In Re Cox

179 B.R. 495, 1995 Bankr. LEXIS 352, 1995 WL 122052

• Court: United States Bankruptcy Court, N.D. Texas
• Decided: March 16, 1995
• Docket: 19-30739
• Status: Published

Opinion

MEMORANDUM OPINION

HAROLD C. ABRAMSON, Bankruptcy Judge.

Came on for consideration on January 10, 1995, the Motion of General Motors Acceptance Corporation to Compel Assumption or Rejection of Executory Contract or, Alternatively, to Lift Automatic Stay (“Motion”). Counsel for General Motors Acceptance Corporation (“GMAC” or “Movant” or “Creditor”) and for Margaret Cox (“Debtor”) appeared and presented briefs and arguments on the Motion. The Court finds that the Motion gives rise to a core proceeding pursuant to 28 U.S.C. §§ 1334 and 157(b)(2)(A), - (B), & -(0).

FINDINGS OF FACT

The facts underlying this Motion are not in dispute. On January 13, 1993, the Debtor executed a SmartBuy Retail Installment Sale Contract (“Contract” or “SmartBuy Contract”) for the purchase of a new 1993 Chevrolet Lumina, Vehicle Identification No. 2G1WL54T3P9162278 (“Vehicle”). On the Contract, the Debtor was listed as the Buyer of the Vehicle and Sun Chevrolet Geo Olds L.P. was listed as the Seller of the Vehicle. The Contract was subsequently assigned to GMAC. A copy of the Contract is attached as Exhibit A. 1

The Contract lists the total sale price of the Vehicle as $21,941.91. The Debtor was to pay this amount according to the following schedule: She was to make 47 payments of $325.23 per month beginning February 27, 1993, and a final payment of $5,394.88 (“Final Payment”), which was due on January 27, 1997. When the Final Payment was due, the Contract provided the Debtor with three options, as follows:

(1) The Debtor could pay the Final Payment on the due date;

(2) The Debtor could enter into a new agreement with GMAC to refinance the Final Payment; or

(3) The Debtor, upon fulfilling certain conditions, 2 could sell the Vehicle to GMAC and have the sale price applied to the Final Payment. The sale price was to be the amount of the Final Payment, less $250 and any “Excess Wear and Tear Deductions” and “Excess Mileage Deductions.” 3 If the sale price was less than the Final Payment, the Debtor would have to pay the difference.

The Contract also provides that the Debtor gives GMAC a security interest in the Vehicle and in proceeds of any insurance policy on the Vehicle, among other things. The Debtor is to note GMAC’s interest in the Vehicle on the title of the Vehicle. Furthermore, if the Debtor defaults on the Contract, GMAC has all the rights provided under Chapter 9 of the Texas Business and Commerce Code, including the remedy of repossession.

CONCLUSIONS OF LAW

Section 365 of Title 11 provides that the trustee may assume or reject any executory contract of the debtor. 11 U.S.C. § 365. Although not defined in Title 11, an executory contract is defined generally as a contract under which both parties’ obligations are so far unperformed that the failure of either to complete their performance constitutes a material breach excusing performance of the debtor. Countryman, Executory Contracts in Bankruptcy: Part I, 57 Minn.L.Rev. 439, 460 (1973); In re Independent American Real Estate, Inc., 146 B.R. 546, 552 (Bankr.N.D.Tex.1992); In re Placid Oil Co., 72 B.R. 135, 137 (Bankr.N.D.Tex. 1987). In addition, assumption or rejection under 11 U.S.C. § 365 is not appropriate if the Court determines that the agreement is a security agreement. See Pacific Express, Inc. v. Teknekron Infoswitch Corp. (In re Pacific Express, Inc.), 780 F.2d 1482, 1487 (9th Cir.1986) (“Courts have declined to apply section 365 to security agreements, even where those agreements have taken on the surface formalities of contracts or unexpired leases that might otherwise come within the apparent reach of that section.”); In re Hartman, 102 B.R. 90 (Bankr.N.D.Tex.1989) (holding that the contract at issue was a secured transaction and not an executory contract that the debtors could be compelled to assume or reject). The Court finds that the SmartBuy Contract is not executory because it does not fit within the Countryman definition and because it is a security agreement.

