Opinion ID: 416544
Heading Depth: 3
Heading Rank: 2

Heading: Payments Received On or After June 5, 1972 and Before

Text: 43 August 6, 1973. 44 Payments received on executory contracts on or after the date of filing but prior to August 6, 1973 became property of the estate yet give rise to administrative expense claims against the estate in the amount of those payments. 45 An executory contract of the bankrupt vests in the trustee, if at all, only if the trustee affirms the contract. Palmer v. Palmer, 104 F.2d 161, 163 (2d Cir.), cert. denied, 308 U.S. 590, 60 S.Ct. 120, 84 L.Ed. 494 (1939); 4A J. Moore & L. King, Collier on Bankruptcy p 70.43, at 524-25 (14th ed. 1978). Until rejection, however, the executory contract continues in effect and the non-bankrupt party to the executory contract is not a creditor with a provable claim against the bankrupt estate. See Mohonk Realty Corp. v. Wise Shoe Stores, Inc., 111 F.2d 287, 290 (2d Cir.), cert. denied, 311 U.S. 654, 61 S.Ct. 47, 85 L.Ed. 418 (1940). 46 Where a bankrupt is in reorganization under Chapter X, the trustee need not affirm or reject an executory contract until a reorganization plan is submitted. 6 J. Moore & L. King, Collier on Bankruptcy p 3.23, at 580 (14th ed. 1978); see In re American National Trust, 426 F.2d 1059, 1064 (7th Cir.1970); Mohonk Realty, 111 F.2d at 290. If the trustee fails to adopt the executory contract in the reorganization plan, the contract is deemed rejected, as of the date a petition was originally filed under the Act. See In re Gravure Paper & Board Corp., 234 F.2d 928, 930-31 (3d Cir.1956). 47 Where the bankrupt estate is in liquidation, the trustee to affirm an executory contract must do so by the later of the date 30 days after the trustee's appointment and the date 60 days after the adjudication of bankruptcy. Bankruptcy Act Sec. 70b, 11 U.S.C. Sec. 110(b) (1976). If the trustee fails to affirm the contract during that period, it is deemed rejected as of the date of the original filing of a petition under the Act. Bankruptcy Act Sec. 63c, 11 U.S.C. Sec. 103(c) (1976); Gravure Paper & Board, 234 F.2d at 931. 48 The rejection of an executory contract, whether by law or by affirmative act of the trustee, constitutes a breach of such contract ... as of the date of the filing of the petition initiating a proceeding under this title. Bankruptcy Act Sec. 63c, 11 U.S.C. Sec. 103(c) (1976). 12 The anticipatory breach gives rise to a claim provable against the bankrupt estate for damages arising from the breach. Bankruptcy Act Sec. 63a(9), 11 U.S.C. Sec. 103(a)(9) (1976). 13 The claim for damages is treated on a parity with other similar claims. In re Maryvale Community Hospital, Inc., 456 F.2d 414, 418 (9th Cir.), cert. denied, 409 U.S. 879, 93 S.Ct. 133, 34 L.Ed.2d 133 (1972); see Matter of Greenpoint Metallic Bed Co., 113 F.2d 881, 884 (2d Cir.1940) (arrangement proceeding). 49 Where the trustee does not submit a plan of reorganization and does not explicitly affirm the contract either during the period of reorganization or within the 60 days after the termination of reorganization, a contract that is executory on the date of the original filing under the Act is deemed rejected by operation of law on the later of the date 30 days after the appointment of the trustee and the date 60 days after the date of the adjudication of bankruptcy that terminates the reorganization period. Thus, in this case, all of the land sale contracts that were executory on June 5, 1972 were rejected by operation of law on August 6, 1973, effective June 5, 1972, and hence were breached by Cochise as of June 5, 1972. 14 The lot purchasers whose contracts were executory on June 5, 1972 were therefore not obligated to make payments on the notes after June 5, 1972, the date of the breach of those contracts. 15 Nevertheless, some of the purchasers here did continue to make payments on the executory contracts after the date of the breach of the underlying contract but before the date upon which the rejection took place. 50 Payments on a rejected executory contract made after the rejection takes place are not property of the estate. See infra Part II(B)(3). Since title to such contracts does not vest in the trustee, the trustee has no right to enforce them. The Bankruptcy Act does not address, however, the status of payments that are made to the trustee after the effective date of rejection but before rejection has occurred by action of the trustee or by operation of law. 51 Appellants contend that payments made on an executory contract in the period between the June 5, 1972 filing and the August 6, 1973 rejection should be treated not as property of the estate but as property held by the trustee in a constructive trust for the purchasers pending rejection. Under this approach, where the executory contract is affirmed, the payments at the moment of affirmance become property of the estate. On the other hand, where the executory contract is ultimately rejected, the interim payments are returned dollar-for-dollar to the purchasers. Under this theory, the use of such payments to pay the administrative expenses of the estate would be improper since the payments never become property of the estate. 52 Perry argues in response that payments made in the interim between the original filing and rejection or affirmance should be treated the same as payments on executed contracts. Under Perry's theory, the lot purchasers are as to these payments mere general creditors of the bankrupt estate. 