Bankruptcy Judge Kevin R. Anderson of Salt Lake City declined to employ a strict interpretation of the Countryman definition of an executory contract.
Instead, Judge Anderson identified several grounds for deciding that a contract was no longer executory — or incapable of rejection — even though obligations remained on both sides that would have amounted to breach of contract were they not performed.
The Contract to Sell Land
Years before bankruptcy, the debtor signed a contract to sell one acre of undeveloped land in a three-acre parcel. The purchase price was $250,000. There were numerous conditions to closing, mostly regarding subdivision approval allowing the buyer to build homes on the site.
Also before bankruptcy, the buyer sued the seller in state court, alleging that the debtor had breached the contract by failing to cooperate in obtaining subdivision approval. The state court ruled for the buyer and entered an order requiring specific performance by the seller with regard to its obligations to assist in obtaining subdivision approval.
In his June 11 opinion, Judge Anderson said that the buyer was “on the cusp” of obtaining final approval required for closing when the debtor filed a chapter 11 petition. Within a week of filing, the debtor filed a motion to reject the purchase and sale agreement as an executory contract under Section 365(d).
The Contract Isn’t Executory
Judge Anderson denied the rejection motion on a variety of grounds. In substance, he saw the case as one of seller’s remorse, because the debtor decided after signing the contract that the property was worth more than $250,000. However, seller’s remorse wasn’t the only reason for denying the rejection motion.
Judge Anderson was tasked with deciding whether or not the contract was executory. Naturally, the debtor argued that material obligations remained on its part to render the contract executory, such as conveying title to the buyer. The buyer contended that the order for specific performance by the state court meant the contract was no longer executory.
The argument put the Countryman definition in the forefront.
Harvard Law Professor Vern Countryman defined an executory contract as “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 performance of the other.” Executory Contracts in Bankruptcy: Part I, 57 Minn. L. Rev. 439, 460 (1973).
Judge Anderson said that the Tenth Circuit adopted the Countryman definition, but with a caveat: In agreement with the Seventh Circuit, the Tenth Circuit said that the remaining obligations must be “significant.” Olah v. Baird (In re Baird), 567 F.3d 1207, 1211 (10th Cir. 2009).
To decide whether the debtor’s remaining obligations were significant, Judge Anderson analyzed the state court’s order for specific performance. He found that the state court’s “intent . . . was to remove the Debtor’s discretion as to performance under the [contract] and to require the Debtor to both stop impeding the sale and to take all ancillary steps necessary to close the sale.”
Judge Anderson interpreted the state court as “order[ing] as much specific performance as was possible at that time . . . . to preclude the Debtor from further interfering with [the buyer’s] ability to close the sale.”
Given the import of the state court’s order for specific performance, Judge Anderson concluded that the debtor’s performance “was no longer discretionary or executory, but was merely a ministerial act necessary to carry out the State Court’s directive.” On that basis alone, he ruled that the contract was no longer executory and therefore incapable of rejection.
But Judge Anderson wasn’t through.
Even if the specific performance order did not render the contract non-executory, the Rooker-Feldman doctrine barred Judge Anderson from countermanding what the state court had directed. Named for two Supreme Court decisions, the doctrine bars lower federal courts from engaging in appellate review of state court judgments.
Judge Anderson said that the “practical effect” of rejection would relieve “the Debtor from the rulings and orders of the State Court.” As a matter of comity and the “judicial bar” from Rooker-Feldman, he therefore declined to reject the contract.
But Judge Anderson still wasn’t through.
Even if the contract remained executory and even if Rooker-Feldman did not apply, Judge Anderson said he “would still deny the motion as not being in the best interests of the estate from the perspective of non-insider claimholders and because it is [not] an appropriate exercise of the Debtor’s business judgment.”
Bankruptcy Judge Kevin R. Anderson of Salt Lake City declined to employ a strict interpretation of the Countryman definition of an executory contract.
Instead, Judge Anderson identified several grounds for deciding that a contract was no longer executory — or incapable of rejection — even though obligations remained on both sides that would have amounted to breach of contract were they not performed.
The Contract to Sell Land
Years before bankruptcy, the debtor signed a contract to sell one acre of undeveloped land in a three-acre parcel. The purchase price was $250,000. There were numerous conditions to closing, mostly regarding subdivision approval allowing the buyer to build homes on the site.
Also before bankruptcy, the buyer sued the seller in state court, alleging that the debtor had breached the contract by failing to cooperate in obtaining subdivision approval. The state court ruled for the buyer and entered an order requiring specific performance by the seller with regard to its obligations to assist in obtaining subdivision approval.
In his June 11 opinion, Judge Anderson said that the buyer was “on the cusp” of obtaining final approval required for closing when the debtor filed a chapter 11 petition. Within a week of filing, the debtor filed a motion to reject the purchase and sale agreement as an executory contract under Section 365(d).