In re Booth

• Decision Date: 13 April 1982
• Docket Number: Bankruptcy No. 80-00292.
• Citation: In re Booth, 19 B.R. 53 (Bankr. Utah 1982)
• Parties: In re Glade S. BOOTH and Glade S. Booth dba G.S. Booth Enterprises, Debtor.
• Court: U.S. Bankruptcy Court — District of Utah

19 B.R. 53 (1982)

In re Glade S. BOOTH and Glade S. Booth dba G.S. Booth Enterprises, Debtor.

Bankruptcy No. 80-00292.

United States Bankruptcy Court, D. Utah.

April 13, 1982.

William T. Thurman, McKay, Burton, Thurman & Condie, Salt Lake City, Utah, for debtor.

Kim R. Wilson, Snow, Christensen & Martineau, Salt Lake City, Utah, for Lewis and Edris Calvert.

Richard I. Aaron, Salt Lake City, Utah, for Noel deNevers.

RALPH R. MABEY, Bankruptcy Judge.

INTRODUCTION AND FACTUAL BACKGROUND

This case asks whether debtor, who is vendee under a contract for deed, has rights in an "executory contract" within the meaning of 11 U.S.C. Section 365.

Debtor is a debtor in possession under Chapter 11.¹ He is a broker and dealer in real property. His schedules show land worth $2,641,550, most of which has been bought or sold on contracts for deed.

Lewis and Edris Calvert (sellers) made a contract to sell land to debtor at a price of $97,200, with $1,100 down, and the balance payable over time with interest. Sellers must convey title when debtor completes performance. They may forfeit his interest if he defaults. Debtor has resold the property, again using a contract, to a third party, John Collett.

Sellers moved for an order, pursuant to Section 365(d)(2), directing debtor to assume or reject their contract. Debtor demurred, arguing that the contract is not executory and therefore Section 365 is inapplicable. After denying the motion orally on the record, the court files this explanatory memorandum.

EXECUTORY CONTRACTS AND BANKRUPTCY POLICY

Sellers point to the definition of executory contract formulated by Professor Countryman: "a contract under which the obligations of both the bankrupt and the other party to the contract are so far unperformed that the failure of either to complete performance would constitute a material breach excusing the performance of the other." Countryman, "Executory Contracts in Bankruptcy: Part I," 57 Minn.L.Rev. 439, 460 (1973).² This definition embraces the contract for deed, they maintain, because both sides have unperformed obligations, viz. payment by debtor and delivery of title by sellers. Failure of either to complete performance would constitute a material breach excusing the performance of the other.³

Countryman propounded a definition of executory contract which was "functional," that is, "defined in the light of the purpose for which the trustee is given the option to assume or reject. Similar to his general power to abandon or accept other property, this is an option to be exercised when it will benefit the estate." Countryman, supra at 450. From this premise, he framed his test of performance due on both sides. If the creditor has performed, rejection would be meaningless, since "the estate has whatever benefit it can obtain. . . . and . . . rejection would neither add to nor detract from the creditor's claim or the estate's liability." Id. at 451. Assumption likewise would be meaningless, and further, would transform the obligation of debtor into a cost of administration, "a prerogative which the Bankruptcy Act has never been supposed to have vested in either the trustee or the court." Id. at 452. If the debtor has performed, assumption adds nothing to his right to performance. Rejection, on the other hand, would not constitute a breach. In short, the Countryman test is an index to when assumption or rejection of a contract will "benefit the estate" and therefore of when a contract is executory.

Section 365, however, reflects a number of policies, including not only benefit to the estate but also protection of creditors. The Countryman test may often define the benefit to the estate, but does it always? And does it speak to the protection of creditors? See Julis, "Classifying Rights and Interests Under the Bankruptcy Code," 55 Am.Bank. L.J. 223 (1981). These questions underlie the refusal of the Commission to define executory contract, Report of the Commission on the Bankruptcy Laws of the United States, H.Doc.No.93-137, Part I, at 199 (1973) ("any succinct statutory language risks an unintended omission or inclusion"), especially in relation to the contract for deed.

