Opinion
21-10806
11-02-2021
In re: WILLIAM BAVER SHARON R. BAVER Debtors
Default List Plus Benjamin Bauer, Esq.
[This opinion is not intended for publication or citation.]
Chapter 13
Default List Plus Benjamin Bauer, Esq.
ORDER SUSTAINING CREDITOR'S OBJECTION TO CONFIRMATION [DOCKET NUMBER 25]
Beth A, Buchanan, Judge
This matter is before this Court on Creditor Venture Real Estate Group, LLC's Objection to Confirmation of Debtors William and Sharon Baver's proposed chapter 13 plan ("Objection") [Docket Number 25] and Debtors' Response [Docket Number 32]. This Court also considers the facts as agreed to in the parties' Joint Stipulation and Exhibits ("Stipulation") [Docket Number 31]. Although the parties initially indicated that they would be amenable to oral argument, they determined after conclusion of briefing that oral argument was unnecessary. Accordingly, this matter is ripe for determination.
I. Factual and Procedural Background
Prior to their bankruptcy filing, Debtors William and Sharon Baver ("Debtors") entered into a Real Estate Purchase Agreement with Venture Real Estate Group, LLC ("Venture") dated September 24, 2020 (the "Agreement") [Stipulation ("Stip."), ¶ 1 and Ex. A]. Pursuant to the Agreement's terms, Venture agreed to purchase residential real estate from the Debtors at 1829 Laredo Drive in Hamilton, Ohio (the "Real Estate") for the purchase price of $102,500 payable at closing [Id.]. The closing was to occur on November 5, 2020 "or within a reasonable time thereafter" [Ex. A].
On October 15, 2020, Venture filed an Affidavit of Title in the Records of Butler County, Ohio to preserve its rights under the Agreement and to provide public notice of Venture's interest in the Real Estate [Stip., ¶ 2].
On or about January 25, 2021, Venture filed a complaint against the Debtors in the Butler County, Ohio Court of Common Pleas seeking specific performance of the Agreement and damages for breach of the Agreement [Stip., ¶ 3]. The Debtors did not participate in the state court litigation [Id.]. Venture moved for default judgment which was granted by state court order dated March 31, 2021 and captioned the Order Granting Plaintiff's Motion for Default Judgment and Ordering Specific Performance ("State Court Order") [Id. and Ex. B]. The State Court Order contained the following language:
Defendants, William C. Baver and Sharon R. Baver, are ordered to specifically perform their obligations under their contract with Plaintiff [Venture] to close on the sale of the property located at 1829 Laredo Drive, Hamilton, Butler County, Ohio 45013 (the "Property"). Specifically, Defendants shall deliver a deed conveying title to the Property of the quality required by Section 5 of the contract no later than April 20, 2021, in exchange for the purchase price, and shall fully cooperate to effectuate the closing. Further Defendants shall transfer possession and occupancy of the Property to Plaintiff at the time of the transfer of title. If the
parties do not arrange for a closing and transfer of possession and occupancy on an earlier date, the parties are to conduct the closing and transfer of possession at 12:00 P.M. (noon) on April 20, 2021 . . . .
It is further ordered that if, by 1:00 P.M. on April 20, 2021, Defendants have not tendered a deed to the Property as provided in Section 5 of the Contract, with the quality of title provided in the Contract, then Plaintiff may petition this Court to judicially impose a deed and closing statement (including allocation of the price) and otherwise to do all things necessary or appropriate to effectuate a closing as contemplated by the contract.[Ex. B (emphasis in the original)].
Shortly before the date for the closing mandated in the State Court Order, the Debtors filed their chapter 13 bankruptcy petition on April 14, 2021 [Stip., ¶ 4]. On that same date, the Debtors filed their chapter 13 plan (the "Plan") [Docket Number 7]. In the Plan, the Debtors propose to reject the Agreement with Venture [Id., ¶ 5.1.6]. They also propose to sell the Real Estate themselves which they believe will supply them with sufficient proceeds from the equity in the property to pay unsecured creditors (although it is unclear whether that includes Venture), 100% on their claims [Id., ¶ 13]. According to the Butler County Ohio Auditor, the Real Estate has an assessed tax total value of $128,070 [Stip., ¶ 6], which equates to $25,570 more than the amount of the purchase price to be paid by Venture in the Agreement.
