In re JM Fields, Inc., 78 B 1764-78 B 1773.

• Decision Date: 01 September 1982
• Docket Number: No. 78 B 1764-78 B 1773.,78 B 1764-78 B 1773.
• Citation: 22 BR 861
• Parties: In re J.M. FIELDS, INC., Food Fair, Inc., et al., Debtors.
• Court: U.S. Bankruptcy Court — Southern District of New York

22 B.R. 861 (1982)

In re J.M. FIELDS, INC., Food Fair, Inc., et al., Debtors.

Nos. 78 B 1764-78 B 1773.

United States Bankruptcy Court, S.D. New York.

September 1, 1982.

Levin & Weintraub, New York City, for debtor.

Sunshine & Sunshine, New York City, for Jerome Silverstein d/b/a Silverstein Agency.

MEMORANDUM & ORDER

JOHN J. GALGAY, Bankruptcy Judge.

The question presently before this Court is whether the real estate brokerage commissions payable to the Silverstein Agency ("Silverstein"), under the terms of its brokerage agreement dated September 21, 1973, ("Brokerage Agreement"), with Food Fair, Inc. ("Food Fair") should be deemed a general unsecured claim or an expense in administration. For reasons to be set forth below, this Court finds that the claim of Silverstein for brokerage commissions is a general unsecured claim, and the Court holds that Silverstein may file a general claim in these proceedings.

A summary of the leases and contractual arrangements underlying the controversy between Food Fair and Silverstein is essential to an understanding of the present decision by this Court.

Food Fair, as tenant, and the Sixth Fairland, Inc., ("Fairland"), as landlord, entered into a lease agreement dated May 25, 1964, ("Overlease") under which Food Fair rented the supermarket building located at Long Hill and Drozdyk Road, Groton, Connecticut known as Store No. 312. Under the express terms Article 2(2) of the Overlease, Food Fair was given the right to make a written offer for the purchase of the land with the supermarket building ("Premises").

Subsequently, Food Fair entered into a sublease agreement dated September 10, 1973, ("Sublease") with New England Variety Distributors, Inc. ("Subtenant") under which the subtenant rented Store No. 312. Paragraph 49 of the Sublease contains a purchase option provision similar to the purchase option in the Overlease. The Sublease provision obligated Food Fair to exercise the purchaser option in the Overlease upon written demand by the Subtenant and to resell the Premises to the Subtenant at the same purchase price.

On September 21, 1973, eleven days after entering into the Sublease, Food Fair submitted the Brokerage Agreement, a letter agreement, to Silverstein. Silverstein signed and returned the Brokerage Agreement on September 25, 1973. Under the express terms of the Brokerage Agreement, Food Fair is obligated to pay Silverstein, quarterly during the primary lease term, five percent of the minimum rent collected from the Subtenant. Additionally, in the event that the Subtenant successfully exercises the purchase option in the Sublease, Food Fair is obligated to pay Silverstein five percent of the purchase price.

It should be noted that the Brokerage Agreement does not impose any affirmative duties on Silverstein and that Food Fair and Silverstein are the only parties to the agreement, not Fairland or the Subtenant. Moreover, the Brokerage Agreement does not incorporate the express terms of the Sublease either by reference or otherwise. In addition, neither Food Fair nor Silverstein allege that the Sublease incorporates the terms of the Brokerage Agreement. Accordingly, the Brokerage Agreement stands as a distinct, separate agreement from the Sublease.

On October 2, 1978, five years after the signing of the Brokerage Agreement, Food Fair filed a petition for an arrangement under Chapter XI, Section 322 of the Bankruptcy Act and Bankruptcy Rule 11-6, and it continued in the management and operation of its business and properties as debtor in possession. The principals of the Subtenant operating under the name Seven Hundred Long Hill Road Associates ("700 Associates") subsequently gave notice of their intention to exercise the purchase option in the Sublease.

By application dated February 17, 1981, Food Fair brought a motion before this Court for an order approving the sale of the Premises to 700 Associates and the real estate sales contract between Fairland and 700 Associates. Additionally, Food Fair sought an order rejecting and disaffirming its Brokerage Agreement with Silverstein and authorizing Silverstein to file any and all claims arising from the agreement as a general unsecured claim.

