November 16, 2015
What does a purchaser do when he or she is about to close on the perfect house, but the seller files for bankruptcy? The options for the purchaser are limited, largely because of 11 USC 365. 11 USC 365 provides that a debtor-in-possession or a trustee may assume or reject any executory contract. “Rejection denies the right of the contracting creditor to require the bankrupt estate to specifically perform the . . . executory portions of the contract. Rejection also limits the creditor’s claim to damages for breach of contract.” Leasing Serv Corp v First Tenn Bank Nat'l Ass'n, 826 F2d 434, 436 (6th Cir., 1987). In other words, a purchaser may have a claim for damages – costs of finding another perfect house. However, a purchaser cannot request specific performance of the contract.
The Bankruptcy Court for the Western District of Michigan has addressed this very issue in a footnote. The facts of In re Sturgis Iron & Metal Co, 420 BR 716 (Bankr WD Mich, 2009) are largely unimportant. However, the footnote in the case highlights a purchaser’s right, or lack thereof, to enforce the agreement by way of specific performance.
[S]ince specific performance is seldom available as a remedy, and when it is (e.g., when real estate is involved), the stay imposed by Section 362(a)(3) provides the needed protection. Consider, for instance, what happens when the debtor files his case after agreeing to sell property but before actually closing the sale. Although non-bankruptcy law would typically permit the purchaser to compel performance in lieu of receiving damageshad the debtor not [f]iled for bankruptcy relief, the automatic stay would keep the purchaser at [b]ay until the trustee had had sufficient time to decide whether to reject the contract. If the trustee were then to reject it, that rejection would excuse the estate from what otherwise had been its obligation under state law to specifically deliver the deed as had been promised. Conversely, if the trustee were at that time to assume the contract, then the trustee could continue to demand the promised payment from the contract's buyer provided the requirements of Section 365(b) had otherwise been met. [In re Sturgis Iron & Metal Co, 420 BR 716, 722 n 14 (Bankr WD Mich, 2009).]
Remarkably, the debtor/seller is permitted to request specific performance of the executory contract. “[T]he estate, as the debtor/seller's assignee, would have the right to enforce the contract against the buyer while the buyer would not have the reciprocal right to enforce the same contract against the estate. But, compare, Section 365(i). where, by operation of the Bankruptcy Code itself, a land contract vendee who is in possession can still compel from the estate performance of the underlying land contract.” In re Sturgis Iron & Metal Co, 420 BR 716, 722 n 14 (Bankr WD Mich, 2009).
The above scenario tends to be highly fact sensitive. A debtor or a purchaser in this type of situation needs immediate advice to negotiate a favorable outcome during a bankruptcy proceeding. The attorneys at Keller & Almassian are seasoned attorneys in the area of bankruptcy and bankruptcy-litigation, and can guide the debtor or purchaser to a favorable outcome.
 See previous posting addressing land sale contracts in bankruptcy.