In re Crummie

• Decision Date: 20 March 1996
• Docket Number: 95-51407-ASW-OR.,Bankruptcy No. 94-57951-ASW-OR
• Citation: 194 BR 230
• Parties: In re Desiree CRUMMIE, Debtor. In re Antonio and Myrna YSAGUIRRE, Debtors.
• Court: U.S. Bankruptcy Court — Northern District of California

194 B.R. 230 (1996)

In re Desiree CRUMMIE, Debtor.

In re Antonio and Myrna YSAGUIRRE, Debtors.

Bankruptcy Nos. 94-57951-ASW-OR, 95-51407-ASW-OR.

United States Bankruptcy Court, N.D. California.

March 20, 1996.

Marcia E. Gerston and Evelyn T. Crane (argued), Levy, Greenfield & Davidoff, San Jose, CA, for Creditor GMAC.

James M. Lauderdale (argued), Law Offices of James M. Lauderdale, Monterey, CA, for Debtor Desiree Crummie.

Clark A. Miller (argued), Law Offices of Clark A. Miller, Salinas, CA, for Debtors Antonio and Myrna Ysaguiree.

Leon Jon Bonney (argued), Office of Duncan A. Kester, San Jose, CA, for Chapter 13 Trustee.

MEMORANDUM DECISION DENYING MOTION TO COMPEL ASSUMPTION OR REJECTION OF CONTRACT

ARTHUR S. WEISSBRODT, Bankruptcy Judge.

INTRODUCTION

General Motors Acceptance Corporation ("GMAC") has filed a motion in each of the above-entitled cases, seeking to compel the debtor in each case to assume or reject an executory contract between each debtor and GMAC. With the consent of all parties, the motions in the two cases have been handled together because the substantive provisions of the subject contracts are identical. The debtors (collectively, "Debtors") in both cases oppose GMAC's motions, as does Duncan H. Kester, the Chapter 13 Trustee ("Trustee").

GMAC is represented by Marcia E. Gerston, Esq. and Evelyn T. Crane, Esq. of Levy, Greenfield & Davidoff. Debtor Desiree Crummie ("Crummie") is represented by James M. Lauderdale, Esq. Debtors Antonio and Myrna Ysaguirre (collectively, "Ysaguirre") are represented by Clark A. Miller, Esq. Trustee is represented by Leon Jon Bonney, Esq.

All parties have filed briefs and oral argument has been concluded.

I. BACKGROUND

Petitions under Chapter 13 of Title 11, United States Code, were filed by Crummie on December 19, 1994, and by Ysaguirre on March 8, 1995.¹

Prior to commencement of their respective Chapter 13 cases, Debtors entered into contracts with Love Chevrolet of Seaside, California ("Love"), entitled "SmartBuyTM Retail Installment Sale Contract" ("Contract"); GMAC claims to be the successor in interest to Love. Aside from differing factual details of what automobile is being sold to whom at what price, the Contracts of Debtors have identical terms: the buyer is to pay the purchase price plus interest in forty-seven monthly installments plus a single "balloon" payment at the end of that time, and GMAC retains a security interest in the automobile until the purchase price has been paid in full.²

Debtors filed Chapter 13 plans treating GMAC as a creditor holding secured claims in the amount of the fair market values of the automobiles and unsecured claims for any deficiency balances, proposing to pay the secured claims at 100% plus interest and the unsecured claims at 10%.³ GMAC objected to confirmation of both plans, asserting that the Contract was an executory one, subject to assumption pursuant to 11 U.S.C. § 365. By agreement in both cases, Debtors' plans were confirmed without prejudice to GMAC's right to move to compel Debtors to assume or reject the Contract.

II. DISCUSSION

A. Executory Contracts

GMAC contends that the Contract constitutes an "executory contract" within the meaning of § 365, which section authorizes assumption of executory contracts and unexpired leases,⁴ and which also provides, at § 365(d)(2), that the Court may compel assumption or rejection by a date certain.

The term "executory contract" is not defined by the Bankruptcy Code, but its definition is well-settled under applicable case law:

To determine whether a contract is executory for the purposes of the Code, we employ the following definition:

An executory contract is one on which performance is due to some extent on both sides. . . . In executory contracts the obligations of both parties are so far unperformed that the failure of either party to complete performance would constitute a material breach and thus excuse the performance of the other. Marcus & Millichap Inc. v. Munple, Ltd (In re Munple), 868 F.2d 1129, 1130 (9th Cir.1989); accord Griffel v. Murphy (In re Wegner), 839 F.2d 533, 536 (9th Cir. 1988); Pacific Express Inc. v. Teknekron Infoswitch Corp. (In re Pacific Express), 780 F.2d 1482, 1487 (9th Cir. 1986) (employing the definition of an executory contract formulated by Professor Countryman in Executory Contracts in Bankruptcy: Part I, 57 Minn. L.Rev. 439, 460 (1973); Fenix Cattle Co. v. Silver (In re Select-A-Seat), 625 F.2d 290, 292 (9th Cir.1980).

