Opinion
Case No. 95-10137
April 9, 1996
DECISION AND ORDER ON MOTION TO ASSUME OR REJECT EXECUTORY CONTRACT
THIS MATTER is before the court on the motion of a creditor, Benham's, Inc., (Benham's) for an order setting a time by which the debtor, Little Beaver Enterprises, Inc., (Little Beaver) must assume or reject an executory contract with Benham's. The debtor objected and argued that the agreement between the parties is actually a security interest which should be treated under 11 U.S.C. § 506, rather than § 365. The parties submitted the question of whether the agreement is an executory contract or a security agreement to the court on a stipulation of facts and simultaneously filed memoranda. Now the court, having reviewed the document in question, the arguments of the parties, and the applicable law, and being fully advised enters this decision.
The court has jurisdiction over this matter pursuant to 28 U.S.C. § 157 1334(b). This matter is a core proceeding as defined by § 157(b)(2)(B) (K).
Findings
The parties entered into a contract on June 11, 1992, pursuant to which Little Beaver purchased a liquor business from Benham's. The property sold included real estate, a liquor license, and personalty identified as furniture and fixtures. The parties called this agreement a "Sale Contract, Contract for Deed, Financing Agreement and Security Agreement" (contract).
The debtor defaulted in its payments, and Benham's sent a notice of default on April 27, 1995. No further action was taken until Little Beaver filed this chapter 11 bankruptcy case on June 23, 1995.
The contract is all encompassing. It contains a financing provision under which, after receipt of a down payment, Benham's financed the remainder of the purchase price. Part of this payment, $10,000 was paid on signing. The remainder, $40,000 was paid when the liquor license was transferred to Little Beaver by the City of Casper, Wyoming.
The contract contains a Security Agreement pursuant to which Little Beaver granted a security interest to Benham's in the personal property and the liquor license. Benham's filed a financing statement covering the listed collateral on August 28, 1992 with the Natrona County Clerk.
With respect to the real property, the contract contains a "Contract for Deed." The parties caused a Memorandum of Sale to be recorded in the real estate records of Natrona County on August 28, 1992. This document referred to the Contract for Deed and contained a legal description of the real property included in the sale. No warranty deed from Benham's to Little Beaver was recorded in the real estate records of Natrona County.
An escrow arrangement was set up under the contract, into which the parties deposited a warranty deed from Benham's to Little Beaver and a quitclaim deed from Little Beaver to Benham's, both conveying the subject real property; a reassignment of the liquor license from Little Beaver to Benham's; and a termination statement relating to the filed UCC financing statement.
The contract provided that a bill of sale conveying the personalty from Benham's to Little Beaver would also be escrowed. However, no mention of this is in the escrow instructions and no copy of a bill of sale is in evidence. Payments due under the contract were intended to be paid to the escrow agent. The contract provides that if the payments due under the financing arrangement are paid in full, all documents in escrow will be transferred to Little Beaver.
The contract provided alternative remedies in the event of default by Little Beaver. After notice of default and a failure to cure, Benham's could choose to terminate the agreement, retain the payments made, record the quitclaim deed, initiate the reassignment of the liquor license, and proceed under the Uniform Commercial Code with regard to the personalty by retaining the collateral in satisfaction of the debt. In the alternative, Benham's could accelerate the balance due under the contract, sell the property, foreclose under the Uniform Commercial Code, and sue Little Beaver and the guarantors for a deficiency judgment, specific performance and damages.
In addition, the contract contained the usual list of provisions such as an allowance of attorney fees, an indemnity provision, an integration clause, and a provision for payment of taxes. Nancy and Leslie Spokany, the owners of Little Beaver, executed guarantees of performance of the contract obligations.
Conclusions of Law
In this case, the debtor asserts that the contract is not an executory contract, but rather a note and mortgage (security interest) which can be treated in a chapter 11 reorganization plan under § 506(b). The debtor points to several provisions as controlling: the security agreement in the personalty; the transfer of the liquor license; and the ownership responsibilities which Little Beaver assumed.
Benham's argues that this is an executory contract which must either be assumed and the default cured or rejected pursuant to § 365. The issue raises three (3) questions: what the nature of the contract is under Wyoming law; whether that contract is an executory contract under Federal law; and, if so, when the debtor must assume or reject the contract.
Although the courts interpreting 11 U.S.C. § 365 disagree among themselves, the majority holds that whether a contract is executory and can be assumed or rejected is a question of Federal Bankruptcy law. In re Oven-Johnson, 115 B.R. 254, 257 (Bankr.S.D.Cal. 1990); see, contra, Heartline Farms, Inc. v. Daly, 128 B.R. 246 (D.Neb. 1990), aff'd, 934 F.2d 985 (8th Cir. 1991).
