In Re Bellamah Community Development
MEMORANDUM OPINION
This matter came before the Court on Robert W. Lewis’ Motion to compel assumption or rejection of executory contract. Having considered the arguments of counsel, and being otherwise fully informed and advised, the Court issues this memorandum opinion.
FACTS
On October 16, 1985, Bellamah Community Development (buyer), Robert W. Lewis (seller), and Pioneer Trust Company of Arizona (trustee), entered into a trust agreement. The agreement involves the conveyance of a tract of land in Pima County, Arizona. The purchase price is $471,- *339 008.00, with an initial payment of $141,-302.40 and assumption of certain notes and deeds of trust in the amount of $64,217.79. The balance of the purchase price, $265,-487.81 plus interest at 11% per annum is to be paid in equal annual installments in the amount of $71,833.12. The first installment was due October 15, 1986, and the entire balance is to be paid October 15, 1990. Bellamah has made two annual installment payments totalling $143,666.24 for 1986 and 1987. Payments have not been made for 1988 and 1989. Trust agreements such as this one are utilized in Arizona. Lewis conveyed legal title to the land to the trustee, which holds the property for the benefit of both the seller, as first beneficiary, and the buyer, as second beneficiary. The trustee has duties as specified in the trust agreement, among which is to collect and distribute funds, and release the property as it is sold. Bellamah was given possession of the property and the right to develop and sell the land. Upon default, Lewis is required to submit written instruction to the trustee declaring a default. Upon direction of Lewis, the first beneficiary, the trustee must then serve a notice of default on Bellamah, the second beneficiary. If not remedied within 30 days, Lewis may elect to accelerate the sums due by giving written notice to • the trustee. Forfeiture is achieved by written instruction to the trustee, which serves a notice and declaration of forfeiture upon Bella-mah. Under Arizona Revised Statutes § 33-742, there is a nine month redemption period after default. Upon failure to correct the default, all unreleased property, legal and equitable interest and sums paid by Bellamah revert to and vest in the trustee for the benefit of Lewis. Thereafter, Lewis may instruct the trustee to convey all unreleased property and funds to Lewis within 30 days.
DISCUSSION
Lewis asserts that the trust agreement is an installment land sales contract and as such is an executory contract for the purposes of 11 U.S.C. § 365. 1 Bel-lamah argues that the land sale contract is not an executory contract as contemplated by 11 U.S.C. § 365 but is a lien or mortgage device which is not an executory contract.
The question becomes important in that the two are treated differently under the Bankruptcy Code. An executory contract must be assumed or rejected. 11 U.S.C. § 365(d)(2). If the installment land contract is an executory contract and is assumed, any default must be cured, damages paid and adequate assurance of future performance given. 11 U.S.C. § 365(b)(1). No modification of the terms is allowed without agreement of the contracting parties.
In re McDaniel,
Further, Bellamah asserts that the question whether a contract is exec-utory is controlled by federal law. We disagree.
Under New Mexico conflict of law rule, when interpreting a contract, the Court should look to the law of the state where the contract was consummated. A contract is consummated where the last act necessary to its formation takes place.
In re Bennett,
There is no Arizona case law which discusses whether a trust agreement is exec-utory. However,
Lane Title and Trust Co. v. Brannan,
In deciding the issue, the court stated that the subdivision trust was created to fill the need for purchasers of large subdivisions for development, who have a shortage of capital. The trust allows payment for the land with proceeds received on the sale of subdivided lots.
Id.
at 276,
The court compared a subdivision trust with a mortgage, and stated that “merely because a subdivision trust can be used as a security device in place of a mortgage does not mean that it is to be treated as a mortgage.”
Id.
at 277,
Another Arizona case attempted to distinguish between installment land contracts and executory earnest money contracts for the sale of land, and holds that two prior “earnest money” payments did not constitute “installments” or partial payments under typical installment land contracts.
