Shaw v. Dawson (In Re Shaw)Shaw v. Dawson (In Re Shaw)
MEMORANDUM OPINION AND ORDER
This matter comes on upon an appeal from two orders entered by the United States Bankruptcy Court for the District of New Mexico. Having considered the matter, the memoranda and exhibits submitted by the parties, and the record, the Court finds that the decision of the Bankruptcy Court should be affirmed.
The questiоn presented in this appeal is whether the Bankruptcy Court was correct in holding that a real estate contract, in which the debtors are the purchasers of the land, is an executory contract subject to the provisions of 11 U.S.C. § 365. The Shaws, appellants herein, are debtors-in-possession in this proceeding under Chapter 11 of the Bankruptcy Code. In May, 1980, the Shaws assumed a contract to purchase from Sam Dawson, appellee herein, a tract of land of some 800 acres near Cebolla, New Mexico. Dawson originally made a contract to sell the land to a Mr. and Mrs. Garber, in November of 1979. The contract was for a purchase price of $160,000, with $10,000 due on the date the contract was executed, $10,000 due on or before April 15, 1980, and the principal balance of $140,000, plus interest at nine percent, to be paid in monthly payments of $1,175. In May, 1980, the Garbers assigned the rеal estate contract to the Shaws. The Garbers apparently had paid Dawson the first $10,000 of the down payment. At the time they were assigned the contract, the Shaws paid Dawson an additional $5,200 in cash toward the second $10,000 portion of the down payment, and canceled a debt of $4,800 that Dаwson allegedly owed to them.
The Shaws allege that they made 37 payments under the contract in the amount of $1,175 each. They apparently became financially unable to meet the monthly payment due June 15, 1983, and have made no subsequent payments. Judging that they were in default under the contraсt, Dawson sent a “30 day notice” to the Shaws. The contract provides that if a default occurs, and is not cured within thirty days after the seller notifies the defaulting buyer, the seller may terminate the contract and retain, as rent, all sums paid by the buyer up to that time. This contract, including the thirty day notice and forfeiture provisions, is apparently the standard form for a real estate contract in New Mexico.
The Shaws filed a petition for relief under Chapter 11 of the Bankruptcy Code on June 22, 1983, before the thirty day “no
The Bankruptcy Court denied approval of the disclosure statement on June 16, 1984, and, on October 15, 1984, it denied approval of the debtors’ Amended Disclosure Statement. Prior to thе second denial, Dawson’s motion for relief from the automatic stay came on for a hearing. The court ruled, in its order entered August 30, 1984, that the real estate contract between Dawson and the Shaws is an executory contract, and that the debtors-in-possession must either assume or rejeсt the contract not later than November 1, 1984. The Shaws filed a motion to vacate the court’s August 30th order, which the court denied on October 29, 1984. The Shaws then brought this appeal from the Bankruptcy Court’s August 30th and October 29th orders. They contend that both orders, which held in essence that the real estate сontract at issue is an executory contract which must be assumed or rejected pursuant to 11 U.S.C. § 365, are in error.
11 U.S.C. § 365(a) provides that the trustee (or the debtor-in-possession, who holds the power of a trustee) may assume or reject any executory contract of the debtor. Subsection (b) provides that if there has been a default in the contract by the debt- or, the trustee, at the time of assumption, must cure the default, compensate the other party for any loss resulting from the default, and provide adequate assurance of future performance. In the case at bar, the Shaws were not financially able to cure the default nor to provide adequate assurance of future performance at the time set by the court for them either to affirm or to reject the contract. Therefore, the court’s order had the practical effect of forcing them to reject the contract and lose the land.
The court was not simply acting in a discretionary manner in ordering the debtors to assume or reject the contract. Subsection (d)(2) provides that an executory contract should be assumed or rejected at least by the time of confirmation of a plan of reorganization, and at a specified time before confirmation on the request of the other party to the contract. The ultimate consequence of the various provisions of section 365 is that if this contract is deemed to be an executory contract, within the scope of section 365, forfeiture of the land by the Shaws appears to be unavoidable.
