Opinion
No. 211108.
Submitted February 8, 2000, at Detroit.
Decided August 29, 2000, at 9:15 a.m.
Appeal from Oakland Circuit Court, LC No. 96-525279-CK.
Phillip Strehle, for the plaintiff. Waterford
Jacob Weingarten, P.C. (by Stephen M. Landau and Brian D. Figot), for the defendants. Troy
Before: Holbrook, Jr., P.J., and Kelly and Collins, JJ.
Plaintiff appeals as of right an order of the circuit court dismissing with prejudice his complaint for specific performance of an alleged contract to buy and sell land. We reverse and remand.
The property at issue is located at 9457 Dixie Highway in Springfield Township, Oakland County, Michigan. On November 4, 1994, plaintiff submitted an offer to purchase the subject property for the sum of $360,000, with $125,000 down and the balance to be paid on a five-year land contract. Plaintiff paid $5,000 in earnest money. An addendum to the purchase agreement states that plaintiff's "offer shall be valid until November 7, 1994, and if not fully executed within that time shall be null and void." Nonetheless, defendants signed the purchase agreement on November 9, 1994. Apparently, plaintiff did not know until after this alleged acceptance that the property, along with two other parcels, served as security for a $700,000 mortgage loan made to defendants. The mortgagee then and now refuses to release its lien on the premises.
On June 26, 1996, plaintiff filed this action seeking specific performance of the purchase agreement. In lieu of filing an answer, defendants responded with a motion for summary disposition. Defendants argued that as a matter of law, plaintiff could not seek specific performance of a purchase agreement that was, by its own terms, null and void when executed. In the alternative, defendants argued that the agreement included a standard arbitration clause, requiring that any and all disputes arising under the purchase agreement be submitted to binding arbitration.
Plaintiff countered that defendant Marvin Blachura testified at his deposition that he fully intended to enter into a contract when he signed the purchase agreement on November 9, 1994. Plaintiff further asserted that there was nothing to arbitrate because defendants had been unable to clear title to the property and plaintiff had not wavered from his intention to close on the sale.
In reply, defendants cited ¶ 7 of the purchase agreement, which states, in pertinent part: "If the Seller is unable to remedy the title or obtain title insurance within the time specified, the deposit shall be refunded forthwith in full termination of this agreement." Without specifically finding that a valid contract existed, the circuit court granted defendants' motion for summary disposition and ordered that the matter be submitted to arbitration.
Given the court's reliance on the arbitration clause, we conclude that summary disposition was granted under MCR 2.116(C)(7).
It appears from the transcript of the hearing on defendants' motion for summary disposition that the court initially was under the belief that the parties had agreed that the purchase contract was valid. In response, defendants' counsel noted that this point was not being conceded and that defendants were still pursuing their arguments that the purchase agreement was either null and void when signed by defendants or that plaintiff's damages were limited to refund of his deposit money.
The issue whether the circuit court had spoken on the validity of the contract was subsequently raised at a January 29, 1997, hearing held on defendants' motion to compel arbitration and removal of lis pendens together with plaintiff's motion for injunctive relief. The record reveals that plaintiff was operating under the belief that because the matter had been submitted to arbitration, this necessarily meant that the court had found a contract to exist. Defendants rejected this assumption, reasserting in a letter dated January 21, 1997, that the contract is "null and void." At the January 1997 hearing, the following exchange took place between counsel for plaintiff and the court:
Plaintiff's Counsel: [W]e all agreed that your honor awarded arbitration. What [defense counsel is] trying to do now is, . . . he wants the arbitrators to decide whether or not there's a valid contract. The law says you can't do that. He's doing exactly what your Honor said I couldn't do on December 18th. He's trying to have his cake and eat it too. Either it's in the court or it's in arbitration.
Court: It's in arbitration. Let the . . . arbitrators decide. It's got to come back to me ultimately. If there's objections because they exceeded their authority, I'll listen to it at that time.
Plaintiff's Counsel: Okay. So they do decide the validity —Court: I suggest you argue to the arbitrators.
In the order denying both parties' motions, the court specifically ordered "that the issue of the validity of the contract between the parties be argued at arbitration." We therefore conclude that the trial court did not decide if a valid contract existed.
In September 1997, before the matter could be arbitrated, defendants filed for bankruptcy, thereby staying further proceedings. 11 U.S.C. § 362. On January 22, 1998, the bankruptcy court entered an order lifting the automatic stay in response to a motion filed by plaintiff. The bankruptcy court also ordered that plaintiff "shall be allowed to proceed against the Debtors in the state court case . . . pending in the Oakland County Circuit Court."
Next, the bankruptcy court ordered that the executory contract to purchase the property be rejected pursuant to the Bankruptcy Code's "business judgment rule," 11 U.S.C. § 365(a). In so doing, it specifically stated it was not making any finding on the validity of the alleged contract. In effect, the bankruptcy court was simply operating in anticipation of any finding on the validity of the contract. If no contract were found to exist, then the motion to reject the bankruptcy estate's assumption of the contract would be meaningless. However, if a contract were found to exist, then the bankruptcy court's order indicates that the bankruptcy estate will not become a party to it.