Both Venture and the chapter 13 trustee filed objections to the Debtors' Plan and the Debtors responded. In their filings, the parties disagree on whether the Debtors can reject their Agreement with Venture as an executory contract.
The chapter 13 trustee objects to confirmation for various reasons including arguments similar to those of Venture [Docket Number 23]. Because this Court denies confirmation of the Debtors' Plan based on Venture's objection, this Court does not address the remaining issues in the chapter 13 trustee's objection at this time. Instead, any remaining issues raised by the chapter 13 trustee will be addressed upon the Debtors' filing of an amended plan.
II. Legal Analysis
Although the Bankruptcy Code provides for the assumption or rejection of executory contracts within a chapter 13 plan subject to the provisions of 11 U.S.C. § 365(a), Venture objects to the treatment of its Agreement as an executory contract in this instance. First, Venture argues that a real estate agreement is not an executory contract capable of rejection. Alternatively, Venture argues that even if the Agreement had been executory, it was no longer so once the State Court Order was entered granting Venture's request for specific performance. Finally, Venture argues that the chapter 13 plan itself is not proposed by the Debtors in good faith.
A. Real Estate Agreements as Executory Contracts
The analysis begins with defining what constitutes an executory contract. The term is not defined in the Bankruptcy Code, but the legislative history for § 365(a) indicates that Congress intended the term to be defined as a contract "'on which performance remains due to some extent on both sides.'" Terrell v. Albaugh (In re Terrell), 892 F.2d 469, 471 (6th Cir. 1989) (citing S. Rep. No. 95-989, 95th Cong., 2d Sess. 58, reprinted in 1978 U.S.C.C.A.N. 5787, 5844; H.R. Rep. No. 95-595, 95th Cong., 1st Sess. 347, reprinted in 1978 U.S.C.C.A.N. 5787, 5963, 6303); see also O'Brien v. Ravenswood Apts., Ltd. (In re Ravenswood Apts., Ltd.), 338 B.R. 307, 311 (B.A.P. 6th Cir. 2006). Taking that definition further, the Sixth Circuit cites with approval the Countryman definition of an executory contract, which is "a contract under which the obligation of both the [debtor] 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." Terrell, 892 F.2d at 471 n.2. The Sixth Circuit noted that, based on the legislative history and language of Section 365, “Congress contemplated that at least some land sale contracts should be classified as executory contracts.” Terrell, 892 F.2d at 471.
In Terrell, the Sixth Circuit notes that a trustee's power to assume or reject an executory contract for the sale of real estate is limited by 11 U.S.C. § 365(i) and (j). 892 F.2d at 471. Sections 365(i) and (j) apply to the rejection of an executory contract for the purchase of real property when the debtor is the seller and the purchaser is either in possession of the property (§ 365(i)) or the purchaser has paid a portion of the purchase price (§ 365(j)). While not relevant to the facts in this case, they do support the Sixth Circuit's proposition that Congress intended at least some real estate contracts to be encompassed within the definition of an executory contract.
While this definition of an executory contract is determined by federal law, the Sixth Circuit noted the relevance of state law to determining whether a land sale contract is executory in nature, citing the Ninth Circuit's "useful and workable analysis":
"the question of the legal consequences of one party's failure to perform its remaining obligations under a contract is an issue of state contract law. While the principles of contract law do not differ greatly from one jurisdiction to another, to the extent that they do, a bankruptcy court should determine whether one of the parties' failure to perform its remaining obligations would give rise to a "material breach" excusing performance by other party under the contract law applicable to the contract."Terrell, 892 F.2d at 471-72 (quoting Hall v. Perry (In re Cochise College Park, Inc.), 703 F.2d 1339, 1348 n. 4 (9th Cir. 1983)). In other words, state law determines whether the obligations of the parties to the contract are so unperformed that the failure to complete performance would constitute a material breach excusing performance of the other party.
