TERRY L. MYERS, Bankruptcy Judge.
On June 15, 2017, Ernest Woodrow Barstad and Christine Ragan Barstad ("Barstads" or "Debtors") filed a chapter 13 petition commencing the above captioned bankruptcy case, Case No. 17-60586.
Several filings in the main case, and in the related adversary proceeding, are now ripe for decision. In the main case, Davidson and Ide filed a Motion to Modify Stay, Doc. No. 112 ("Stay Motion"), and Debtors objected thereto. That matter was heard on April 25, 2019, and taken under advisement. In addition, Trustee filed a motion to dismiss the chapter 13 case, Doc. No. 128, as did Davidson and Ide, Doc. No. 131 (the "Dismissal Motions"). And Debtors filed objections to the proofs of claim of Davidson and Ide, Doc. Nos. 134, 135 (the "Claim Objections"). The Dismissal Motions and the Claim Objections were heard on May 22, 2019, and taken under advisement. In the adversary proceeding, Debtors filed a motion for summary judgment on the preference issue, Adv. Doc. No. 18 ("Debtors' MSJ"), which was argued on April 25, 2019, and taken under advisement.
This Court has jurisdiction under 28 U.S.C. § 1334 and 28 U.S.C. § 157. All matters at issue in the case and adversary proceeding are core proceedings. 28 U.S.C. § 157(b)(2)(A), (B), (F), (G) and (O).
Prior to bankruptcy, Debtors owned a 320-acre ranch property located at 3401 Dry Gulch Road, Ovando, Powell County, Montana (the "Property"). In April 2016, Debtors contracted with an auction company, Albert Burney, Inc. ("Auctioneer"), to sell the Property at an "absolute auction with no minimums or reserves . . . to the highest bidder(s) regardless of bid price." The agreement specified that, upon sale, Debtors would convey the Property by general warranty deed, free and clear of all encumbrances, including but not limited to a mortgage debt of $550,000 Debtors owed to Two Rivers Bank. The Property was to be sold as a whole or alternatively in two separate 160-acre parcels: Parcel #1 (the southern 160 acres, with some improvements) and Parcel #2 (the northern unimproved 160 acres).
The auction was held on June 30, 2016. Davidson was the successful bidder on Parcel #1 at $341,000, and Ide was the successful bidder on Parcel #2 at $154,000. Both had executed Real Estate Auction Terms and Conditions ("REATC") governing the auction sale process and subsequent real estate transactions. The REATC required bid deposits of $50,000 to bid on the entire Property, $30,000 to bid on Parcel #1 and $20,000 to bid on Parcel #2, such deposits to be "in certified funds, or other funds acceptable to the Seller and/or Auction Company[.]" The Auctioneer accepted Davidson's $50,000 personal check and his bank's letter verifying the availability of funds. The Auctioneer also accepted Ide's $50,000 cash bid deposit.
Following the auction, Debtors, Davidson and Ide executed "Agreements to Purchase Real Estate" on their respective parcels (the "Buy-Sell Agreements").
The Buy-Sell Agreements each state that "Seller agrees to sell and convey [the Property] to Purchaser by General Warranty Deed . . . pursuant to" the terms in the Buy-Sell Agreement. Those terms included those in the incorporated and attached REATC. Each Buy-Sell Agreement states that the Seller "acknowledges and agrees" that the sale was pursuant to the auction contract and that the Seller "accepts Purchaser [Davidson and Ide respectively] was the successful bidder." The Buy-Sell Agreements also provide that, upon execution, "a valid and binding contract of sale shall exist under the [following] terms and conditions" and that, should Seller default, "Purchaser may reclaim the earnest money or . . . shall have only the right of specific performance." The Buy-Sell Agreements provided for an August 1, 2016 closing date.
On July 12, 2016, Debtors advised Davidson by letter that they would not perform their Buy-Sell Agreement with him because he had used a personal check for the earnest money. And Debtors sent a July 26 letter to Ide advising that they would not perform their Buy-Sell Agreement with him because his earnest money was provided to the title company the day after the auction and also because they challenged his pre-auction bid deposit. On July 12, 2016, Debtors also sent letters to both Davidson and Ide advising that Debtors intended to sell the water rights separately from the Property.
Davidson and Ide filed complaints in state court seeking specific performance of their Buy-Sell Agreements. Debtors answered and asserted counterclaims. Debtors moved for summary judgment, and Davidson and Ide filed cross-motions for summary judgment. The Powell County District Court denied Debtors' summary judgment motion and granted Davidson and Ide's motions, awarding them specific performance of their Buy-Sell Agreements. Debtors filed their bankruptcy petition six days after the Powell County District Court entered its decision, and Davidson and Ide filed the adversary complaint shortly thereafter.
