DeLawrence Beard v. S/E Joint Venture

587 A.2d 239, 322 Md. 225, 1991 Md. LEXIS 27
CourtCourt of Appeals of Maryland
DecidedJanuary 25, 1991
DocketNo. 171
StatusPublished
Cited by3 cases

This text of 587 A.2d 239 (DeLawrence Beard v. S/E Joint Venture) is published on Counsel Stack Legal Research, covering Court of Appeals of Maryland primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
DeLawrence Beard v. S/E Joint Venture, 587 A.2d 239, 322 Md. 225, 1991 Md. LEXIS 27 (Md. 1991).

Opinion

ON MOTION FOR RECONSIDERATION

RODOWSKY, Judge.

Respondents have moved that this Court reconsider its opinion filed November 13, 1990. See Beard v. S/E Joint Venture, 321 Md. 126, 581 A.2d 1275 (1990). Applying Maryland law we held that, in the event the circuit court on remand determined that the Beards would have been awarded specific performance but for the bankruptcy rejection of the executory contract, the circuit court, for the purpose of computing an award of damages in lieu of specific performance, should value the property as of the date specific performance became unavailable. We said that date was June 17, 1988, when the order of rejection was entered.

By their motion Respondents, for the first time in this Court, argue that such an application of Maryland law would be preempted by § 365(g)(1) of the Bankruptcy Code, 11 U.S.C. § 365(g)(1) (1988). Respondents assert that § 365(g)(1) requires damages in lieu of specific performance to be computed by valuing the realty as of the day preceding the filing of the petition in bankruptcy. The Beards deny that § 365(g)(1) has that effect. They maintain that § 365(g)(1) simply prevents claims arising out of the rejec[227]*227tion of executory contracts from becoming administration expenses, and that the section requires purchasers’ claims, once determined and to the extent unsecured, to be treated ratably with general, unsecured pre-bankruptcy creditors.

The background of this issue is as follows. Bankruptcy Judge Mannes in the United States Bankruptcy Court for the District of Maryland on December 10, 1987, lifted the automatic stay under the Bankruptcy Code “to permit [this action] to proceed to trial” in the Circuit Court for Montgomery County. By an order entered on June 17, 1988, Bankruptcy Judge Derby approved S/E Joint Venture’s motion to reject its contract with the Beards. Bankruptcy Judge Derby further ordered that the Beards “shall, and are authorized to, file any claim they, or either of them, may seek to assert for damages resulting from such rejection on or before thirty (30) days after the entry of this Order.” Presumably the claim was filed.

In connection with the motion for reconsideration pending before this Court, we were for the first time furnished a copy of an opinion and order by Judge Derby, entered February 6, 1989. That opinion reflects that, after the circuit court had entered judgment in the amount of $124,-594 for the Beards, representing restitutionary and reliance interest damages, S/E Joint Venture had sought in the bankruptcy court a summary judgment limiting the Beards’ claim to that amount. On the rationale set forth below, Judge Derby denied summary judgment.

“[T]he Beards contend that because Debtor’s rejection of their contract deprived them of their option under State law to seek specific performance and forced them to seek damages exclusively, they are entitled to receive under 11 U.S.C. § 365(g)(1) the monetary equivalent of their specific performance remedy, namely, the loss of the economic benefit of their bargain. Inherent in this argument as presented by the claimants, on the undisputed facts of this case, is the legal contention that 11 U.S.C. § 365(g)(1) gives rise to a measure of damages independent of State law. This Court disagrees.
[228]*228“Section 365(g)(1) provides that ‘... the rejection of an executory contract ... of the debtor constitutes a breach of such contract ... immediately before the date of the filing of the petition----’ The significance under the Bankruptcy Code of treating the breach as occurring immediately prepetition is that the damages arising from the breach are unsecured prepetition claims, rather than post-petition, priority administrative claims. Since the damages are determined as if there was a breach of the contract immediately prepetition, they are measured under State law for breach of contract. E.g., In re Waldron, 36 B.R. 633 (Bkrtcy.S.D.Fla.1984), particularly at 641-42. Cf., In re Northrup-Johnson, Inc., 15 B.R. 767 (Bkrtcy.D.Md.1981). Section 365(g)(1) does not provide a measure of damages, nor does it prescribe what elements of potential damage are compensable as the result of a breach. These are questions governed by State contract law.”

In re S/E Joint Venture, Debtor, Ch. 11 Case No. 87-4-2841SD, Memorandum of Decision at 3-4 (Bankr.D.Md. Feb. 6, 1989).

Judge Derby then considered an argument by the debtor that there was no contract in existence to be breached post-petition because of the circuit court’s finding of a breach on March 16, 1987. The argument was rejected. The bankruptcy court pointed out that the Beards were seeking specific performance in the state court, but that that remedy “was no longer available because Debtor successfully had exercised its legal option to reject the contract. ... The Beards may have alternative bases for computing their damage claim under State law, namely, breach by rejection or prior breach, but they will not receive a double recovery.” Id. at 4-5. In concluding the memorandum decision, Judge Derby said:

“Therefore, it appears that if Debtor was able to perform the contract with the Beards, but refused to perform the contract by rejecting it in this bankruptcy case, the Beards allowed claim determined under Maryland law [229]*229may include loss of bargain damages as of the date of the breach, namely, immediately before the petition. 11 U.S.C. Section 365(g)(1).”

Id. at 8. The circuit court, however, had “made no determination on the rejection damage issue.” Id. at 9.

Section 365, a companion provision of the Bankruptcy Code, § 502(g), and the legislative history of both sections support the Beards’ analysis. Section 365(a) authorizes a trustee in bankruptcy, with court approval, to “assume or reject any executory contract or unexpired lease of the debtor.” Section 365(g) provides in relevant part as follows:

“[T]he rejection of an executory contract or unexpired lease of the debtor constitutes a breach of such contract or lease—
(1) if such contract or lease has not been assumed under this section or under a plan confirmed under chapter 9, 11, 12, or 13 of this title, immediately before the date of the filing of the petition[.]”

Senate Report No. 989, 95th Cong., 2d Sess. 60, reprinted in 1978 U.S.Code Cong. & Admin.News 5787, 5846, stated:

“Subsection (g) defines the time as of which a rejection of an executory contract or unexpired lease constitutes a breach of the contract or lease. Generally, the breach is as of the date immediately preceding the date of the petition. The purpose is to treat rejection claims as prepetition claims.”

Section 502 of the Code deals with the allowance of claims. Subsection (g) of § 502 reads:

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Bluebook (online)
587 A.2d 239, 322 Md. 225, 1991 Md. LEXIS 27, Counsel Stack Legal Research, https://law.counselstack.com/opinion/delawrence-beard-v-se-joint-venture-md-1991.