In Terrell, the Sixth Circuit concluded that a land contract at issue in that case met the definition of an executory contract. The Chapter 12 debtors had entered a land contract to purchase farmland for a total of $252,000, of which $226,800 was to be paid in installments. 892 F.2d at 470. When the debtors filed bankruptcy five years later, they still owed an outstanding balance of $214,780. Id. However, during the five years prior to the bankruptcy filing, the land had decreased in value and was only worth $160,000. Id. The debtors argued that under state law, the land contract was analogous to a mortgage such that the seller's claim was subject to the cramdown provisions of the Bankruptcy Code. Id. at 472. The seller, on the other hand, maintained that the contract was executory and, if assumed, must be performed according to its terms. Id. at 471. Both the bankruptcy court and the district court approved of the debtors' treatment of the seller's claim concluding that under Michigan law of land sale contracts, the contract was not executory and, thus, the Bankruptcy Code's cramdown provisions were applicable. Id. at 470-71.
On the seller's appeal, the Sixth Circuit reversed concluding that the land sale contract was executory in nature and, thus, the cram down provision did not apply. Terrell at 473. To make this determination, the Sixth Circuit considered the obligations left to be performed by both parties. Id. at 472. Specifically, the debtor-purchasers still had several more years of installment payments and the seller, while having already given the debtors occupancy of the land, had not yet surrendered legal title. Id. With payments and the transfer of legal title left unfinished, the Sixth Circuit concluded that, under Michigan law, "the failure of either party to perform his remaining obligations would give rise to a material breach allowing the other party to avoid continued performance." Id.
Significantly, the Sixth Circuit rejected the debtors' argument and holding of various bankruptcy courts that, under Michigan law, land sale contracts are similar to mortgages in that the vendor continues to hold legal title to the land only as security for payment of the purchase price. Id. The Sixth Circuit noted that:
statements concerning the equitable or legal nature of a vendee's or vendor's interest "are only incidents of or necessary consequences of the right to specific performance, and in seeking to give a simple and easily understood reason for them, courts have frequently said that the vendor 'holds the legal title to the real estate in trust for the vendee and as security for the payment of the agreed consideration.'" Such statements do not change the reality of Michigan law. Under a land sale contract, unlike most mortgages, "performance remains due to some extent on both sides" and the failure of either party to fulfill his or her obligations would excuse the other from continued performance.Terrell, 892 F.2d at 473 (further citation omitted). Thus, based on the definition of an executory contract "intended by Congress," the Sixth Circuit concluded that the land sale contract was "executory within the meaning of section 365 since under state law both parties have substantial obligations left to perform." Id.
Based on Terrell, the Debtors argue that the Agreement with Venture is executory in nature. Simply put, both parties have substantial obligations left to perform: Venture has not yet paid the Debtors the purchase price for the Real Estate and the Debtors have not yet turned over legal title.
Alternatively, the Debtors argue that the Agreement with Venture is executory under the so-called "functional approach" to defining executory contracts considered by the Sixth Circuit in Chattanooga Mem. Park v. Still (In re Jolly), 574 F.2d 349 (6th Cir. 1978). Citing Cardinal Industries, the Debtors maintain that bankruptcy courts in the Sixth Circuit must consider both the traditional Countryman definition cited with approval by the Sixth Circuit in Terrell, and the "functional approach" considered by the Sixth Circuit in Jolly. In re Cardinal Indus., 146 B.R. 720, 729 (Bankr. S.D. Ohio 1992). The functional approach looks to the objectives that rejection is expected to accomplish. Jolly, 574 F.2d at 351. "If those objectives have already been accomplished, or if they can't be accomplished through rejection, then the contract is not executory within the meaning of the Bankruptcy [Code.]" Id. The Debtors argue that rejection of the Agreement will serve two objectives: First, it will benefit the bankruptcy estate by preventing the transfer of the Real Estate, allegedly for less than fair market value. Second, it will benefit Venture by "clarifying" its status as a creditor (versus merely a party to an unperformed contract) thereby entitling Venture to a quantifiable claim for damages.