In addition to the adversary proceeding initiated by Davidson and Ide, Debtors filed their own complaint commencing Adv. Proc. 17-00030. Through it, Debtors removed the Powell County District Court case addressing specific performance, and a second state court case in which Debtors were suing Davidson, Ide, the Auctioneer and a real estate company. The Court, on December 21, 2017, determined that remand of the removed actions was warranted and appropriate.
In the order remanding the state court litigation, this Court terminated the stay of § 362(a) in order for the state court to hear and resolve the parties' disputes and enter appropriate orders and judgments; required the parties to advise this Court of the entry of any such state court orders and/or judgments; stayed enforcement of the state court orders and judgments absent this Court's order; and abstained from hearing matters in Adv. Proc. 17-00027 until the state court had ruled. See Adv. Proc. 17-00030 at Adv. Doc. Nos. 165, 166.
On January 10, 2018, Davidson and Ide advised the Court of a January 8, 2018 post-remand entry of the Powell County District Court's decrees for specific performance. Id. at Adv. Doc. Nos. 169-2 and 169-3.
On February 26, 2019, the Montana Supreme Court affirmed the Powell County District Court decision.
Id. at 647-48. It further held:
Id. at 648.
Debtors assert the Buy-Sell Agreements are executory contracts subject to § 365 of the Code and, as such, Debtors may reject them. Their amended plan, like their two preceding chapter 13 plans, proposes to do so.
Under Mont. Code. Ann. § 27-1-411(2), specific performance is an equitable remedy that is applicable when pecuniary compensation for a defendant's failure to perform pursuant to the terms of a contract fails to afford adequate relief. The Montana statute also provides that specific performance may be compelled where, as here, "it has been expressly agreed in writing, between the parties to the contract, that specific performance thereof may be required by either party or that damages shall not be considered adequate relief." Mont. Code Ann. § 27-1-411(4). See also Hanson v. Hayes (In re Hayes), 2010 WL 2025516, *6-8 (Bankr. D. Mont. May 19, 2010) (recognizing operation of § 27-1-411(4)). And, under Mont. Code Ann. § 27-1-419, a court presumes that a breach of a contract involving the sale of land cannot be relieved adequately by pecuniary compensation. See Boyne USA, Inc. v. Spanish Peaks Devel., LLC, 292 P.3d 432, 444 (Mont. 2013); see also McDonald v. Cosman, 6 P.3d 956, 958 (Mont. 2000) ("Contracts for the sale of real property are specifically enforceable because `[i]t is to be presumed that the breach of an agreement to transfer real property cannot be adequately relieved by pecuniary compensation.' Section 27-1-419, MCA"); Double AA Corp. v. Newland & Co., 905 P.2d 138, 141 (Mont. 1995).
The decision of the Montana Supreme Court clearly and unambiguously held that the Powell County District Court correctly determined Davidson and Ide were entitled to specific performance of their respective Buy-Sell Agreements. The RETAC incorporated into the Buy-Sell Agreements expressly provided for that remedy and result, and the Montana statutory provisions apply.
The Montana Supreme Court's ruling on this aspect of the dispute is preclusive and cannot be relitigated. Mont. Dep't. of Labor & Indus. v. Neff (In re Neff), 2013 WL 6713071 (Bankr. D. Mont. Dec. 19, 2013), holds that, under the Full Faith and Credit Act, the court will apply the preclusion law of the state in which the judgment originates. In Montana, the test for preclusion is (1) was the issue decided in the prior adjudication identical to the one presented in the action in question; (2) was there a final decision on the merits; and (3) was the party against whom collateral estoppel is asserted a party or in privity to a party to the prior adjudication. Id. at *7 (citing In re Houston, 2008 WL 5971043 (Bankr. D. Mont. 2008)).
As discussed further below, it is significant that the operative underlying decision granting specific performance was entered by the Powell County District Court on June 9, 2017, prior to Debtors filing their chapter 13 petition. After this Court ordered that the state court process could continue to conclusion, the post-bankruptcy affirmance by the Montana Supreme Court validated that prebankruptcy decision.
As noted, Debtors' Amended Plan characterizes the Buy-Sell Agreements executed on June 30, 2016, as executory contracts and proposes to reject the same. Doc. No. 126 at 3. The Court finds and concludes that this characterization is incorrect.