The SmartBuy Contract Is Not Executory Under the Countryman Definition

GMAC argues, in the language of Countryman cited above, that the SmartBuy Contract is executory because the obligations of both the Debtor and GMAC are so far unperformed that the failure of either to complete their performance would constitute a material breach. As GMAC notes in its brief, the Debtor must do one of the following: (1) pay the Final Payment, (2) refinance the Final Payment, or (3) sell the Vehicle to GMAC. (Movant’s Brief at 4). Depending on which option the Debtor chooses, GMAC must refinance the collateral or purchase the Vehicle from the Debtor. (Movant’s Brief at 4). These alternative obligations of each of the parties, GMAC contends, make the SmartBuy Contract executory. In support of its argument, GMAC cites Rivercity v. Herpel (In re Jackson Brewing Co.), 567 F.2d 618 (5th Cir.1978), in which the Fifth Circuit affirmed a district court finding that an option contract to purchase real estate and a leasehold interest was executory, and Johnson v. Fairco Corp., 61 B.R. 317 (N.D.Ill.1986), in which the court found that a stock redemption agreement was executory because no money had been paid to the estate and the estate had not tendered the shares.

The Court, however, finds that GMAC’s argument is not persuasive and finds the case law cited by GMAC is distinguishable. Under the SmartBuy Contract, the parties do not have substantial obligations outstanding because the only performance remaining is the repayment of GMAC under the Contract. A note is not an execu-tory contract if the only performance that remains is repayment. In re Texstone Venture, Ltd., 54 B.R. 54, 56 (Bankr.S.D.Tex.1985); see also Placid Oil Co., 72 B.R. at 138 (holding that a premium agreement was not an executory contract when the Debtor’s only outstanding duty was to pay money). In reality, the SmartBuy Contract is simply an undefined financing arrangement. The “options” are simply alternative methods by which the Debtor can repay the amount owed under the Contract. Even the option to sell is simply another way. for the Debtor to repay the Contract: If the Debtor decides to exercise her option to sell the Vehicle to GMAC, the sale price is applied to the Final Payment. The fact that the Contract provides the Debtor with three ways to pay does not make the Contract executory. See Texstone Venture, Ltd., 54 B.R. at 56 (finding that an option for the lender to receive an equity participation in lieu of a monetary payment was an alternative to principal repayment that did not make the loan executo-ry).

As this discussion makes clear, the cases cited by GMAC are distinguishable from this case. The cases are distinguishable because they do not involve repayment of an amount financed, as the SmartBuy Contract does. In addition, to the extent that the Fairco court found that payment of money constituted such a material obligation as to make the contract executory, this Court disagrees with that court. Finally, the Court rejects GMAC’s comparison of the option-to-sell portion of the SmartBuy Contract with the stock redemption agreement in the Fairco ease for two reasons. First, the Court cannot analyze the Contract in such piecemeal fashion. See Texstone Venture, Ltd., 54 B.R. at 56 (finding that, when an option is merely an alternative method of principal repayment, “the option would not be an executory contract and nei ther would the note be an executory contract because of the inclusion of the option”). Second, the Court rejects the comparison because GMAC has designed the Contract such that it can escape, or at least make undesirable, the option-to-sell alternative to repayment without committing a material breach. GMAC has accomplished this by including in the Contract the eight conditions to sale described above, and by providing itself with substantial leeway to adjust the purchase price. In contrast, the Fairco and Jackson Brewing contracts did not allow for the manipulation of the contract by either party, much less by one party. See Fairco, 61 B.R. at 319 n. 2 (quoting the agreement as providing that “[u]pon the death of any Shareholder, the Company shall purchase, and the estate shall sell, all of the decedent’s stock in the Company”); Jackson Brewing, 567 F.2d at 619, 622 (describing that the requirements for exercising the option agreement were to provide written notice within a stipulated one-month time frame and to pay the stipulated consideration).

Because the options in the SmartBuy Contract are simply alternative methods to repay GMAC, the Court finds that the SmartBuy Contract is not an executory contract.

The Contract Is a Secured Transaction

As noted above, assumption or rejection under 11 U.S.C. § 365 is not appropriate if the Court determines that the agreement is a security agreement. State law governs the determination of the existence, nature, and extent of a security interest in property. See In re Waldron, 65 B.R. 169 (Bankr.N.D.Tex.1986) (applying state law in determining a land-sale contract was exec-utory). Texas law provides that a “[security agreement” is “an agreement which creates or provides for a security interest.” Tex. Bus. & Com.Code Ann. § 9.105(a)(12) (West 1991). A security interest “means an interest in personal property or fixtures which secures payment or performance of an obligation.” Tex.Bus. & Com.Code Ann. § 1.201(37)(A) (West 1994). The principal test for determining whether a transaction is to be treated as a security interest is whether the parties intended the agreement “to have effect as security.” Looney v. Nuss (In re Miller), 545 F.2d 916, 918 (5th Cir.) (quoting Comment 1 of Tex.Bus. & Com.Code Ann. § 9.102), cert. denied, 430 U.S. 987, 97 S.Ct. 1687, 52 L.Ed.2d 382 (1977). No formal wording is required. Id. The instrument must, however, contain language which leads to the logical conclusion that the parties intended to create a security interest. Sommers v. International Business Machines, 640 F.2d 686, 689 (5th Cir.1981). In making the determination, the Court is required to examine the substance of the documents in light of the circumstances of the case. Miller, 545 F.2d at 918, citing Davis Brothers v. Misco Leasing, Inc., 508 S.W.2d 908, 912 (Tex.Civ.App.-Ama.1974, no writ).

