Indian River Homes, Inc. v. Sussex Trust Co.

• Decision Date: 01 December 1989
• Docket Number: Civ. A. No. 89-254-CMW.
• Citation: 108 BR 46
• Parties: In re INDIAN RIVER HOMES, INC., Plaintiff, v. The SUSSEX TRUST COMPANY, Defendant.
• Court: U.S. District Court — District of Delaware

108 B.R. 46 (1989)

In re INDIAN RIVER HOMES, INC., Plaintiff, v. The SUSSEX TRUST COMPANY, Defendant.

Civ. A. No. 89-254-CMW.

United States District Court, D. Delaware.

December 1, 1989.

James L. Patton, Jr., of Young, Conaway, Stargatt & Taylor, Wilmington, Del., for plaintiff.

Michael B. Joseph, of Priestly & Joseph, Wilmington, Del., for defendant.

OPINION

CALEB M. WRIGHT, Senior District Judge.

This is an appeal from an order of the Bankruptcy Court. The April 14, 1989 order approved the assumption of an agreement of sale relating to certain real property entered into by Appellee Indian River Homes, Inc. (hereinafter referred to as "debtor"). Appellant Sussex Trust objects to the Bankruptcy Court's approval of that portion of the agreement of sale which provides for the payment of fees and commissions to an attorney and a real estate agency (hereinafter referred to as "the professionals"). Sussex Trust also objects to the Bankruptcy Court's approval of the employment of the professionals nunc pro tunc for purposes of the agreement of sale. This court has jurisdiction pursuant to 28 U.S.C. § 158(a).¹

FACTUAL BACKGROUND

On March 30, 1989, the debtor filed a voluntary petition seeking reorganization relief under Chapter 11 of the Bankruptcy Code. The debtor is in the business of developing and selling real estate projects. Prior to filing its petition, the debtor had entered into an agreement of sale on October 14, 1988 relating to real property in a development called "Gull Point". On December 19, 1988, the sales contract was amended with an addendum providing that the debtor would pay a 3½ percent commission to Indian River Land Company, a real estate agency, and a 3½ percent "attorney's fee" to J. Everett Moore, Jr., Esq.² After filing its bankruptcy petition, the debtor filed an application as debtor-in-possession on April 3, 1989 seeking Bankruptcy Court approval of the debtor's assumption of the agreement of sale.³ Appellant Sussex Trust, a creditor of the debtor, objected to the application. After conducting a hearing, the Bankruptcy Court entered an order on April 14 granting the application. The order approved assumption of the entire agreement of sale, including the commissions addendum.⁴ The order also approved the employment of the professionals⁵nunc pro tunc⁶ to March 30, 1989 as well as professional fees, solely for the purposes of the Gull Point sale. Sussex Trust took this appeal from the April 14 order.

This court hereby reverses that portion of the Bankruptcy Court's order approving the assumption of the commissions addendum to the agreement of sale. The court affirms the Bankruptcy Court's approval of the professionals' employment nunc pro tunc to the date of the petition, for purposes of the Gull Point sale. The court vacates the awards of professional fees and remands this case to the Bankruptcy Court for its consideration of the appropriate amount of fees in light of this opinion.

THE COMMISSIONS ADDENDUM

A district court ruling on an appeal from the Bankruptcy Court may not set aside the bankruptcy judge's findings of fact unless they are clearly erroneous. Bankr.R. 8013 (West Supp.1989). However, the district court has plenary review over legal questions. See F/S Airlease II, Inc. v. Simon, 844 F.2d 99, 103 (3d Cir.); cert. denied, ___ U.S. ___, 109 S.Ct. 137, 102 L.Ed.2d 110 (1988). In addition, the district court reviews discretionary decisions under an abuse of discretion standard. See id.

The debtor in this case had sought approval of its assumption of the agreement of sale pursuant to 11 U.S.C. § 365 and approval of the completion of the sale pursuant to 11 U.S.C. § 363(b)(1). Appendix to Answering Brief, Exhibit G at 57; see In re Gardinier, Inc., 831 F.2d 974, 975 (11th Cir.1987); cert. denied, ___ U.S. ___, 109 S.Ct. 140, 102 L.Ed.2d 112 (1988). Section 365(a) of the Bankruptcy Code provides that the trustee in bankruptcy may assume or reject any executory contract of the debtor, subject to the court's approval. 11 U.S.C.A. § 365(a) (West Supp.1989). A debtor-in-possession has all the powers of a bankruptcy trustee. 11 U.S.C.A. § 1107(a) (West Supp.1989). This court holds that the Bankruptcy Court erred as a matter of law⁷ in its approval of the debtor's assumption of the entire agreement of sale, for two reasons. First, the commissions addendum forms a contract separate from the land sale contract. Second, the commissions contract was not executory, and thus the debtor had no power to assume it.⁸

