In Re: Midwest , 174 F. App'x 34 ( 2006 )

Opinions of the United
2006 Decisions States Court of Appeals
for the Third Circuit
3-9-2006
In Re: Midwest
Precedential or Non-Precedential: Non-Precedential
Docket No. 05-2489
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NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT
No. 05-2489
IN RE: MIDWEST PORTLAND CEMENT COMPANY,
Debtor
MARK L. GLOSSER, Trustee
KENTS RUN PARTNERSHIP, LTD.
v.
MAYSVILLE REGIONAL WATER DISTRICT
Kents Run Partnership, Ltd.,
Appellant
On Appeal from the United States District Court
for the Western District of Pennsylvania
(D.C. No. 03-cv-01760)
District Judge: Honorable David S. Cercone
Submitted Under Third Circuit LAR 34.1(a)
February 28, 2006
Before: SLOVITER, FUENTES, Circuit Judges, and BRODY,* District Judge
(Filed March 9, 2006)
OPINION
*
Hon. Anita B. Brody, United States District Court for the
Eastern District of Pennsylvania, sitting by designation.
SLOVITER, Circuit Judge.
At issue is whether a contract entered into by the debtor is executory and therefore
one that the bankruptcy trustee may assume and assign under 11 U.S.C. § 365. Both the
Bankruptcy Court and the District Court held that the contract is not executory.
I.
The relevant facts are undisputed, well-known to the parties, and were set forth in
full in the opinions below. We thus summarize for purposes of this appeal. On March
15, 1993, Midwest Portland Cement Company (Midwest), and appellee Maysville
Regional Water Department (Maysville), entered into a contract for the sale of real
property located in Muskingum County, Ohio. Midwest sold to Maysville: (i) the land
surrounding a water source that Maysville owns called Frazier Quarry; and (ii) a separate
property called Lake Isabella. Each party also secured an easement in the transaction.
Midwest retained an easement through Maysville’s property so that it could construct a
conveyor belt and storage facility for limestone that it mined from an adjacent property
where Midwest had mining rights. That adjacent property is owned by the appellant in
this proceeding, Kents Run Partnership Ltd. (Kents Run). Maysville, in turn, obtained an
easement to run waterlines from the Lake Isabella property across certain adjacent
property that Midwest still owned. The parties recorded a deed on December 22, 1993,
reflecting the sale. Maysville made full payment under the contract.
On May 5, 1997, an involuntary petition placed Midwest in Chapter 7 bankruptcy
proceedings. In 2002, the Bankruptcy Court approved a settlement agreement among
2
Midwest’s Bankruptcy Trustee (the Trustee), Kents Run, and two other companies that,
like Kents Run, were claimants in the bankruptcy proceedings. As relevant here, the
settlement agreement called for the Trustee to seek approval from the Bankruptcy Court
to assume the 1993 contract with Maysville on the ground that the contract is
“executory.” See 11 U.S.C. § 365(a) (“[T]he trustee, subject to the court’s approval, may
assume or reject any executory contract or unexpired lease of the debtor.”). If approved,
the Trustee would then assign the executory contract to Kents Run.1 Kents Run, it
appears, is primarily interested in Midwest’s easement to construct a conveyor belt and
storage facility for stones mined from Kents Run’s property. At the time of the
bankruptcy petition, Midwest had yet to develop its easement.
The Bankruptcy Court denied the Trustee permission to assume the 1993 contract.
It agreed with Maysville that the contract is not “executory” within the meaning of § 365
because the parties’ sale of property became final and complete upon recording their
deed, and neither Midwest nor Maysville has remaining obligations that would constitute
a material breach if unperformed. The Court also concluded that the easement granted to
Midwest is personal and non-assignable. The District Court affirmed. Kents Run P’ship,
Ltd. v. Glosser, 323 B.R. 408 (W.D. Pa. 2005). It too held that the contract is not
executory and concluded, alternatively, that Midwest’s easement is non-assignable.
1
A trustee has authority to assign an executory contract, §
365(f)(1), but must first assume the contract, § 365(f)(2).
3
Kents Run filed this appeal.2 We have jurisdiction under 28 U.S.C. § 158(d). See
Matter of Taylor, 913 F.2d 102, 104 (3d Cir. 1990). The question whether the parties’
contract is executory under § 365 is a legal one subject to de novo review. In re Sunterra
Corp., 361 F.3d 257, 263 (4th Cir. 2004).
