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Courts have struggled with the specific issue of whether installment land sales contracts are executory contracts.  Some consider installment land sales contracts to be executory, finding that performance remains on both sides, but the majority categorize them as non­executory because they are in the nature of a sale and security device.  See, In re Kane, 248 B.R. 216, 223 (1st Cir.BAP 2000).  In re Streets & Beard Farm Partnership, 882 F.2d 233 (7th Cir.1989); In re Fahnders, 66 B.R. 94 (Bankr.C.D.Ill.1986); and In re Walker, 227 B.R. 870 (Bankr.S.D.lnd.1998) (interpreting Indiana law), all stand for the proposition that a land sale contract is not “an executory contract” which debtors must either accept or reject.  Rather, land sale contracts were security devices similar to mortgages in which the provisions of the Code governing executory contracts did not apply.

A different conclusion was reached in In re Carson, 286 B.R. 645 (Bankr.E.D. Tenn.2002), a decision interpreting Tennessee law.  This court stated:

The crux of this finding is that installment land contracts impose future obligations of both parties because the “debtor/purchaser” is obligated to make installment payments in accordance with the payment schedule set forth in the contract while the seller must deliver legal title to the property upon completion of the debtor’s payments.  Failure of either party to perform generally constitutes a material breach of the contract.

Id. at 650.  See also, In re Munoz, 2019 WL 6528810 at *3 (Bankr.D.N.M. December 4, 2019) (“The rule in this district is that real estate contracts are ‘executory contracts’ subject to §365.”)

In re Kane, 248 B.R. 216 (1st Cir.BAP 2000) followed a middle ground espoused by Collier.  The Collier treatise set forth the following analysis on the issue:

In some places, it is common for purchasers of real estate to enter into installment land sales contracts, under which at the end of the installment payments the seller transfers title to buyer.  In virtually every other respect, such as responsibility for taxes, insurance and maintenance, the transaction is indistinguishable from a sale in which the seller takes back a mortgage to secure payment.  Because of the similarity of such contracts to secured mortgage loans, courts have often treated them as secured debts rather than executory contracts.  The classification of a particular contract depends on the terms of the transaction.  If the seller has no significant duty to the buyer other than to convey title upon completion of payments, the contract should be found to be a· secured debt and not an executory contract.  Treatment of the contract as a secured debt rather than an executory contract has a number of ramifications, including the inapplicability of section 365.

3 Collier on Bankruptcy ¶365.02[1][a] (15th ed. Rev.2000). Based on the Collier analysis, Kane concluded that courts cannot categorize all installment sales contracts as either executory or non-executory.  Kane, 248 B.R. at 223-24.  The categorization of an installment sales contract required a case by case analysis based upon the specific terms of the contract and the parties’ rights and obligations under state law.  Applying these principles to the facts of its case, the court ruled that the installment land contract was essentially a sale of real estate pursuant to which the debtors became the equitable owners.  Id. at 224.

 

Matthew T. Gensburg
mgensburg@gcklegal.com