In re Revenswood Apartments, Ltd.

• Citation: 338 B.R. 307
• Decision Date: 17 February 2006
• Docket Number: No. 05-8017.,05-8017.
• Parties: In re RAVENSWOOD APARTMENTS, LTD., Debtor. v. James F. O'Brien, Trustee, Robert S. Corbly, Glen A. Burns, and Carol Burns, Appellants, v. Ravenswood Apartments, Ltd., Appellee.
• Court: Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Sixth Circuit

338 B.R. 307

In re RAVENSWOOD APARTMENTS, LTD., Debtor. v. James F. O'Brien, Trustee, Robert S. Corbly, Glen A. Burns, and Carol Burns, Appellants, v. Ravenswood Apartments, Ltd., Appellee.

No. 05-8017.

United States Bankruptcy Appellate Panel for the Sixth Circuit.

Argued November 9, 2005.

Decided and Filed February 17, 2006.

COPYRIGHT MATERIAL OMITTED

J. Michael Debgeler, Katherine M. Lasher (on brief), Graydon Head & Ritchey LLP, Cincinnati, Ohio, for Appellants.

Mark Vanderlaan, John J. Schmidt (on brief), Dinsmore & Shohl LLP, Cincinnati, Ohio, for Appellee.

Before: GREGG, LATTA, and WHIPPLE, Bankruptcy Appellate Panel Judges.

OPINION

GREGG, Bankruptcy Judge.

James F. O'Brien, Trustee, Robert S. Corbly, Glen A. Bums and Carol Burns (the "Appellant,") appeal the bankruptcy court's order denying their motion to compel the Debtor to make payments under a land installment contract and to assume or reject the contract within a specified time period. For the reasons that follow, we find that the land installment contract is executory under controlling Sixth Circuit precedent and Ohio law and REVERSE the order of the bankruptcy court.

I. ISSUE ON APPEAL

The sole issue on appeal is whether the land installment contract is an "executory contract" within the meaning of 11 U.S.C. § 365.

II. JURISDICTION AND STANDARD OF REVIEW

The bankruptcy court's order constitutes a final order, which may be appealed as of right. 28 U.S.C. § 158(a)(1); Stevens v. CSA, Inc., 271 B.R. 410, 413 (D.Mass.2001); Enter. Energy Corp. v. United States (In re Columbia Gas Sys., 100.), 146 B.R. 106, 110-11 (D.De1.1992), aff'd, 50 F.3d 233 (3d Cir.1995); In re Heston Oil Co., 69 B.R. 34, 35-36 (N.D.Okla.1986) (all finding appealable orders denying motions to compel assumption or rejection on basis that contracts were not executory). The United States District Court for the Southern District of Ohio has authorized appeals to the Bankruptcy Appellate Panel, and neither party has timely elected to have this appeal heard by the district court. 28 U.S.C. §§ 158(b)(6), (c)(1). Accordingly, the Pan-1 has jurisdiction to decide this appeal.

Since the Appellants claim that the order denying their motion represents an error of law, the order is reviewed de novo. E.g., Corzin v. Fordu (In re Fordu), 201 F.3d 693, 696 n. 1 (6th Cir.1999). "De novo means that the appellate court determines the law independently of the trial court's determination." Treinish v. Norwest Bank Minn., N.A. (In re Periandri), 266 B.R. 651, 653 (6th Cir. BAP 2001).

III. FACTS

In November 1996, Ravenswood Apartments, Ltd. (the "Debtor") and James F. O'Brien, Trustee ("O'Brien") entered into a land installment contract (the "Contract"). Under the Contract, O'Brien agreed to sell an 82-unit apartment complex located in Cincinnati, Ohio (the "Property"), to the Debtor. The total purchase price, 83,415,000, was to be paid by the Debtor in monthly installments of approximately $27,000, with any remaining balance to be entirely due on November 1, 2020. Upon payment of the full purchase price, O'Brien was to convey title of the Property to the Debtor.

Beginning in the early 2000s, a variety of factors caused increased vacancies at the apartment complex, resulting in several years of financial difficulty for the Debtor. Eventually, on April 28, 2004, the Appellants filed suit against the Debtor in an Ohio state court. The Appellants' state court complaint alleged various defaults under the Contract and sought, among other things, specific performance of the Contract, damages for breach of the Contract, and "restitution of [Appellants'] possession" of the Property. (J.A. at 132.)

Soon thereafter, on July 22, 2004, the Debtor filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code. On August 17, 2004, the Appellants filed a motion to compel the Debtor to make payments under the Contract in accordance with the terms thereof, and force the Debtor to assume or reject the Contract within a specified time period. The Debtor filed a response to the motion on August 30, 2004. A hearing was held before the bankruptcy court on October 6, 2004.