II.
Kents Run contends that as of the date of the bankruptcy petition, there were five
unperformed obligations by Midwest and Maysville concerning the two easements
conveyed in the 1993 sale. It contends that (1) Midwest must “more particularly
describe” its easement after it constructs the conveyor belt and storage facility; (2)
Maysville must “more particularly describe” its easement after constructing the
waterlines; (3) Midwest must make any conveyance of the property over which the
waterlines run subject to Maysville’s easement; (4) Maysville must record an appropriate
written document regarding the portion of Midwest’s easement that crosses over Frazier
Quarry; and (5) Midwest must file a document in the chain of title to provide subsequent
purchasers with notice of Maysville’s easement.3 According to Kents Run, the District
2
The Trustee has not appealed the District Court’s judgment,
nor was the Trustee required to pursue an appeal under the terms
of the approved settlement agreement between the Trustee and
Kents Run. App. at 48. Notably, the Trustee and Kents Run did
not make the validity and enforceability of their settlement
contingent or conditional upon the result of the present proceeding.
Id.
3
In the District Court, Kents Run also cited Midwest and
Maysville’s obligation to limit use of the easements to the
4
Court erred in failing to deem the 1993 contract executory based on these unperformed
obligations. We disagree.
This court has defined an executory contract for purposes of § 365 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 the performance of the other.” Sharon Steel Corp. v. Nat’l Fuel
Gas Distrib. Corp., 872 F.2d 36, 39 (3d Cir. 1989) (citations omitted); see also In re
Columbia Gas Sys. Inc., 50 F.3d 233, 239 (3d Cir. 1995) (“[U]nless both parties have
unperformed obligations that would constitute a material breach if not performed, the
contract is not executory under § 365.”). “The time for testing whether there are material
unperformed obligations on both sides is when the bankruptcy petition is filed.” In re
Columbia Gas, 50 F.3d at 240.
The parties agree that the materiality of any unperformed obligation under the
1993 contract must be evaluated under Ohio law. See also id. at 239 n.10. Ohio courts
generally look to the Restatement (Second) of Contracts, which presents five factors as
significant in determining whether a failure to render or to offer performance is material:
(a) the extent to which the injured party will be deprived of
particular purposes for which they were granted. The District
Court rejected that ground because “any use of the property interest
contrary to the right which was granted is a property dispute, not
a breach of the original contract.” Kents Run, 323 B.R. at 417.
Because Kents Run does not pursue this argument on appeal, we do
not address it.
5
the benefit which he reasonably expected; (b) the extent to
which the injured party can be adequately compensated for
the part of that benefit of which he will be deprived; (c) the
extent to which the party failing to perform or to offer to
perform will suffer forfeiture; (d) the likelihood that the party
failing to perform or to offer to perform will cure his failure,
taking into account all of the circumstances including any
reasonable assurances; and (e) the extent to which the
behavior of the party failing to perform or to offer to perform
comports with the standards of good faith and fair dealing.
Russell v. Ohio Outdoor Adver. Corp., 701 N.E.2d 417, 419 (Ohio Ct. App. 1997)
(quoting Restatement (Second) of Contracts § 241).
Kents Run first contends that Midwest and Maysville have yet to “more
particularly describe” their respective easements. As the District Court recognized,
however, these unperformed obligations are conditioned under the terms of the parties’
agreement upon the occurrence of events that have yet to occur. “There is a distinction in
the law between failure of a condition and breach of a duty: ‘Non-occurrence of a
condition is not a breach by a party unless he is under a duty that the condition occur.’”
In re Columbia Gas, 50 F.3d at 241 (quoting Restatement (Second) of Contracts § 225(3)
(1981)).
The terms of the parties’ deed requires a further description of Midwest’s easement
after Midwest constructs the conveyor belt and storage facility. Maysville likewise must
first construct its waterlines before added description becomes an obligation. It is
undisputed that neither Midwest nor Maysville had developed the easements at the time
of the bankruptcy petition. Moreover, Maysville and Midwest were under no contractual
6
duty or promise to create the contemplated improvements on the easements. Absent such
a duty, failure to perform the contingent obligations of further description did not breach
the contract. The same holds true for the claim that the contract is executory due to
Midwest’s obligation to burden any future conveyance with the Maysville easement– any
breach of this obligation could not occur until Midwest conveys the property without
notice of the easement, but Midwest had not conveyed the property, nor was it under an
obligation to convey it, prior to the bankruptcy proceeding.