The first issue the court will address is whether the addendum is a separate contract. An executory contract must be assumed or rejected in its entirety. In re Gardinier, 50 B.R. 491, 493 (Bankr.M.D. Fla.1985). However, the fact that a transaction is set forth in one instrument is not conclusive evidence that the parties intended to make only one contract. In re Gardinier, Inc., 831 F.2d 974, 976 (11th Cir.1987); cert. denied, ___ U.S. ___, 109 S.Ct. 140, 102 L.Ed.2d 112 (1988); see 3A A. Corbin, Corbin on Contracts § 696, at 291 (1960) (a writing may have been executed as a mere memorial of several separate transactions). Two courts that have examined whether a provision for a brokerage commission in a land sale contract is a separate agreement have held in the affirmative. In re Gardinier, Inc., 831 F.2d at 975; In re Moskovic, 77 B.R. 421, 422 (Bankr.S.D. N.Y.1987). In Gardinier, the court looked to several factors in ruling that a brokerage provision was a separate agreement. For example, the court noted that the nature and purpose of a land sale agreement and a brokerage agreement are different. 831 F.2d at 976. The former addresses the sale of property, while the latter is an employment contract. Id. In addition, the court noted that a brokerage agreement involves promises between the seller and the broker only, with no promises running between the buyer and the broker. Id. This court is satisfied that the rationales discussed in the Gardinier opinion, as well as the fact that the commissions addendum was entered into two months after the initial contract, lead to the conclusion that the addendum was a contract separate from the land sale agreement. But see Matter of Steelship Corp., 576 F.2d 128, 133 (8th Cir.1978) (trustee's approval of a sale of assets was also an assumption of the debtor's agreement to pay a brokerage fee).

The next issue the court must decide is whether the commissions agreement was executory, and thus assumable. Whether a contract is executory within the meaning of the Bankruptcy Code is a question of federal law. In re Munple, Ltd., 868 F.2d 1129, 1130 (9th Cir.1989). The Bankruptcy Code contains no definition of an executory contract. The legislative history states that the term "generally includes contracts on which performance remains due to some extent on both sides." S.Rep. No. 989, 95th Cong., 2d Sess. 58, reprinted in 1978 U.S.Code Cong. & Admin.News 5787, 5844. Many courts have adopted the definition of executory contracts set forth by Professor Countryman: "contracts 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." Countryman, Executory Contracts in Bankruptcy: Part I, 57 Minn.L.Rev. 439, 460 (1973); see Sharon Steel Corp. v. National Fuel Gas Distribution Corp., 872 F.2d 36, 39 (3d Cir.1989); In re Munple, Ltd., 868 F.2d 1129, 1130 (9th Cir.1989).

This court finds that the commissions addendum was not executory. The general rule in Delaware is that a broker may recover a commission only when the broker is the procuring cause of a consummated transaction. B-H, Inc. v. "Industrial America" Inc., 253 A.2d 209, 213 (Del. 1969). One exception to this rule is that, if a duly authorized broker produces a prospect ready, willing, and able to meet his principal's expressed terms, the commission has been earned whether or not the transaction is thereafter consummated. Id.; BDB Partnership v. Rehoboth Realty, Inc., 1988 WL 55317 (Del.Super. May 26, 1988). By the time the bankruptcy petition was filed in this case, the agreement of sale was already signed by both parties. The professionals had thus already earned their commissions by procuring a ready, willing and able buyer. The sole remaining obligation of the debtor to pay the commissions cannot be regarded as calling for any further performance on the part of the professionals such that the addendum could be considered executory. See In re Moskovic, 77 B.R. 421, 423 (Bankr.S.D.N.Y. 1987). The commissions addendum is therefore not an executory contract and is not assumable by the debtor-in-possession. See In re Munple, Ltd., 868 F.2d 1129, 1130 (9th Cir.1989); In re Moskovic, 77 B.R. 421, 423 (Bankr.S.D.N.Y.1987); In re Murtishi, 55 B.R. 564, 569 (Bankr.N.D.Ill. 1985) (exclusive listing agreement was not executory when petition was filed; "it is well established that where all the elements of performance have been accomplished leaving only an obligation to pay money, the contract is not executory within the meaning of the statute"); In re Gardinier, 50 B.R. 491, 494 (Bankr.M.D.Fla. 1985).⁹,¹⁰

The bankruptcy court thus erred in approving the assumption of the commissions addendum to the land sale contract. The court failed to examine the question of whether the addendum formed a separate, executory contract assumable by the debtor. The portion of the court's order approving the assumption of the commissions addendum is thus reversed.¹¹

NUNC PRO TUNC APPROVAL

In addition to assuming the contractual commissions, the Bankruptcy Court approved the employment of the professionals nunc pro tunc to the date of the petition, for the purposes of the Gull Point sale only.¹² Section 327(a) of the Bankruptcy Code provides that the trustee, with the court's approval, may employ one or more attorneys or other...