Silverstein objected that Food Fair has paid commissions in the amount of $18,000.00 on rentals that accrued after the filing of the Chapter XI petition¹ and has thus assumed performance of the Brokerage Agreement. Furthermore, Silverstein argues that the Brokerage Agreement and purchase option in the Sublease are "inextricably intertwined" and thus Food Fair "implicitly assumed the entire transaction" or "package" when it continued the Sublease and collected rents from the Subtenant.

Silverstein also objects that Food Fair's equitable position is unfavorable and urges this Court not to allow Food Fair to confirm the Sublease and "reap the benefit of the Subleasee's sic exercise of the option to purchase" and at the same time reject the Brokerage Agreement and be discharged of its obligations under such agreement.

It is the position of Food Fair that the Brokerage Agreement is not an executory contract that can be assumed or rejected in bankruptcy, as it had been fully performed on one side prior to the date of the Chapter XI petition. Food Fair argues that Silverstein's right to be paid a percentage of the purchase price for the Premises was earned prior to the date of the petition, but Food Fair's obligation to pay was deferred until the purchase option had actually been exercised. In sum, Food Fair contends that any claim Silverstein asserts for brokerage commissions is a general unsecured claim since it arose at the time the two parties entered into the Brokerage Agreement long before the commencement of this Chapter XI proceeding.

By order filed on March 3, 1981, this Court approved the sale of the Premises to 700 Associates and the real estate sales contract between Fairland and 700 Associates "without prejudice to any and all claims of Silverstein Agency arising out of the Brokerage Agreement dated September 12, 1973."

I

In order to resolve the instant controversy concerning the status of Silverstein's claim for brokerage commissions, this Court must initially determine whether the Brokerage Agreement between Silverstein and Food Fair is an "executory contract" within the meaning of the Bankruptcy Act.

If the Court deemed the Brokerage Agreement was an "executory contract," Food Fair would have the choice of assuming or rejecting the agreement depending on which option benefitted the estate. In addition, if Food Fair had assumed the contract, as Silverstein argues, the brokerage commissions payable after the petition date would be expenses of administration entitled to a first priority under section 64(a)(1) of the Bankruptcy Act. Conversely, if the Court deemed the Brokerage Agreement was not an "executory contract," Silverstein would simply have a claim in these proceedings for breach of contract.

The term "executory contract" in its general legal usage describes a contract that is not fully performed; however, in the bankruptcy context, the term has a more limited meaning. For the purposes of the Bankruptcy Act, the courts have adopted Professor Countryman's definition of an "executory contract" as:

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 of either to complete performance would constitute a material breach excusing the performance of the other. (emphasis added)

V. Countryman, Executory Contracts in Bankruptcy: Part I, 57 Minn. L. Rev. 439, 460 (1973), see also Jenson v. Continental Finance Corp., 591 F.2d 477, 481 (8th Cir. 1979), citing, Northwest Airlines, Inc. v. Klinger, 563 F.2d 916 (8th Cir. 1977); In re Lake Minnewaska Mountain Houses, Inc., 11 B.R. 455 (Bkrtcy. S.D.N.Y. 1981) (J. Schwartzberg); V. Countryman, Executory Contracts in Bankruptcy: Part II, 58 Minn. L. Rev. 749 (1974).

An "executory contract" so defined does not encompass the situation where a nonbankrupt party to a contract has rendered full performance of its obligations but where a bankrupt party has performed only partially or not at all.

It would run contrary to the fundamental policies underlying the Bankruptcy Act to extend the statutory option, conferred upon the trustee and debtor in possession, to reject or assume executory contracts to situations where the debtor has already received the contractual benefits and where the sole effect of assuming the contract would be to prefer one general creditor over others whose contracts have not been assumed. V. Countryman, Executory Contracts in Bankruptcy: Part I, 57 Minn. L. Rev. 439, 450-52 (1973); Jenson v. Continental Financial Corp.,...