In re Texscan Corp., 976 F.2d 1269, 1271-72 (9th Cir.1992).

B. The Subject Contract

The Contract is a straightforward agreement for sale of an automobile on installment payment terms with a security interest retained by the seller, but for one feature: the balloon payment that falls due in the forty-eighth month as the final installment need not be made in full in cash on its due date, but can instead be made in one of three ways at the option of the buyer. The buyer can elect to make the balloon payment in full in cash when it comes due; or, the buyer can elect to sell the automobile to GMAC for an amount to be determined according to procedures set forth in the Contract, have that amount credited against the balloon payment, and pay the difference in cash; or, the buyer can elect to finance the amount of the balloon payment with GMAC on terms to be established if and when the buyer elects to finance. It is the existence of these options that GMAC contends renders the entire contract an executory one because, under two of the three options, GMAC would have to perform in response to the buyer's election.⁵

(1) Cash

The option for the buyer to make the balloon payment by tendering cash does not, by its own terms, call for any counter-performance by GMAC. A contract under which a seller's sole remaining role is to accept payment does not constitute an executory contract, In re Pacific Express, 780 F.2d 1482 (9th Cir.1986) ("Pacific Express").

(2) Sale

The option for the buyer to sell the automobile to GMAC does, on the face of it, call for some counter-performance by GMAC, in that it appears as if GMAC must purchase the automobile. However, a close analysis of this option reveals that all it actually provides is that GMAC might have to accept the automobile (valued at less than fair market value, regardless of its actual value) as part of the balloon payment.

In order to exercise this option, the buyer must give notice of intent to exercise thirty days prior to the due date of the balloon payment and then prove that: The automobile has not been encumbered; a certain maintenance schedule of service has been followed; the terms of any recalls requiring any repairs to be made have been observed; the automobile has not been altered in any way without GMAC's prior consent. Presumably, if a buyer does not meet all of these requirements, the sale option cannot be exercised. It should be noted in this regard that, after a four year period of ownership, a buyer (particularly one who had to file bankruptcy) may well be unable to demonstrate that all of these conditions have been met: The required service might not have been maintained throughout the period, or the buyer might not have retained records sufficient to demonstrate that the service was maintained; a buyer might have been ignorant of a recall; alterations might have been made in the normal course of using the vehicle; etc.

If a buyer does qualify to exercise the sale option, the automobile and title documents must be delivered to GMAC and sale will be effected. GMAC is then to credit the sale price against the balloon payment, with the buyer paying any difference. The sale price is to be the amount of the balloon payment less a $250 fee, less any "excess wear and tear deductions" and any "excess mileage deductions". The excess wear and tear deduction is the amount that GMAC in good faith reasonably estimates it would cost to make all repairs to the automobile that do not result from normal wear and tear, including but not limited to a list of ten specified defects (such as body repair, painting, upholstery tears and stains, tires with less than 1/8 inch of tread, unmatched tires, etc.) and "any other costs required to restore the vehicle to saleable condition". The contract provides that the sale price starts at the amount of the balloon payment and goes down by a minimum of the $250 fee, plus any deductions for excess wear and tear and/or excess mileage; the sale price is not dependent upon the market for used cars, and it can never equal or exceed the balloon payment (so that, since the buyer must pay the difference between the sale price and the balloon payment, the buyer will always have to pay at least the $250 fee).

If a buyer disagrees with the excess wear and tear deduction, the buyer can obtain (at the buyer's expense) a professional appraisal of the automobile by an independent third party acceptable to both the buyer and GMAC, and the sale price will then be the lesser of: 1) the balloon payment minus a $250 fee; or 2) the appraised value minus a $250 fee. Under this alternative scenario, if the appraised value were less than the balloon payment, the buyer would sell for the appraised value minus the fee, and would have to make up the difference between that sale price and the balloon payment; if the appraised value were more than the balloon payment, the sale price would be set at the lesser of the two (the amount of the balloon payment minus the fee), so that the difference between the sale price and the balloon payment would be the amount of the fee, and the buyer would have to make up that difference. While this method does take into account the actual value of the automobile, it does not allow for the buyer to reap any value that may exist over and above the amount of the balloon payment. The most favorable possible result for a buyer exercising the sale option would be to sell for the full amount of the...