In Re James R. Corbitt Co.
MEMORANDUM OPINION
The debtor was a residential builder. At issue are three claims arising out of contracts for new homes for which the debtor collected deposits from the purchasers but never completed the houses.
Following the filing by the debtor of a voluntary petition under Chapter 11 of Title 11 of the United States Code (hereafter the “Bankruptcy Code”), three couples who had contracted to purchase houses and had paid deposits executed agreements assigning to Area Consultants, Inc. (hereafter “ACI”) their claims against the debtor.
As filed by ACI each claim has two (2) parts, “Claim A” for earnest money deposited but not returned, and “Claim B” for breach of contract damages based on the debtor’s failure to construct and convey the house. The claims assert further that each of the purchasers is entitled to the $900.00 customer deposit priority provided in section 507(a)(5) of the Code under the “Claim A” or unreturned deposit portion of each claim. 1 ■ All three claims involve contracts signed by both husband and wife, and the priority, accordingly, is asserted as to both spouses for a total of six priority claims.
The trustee has objected to both the “A” and “B” portions of the claims on several grounds. Regarding the claim for priority, *939 the trustee argues that, at most, each claim should be accorded only a single $900.00 priority because in each case there was only one agreement and one deposit made, for the purchase of a single house. 2 The trustee argues further that the priority claims should be denied in their entirety because the legislative history of section 507(a)(5) indicates a congressional intent to limit the priority to deposits placed with retail merchants. The trustee objects to the breach of contract claims on the grounds that such claims, for damages based on loss of the benefit of the bargain, are barred by the express language of the contract, barred under Virginia law, and, further, that any damages thereunder are too hypothetical and speculative to support an award.
Priority Claims for Customer Deposits Section 507 of the Bankruptcy Code provides as follows:
(a) The following expenses and claims have priority in the following order:
(5) Fifth, allowed unsecured claims of individuals, to the extent of $900 for each individual, arising from the deposit, before the commencement of the case, of money in connection with the purchase, lease, or rental of property, or the purchase of services, for the personal, family, or household use of such individuals, that were not delivered or provided.
There is nothing in this statutory language to support the trustee’s contention that only one $900.00 priority should be awarded for each claim here. It is axiomatic that words used in a statute are to be given their ordinary meaning in the absence of persuasive reasons to the contrary.
Burns v. Alcala,
The Court has found only one case concerning
In the instant case each of the contracts was signed by both husband and wife. If the debtor had completed the house, each spouse would have been equally liable for consummating the purchase and each would have owned an undivided, but alienable, one-half interest in the property. This Court can find no reason to attribute to the word “individual” any meaning other than the commonly understood meaning of one natural person. Congress could have limited married couples to one priority claim but did not do so.
The trustee’s argument that the legislative history of
The few Courts that have considered the issues raised by the trustee have ruled consistently in favor of individual consumers as that term is commonly understood, and equally consistently have ruled against corporations, banks or other business entities attempting to assert the priority.
Matter of CSY Yacht Corporation,
Accordingly, the objections of the trustee to
Breach of Contract Damage Claims
Part B or “Claim B” of each of the claims at issue is a claim for damages based upon the debtor’s failure to construct and convey a house to the purchasers. In each claim, the amount demanded is the difference between the contract price and the alleged reproduction cost, as shown in appraisals made as of July 1 and September 21, 1981, less the deposit paid.
It appears that ACI ordered the appraisals to be made as of the summer of 1981 in order to coincide with the time ACI believed that breach of the contracts occurred. This apparently was the time when the prospective purchasers concluded that the debtor was unwilling or unable to build the houses.
The contracts between the debtor and these purchasers were executory contracts. As such, the effective date of any breach is controlled by the provisions of section 365 of the Bankruptcy Code. 4 The debtor originally filed a petition under Chapter 11 on March 19, 1981 and converted to Chapter 7 on January 19, 1983. Section 348, accordingly, must be read together with section 365 to determine the effective date of the debtor’s breach.
Section 365(d)(2) provides:
(2) In a case under chapter 9,11, or 13 of this title, the trustee may assume or reject an executory contract or unexpired *941 lease of the debtor at any time before the confirmation of a plan, but the court, on request of any party to such contract or lease, may order the trustee to determine within a specified period of time whether to assume or reject such contract or lease.
Conversion of this case to Chapter 7 triggered the operation of
In this case the trustee did not act to assume or reject the contracts within sixty days of the conversion to Chapter 7 on January 19, 1983, and said contracts thus were deemed rejected by operation of law on March 20, 1983.