In response, Venture argues that the Debtors cannot treat the Agreement as executory because, under Ohio law, equitable title transferred to Venture upon the parties' entering the Agreement so it did not become property of the estate when the bankruptcy case was filed, relying on Wood v. Donohue, 736 N.E.2d 556, 558 (Ohio Ct. App. 1999) ("Under the long-recognized doctrine of equitable conversion, where land is contracted to be sold, even under an executory contract, equity treats the exchange as actually taking place when the contract becomes effective.").
While Venture's argument has some appeal under state law equitable principles, it ignores the fact that federal law, and not state law, defines what constitutes an executory contract. Terrell, 892 F.2d at 471. Indeed, the Sixth Circuit rejected the use of similar state law equitable principles under Michigan law when defining an executory contract determining, instead, that a land sale contract is executory in nature so long as substantial obligations on both sides remain unperformed. Id. at 473; see also Ravenswood, 338 B.R. at 315 (concluding that, under Terrell, an Ohio land installment contract remained executory when the vendor still held legal, if not equitable title to the property and the debtor, who was the vendee-purchaser in that case, still had to pay at least part of the purchase price).
Venture's argument would also mean that no Ohio real estate contract ever remains executory once entered into, a conclusion that conflicts with the Sixth Circuit's recognition in Terrell that "Congress contemplated that at least some land sale contracts should be classified as executory contracts." Id. at 471.
Ultimately, this Court need not determine whether the parties' Agreement meets the definition of an executory contract under the Countryman definition or the functional approach because, subsequently, Venture sued the Debtors in state court to obtain an order for specific performance. That request was granted by State Court Order dated March 31, 2021 [Docket Number 31, Ex. B] prior to the Debtors' bankruptcy filing. As explained in the analysis below, the State Court Order granting specific performance is the factor that controls the outcome in this case.
B. Impact of a State Court Order for Specific Performance
Venture argues that the pre-petition state court order granting Venture's request for specific performance and requiring the Debtors to convey the land takes their Agreement outside the context of an executory contract that can be rejected. Venture cites Jolly to support that upon a state court reducing a contract to judgment, a real estate contract ceases to be executory. See Chattanooga Mem. Park v. Still (In re Jolly), 574 F.2d 349 (6th Cir. 1978).
In Jolly, a chapter 13 trustee attempted to reject the debtor's contract to purchase burial plots under which payments remained outstanding. 574 F.2d at 350. However, prior to the bankruptcy filing, the creditor had brought suit after the debtor missed payments and a default judgment had been entered against the debtor for damages. Id. Citing both Countryman and a definition of an executory contract as one involving obligations that continue into the future, the Sixth Circuit concluded that a contract that has been reduced to judgment is no longer executory in nature. Id. at 350-51 ("In this case, there is no obligation for the debtor to do anything in the future. His duty was in the past, he has breached that duty, and had judgment entered against him for that breach.").
The Sixth Circuit noted that the fact that the debtor or the estate might be better off without the burial plots was irrelevant. Jolly at 350-51. "The only obligations Congress allows debtors to reject are executory ones[.]" Id. In bankruptcy cases where the contract "has been breached, and judgment obtained, the precise goal of the rejection provisions [of the Bankruptcy Code] has already been accomplished." Id. at 352.
Unlike Jolly, however, this case does not involve a judgment for breach of contract reducing the claim to a monetary amount of damages. Instead, the State Court Order, labeled a "Final Appealable Order," grants Venture's motion for default judgment and requires specific performance of contractual obligations [Docket Number 31, Ex. B].