No definition of an executory contract is provided in the Code and courts also disagree over a workable definition. However, most courts adopt the Vernon Countryman definition: a contract is executory when the obligations of both parties are so far unperformed that the failure of either party to complete performance would constitute a material breach, excusing performance of the other. In re Texscan Corp., 976 F.2d 1269, 1272 (9th Cir. 1992). This definition is supported by the legislative history of § 365. In re Terrell, 892 F.2d 469, 471 (6th Cir. 1989).
Whether a breach under a particular contract is material, and therefore excuses performance, is a question of state law. Id. Under Wyoming law, an installment land contract, a contract for deed, provides for the payment of the purchase price over a period of years. The determinative factor in defining a contract for deed is whether title to the real property remains in the seller. McKone v. Guertzgen, 811 P.2d 7281 730 (Wyo. 1991). Under Wyoming law a contract for deed is considered an executory contract. Marple v. Wyoming Production Credit Ass'n., 750 P.2d 1315, 1318 (Wyo. 1988); In re Porter, No. 86-01051-D (Bankr.D.Wyo. July 7, 1987).
Conversely, under the lien theory law of Wyoming, a mortgage is created when title is transferred by deed to the buyer prior to payment. The remedy on default is foreclosure. Id.
An executory land contract under Wyoming law is also an executory contract under § 365. The failure of the buyer to perform, (complete payments) is a material breach. The breach excuses performance by the seller (transfer of title). Cliff Co., Ltd. v. Anderson, 777 P.2d 595, 601 (Wyo. 1989).
In Wyoming, a deed in escrow is not held as security for the payment of the purchase price. The remedy for default is a forfeiture, and a deficiency is precluded. Id. Contrary to the argument of the debtor, the fact that a deed is in escrow does not lessen the significance of title remaining in the seller. The seller retains control of the escrow until payment is complete.
In all cases of contract interpretation, the court must look for, and give effect to the intent of the parties. Prudential v. J J Ventures, 859 P.2d 1267, 1271 (Wyo. 1993). Where a contract is clear and unambiguous, the intent of the parties is determined from the words of the contract. Id.
The parties in this case do not argue that this contract is ambiguous. The contract does contain seemingly contradictory provisions which the parties use to support their individual positions. The court must reconcile conflicting provisions if possible when construing a contract. Shepard v. Top Hat Land Cattle Co., 560 P.2d 730, 732 (Wyo. 1977). Here, the real interpretation problem stems from the inclusion of alternative remedies.
Even though the contract contains separate and different provisions regarding the transfer of the personalty and the real estate, and even though it contains alternative remedies on default, the contract is indivisible and entire. The consideration is not apportioned, the default remedies are interdependent, and the purpose of the contract was to sell a complete business. See In re Plum Run Service Corp., 159 B.R. 496, 499 (Bankr.S.D.Ohio 1993); Baker v. Jones, 69 Wyo. 314, 240 P.2d 1165 (1952). Further, simply because a land sale contract contains alternative remedies does not render that contract ambiguous. Cliff Co., Ltd. v. Anderson, 777 P.2d at 600.
In this case, the contract is clear that the parties did not intend title to the real estate to pass to the buyer until all payments due were completed. Even though ownership of the liquor license was transferred to the debtor, a default in the payments allowed Benham's to immediately close the escrow and reassign the license without the necessity of foreclosing a security interest. A material breach by the buyer established title to the entire business in Benham's. No sale had to be conducted. There is no evidence of an intent to create a mortgage. Thus, the court concludes that the overriding remedy on default is Benham's ability to declare a forfeiture of the entire contract.
The debtor points to the incidents of ownership and the security interest in the personalty as evidence of an intent to create a mortgage. The court sees these provisions as the drafter's attempt to protect Benham's under any and every conceivable circumstance following a default. However, these provisions do not conflict with the overall forfeiture of the business in the event of default.
The court agrees with Little Beaver that Benham's cannot have it both ways. The alternative remedy, suing for a deficiency, is precluded by Wyoming law in this instance. The paramount intent of the contract was to maintain title in Benham's and provide for forfeiture in the event of a material breach.
In summary, the court concludes that the Benham's/Little Beaver contract is an installment contract for the purchase of a liquor business. The contract is executory because title to the real estate has not been transferred; because on default in the payments, the parties intended that Benham's would be excused from transferring title; and because on default by the debtor, ownership of the entire business was established in Benham's.
This chapter 11 case is basically a one-creditor dispute. The case has been pending for nearly ten (10) months while the instant issue was resolved. Therefore, the court believes that no further delay should be necessary. Little Beaver should have 30 days from the date of this order to assume or reject the contract with Benham's at which time the debtor should be able to formulate a proposed chapter 11 plan.
Accordingly, it is ORDERED that the contract between Benham's Inc. and Little Beaver Enterprises, Inc. is an executory contract governed by the provisions of 11 U.S.C. § 365 in this case; and further
ORDERED that the debtor shall have 30 days from the date of this order to assume or reject the contract.