On January 21, 2005, the bankruptcy court entered an order determining that the Contract was not executory and denying the Appellants' motion. In reaching this conclusion, the court held that the Sixth Circuit Court of Appeals case Terrell v. Albaugh (In re Terrell), 892 F.2d 469 (6th Cir.1989), was "not controlling" because the contract at issue in Terrell was governed by Michigan law. (J.A. at 197.) Instead, the bankruptcy court's analysis focused on an Ohio statutory provision. That provision precludes forfeiture of a vendee's payments under a land installment contract where payments have been made for five years or more or where more than twenty percent of the purchase price has been paid. Ohio Rev.Code Ann. § 5313.07. The bankruptcy court interpreted the effect of § 5313.07 on the Contract as follows:

Where payments under the [land installment contract] have stopped prior to the filing of the bankruptcy, those rights have been vested and it cannot be said that the contract is any longer executory. In the case before us the five year condition has been met and the right[s] to which the debtor/vendee is entitled by virtue of the statute have been vested in debtor, and they did so prior to the time that the bankruptcy case was filed.

The situation here is comparable to that of a lease or contract terminated by state law prior to the filing of a bankruptcy case. Because the rights of the debtor in such a case have been fixed prior to the filing of the bankruptcy case, the lease or contract can no longer be assumed by a trustee. (J.A. at 197-98.) The Appellants filed this timely appeal of the bankruptcy court's order on January 27, 2005.

IV. DISCUSSION

A. Is the Contract Executory under the Bankruptcy Code and the Ohio Common Law?

1. Definition of Executory Contract Under the Bankruptcy Code.

Section 365(a) of the Bankruptcy Code provides that, subject to court approval, the trustee may assume or reject any executory contract of the debtor. 11 U.S.C. § 365(a). The phrase "executory contract" is not defined in § 365(a) or any other section of the Bankruptcy Code. A clue to the intended meaning of the term is found in the legislative history, which suggests "that Congress intended the term to be defined as a contract `on which performance remains due to some extent on both sides.'" Terrell v. Albaugh (In re Terrell), 892 F.2d 469, 471 (6th Cir.1989) (quoting S.Rep. No. 95-989, at 58 (1978), as reprinted in 1978 U.S.C.C.A.N. 5787, 5844; H.R.Rep. No. 95-595, at 347 (1977), as reprinted in 1978 U.S.C.C.A.N. 5787, 5963, 6303). Unfortunately, this definition has not proven particularly workable because, in practicality, "[i]t is only the rare agreement that does not involve unperformed obligations on either side." Huntington Nat'l Bank v. Alix (In re Cardinal Indus., Inc.), 146 B.R. 720, 726 (Bankr. S.D.Ohio 1992).

The Sixth Circuit Court of Appeals has defined the term "executory contract" on two occasions. The most recent of these cases, Terrell, involved interpretation of a land sale contract executed under Michigan law. After citing the definition set forth in the legislative history, the Terrell court adopted the so-called Countryman definition of an executory contract According to Professor Vern Countryman, an executory contract is "a contract under which the obligation 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." In re Terrell, 892 F.2d at 471 n. 2 (quoting Vern Countryman, Executory Contracts in Bankruptcy: Part I, 57 Minn. L.Rev. 439, 460 (1973)). Applying this definition to the land sale contract before it in Terrell, the Sixth Circuit concluded that there were "material obligations left to be performed by both parties" and that "the failure of either party to perform [those] remaining obligations would give rise to a material breach allowing the other party to avoid continued performance." Id. at 472. For instance, "[t]he failure of a vendee to continue paying installments [would give] the vendor a number of remedies for breach, including forfeiture and foreclosure." Id. (citations omitted). "Likewise, if a vendor fails to transfer title when promised or impairs his or her ability to deliver title in the future, he or she has committed a material breach entitling the vendee to sue for specific performance or to cease performance and sue for recision." Id. (citations omitted).

In reaching this conclusion, Terrell expressly overruled a prior bankruptcy court decision, Chapman v. Britton (In re Britton), 43 B.R. 605 (Bankr.E.D.Mich. 1984), which held that land sale contracts were not executory in Michigan. In Britton, the bankruptcy court determined that land sale contracts were analogous to mortgages in that the "vendor holds legal title to the land only as security for the payment of the purchase price." In re Terrell, 892 F.2d at 472 (discussing In re Britton, 43 B.R. at 607). The Sixth Circuit explained that the Britton court's emphasi the functional "similarities between land sale contracts and mortgages" was misguided. Rather, under the Countryman definition, the executory nature of the contract is determined by "the unperformed obligations of the two parties or the legal effect of the failure to perform." Id. "It is precisely because the vendor has not completed performance, unlike most mortgagees, that the contract is executory." Id. at 472 n. 5.

Terrell also rejected a Seventh Circuit case, Mitchell v. Streets (In re Streets & Beard Farm P'ship), 882 F.2d 233 (7th Cir.1989), which deemed an Illinois land sale contract non-executory because "the only remaining obligation on the part of the vendor[s] [was] to deliver legal title upon the...