This Court found no controlling Sixth Circuit precedent regarding how a state court order for specific performance impacts the executory nature of the parties' underlying agreement. Nonetheless, a clear majority of the cases outside the Sixth Circuit support that a state court order requiring specific performance, much like an order reducing a contract to judgment for monetary damages, is not an executory contract subject to rejection. In re Brick House Props., LLC, 2021 Bankr. LEXIS 1585, at *9-10, 2021 WL 3502914, at *4-5 (Bankr. D. Utah June 11, 2021) ("'Courts agree that the phrase 'executory contract' cannot be applied to a judicial order" including one for specific performance); In re Bennett Enter., Inc., 628 B.R. 481, 488 (Bankr. D. N.J. 2021) (noting that the "vast majority of case law agrees . . . once a state court orders specific performance, the debtor cannot reject that order as an executory contract") (involving the transfer of a liquor license); In re Smith, 269 B.R. 629, 632 (Bankr. E.D. Tex. 2001) (entry of a specific performance decree precludes any attempt to characterize a contract as an executory contract); Roxse Homes, Inc. v. Roxse Homes Limited P'ship, 83 B.R. 185, 187-89 (D. Mass. 1988) aff'd 860 F.2d 1072 (Table) (1st Cir. 1988) (holding that a contract is no longer executory once a judgment for specific performance is entered); Brown v. Bassett (In re Bassett), 74 B.R. 361, 362 (Bankr. D. Colo. 1987) (holding that when a contract for the purchase and sale of real property is buttressed by an order for specific performance entered prepetition, it is no longer an executory contract for § 365 purposes); Rusiski v. Pribonic (In re Pribonic), 70 B.R. 596, 599-601 (Bankr. W.D. Pa. 1987) (finding that a real estate sales agreement was no longer executory after entry of a prepetition decree for specific performance even though the decree had not been enforced to the point of transfer of a deed). But see In re Confer, 2021 Bankr. LEXIS 1545, at *15-19, 2021 WL 2349907, at *6-7 (Bankr. E.D. Cal. June 8, 2021) (denying relief from stay to enforce an order for specific performance of a real estate sales contract where confirmed plan rejected all executory contracts).
The Debtors maintain that this line of cases is not an accurate interpretation of relevant Sixth Circuit case law. First, the Debtors argue that, even with the State Court Order, both parties' obligations under the Agreement remained unfulfilled and executory at the time of the petition filing. Therefore, the Agreement remains executory under the Countryman definition of an executory contract.
The Debtors, however, fail to recognize the important distinction noted by the majority of courts that have considered the effect of an order for specific performance to the executory contract analysis. Although the reasoning is not entirely identical, the majority of decisions support that when a pre-petition order for specific performance has been entered following a debtor's default on contractual obligations, the parties no longer have future obligations under a contract, but instead, have duties imposed by judicial command. See Roxse Homes, 83 B.R. at 187 (holding that a prepetition state court order for specific performance is not an executory contract because it replaces the consensual obligations of contract with a new set of duties imposed by judicial command); In re Smith, 269 B.R. at 632 (upon entry of a pre-petition decree of specific performance, the debtors' obligations are no longer determined by the contract but, instead, defined and governed by the decree). The obligations imposed by court order can be carried out even without the debtor's participation. Brick House, 2021 Bankr. LEXIS 1585, at *10, 2021 WL 3502914, at *4 (noting that "'[o]nce a judgment for specific performance is entered, the parties remaining unperformed obligations become non-material or 'ministerial' acts through which the parties merely carry out the court's directive . . . .'"); Bennett Enter., 628 B.R. at 487-88 (noting that to the extent that either party failed to fulfill its obligations under the specific performance order, state law authorized the completion of such obligations by the court or a court appointed third party, thus rendering any potential remaining obligations of the parties as ministerial); see also Ohio Civ. R. 70 ("If a judgment directs a party to execute a conveyance of land, . . . to deliver deeds or other documents, or to perform any other specific act, and the party fails to comply within the time specified, the court may, where necessary, direct the act to be done at the cost of the disobedient party by some other person appointed by the court, and the act when so done has like effect as if done by the party. . . . If real or personal property is within this state, the court in lieu of directing a conveyance thereof may enter a judgment divesting the title of any party and vesting it in others, and such judgment has the effect of a conveyance executed in due form of law."). Because the obligations now arise from the State Court Order rather than the Agreement, the Agreement is no longer executory and cannot be rejected.