Returning to the circuit court, defendants argued that the order compelling arbitration should be vacated and summary disposition granted in their favor on the ground that the bankruptcy court's order rejecting the executory contract barred any further action. In short, defendants were arguing that the rejection of the executory contract operated as a revocation of the offer or a cancellation of the contract. Without addressing the merits of defendants' argument, the circuit court ordered that its previous order granting summary disposition to defendants and sending the matter to arbitration was vacated, and dismissed with prejudice plaintiff's claim. The court reasoned that such actions were appropriate "in view of the fact that the subject matter of this litigation . . . involves property that's under the jurisdiction of the Bankruptcy Court."
The judge sitting at this time was not the same judge who had ordered the matter into arbitration approximately fifteen months earlier.
Plaintiff argues on appeal that the circuit court erred in divesting itself of subject-matter jurisdiction. We agree.
As an initial matter, we turn to the issue whether the bankruptcy court's order rejecting assumption of the executory contract by the bankruptcy estate canceled or in any manner terminated the contract. We have not been able to find any Michigan cases addressing this issue, and there is some disagreement in the foreign cases we have identified. Compare Giddings Petroleum Corp v Peterson Food Mart, Inc, 859 S.W.2d 89, 93 (Tex App, 1993) (holding that an executory contract deemed rejected effectively terminated the contract as of the filing of the bankruptcy action), and In re R O Elevator Co, 93 B.R. 667, 671 (D Minn, 1998) ("Rejection of an executory contract terminates the obligation of the parties under the contract . . . ."), with In re Drexel Burnham Lambert Group, Inc, 138 B.R. 687, 709 (SD NY, 1992) (observing that "rejection of a contract does not terminate such rights that arise from rejected contracts"), and In re Murphy, 694 F.2d 172, 174 (CA 8, 1982) (observing that "rejection of an executory contract in accordance with applicable provisions of the Bankruptcy Act is not the equivalent of rescission").
Following careful review, we agree with those cases holding that rejection of an executory contract does not constitute a cancellation or termination of the contract. In reaching this conclusion we find persuasive two law review articles that have addressed this issue. In Executory contracts in bankruptcy: Understanding "rejection," 59 U Colo L R 845, 848-849 (1988), Professor Michael T. Andrew observes that:
rejection is not the revocation or repudiation or cancellation of a contract or lease, nor does it affect contract or lease liabilities. It is simply a bankruptcy estate's decision not to assume, because the contract or lease does not represent a favorable or appropriate investment of the estate's resources. Rejection does not change the substantive rights of the parties to the contact or lease, but merely means that the bankruptcy estate itself will not become a party to it. Simply put, the election to "assume or reject" is the election to assume or not assume; "rejection" is the name for the latter alternative.
Professor Jay Westbrook also agrees that rejection does not affect the continuing existence of the contract. Commenting on how the courts have dealt with executory contracts in bankruptcy proceedings, Westbrook criticizes court decisions "posting that obligations owed [to the nondebtor] can be rejected right out of existence." Westbrook , A functional analysis of executory contracts, 74 Minn L R 227, 269 (1989).
While the approaches taken by Andrew and Westbrook differ in many respects, see Andrew, Executory contracts revisited: A reply to Professor Westbrook, 62 U Colo L R 1 (1990), the two men agree on the essential point that rejection of an executory contract does not result in cancellation or termination of that contract.
Further, we conclude that rejection is not an extension of the trustee's special avoiding power available under the Bankruptcy Code. See Professor Andrew's article supra at 919-929. Instead, under 11 U.S.C. § 365(g)(1), "the rejection of an executory contract . . . constitutes a breach of the contract which relates back to the date immediately preceding the filing of a petition in bankruptcy." NLRB v Bildisco Bildisco, 465 U.S. 513, 530; 104 S.Ct. 1188; 79 L.Ed.2d 482 (1984). Accordingly, the nondebtor is left with a claim in the distribution of the estate that should "be presented through the normal administration process by which claims are estimated and classified." Id.
Therefore, because the bankruptcy court's presumptive rejection of the executory purchase contract does not amount to a termination, the question whether a contract to purchase the property exists remains unanswered. We believe this question of contract law is best resolved in our state courts. Kauffman v Chicago Corp, 187 Mich. App. 284, 287; 466 N.W.2d 726 (1991) ("The question regarding the existence of a contract is governed by general contract principles found in state law."). If the answer is that no contract exists, then the matter is effectively resolved. If a contract is found, then plaintiff has the option to pursue his unsecured claim for prepetition damages through the normal bankruptcy process. In re Child World, Inc, 147 B.R. 847, 852 (SD NY, 1992).
Reversed and remanded to the circuit court for a determination whether an enforceable contract to purchase property exists. We do not retain jurisdiction.
I concur in the result only.