ACI, as assignee of the potential purchasers, seeks damages for the loss of the bargains made with the debtor. Initially the trustee objects on grounds that the purchasers waived their right to any recovery beyond refund of payments made when they executed the contracts, all of which contained the following language:
9. In the event that SELLER shall determine, in good faith, and for reasons beyond its control including any cause specified in Paragraph 4(A) [Acts of God, etc.] and including any pending or declared government moratorium that the house purchased hereunder cannot be completed and made available for occupancy prior to the time provided for settlement hereunder or within a reasonable time thereafter, or if SELLER shall be unable to deliver good and marketable title to the property this agreement may be cancelled at the option of the SELLER upon ten (10) days’ written notice to the BUYER. In the event of cancellation as provided for in this paragraph 9, SELLER’S liability shall be limited to the return of all moneys paid hereunder by the BUYER and upon such return, this agreement shall be null and void and SELLER shall be released from all obligations hereunder.
In Virginia, parties to a contract may provide the remedy that will be available to them in the event of breach so long as that remedy is not contrary to law or public policy. Such remedy may be exclusive only if the language clearly shows an intent that the remedy be exclusive, and it is the duty of the court to determine the intent of the parties from the language they employ.
Bender-Miller Co. v. Thom-
*942
wood Farms, Inc.,
The Court notes that the contract document is a printed form contract of the debtor and that the purchasers, accordingly, had little bargaining power concerning terms other than price and completion date. It is doubtful that either party intended to include the financial collapse of the builder among the events justifying cancellation, so that any attempt to discern the parties’ intent regarding damages in the present circumstances would involve the Court in reckless speculation. Moreover, paragraph 9, by its terms, requires the debtor to have given the purchasers ten days’ written notice of cancellation, which notice apparently never was given.
Accordingly, the Court concludes that any exclusivity of remedy provided for in Paragraph 9 of the contract would be insufficient, standing alone, to deprive the purchasers of a claim for damages.
In Virginia, the measure of damages for breach by the seller of a contract to convey real property is limited to the return of purchase money actually paid, with interest, absent special circumstances justifying exception to the rule.
Horner v. Holt,
In Horner v. Holt, supra, the court found that the builder-seller had willfuly refused to construct and convey to the purchaser pursuant to the contract because the price of materials had risen sharply. Because the seller’s breach was willful, the court held that the purchaser was entitled to damages for the loss of his bargain. Homer v. Holt, supra.
ACI has failed to demonstrate any bad faith, willful neglect, refusal, self-imposed inability such as conveyance to another, fraud, or collusion on the part of the debtor. Thus, the Virginia rule limits damages here to recovery of any purchase money actually paid plus interest from the date of payment.
Boston v. DeJarnette,
Accordingly, we find it unnecessary to reach the trustee’s final objection which concerns the issue of whether ACI’s appraisals of “comparable” properties as of July 1 and September 21, 1981 are too speculative a measure of damages in light of the March 18, 1981 effective date of debtor’s breach of the three contracts. 7 Nor it is necessary to reach the question whether it is the “market value” or the “reproduction cost” in said appraisals which ought to be taken as the proper measure of damages.
Accordingly, “Claim B” of Claims 84, 85 and 86, for damages for breach of contract, will be disallowed.
An appropriate Order will enter.
Notes
. This case is controlled by the provisions of the Bankruptcy Code as they existed at the time the case was filed, March 19, 1981.
. The trustee states that he has paid ACI $900.00 in behalf of each of the three claims, for a total of $2,700.00. ACI acknowledges receipt of payment on behalf of the claims of purchasers Patricia and John Boyer and Una and Kevin Mahar only, for a total of $1,800.00. ACI does not acknowledge receipt of any payment on behalf of the claim of purchasers Sally and John Powell.
. “[a] consumer that pays money on a lay-away plan or as a deposit on merchandise, or that buys a service contract or a contract for lessons or a gym membership, is a general unsecured creditor of the business to which he has given his money. Very few consumers are aware of their status as general unsecured creditors. If the merchant involved files under the bankruptcy laws, the consumer is usually left holding the bag. Though he assumed his deposit was tantamount to a trust fund, he gets nothing from the estate of the debtor, because the assets available provide little return to unsecured creditors. Because of his ignorance and his inability to bargain with a retail merchant, he is unable to do a credit investigation or obtain special terms from the merchant, as a true creditor may do. A recent example is the W.T. Grant bankruptcy. All customers who held “Grant's script” have essentially lost their deposits.
“In order to remedy this problem and to reorganize [sic] the position of consumer creditors as different from that of business creditors, the bill provides a priority for consumer creditors of a bankrupt business."
H.R.Rep. No. 595, 95th Cong., 1st Sess. 188 (1977), U.S.Code Cong. & Admin.News 1978, 6148, 6149.
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. If the debtor-in-possession or trustee had rejected the contracts during the Chapter 11, without having previously assumed them, the same effective date of breach would apply pursuant to
. For purposes of determining the status of these claims, the breach date of these contracts relates back and becomes effective March 18, 1981, pursuant to the provisions of