Cases such as Benevides v. Alexander (In re Alexander), 670 F.2d 885 (9th Cir. 1982); In re Hertz, 536 B.R. 434 (Bankr. C.D. Cal. 2015); and Zeiler v. Matt (In re Matt), 2013 WL 2250300 (Bankr. D. Mont. May 22, 2013), address the applicability of § 365(a) rejection to a real estate purchase contract. Hertz recognized that, within the Ninth Circuit, the "Countryman" definition
The case law makes it clear that within the Ninth Circuit, the distinction between performance and tender of performance can be critical in determining whether a real estate contract is executory and capable of being rejected. However, here, the Court is presented with more than unfulfilled Buy-Sell Agreements. In this case, there is a pre-petition decision and order by the Powell County District Court that specific performance would be compelled. And, thus, this situation falls outside the Hertz, Matt, and Alexander analysis. Indeed, in cases in which specific performance had been ordered prior to bankruptcy, courts have concluded there is no executory contract.
For example, in In re Smith, 269 B.R. 629 (Bankr. E.D. Tex. 2001), purchasers of real estate sought relief from the § 362(a) stay in order to enforce a pre-petition judicial decree mandating the specific performance of a land sale contract by debtors, and "to preclude any rejection of that contract" by debtors. Id. at 630. The transaction was documented with an earnest money contract executed by the debtors and buyers. It was scheduled for closing but, prior to that time, the debtors informed the listing broker that they were unwilling to consummate the sale. The buyers appeared at closing with certified funds to complete the purchase as per the contract, but debtor failed to appear. The purchasers thereafter brought a lawsuit, and the state court entered an order of specific performance requiring the debtors to convey the property. The debtors thereafter filed a chapter 13 petition. Prior to any plan confirmation hearing, the purchasers brought motions to forbid rejection of the contract and to obtain stay relief in order to enforce the state court order. The debtors objected to both motions contending the earnest money contract was an executory contract which could be properly rejected under § 365 and § 1322(b)(7). Id. at 630.
In addressing the dispute, the court in Smith noted the applicability of the Countryman definition for executory contracts. It then stated:
Id. at 631 (emphasis added).
That court proceeded to distinguish both Alexander and TKO Properties, LLC v. Young (In re Young), 214 B.R. 905 (Bankr. D. Idaho 1997), both of which are relied upon by Debtors in the present litigation. Smith states, apropos to the instant action:
269 B.R. at 632. Smith continues:
Id. at 632-33.
Here, the Powell County District Court decision had not been reduced to judgment prior to Debtors' filing, but the Court concludes this distinction does not make a difference. As found in In re Ter Bush, "A contract for the purchase and sale of real property is no longer executory once that contract has been reduced to a judgment in a specific performance action. . . . Although Debtor's bankruptcy filing prevented [purchaser] from getting a final judgment because of the automatic stay going into effect, that technicality does not cause the Agreement to remain executory." 273 B.R. 625, 628 (Bankr. S.D. Cal. 2002) (citing Glaze and Roxse Homes).
Therefore, this Court concludes, in light of the foregoing case law, that the Powell County District Court decision, entered six days before Debtors filed their chapter 13 petition, and now validated and affirmed by the decision of the Montana Supreme Court, had the effect of rendering the Davidson Buy-Sell Agreement and Ide Buy-Sell Agreement non-executory, and that this eliminates Debtors' ability to reject the same under § 365 and § 1322(b)(7).
As noted, Debtors' Amended Plan is premised upon the ability to reject the Buy-Sell Agreements as executory contracts under § 365 and § 1322(b)(7). Debtors, Trustee, and Davidson and Ide have all addressed this legal issue at length. Even though confirmation is not presently ripe for decision, Debtors' proposed approach cannot be sustained.
Debtors argue that, if the Court rejects the executory contract argument, they are entitled to a ruling on their alternative contention that the Powell County District Court's decision constituted a preferential transfer. That issue is discussed below. They also contend they could propose a "surrender" of the Property in an amended plan as an alternative to § 365(b) treatment, though it was not explained how surrender would comply with the decrees' commands (e.g., conveyance free and clear of encumbrances). Since confirmation of the Amended Plan is not before the Court, and there is no amendment proposing surrender or other treatment, the Court will not address these matters further. It will, however, address Debtors' MSJ, the Dismissal Motions, and the Stay Motions, all of which relate in material ways to the foregoing conclusions.
