Debtor in his performance,¹ we believe that the Order did serve this purpose.

The only witnesses called were Thomas M. Descano, an appraiser, and Mr. Cicalese, on behalf of the Debtor. The Buyer presented no witnesses. By Order of February 13, 1987, we directed the parties to file Briefs at one-week intervals after preparation of the Notes of Testimony. Very helpful Briefs were produced by both the Debtor and the Buyer on March 9, 1987, and March 17, 1987, respectively.

Because we perceive this matter to present almost exclusively issues of law, we shall not designate specific Findings of Fact as such, but shall prepare our Opinion in narrative form. See In re Campfire Shop, Inc., Barone v. Strouse, Greenberg Mortgage Co., 71 B.R. 521, 524-25 (Bankr. E.D.Pa., 1987). The parties agree that, on May 11, 1986, the Debtor contracted to sell the realty in issue to "Richard Zoghibe sic or Nominee" for $251,750.00. Settlement was postponed by agreement of the parties until September 24, 1986, when the Buyer appeared to settle and the Debtor failed to do so. The Buyer deposited a check in the amount of $270,000.00 with the settlement agent, and commenced an action against the Debtor in state court to obtain specific performance of the Agreement of Sale. Before this case could proceed to decision, the Debtor filed the instant bankruptcy case.

Mr. Cicalese conceded that the Buyer had attempted to make certain improvements to the realty in contemplation of the purchase. However, he disputed that these were necessary or in any way enhanced its value, and in fact claimed that they damaged the property.

In his testimony, Mr. Descano indicated that he appraised the property in issue at $412,800.00. We accord this opinion little weight due to Mr. Descano's admitted lack of experience in appraising parking lots and our doubts as to whether the transactions which he deemed comparable, in forming his appraisal, really were an adequate basis for comparison. However, we do find that the recited sale price of $251,750.00 is less than the realty's value, and the failure of the Buyer to produce any testimony as to value causes us to accept the Debtor's contention, as least on this record, that the fair market value of the premises is at least $300,000.00.

The Buyer presented three (3) arguments in opposition to the granting of this Motion:

1. The Agreement of Sale, having allegedly been fully performed by the Buyer as of the date of the bankruptcy filing, was not an "executory contract."

2. The Agreement "is not burdensome under the business judgment rule," and therefore cannot be rejected.

3. Relief should be denied to the Debtor because he filed his bankruptcy Petition solely to avoid the Agreement, and thus his filing was in bad faith and would unjustly enrich the Debtor at the expense of the Buyer.

Easily the most potentially meritorious of these arguments is the first. As Collier accurately points out, "no attempt has been made to define the term `executory contract'" in the Code. 2 COLLIER ON BANKRUPTCY, ¶ 365.02, at 365-13 (15th ed. 1986). However, Collier does allow that "the principle of mutuality," i.e., the restriction of the term to only "contracts on which performance remains due to some extent on both sides," is supported by "legislative history." Id.

We note that many courts have adopted this definition, usually citing, as its ultimate source, a law review article by the respected bankruptcy scholar, Professor Vern Countryman, Executory Contracts in Bankruptcy: Part I, 57 MINN.L.REV. 439, 450-62 (1973). See, e.g., Lubrizol Enterprises v. Richmond Metal Finishers, 756 F.2d 1043, 1045-46 (4th Cir.1985); In re Newcomb, 744 F.2d 621, 624 (8th Cir. 1984); and In re Cochise College Park, Inc., 703 F.2d 1339, 1348 (9th Cir.1983). See also, 2 COLLIER, supra, ¶ 365.01, at 365-12 n. 17.

However, we note that the general definition of an "Executory contract" is simply "a contract that has not as yet been fully completed or performed." BLACK'S LAW DICTIONARY 512 (5th ed. 1979). More significantly, Countryman, in formulating his seminal definition, posits that contracts fully performed by the non-debtor party should not be subject to rejection only because of his observation that, in such a situation, "the estate has whatever benefit it can obtain from the other party's performance and the trustee's rejection would neither add to nor detract from the creditor's claim or the estate's liability." 57 MINN.L.REV. at 451. Therefore, it is apparent that Countryman meant to exempt from the scope of executory contracts only that group of contracts pursuant to which the Debtor has already received the full benefit of the contract from the non-debtor contracting party prior to the bankruptcy filing.

By contrast to the plethora of authority approving the Countryman definition of executory contracts generally, the Buyer can cite to very few cases where, on similar facts, courts have declined requests by debtors to reject executory contracts because the non-debtor has fully performed his obligations pre-petition. In fact, the Buyer cites and relies heavily on but one such case, In re Murtishi, 55 B.R. 564 (Bankr.N.D.Ill.1985).

In Murtishi, the facts were much the same as in the intant case, i.e., debtor-sellers wished to reject a pre-petition agreement to sell realty. The court there begins with the Countryman definition but takes "this reasoning a step further" and concludes that

when the debtor has not only failed to perform but has breached the contract pre-petition with the result that the other party has no further duty to perform but rather holds a claim against the debtor, the contract is no longer executory for purposes of section 365. Id. at 567.

We believe that this application of the Countryman definition by the Murtishi court is erroneous and has been implicitly rejected by several decisions by our local courts, which are ultimately more persuasive to us than Murtishi, In re Philadelphia Penn Worsted Co., 278 F.2d 661 (3d Cir.1960); In re Oxford Royal Mushroom Products, Inc., 45 B.R. 792 (Bankr.E. D.Pa.1985) (per GOLDHABER, CH. J.); and In re Middleton, 3 B.R. 610, 612 (Bankr.E.D.Pa.1980) (per TWARDOWSKI, J.); and elsewhere, e.g., In re Alexander, 670 F.2d 885 (9th Cir.1982); Shaw v. Dawson, 48 B.R. 857, 860 (D.N.M.1985); and In re Norquist, 43 B.R. 224 (Bankr.E.D.Wash. 1984).

As Countryman himself explained, his definition was meant to exclude from its scope only those contracts from which the Debtor's estate had enjoyed the full benefit pre-petition....