In analyzing the language of the Contract, the Court finds that it evidences that the parties intended to create a security interest. As noted in the Findings of Fact, the Contract provides that the Debtor is giving a security interest in the Vehicle inter alia. This provision is on the first page of the Contract. Also on the first page is a section called “Additional Information,” which refers the reader to the back of the Contract for additional information about the security interest. Another paragraph details the property in which the Debtor is giving a security interest, to wit the Vehicle. That paragraph then provides that this security interest “[s]ecures payment of all amounts you owe in this contract_” See Exhibit A. Another paragraph provides that “the Creditor will have all rights and remedies as provided and limited by Chapter 9, Texas Business and Commerce Code.... ” Chapter 9 of the Texas Business and Commerce Code governs secured transactions. In sum, the face of the Contract indicates that the parties intended the Contract to have effect as security. Thus, the Contract creates or provides for a security interest and is therefore a security agreement. 4 As such, GMAC can not use 11 U.S.C. § 365 to force the Debtor to assume or reject the Contract. 5

CONCLUSION

For the foregoing reasons, the Court finds that the Contract is not an executory contract and that it cannot be assumed or rejected pursuant to 11 U.S.C. § 365. If GMAC still desires the Court to make findings on its alternative Motion to Lift Stay, the Court would request that GMAC request a hearing on that matter, as the Court does not believe it has sufficient facts to "make findings on that motion at this time. The Court shall enter an Order consistent with these findings.

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1 . The attached copy is as clear, legible, and complete as the copy the Court received from GMAC’s counsel.

2 . The conditions with which the Debtor had to comply before exercising the option to sell were as follows:

(1) the Debtor must provide the Creditor at least 30 days advance written notice of her intention to exercise the option to sell and drive the Vehicle to a location specified by the Creditor, so that the Creditor could appraise the condition of the Vehicle;

(2) the Debtor has kept all of the agreements under the Contract, including the agreement to keep the Vehicle free from all liens and encumbrances other than the Creditor’s lien;

(3) the Debtor has paid the Creditor all amounts owed under the Contract, except for the amount of the Final Payment;

(4) the Debtor must pay the Creditor on the due date of the Final Payment any amount by which the Final Payment exceeds the sale price, as defined by the Contract;

(5) the Debtor must deliver the Vehicle to the Creditor on the due date of the Final Payment (or the following business day) at a place the Creditor specifies;

(6) the Debtor has serviced the Vehicle as described in the Owner’s manual;

(7) the Debtor has allowed a dealer or repair shop participating in any recall campaign to make the recall repairs at the manufacturer's cost; and

(8) the Debtor has not altered the Vehicle without prior written permission of the Creditor.

3 .Excess Wear and Tear Deduction is defined as "the amount the Creditor in good faith reasonably estimates it would cost to make all repairs to the Vehicle which are not the result of normal wear and tear...." This includes repair to the body and paint of the Vehicle. The Contract does not contain a definition for Excess Mileage Deduction.

4 . In making this determination, the Court has found that it is unnecessary to discuss the argument urged by the Debtor, which is that the Contract is a security interest rather than a lease. See Memorandum Brief in Support of Debtor’s Response to Motion of General Motors Acceptance Corporation to Compel Assumption or Rejection of Executory Contract. GMAC does not contend that the Contract is a lease, and the Contract is not denominated as a lease. The analysis that the Debtor suggests the Court utilize to determine that the Contract is a security interest is one utilized when it is not clear that the agreement is a security agreement. See, e.g., Pacific Express, Inc., 780 F.2d at 1486-87; In re Armstrong, 84 B.R. 94 (Bankr.W.D.Tex.1988); In re Peacock, 6 B.R. 922 (Bankr.N.D.Tex.1980) (examining documents denominated as leases to determine if they were in fact security agreements). The SmartBuy Contract is unambiguously a security agreement.

5 . A debtor also cannot use § 365 to gain an advantage by rejecting a security interest. In ' this case, GMAC seeks to expand its rights by urging the Court to classify what is intended to be a secured transaction as an executory contract. The Debtor desires to keep the automobile and pay GMAC less than she owes on the Contract. The Debtor might accomplish this pursuant to 11 U.S.C. § 1322(b)(2). If the Court were to find that the Contract is executory, the Debtor would have to pay GMAC the full amount due under the Contract in order to keep the Vehicle under 11 U.S.C. § 365. This motivation underlies GMAC's desire to have the Court classify the Contract as executory.