Kents Run concedes that the parties were under no duty to make the conditions
precedent occur, see Appellant’s Br. at 29, but it argues that a contract that is dependent
upon the occurrence of an event, the happening of which is not the contractual obligation
of any party, can still be an executory contract even though the triggering event had not
occurred as of the date of the bankruptcy petition. Id. at 27. Kents Run cites, without
elaboration, two bankruptcy court decisions holding that a contract for an option to
purchase real estate or an unused right of first refusal on a real estate purchase can be
executory. Id. (citing In re Kellstrom Indus., 286 B.R. 833 (Bankr. D. Del. 2002); In re
Carlisle Homes, Inc., 103 B.R. 524 (Bankr. D.N.J. 1988)). We find, however, that the
law as it applies in the present context is sufficiently clear: “if the remaining obligations
in the contract are mere conditions, not duties, then the contract cannot be executory for
purposes of § 365 because no material breach could occur.” In re Columbia, 50 F.3d at
241. For the reasons stated, the first three unperformed obligations cited by Kents Run
7
were properly held to be mere conditions.4
Kents Run’s final two claims of material breach are that Maysville failed to record
a document regarding the portion of the Midwest easement that crosses over Frazier
Quarry, and that Midwest failed to record a document in the chain of title to provide
subsequent purchasers with notice of the Maysville easement. The District Court held
that the parties’ failure to create and record these documents did not render the contract
executory because “these outstanding duties were not material.” Kents Run, 323 B.R. at
419. The District Court determined that the 1993 deed was effective under Ohio law to
create legally enforceable easements between the parties. To the extent that Midwest and
Maysville have both lost a benefit under the contract insofar as the easements have yet to
be made enforceable against subsequent purchasers, Maysville has expressed its readiness
to execute the appropriate documents, the act of creating and filing those documents is
ministerial, and there is no indication that either party failed to comply with the standards
of good faith and fair dealing. The District Court thus concluded that the unperformed
obligations do not amount to a material breach.
Having reviewed the record, we find no error in the District Court’s analysis.
4
In Judge Brody’s view, the District Court was required to
apply Ohio’s five-factor Restatement test to the first three
unperformed obligations cited by Kents Run, even though those
obligations were contingent obligations. Nonetheless, Judge Brody
agrees that a breach of the three unperformed obligations would not
constitute a material breach under Ohio law and, therefore, the
three obligations do not give rise to an executory contract under
section 365.
8
Kents Run does not dispute that the parties’ deed was sufficient under Ohio law to create
and record the easements as between Midwest and Maysville. Rather, Kents Run takes
issue with the District Court’s application of the Restatement (Second) factors, set forth
supra, in holding immaterial the failure to record documents needed to enforce the
easements against subsequent purchasers. Kents Run argues in particular that the District
Court erred in giving weight to Maysville’s representation that it was prepared to record
an appropriate document concerning the portion of the Midwest easement that crosses
Frazier Quarry, noting that Maysville failed to make that representation prior to the
bankruptcy proceeding. As noted, the petition date marks the time to determine
materiality of unperformed obligations for purposes of § 365, In re Columbia Gas, 50
F.3d at 240, but here Maysville had no notice until the bankruptcy proceeding that
Midwest believed the contract was breached by failure to record the easement document.
Under the circumstances, Maysville’s clear statement of its intention to file the necessary
documents, which by all accounts is a ministerial task, was properly weighed against
finding a material breach. Moreover, the District Court rightly observed that there was no
conduct by either party to the 1993 contract reflecting a lack of good faith or fair dealing.
At bottom, “not every contract that appears executory because it has not been
completely performed is executory for purposes of § 365.” In re Columbia Gas, 50 F.3d
at 244 n.20. We agree with the Bankruptcy Court and the District Court that the contract
here is not executory merely because the parties failed to perform various, non-material
obligations with respect to the easements conveyed. As such, assumption of the contract
9
was properly denied under § 365.5
III.
For the reasons stated, we will affirm the District Court’s judgment.
5
Given our conclusion that the contract is not executory and
cannot be assumed by the Trustee under § 365(a), we need not
reach the question whether assignment of the contract would
impermissibly expand the nature of the easement granted to
Midwest.
10