Summary judgment requires the proponent to establish there is no genuine dispute as to any material fact and the proponent is entitled to judgment as a matter of law. See Rule 7056 (incorporating Fed. R. Civ. P. 56). The standards guiding this Court in evaluating such motions are well established. Richardson v. Wolf Auto Ctr. (In re Richardson), 2018 WL 2338357, *1-2 (Bankr. D. Mont. May 23, 2018).
As noted, Debtors' MSJ on their counter-claim in adversary proceeding 17-00027 asserts that the Powell County District Court decision constitutes a preference under § 547(b) that Debtors can avoid.
While the Court discerns several problematic issues in Debtors' MSJ and supporting submissions, a few are outcome determinative.
Debtors argue that Davidson and Ide are "creditors" and that a "claim" exists for each under § 101(5)(B) because they had a "right to payment" because the Buy-Sell Agreements allowed them to seek repayment of their earnest money or specific performance. See, e.g., Adv. Doc. No. 16 at 5-6.
Section 101(5) provides:
Under this definition, the right to an equitable remedy for breach of performance is a "claim" only if the underlying breach gives rise to a right to payment. "Thus, where a creditor receives a judgment entitling him to specific performance of a land sale contract, that person will have a `claim' if the specific performance decree may be satisfied by an alternative award of monetary damages." Acevedo, 441 B.R. at 435. See also Ter Bush, 273 B.R. at 628-29 (same, citing Roxse Homes, and noting that under California statute it is presumed that a breach of an agreement to transfer real property cannot be adequately relieved by pecuniary compensation). As previously noted, Mont. Code Ann. § 27-1-419 creates a presumption "that the breach of an agreement to transfer real property cannot be adequately relieved by pecuniary compensation[.]" In addition to the statutory presumption, the Buy-Sell Agreements here provide that "If Seller defaults in the performance of this agreement, Purchaser may reclaim the earnest money deposit or the Purchaser shall have only the right of specific performance." Adv. Proc. No. 17-00027 at Doc. Nos. 1-3 at 2 and 1-4 at 2 (emphasis added).
The comments of the court in Acevedo are also instructive. That court stated:
441 B.R. at 436 n.19.
Based on the foregoing, the Court concludes that Davidson's and Ide's rights are established by the, now affirmed, Powell County District Court decision. Specific performance is an equitable remedy, it was provided for by the Buy-Sell Agreements, and it was ordered by the state court prior to bankruptcy. This equitable remedy is not a "claim" under § 101(5)(B). Consequently, Davidson and Ide are not "creditors" as defined under § 101(10)(A), and this raises a barrier to relief under § 547(b)(1).
Debtors contend that the subject "transfer" was the entry of the Powell County District Court summary judgment decision and order. Adv. Doc. No. 16 at 4 (arguing that "transfer" is defined in § 101(54)(D) as a "mode . . . of disposing of or parting with property or an interest in property" and that "[i]n this case, the mode of disposition was a state court summary judgment order commanding the Barstads to transfer two parcel of real estate in satisfaction of purchase funds tendered to them by Creditor Glenn Davidson and Creditor Tom Ide.").
What constitutes a transfer and when it is complete is a question of federal law.
The Powell County District Court decision reflects an order of compulsion. It commands Debtors to perform. They did not do so before filing for bankruptcy relief, and they still have not done so. The state court decision and order is not a "transfer" but, rather, an order compelling a transfer, which transfer will occur when Debtors (or court-appointed persons under the Montana rules) comply and close the sales under the Buy-Sell Agreements.
The Court concludes that Davidson and Ide do not have "claims" and, thus, are not "creditors," and that the Powell County District Court decision is not itself a "transfer." Debtors have failed to carry their burden under § 547(g) to show all the requirements of § 547(b) are met. Debtors' MSJ will therefore be denied.
Dismissal of a chapter 13 case may be ordered under § 1307(c) "for cause, including" those grounds itemized in § 1307(c)(1) through (c)(11).
McCarthy v. Martin (In re Martin), 2016 WL 7188655 at *10 (9th Cir. BAP Dec. 6, 2016) (citing Leavitt v. Soto (In re Leavitt), 171 F.3d 1219, 1224 (9th Cir. 1999)). See also Khan v. Barton (In re Khan), 846 F.3d 1058, 1065-66 (9th Cir. 2017). The factors outlined in Leavitt are:
Leavitt, 171 F.3d at 1224 (citations omitted). The four factors are not all-inclusive, and a court need not find every factor to be proven in order to conclude bad faith has been shown. Khan, 846 F.3d at 1066.
