Appeal from a Decision of the Bankruptcy Appellate Panel Calvin K. Ashland, Alfred C. Hagan, and James W. Meyers, Bankruptcy Judges, Presiding Argued and Submitted October 23, 1997 San Francisco, California
B.A.P. No. NV-94-01994-AhM
Before: Procter Hug, Jr., Chief Judge, and Harry Pregerson, Alex Kozinski, Diarmuid F. O'Scannlain, Stephen S. Trott, Ferdinand F. Fernandez, Pamela Ann Rymer, Andrew J. Kleinfeld, Michael Daly Hawkins, A. Wallace Tashima, and Sidney R. Thomas, Circuit Judges.
The opinion of the court was delivered by: Kozinski, Circuit Judge.
Opinion by Judge Kozinski; Partial Concurrence and Partial Dissent by Judge Thomas; Concurrence by judge Rymer; Partial Concurrence and Partial Dissent by judge Fernandez
Guided, or misguided, by Gill v. Easebe Enters. (In re Easebe Enters.), 900 F.2d 1417, 1419 (9th Cir. 1990), the bankruptcy court below held that an option is an executory contract. We took the case en banc to consider whether Easebe was correctly decided.
Southmark, a Texas corporation, sold the Double Diamond Ranch in Nevada to the Double Diamond Ranch Limited Partnership, retaining an option to buy back part of the ranch. Southmark later filed for bankruptcy in the Northern District of Texas. As part of its chapter 11 reorganization plan it assumed various executory contracts by filing a Notice of Assumption; the plan provided that all executory contracts not listed were deemed rejected. See 11 U.S.C.S 1123(b)(2). The Notice didn't list the option to buy back the ranch, so it would have been deemed rejected if it was an executory contract. No one, however, raised the question in the Texas bankruptcy proceeding and the bankruptcy court there apparently did not have occasion to rule on the matter.
Double Diamond then itself filed for bankruptcy in the District of Nevada. The Committee administering the Double Diamond bankruptcy decided to sell the ranch to South Meadows Properties Limited Partnership, a buyer apparently chosen because its name maximizes confusion with Southmark.*fn1 The Committee asked the Nevada bankruptcy court to allow sale of the ranch free and clear of Southmark's option. A free and clear sale was appropriate only if the option was no longer valid because it had been stripped away in the Texas bankruptcy proceeding. The Nevada court thus had to determine the effect of that earlier Texas proceeding on the title to the ranch. Relying on Easebe, the Nevada bankruptcy court held that the option was an executory contract which had been rejected in Southmark's bankruptcy. It therefore allowed Double Diamond to sell the ranch to South Meadows free and clear of Southmark's option.
Southmark appealed to the Bankruptcy Appellate Panel, which reversed, holding that the option was not executory. The Committee appealed for Double Diamond. Our threeJudge panel reversed the B.A.P.*fn2 The panel approved most of the B.A.P.'s reasoning, but held that the bankruptcy court had been right to follow Easebe as the law of the circuit. At the same time, the panel expressed doubt whether Easebe was right. See In re Helms, 110 F.3d at 1473-74. We now vacate the panel opinion and overrule Easebe.
First, however, we must dispose of several preliminary matters. South Meadows' victory, now final, see n.2 supra, raises a mootness question. South Meadows owns the Double Diamond Ranch free and clear of the option. Should Southmark win here, what good would that do it? Although Southmark can no longer exercise the option, it can still seek damages from the Double Diamond estate. The bankruptcy court set aside $30,000 for adequate protection of Southmark's interest in the ranch, see 11 U.S.C.S 363(e), and noted that Southmark could pursue a claim for damages against the sale proceeds as well. If the bankruptcy court on remand decides that the option was not executory, there are appropriate remedies it can impose to make Southmark whole.
Next, we must determine the effect of the confirmed Southmark plan of reorganization. A confirmed reorganization plan operates as a final judgment with res judicata effect. 8 Collier on Bankruptcy P 1141.02 (15th ed. 1997). If the plan treats the option as an unassumed executory contract, we must then deem it rejected. If the option is treated as an asset instead, then the reversion of property from the estate to the debtor upon confirmation is subject ...