Available at: https://huskiecommons.lib.niu.edu/niulr/vol46/iss2/6/
Abstract:
Arguably the most convoluted concept lurking within bankruptcy law is that of the "executory contract" which may be found within section 365 of the bankruptcy code. Since its inception in 1978, this section has been dubbed one of the most "psychedelic" areas of American jurisprudence. The phantasmagoric nature of this section largely derives from Congress declining to provide a definition within the Code for executory contracts. Already rife with confusion and contradiction, the missing definition of executory contract, which comes under section 365, represents a significant "missing link" of understanding for bankruptcy courts in ruling on land sale contracts. Bankruptcy judges nationwide have struggled to make sense of this area of law with scant jurisprudential support. Sale of land contracts within bankruptcy courts thus creates a particularly unique issue wherein circuits and bankruptcy courts alternate between concluding that such sales represent executory contracts, or that they constitute land security devices immune from the reach of section 365. While benefits exist to adopting either interpretation, on balance, treating land sale contracts as security devices presents the more equitable solution. The two camps of logic that courts rely upon, however, pose a more interesting issue. Bankruptcy is under federal jurisdiction and within our Constitution, is a power granted to Congress to create, "uniform Laws on the subject of Bankruptcies throughout the United States." Treating sale of land contracts differently depending on the state in which the bankruptcy court sits is an unsatisfactory and unsustainable strategy. It also flies in the face of what our Framers of the United States Constitution intended for bankruptcies. At the same time, though preferable to the alternative, treating land sale contracts as security devices would not wholly fix the problem but would at least take the issue out of the hands of section 365. Anything less than Congress taking back the reins on section 365 and carving out a niche within the bankruptcy code for sale of land contracts would be akin to placing a Band-Aid over a bullet hole.
Summary:
Abby Ponder’s law review note argues that one of the deepest unresolved problems in bankruptcy law remains Congress’s failure to define “executory contract” in 11 U.S.C. § 365. The article focuses on installment land sale contracts—often called contracts for deed—and how courts across the country sharply disagree on whether those agreements are executory contracts subject to assumption or rejection in bankruptcy, or instead are merely security devices analogous to mortgages.
The article explains that the split matters enormously for financially distressed homeowners. If a land installment contract is treated as executory, the debtor generally must either assume the contract and cure defaults or reject it and lose the property. If the agreement is instead treated as a secured financing device, the debtor may be able to modify the obligation through bankruptcy much like a mortgage loan.
Ponder traces the confusion back to Congress’s decision in 1978 to enact § 365 without defining “executory contract.” Courts therefore turned to Professor Vern Countryman’s famous definition, under which a contract is executory if obligations remain sufficiently unperformed on both sides such that failure by either party would constitute a material breach. Under that analysis, many courts conclude that installment land contracts are executory because the buyer still owes payments while the seller still owes delivery of title.
Other courts, however, focus less on formal contract doctrine and more on economic reality. Those courts view installment land contracts as “poor man’s mortgages” that function primarily as secured financing arrangements. Treating them as security devices better preserves debtor rehabilitation and prevents forfeiture of accumulated equity.
The article ultimately argues that the lack of national uniformity undermines the constitutional purpose of federal bankruptcy law itself. A debtor’s outcome should not depend merely on geography.
Commentary:
This article highlights a recurring bankruptcy problem: courts often attempt to force economically sophisticated financing arrangements into doctrinal categories that were never designed for them. Installment land contracts are a classic example.
Consumer bankruptcy attorneys have long recognized that many contracts for deed operate as high-risk seller financing arrangements targeted toward borrowers who cannot qualify for conventional mortgages. Those agreements often shift taxes, insurance, repairs, and maintenance obligations onto the purchaser while allowing the seller to retain title until the final payment. In practical effect, many of these arrangements function almost identically to mortgages while providing substantially fewer protections to the purchaser.
That concern is particularly important in North Carolina. In North Carolina, land sales contracts—specifically installment land contracts or “contracts for deed” involving five or more payments—are governed by Chapter 47H of the North Carolina General Statutes. Those statutes require the contract to be in writing, recorded within five business days, and to contain extensive disclosures regarding the principal balance, interest rate, taxes, insurance obligations, late fees, and the condition of title. The enactment of Chapter 47H reflects legislative recognition that these agreements are not merely casual executory agreements for future conveyance, but instead function as long-term consumer financing devices with substantial risks to purchasers.
That statutory framework strongly supports the reasoning of courts that treat installment land contracts as secured transactions rather than executory contracts. North Carolina itself has effectively acknowledged that these arrangements are economically analogous to mortgage lending. The detailed disclosure requirements under Chapter 47H resemble consumer mortgage regulation far more than ordinary bilateral contract law.
The article also demonstrates the continuing problems created by the Countryman definition itself. Professor Countryman attempted to clarify executory contract doctrine, but his formulation often proves so broad that nearly any ongoing contractual relationship could qualify as executory. Modern consumer finance contracts almost always impose continuing obligations on both sides. Mortgage servicers must provide statements and accountings. Borrowers must maintain insurance and make payments. Credit card issuers must continue honoring transactions. Auto lenders may have continuing title obligations. If ongoing reciprocal obligations alone define executory contracts, the concept risks becoming nearly limitless.
That is why many bankruptcy courts have increasingly focused on economic substance rather than formalistic contract doctrine. The better question is not whether both sides still owe something, but whether the agreement primarily functions as a financing arrangement or as an ongoing exchange relationship requiring continuing material performance.
The article correctly concludes that Congress created this confusion by failing to define “executory contract” in § 365. Bankruptcy courts are left improvising with competing theories, producing wildly different outcomes depending on jurisdiction. That lack of uniformity is particularly problematic in consumer bankruptcy cases, where losing a home under a technical characterization dispute can be catastrophic.
Tangential Commentary:
The article’s analysis again raises an intriguing question about mandatory arbitration provisions in consumer contracts.
Most arbitration clauses impose continuing obligations on both parties. Consumers agree to submit disputes to arbitration rather than litigation. Creditors similarly agree to arbitrate claims, follow arbitration procedures, pay certain arbitration costs, and waive judicial forums. Under a strict Countryman-style analysis, one could argue that arbitration provisions themselves are executory agreements because material obligations remain unperformed on both sides unless and until a dispute arises.
If arbitration agreements are executory contracts, an even more provocative issue emerges in Chapter 13 cases: what happens if the debtor’s Chapter 13 plan does not assume the arbitration provision?
Under § 365, failure to assume an executory contract generally results in rejection. That could potentially support an argument that an arbitration provision was rejected through confirmation of a Chapter 13 plan and therefore no longer governs post-confirmation disputes going forward.
That argument would likely face enormous resistance from federal courts because of the Federal Arbitration Act and the Supreme Court’s extraordinarily pro-arbitration jurisprudence. Courts have repeatedly treated arbitration provisions as uniquely favored contractual terms. Nonetheless, the conceptual tension remains difficult to ignore.
If bankruptcy courts insist that installment land contracts remain executory because both parties retain future obligations, then many arbitration provisions appear to fit the same logic. Arbitration agreements are not fully performed upon signing. Their central obligations arise only later if disputes occur. Under a pure Countryman framework, they arguably remain executory throughout the contractual relationship.
Consumer bankruptcy practitioners may therefore eventually explore whether arbitration clauses can be rejected in Chapter 13 plans in the same manner as other executory agreements. Even if courts ultimately reject that argument, the question exposes how unstable and indeterminate executory contract doctrine has become. The problem may not simply be installment land contracts. The deeper issue may be that bankruptcy law still lacks a coherent limiting principle for what § 365 actually covers.
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