Debtors do not have a history of filing and dismissing bankruptcy cases. Thus the second factor is not at issue. Instead, the parties' arguments for dismissal focus in varying ways on Debtors' approach to the Montana courts' rulings and their proposed plan treatment of the Buy-Sell Agreements. The Dismissal Motions emphasize the third factor—"whether the debtor only intended to defeat state court litigation"—based on the timing of Debtors' filing mere days after the Powell County District Court decision requiring specific performance was entered after a year of litigation.
Khan discussed this third factor:
Id. at 1066.
In Mead v. Loheit (In re Mead), 2010 WL 6259982 (9th Cir. BAP June 15, 2010), the bankruptcy court found that the debtor engaged in lengthy state court litigation with his former spouse and, "[w]hen he exhausted his state court options, Mead filed a chapter 13 bankruptcy petition and plan, listing [the spouse] as his only unsecured creditor and proposing to pay her a 4% dividend on her claim." Id. at *1. The Panel addressed the Ninth Circuit authority regarding the good faith standards under §§ 1325(a)(3) and (a)(7). Id. at *5-7.
Id. at *6-7.
In light of this Circuit authority, the Court in In re Bennett, 2017 WL 2198951 (Bank. D. Mont. May 18, 2017), concluded that a debtor's petition was filed "with the intent to defeat . . . state court contempt proceedings. Avoidance of state court litigation merely needs to be the `primary' motive. Khan, 846 F.3d at 1066, citing Leavitt, 171 F.3d at 1225). Avoiding . . . state court contempt proceedings clearly was Bennett's primary motive in filing his Chapter 13 petition." 2017 WL 2198951 at *6.
Here, the Powell County District Court decision and order was issued after almost a year of litigation stemming from Debtors' refusal to perform and close the Buy-Sell Agreements. About a week later, the chapter 13 petition was filed. The initial plan, filed a few weeks later, proposed to reject the Buy-Sell Agreements and sell the Property. The conclusion that the intent was to avoid the enforcement of the Powell County District Court decision is clear. In Mead's characterization, supra, Debtors "filed bankruptcy seeking to accomplish in bankruptcy court what [they] could not in state court." 2010 WL 6259982 at *6.
Litigation is often a springboard to bankruptcy, and the mere existence of adversely resolved prebankruptcy litigation is not ipso facto evidence of a lack of good faith. The caselaw requires evaluation of the totality of the circumstances. Here, Debtors' assets and liabilities, income and expenses, number and nature of creditors, proposed plans, and the factual circumstances underlying the claims of Davidson and Ide as found by the prebankruptcy Powell County District Court decision, support the finding that Debtors' petition was filed and Debtors' Amended Plan proposed with the "primary motive" and purpose to defeat this state court litigation. Bennett, supra.
The Court finds and concludes that dismissal of this case is appropriate and warranted under § 1307(c).
Davidson and Ide have sought stay relief under § 362(d)(1) and § 362(d)(2) in order to enforce their decrees of specific performance. Dismissal of the case terminates the automatic stay of § 362(a). See § 362(c)(1) ("the stay of an act against property of the estate under subsection (a) of this section continues until such property is no longer property of the estate"); § 362(c)(2)(B) ("the stay of any other act under subsection (a) of this section continues until the earliest of . . . (B) the time the case is dismissed"). The Stay Motion is thus rendered moot.
Davidson and Ide filed proofs of claim, though they explained that this was done as a matter of excess caution in the event Debtors were successful in their executory contract arguments and obtained a ruling allowing rejection. Dismissal of the case eliminates the need to address the allowance or disallowance of claims. The Objections are thus also rendered moot.
Based on the foregoing, the Court finds, concludes, and will order (1) the Dismissal Motions of Davidson and Ide, and Trustee, will be GRANTED and this case will be DISMISSED; (2) Debtors' Motion for Summary Judgment in Adv. Proc. No. 17-00027 will be DENIED; (3) Davidson and Ide's Stay Motion, and Debtors' Claim Objections, are rendered moot by dismissal of the case and, on such basis, are respectively DENIED and OVERRULED; and (4) given the dismissal of the case, the two pending adversary proceedings, 17-00027 and 17-00030, will be dismissed.
2013 WL 1084500 at *5. Debtors' assertion that the Property was transferred by the Powell County District Court decision creates an inconsistency. Here, Debtors previously asserted the Property was property of their estate, see Doc. No. 16 at 3, and their SOFA denied that any "transfers" were made, id. at 35-36.