“Executory contract” is not defined in section 365, nor in any other section of the Bankruptcy Code. The legislative history of section 365 indicates, however, that Congress intended the term to be defined as a contract “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., & Ad. News 5787, 5844; H.R. Rep. No. 595, 95th Cong., 2d Sess. 347, reprinted at 1978 U.S. Code Cong. & Ad.News 5787, 5963, 6303. This definition essentially follows the definition of an executory contract formulated by Professor Countryman in his seminal article on the topic. Countryman, Exec-utory Contracts in Bankruptcy: Part I, 57 Minn.L.Rev. 439 (1973). According to Countryman, an executory contract for purposes of the bankruptcy statutes is “a contract under which the obligations of both the bankrupt and the other party are so far unperformed that failure of either to complete performance would constitute a material breaсh excusing the performance of the other.” Id. at 460.
The Shaws rely on
In re Booth,
First, and most important, the court in Booth appears to have ignored the legislative history of section 365, and to have somewhat abandoned the usual rules of statutory construction. As stated above, Congress appears to havе contemplated that the term “executory contract” should be given the meaning formulated by Professor Countryman: a contract in which performance remains due to some extent on both sides. A real estate contract falls within the scope of that definition. Moreover, section 365 itself specifically treats real estate contracts as executory contracts. Subsection (i)(l) states, “If the trustee rejects an executory contract of the debtor for the sale of real property ..., under which the purchaser is in possession, such purchaser may treat such сontract as terminated, or, in the alternative, may remain in possession of such real property....” The subsection goes on to set forth the rights and obligations of the parties when this situation arises.
Two conclusions flow from Congress’ decision to include subsection (i) in the statute. First, Congress clearly viewеd an uncompleted contract for the purchase of land where the purchaser is in possession as an executory contract. It concluded that section 365 does apply to such contracts, and that an express exception was necessary in order to deal with a рotentially unfair situation that could arise from the statute’s general application. Second, the fact that Congress was silent in regard to the situation in which the debtor is the purchaser under such a contract should riot be interpreted as giving license to the courts to create an additionаl exception for debtor-purchasers. Congress’ express action in the first situation, in conjunction with its silence in the second, compels the conclusion that Congress did not intend that an exception exist for a debtor-purchaser. As the court stated in
In re Roman Crest Fruit, Inc.,
In
Booth,
the court held that the determination of whether a contract is ex-ecutory, subject to section 365, should be
[I]f the vendee becomes a bankrupt and his trustee finds it is not feasible to assume the contract and рerforce rejects it, he will have no better rights than the vendee after default and may find that state law forfeits the payments already made. But this is only because the bankruptcy law now confines ... the vendee’s trustee on the vendee’s bankruptcy to the vendee’s rights under state law. It need not do sо. It could be written to invalidate state-tolerated forfeiture provisions in private contracts.
Countryman, supra at 473.
New Mexico courts have not held forfeiture provisions in real estate contracts invalid. In
Shindledecker v. Savage,
In contrast, courts in other jurisdictions have construed real estate contracts as mere security devices. In bоth
Matter of Patch Graphics,
The fact that the deed for the land at issue in this case was placed in escrow by the seller, for delivery to the purchaser upon completion of payment, does not constitute full performance of the contract by the seller, so as to render the contract non-executory. Performance, payment of the price by the buyer and delivery of the deed by the seller, remains due on both sides. “The commentators agree that a contract to sell real property is executory where the deed has not been delivered and the purchase рrice not paid in full.”
In re Roman Crest Fruit, Inc.,
The Bankruptcy Court was correct in ruling that the real estate contract at
Now, therefore,
IT IS BY THE COURT ORDERED that the orders of the United States Bankruptcy Court for the District of New Mexico, entered August 30,1984 and October 29,1984 in cause No. 11-83-00750 MA, are affirmed.