Next, the Debtors argue that the specific performance line of cases fails to consider the functional approach to defining executory contracts, and, therefore, is at odds with Jolly. To the contrary-while these specific performance decisions do not originate in the Sixth Circuit, they harmonize with the basic premise of Jolly. Jolly supports that a contract is no longer executory when it is breached and a judgment has been obtained. Jolly, 574 F.2d at 351-52. At that point, the judgment "is conclusive and may not be collaterally attacked in the bankruptcy court." Id. at 351. Indeed, other courts point to Jolly to support that "the phrase 'executory contract' cannot be applied to a judicial order whether it be a judgment for damages or a judgment or order for specific performance. See Bennett Enter., 628 B.R. at 487; Roxse Homes, 83 B.R. at 187. Treating an order or judgment for specific performance like a judgment for damages also makes sense because specific performance is simply a special form of damages that requires performance of the terms of the contract rather than an award of monetary damages as a remedy for a party's breach of the agreement. Center Ridge Ganley, Inc. v. Stinn, 511 N.E.2d 106, 110 (Ohio 1987); Polzer v. Awig, 2000 Ohio App. LEXIS 2629, at *7-9; 2000 WL 776984, at *3 (Ohio Ct. App. June 15, 2000).
Under Ohio law, "[t]he remedy of specific performance is available when the promisor's failure to perform constitutes a breach of the * * * contract, and a remedy for the breach which is ordinarily available at law, such as money damages, will not afford the promisee adequate relief for a loss arising from the breach." Sorrell v. Micomonaco, 89 N.E.3d 21, 29 (Ohio Ct. App. 2017) (internal quotations and citations omitted). Specific performance is the customary remedy under Ohio law for contract disputes involving real property. Gleason v. Gleason, 582 N.E.2d 657, 672-73 (Ohio Ct. App. 1991); Ferraro v. Cristiano, 2009 Ohio App. LEXIS 4050, at *27, 2009 WL 2915617, at *10 (Ohio Ct. App. Sept. 11, 2009).
Under Jolly, as well as the majority of cases outside the circuit, the Agreement was no longer executory when the final appealable State Court Order was entered requiring specific performance of the contractual obligations. The Debtors should not be permitted to collaterally attack in bankruptcy court what they failed to defend in state court. See Jolly, 574 F.2d at 351. See also Brick House Props., LLC, 2021 Bankr. LEXIS 1585, at *19-22, 2021 WL 3502914, at *7-8 (concluding that under concepts of comity and Rooker-Feldman, a bankruptcy court should not allow a debtor to use § 365 to reject a state court ruling granting specific performance of a real estate purchase contract); RLR Invests., LLC v. City of Pigeon Forge, Tenn., 4 F.4th 380, 392-94 (6th Cir. 2021) (noting that "lower federal courts possess no power whatever to sit in direct review of state court decisions" including state court orders that may not be final so long as the order includes a merit decision as opposed to a ministerial or administrative action).
For these reasons, this Court finds Venture's argument meritorious. The Debtors cannot use the Bankruptcy Code and their chapter 13 plan to reject a state court order for specific performance. Accordingly, Venture's objection to confirmation of the Debtors' Plan is sustained.
Because this Court sustains Venture's objection to confirmation on this basis, this Court does not reach Venture's third argument that the plan should be denied because it was not proposed in good faith.
IT IS SO ORDERED.