Sections 365(i) and 365(j), for example, give special treatment to nondebtor vendees of land sale contracts. They were passed in response to the plight of nondebtor vendees under former law. In In re New York Investors Mutual Group, 143 F.Supp. 51 (S.D.N.Y.1956), the debtor had contracted to sell land to a buyer for $105,000. There was a down payment of $15,000 with the balance due at closing in 18 months. Prior to closing, debtor was adjudicated bankrupt. The trustee sought and the referee ordered rejection of the contract with buyer. This order was affirmed on appeal. The court ruled that the interest of buyer was subject to rejection by the trustee and that the remedy of buyer "is a claim for damages for breach of the agreement." Id. at 54. Thus buyer, who under state law may have owned the land, was relegated to the status of an unsecured creditor.⁴New York Investors was followed. E.g., Gulf Petroleum, S.A. v. Collazo, 316 F.2d 257 (1st Cir. 1963); Matter of Philadelphia Penn Worsted Company, 278 F.2d 661 (3d Cir. 1960). But there was uneasiness over its result, and some courts moved to soften its impact. E.g., In re Mercury Homes Development Co., 4 B.C.D. 837 (N.D.Cal.1978) (trustee may reject contract but cannot deprive vendee of interest in land).

Meanwhile, reformers sought change. The Commission spearheaded this movement and Sections 365(i) and 365(j) evolved from its report, see Report of the Commission on the Bankruptcy Laws of the United States, supra at Sections 4-602(d) and 4-602(f)(1), which in turn, was derived from a working paper, see id. at Part I, at 199 n. 114, at 206 n. 160, Part II, at 158 n. 17, at 172-173 n. 21, later published as Lacy, "Land Sale Contracts in Bankruptcy," 21 U.C.L.A.L.Rev. 477 (1973).

The method for apportioning the benefits and burdens of insolvency, Lacy wrote, cannot be found through "definitions of `executory'. . . . Instead, the search should be for a policy which defines those interests of present or potential value which may properly be taken from others for the benefit of the bankrupt or his estate." Id. at 482. Nondebtor vendees deserve special treatment, not because their contract is executory in the sense that performance remains due on both sides, but because "the purchaser in this kind of contract is likely to be the buyer of a home or farm or small business who has adjusted to a new location. Very often, especially in the case of a residential buyer, he will be poor. Certainly, modern American bankruptcy policy places as high a value on relieving the poor from the consequences of their own and others' improvidence as in doing perfect justice between creditors." Id. at 484.

He criticized the assumption that "the purchaser whose contract is rejected after he has paid a part of the price will have only an unsecured claim" but that "he may get the land if he has paid the entire price on the ground that the contract is no longer `executory.'. . . . The suggested distinction between paid-in-part and paid-in-full seems utterly capricious. Instead, one should not speculate about the meaning of `executory' but rather should consider what ought to be thrown into the pot for general creditors and when it is fair to recognize special claims to certain assets." Lacy, supra at 487.⁵

Others echoed Lacy. One, emphasizing the "economic consequences" of rejection, argued that the nondebtor vendee should not be "used as a resource by the trustee to increase the bankrupt's estate and the cost of the bankruptcy should be completely borne by commercial creditors. This would increase the creditors' incentive to deal only with sound vendors and would entirely remove this `policing' function from the vendees, who occupy the poorest position to exercise such control. Moreover, the commercial creditors are capable of distributing the risks of a vendor's bankruptcy, but the vendees are not. The creditors can simply pass on the increased costs of vendor bankruptcy by raising the cost of credit. Most likely, the vendees would ultimately pay for most of this increase in the cost of credit. But they would be paying as a group, and therefore the risks of bankruptcy would be distributed evenly and rationally—rather than falling completely on a small and arbitrary group of vendees." Note, "Bankruptcy and the Land Sale Contract," 23 Case Wes.Res.L.Rev. 393, 410-411 (1972).

Thus, Sections 365(i) and 365(j), far from representing the Countryman test, are a tonic for the consequence of its application. This suggests that, in the final analysis, executory contracts are measured not by a mutuality of commitments but by the nature of the parties and the goals of reorganization. A debtor as vendee is free from the constraints of Section 365, and is thereby afforded flexibility in proposing a plan, but meanwhile must provide, upon request, adequate protection to vendors. A debtor as vendor may use Section 365 as a springboard to rehabilitation but not at the expense of vendees. Cf. In re Summit Land Co., 13 B.R. 310 (Bkrtcy.D.Utah 1980). Thus, it is the consequences of applying Section 365 to a party, especially in terms of benefit to the estate and the protection of creditors, not the form of contract between vendor and vendee, which controls. This conclusion is supported by many statutory provisions and much judicial gloss.⁶

EXECUTORY CONTRACTS AND THE POLICIES OF BENEFIT TO THE ESTATE AND THE PROTECTION OF CREDITORS

The contract for deed, where debtor is vendee, benefits the estate more when viewed as a lien⁷ than as an executory contract. This is because treatment of the contract for deed as a lien enlarges the value of the estate and furthers the rehabilitation of the debtor. This treatment likewise makes adequate protection available to creditors.

1. Enlarging The Value of...