Brigham v. First National Bank of Arizona,
It is the Court’s opinion that the trust agreement is similar to an installment land contract rather than a lien or mortgage. The trustee serves a similar function to that of an escrow agent, the primary difference being that legal title is conveyed to the trustee, whereas an escrow agent holds a warranty deed. However, both trustee and escrow agent collect and distribute funds and convey title to the purchasers upon payment for the property. Under both a trust and a typical installment sales contract there is a provision for default and forfeiture without the necessity of court action as is required with a mortgage. Therefore, we shall continue the analysis *341 on the premise that the trust agreement should be treated as an installment land contract rather than a mortgage.
The courts are split on the issue of whether an installment land sales contract is an executory contract or a lien/mortgage device. Congress did not define the term “executory contract”, however, the definition of an executory contract has been set forth by Professor Vern Countryman and is widely accepted.
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). Legislative history follows this definition as a contract “on which performance remains due to some extent on both sides.”
Shaw v. Dawson,
This jurisdiction rejected the analysis and conclusion in
Booth
in
Shaw v. Dawson,
The
Shaw
court further stated that Congress recognized land sale contracts as ex-ecutory in 11 U.S.C. § 365(i)(1), which describes the rights of a vendee when the debtor is the vendor. Congress could have made an exception where the debtor is the vendee but did not.
Shaw,
Under the trust agreement in the instant case, the sole right and power of the beneficiaries is to enforce the performance of the terms of the trust. Bellamah is still obligated to pay the purchase price. Lewis as the seller has several obligations. As first beneficiary he cannot cause or permit *342 a lien or encumbrance to become a cloud on the title to any trust property. Article II. In the event Bellamah fails to pay taxes, Lewis has the right to advance funds to pay them. Article VII. Upon default, Lewis must declare a default by giving written instruction to the trustee. It must specify the nature of the default or breach. Bellamah is not deemed in default until Lewis completes the written instruction. Article X. The trustee has no independent authority under the trust to declare the default. Lewis may elect to accelerate the sums due if Bellamah fails to cure the default within thirty days. Lewis must give the trustee written notice of the election which becomes effective upon receipt by the trustee. If Lewis elects to accelerate he must cause notice of the election to be served on Bellamah by the trustee. If the default is not cured, Lewis may pursue any remedy at law or in equity or as an alternative may enforce a forfeiture. Lewis must give written instruction to the trustee to serve a notice and declaration of forfeiture to Bellamah. Upon failure by Bellamah to cure the default within the statutory period, all right, estate and interest created by the trust agreement existing in favor of Bellamah in unreleased property become void, and all equitable and legal interest, along with all sums of money paid by Bellamah revert and vest in the trustee for the benefit of Lewis. After the forfeiture is completed, Lewis may instruct the trustee to convey all unreleased property and to deliver all funds held by the trustee to Lewis within 30 days. Article X. Lewis must be available to give approvals or consents under the trust. Article XXXII. And shall give from time to time and within 30 days after request from Bellamah, a statement in writing certifying that the trust agreement is unmodified or if modified, to what extent, and acknowledging that there are no uncured defaults or specifying such defaults. These statements may be relied on by prospective purchasers. Article XXXII.
Thus, under the trust agreement both Bellamah and Lewis have unperformed obligations. The trust agreement is similar to an installment land contract which is held to be an executory contract under Shaw. Bellamah must pay the purchase price and title must be delivered by the trustee, who performs the function of the escrow agent. Lewis has other obligations under the trust as outlined above, and must enforce the terms of the trust upon default to effectuate a forfeiture. Therefore, this Court holds that the trust agreement is an executory contract within the meaning of 11 U.S.C. § 365 and must be either assumed or rejected.
An appropriate order shall enter.
Notes
. 11 U.S.C. § 365(a) provides that the trustee may assume or reject any executory contract of the debtor. 11 U.S.C. § 365(b) provides that if there is a default in the contract by the debtor, the trustee must cure the default, compensate for any loss resulting from the default, and provide adequate assurance of future performance.
. Bellamah cites three Ninth Circuit cases for the proposition that federal law controls, however, this Court is not bound by those decisions.
See In re Cochise College Park Inc.,
.
See In re Rehbein,
. For a line of cases holding that an installment land contract is an executory contract,
see Brown v. First Nat'l Bank in Lenox,