53 We reject both positions. In light of the policies underlying the treatment of executory contracts under the Act, we conclude that payments received by the trustee on an executory contract during the period between the date of filing and the date of rejection do become property of the estate. However, these payments give rise to claims against the estate of an administrative expense priority in the amount of the reasonable value of the consideration tendered to the trustee. In reaching this conclusion, we find support both in previous case law and in the policies underlying the Act. 54 This treatment of executory contracts is supported by the well-settled principles governing treatment of creditors of a bankrupt who confer benefit on the bankrupt estate after the date of filing of a bankruptcy petition. Where the consideration supporting the claimant's right to payment is both supplied to and beneficial to the trustee in the operation of the bankrupt's post-filing business, the consideration becomes property of the estate but the right to payment is accorded first priority under section 64a(1) of the Bankruptcy Act. 16 See 4A J. Moore & L. King, Collier on Bankruptcy p 70.43, at 524 (14th ed. 1978); cf. In re Health Maintenance Foundation, 680 F.2d 619, 621 (9th Cir.1982) (denying priority to severance pay claims based on consideration that was neither supplied to nor beneficial to trustee, since services of claimant had been provided to bankrupt prior to bankruptcy); 120 Wall Associates v. Schilling, 266 F.2d 548, 550 (2d Cir.1959) (denying claim for rent where trustee made no use of leasehold). 55 This rule is commonly applied in the situation arising when the trustee of a bankrupt lessee continues in possession of the leasehold during the period between the effective date of rejection and the date of the actual act of rejection of the lease. See generally Palmer, 104 F.2d at 162-63 (2d Cir.), cert. denied, 308 U.S. 590, 60 S.Ct. 120, 84 L.Ed. 494 (1939); 6 J. Moore & L. King, Collier on Bankruptcy p 3.23[6.1], at 590-93 (14th ed. 1978). During the period between initial filing under the Act and the rejection of the lease, the trustee is not required to pay or to set aside in trust the rent due under the lease nor to refrain from using the leasehold for the benefit of the estate. See Palmer, 104 F.2d at 163; 4A J. Moore & L. King, Collier on Bankruptcy p 70.44, at 550-52 (14th ed. 1978). The lessor obtains, however, a claim with administrative expense priority in the amount of the reasonable value of the leasehold used during the interim period by the trustee for the benefit of the estate. 17 S. & W. Holding Co. v. Kuriansky, 317 F.2d 666, 667-68 (2d Cir.1963); see In re First Research Corp., 457 F.2d 331, 332 (5th Cir.1972). This special administrative expense priority maintains parity among all of the creditors of an estate who confer benefits on the estate after the date of filing. If a lessor, or for that matter any individual, who confers economic benefit on a bankrupt estate, were not given such a priority, it is likely he would refuse to confer such benefits and would thereby jeopardize the orderly reorganization or administration of the estate. 56 Moreover, the Act gives the trustee the power to affirm or reject executory contracts on the theory that the value of the consideration still owed to the estate under some executory contracts exceeds the cost of the remaining obligations owed under the contract to the other party. The theory is that advantageous contracts should be affirmed by the trustee as a means of enhancing the likelihood of successful reorganization, or, if the estate is in liquidation, as a means of increasing creditor dividends. 18 The Act provides that any claim arising from the trustee's post-filing obligations under the contract has an administrative expense priority where the trustee ultimately affirms, 19 yet does not specify how payments made to the estate during the period while the trustee is deciding whether to affirm or to reject are to be treated if the trustee subsequently decides to reject. 57 We think the claim for return of such payments must receive a like priority. If payments made after the initial filing but before rejection were not given an administrative priority, a party who owes the bankrupt payments under an executory contract would face the risk that his claim for post-petition payments would be treated as a mere unsecured claim if the executory contract were rejected. A party placed in that situation would often be well-advised to cease making payments, even though he could be sued for breach of contract, 20 because he might well recover little or nothing as an unsecured claimant if the trustee rejects. Providing an administrative expense priority for post-filing payments in the event of rejection encourages parties to continue performance of their executory contracts with the debtor during the interim period and thus furthers the statutory policy of encouraging the continued performance of executory contracts which may be beneficial to the estate until the trustee makes his decision. 21 58 In this case, the trustee was entitled to use post-filing payments in the administration of the estate. The lot purchasers have claims provable against the estate of administrative expense priority on parity with any other administrative expense claims against the estate. 22 59