In Re F.r. Murphy and Bonnie J. Murphy, Debtors in Possession.f.r. Murphy and Bonnie J. Murphy, Appellants, v. C & W Limited Corporation, Appellee, 694 F.2d 172 (8th Cir. 1982)

Debtors F.R. Murphy and Bonnie J. Murphy appeal the final decree of the bankruptcy court¹  allowing the Murphys to reject, under former Chapter XII of the Bankruptcy Act, an executory contract to sell certain real property to defendant C & W Limited Corporation and assessing damages against the Murphys. We affirm.

In May, 1977 the Murphys entered into a contract to sell certain realty, described by the district judge²  as a commercial building, to C & W. The Murphys had purchased the property subject to a lien held by former owner Mary Ann Halter. The contract price for the property was $74,000.00. As required by the terms of the contract, C & W paid $5,000.00 down and three monthly payments of $650.00 each, but was unable to make a balloon payment of $8,050.00 which was due August 3, 1977. The parties then negotiated an amended contract whereby in consideration for payment of $4,500.00, C & W's remaining debt was declared to be $63,978.70, payable at $750.00 per month at 9% interest.

C & W tendered the first $750.00 payment when due on November 3, 1977, but the Murphys refused tender and filed a foreclosure action several days later.³  It appears that C & W ceased making payments at this time. On October 31, 1978 Mary Ann Halter filed a foreclosure action, obtained judgment, and sale was scheduled for November 30, 1978. However, the Murphys filed a Chapter XII petition on November 29, thereby staying the sale. Halter then filed an adversary complaint, which was referred to the bankruptcy court, seeking relief from the stay. Debtors joined with their answer a third party complaint against C & W, seeking rejection of the contract pursuant to section 413 of the Bankruptcy Act.⁴  In its answer, C & W agreed to the rejection and asserted a claim for damages for breach of contract. Bankruptcy Act Sec. 63(c).

The bankruptcy court allowed rejection of the contract and assessed damages as follows: $6,950.00 representing the down payment and the three $650.00 payments; $4,550.00 for improvements made by C & W; and $1,018.50 for attorney fees for the defense of both the Halter and Murphy foreclosures. C & W was given a lien on the property, subordinate to Halter's, for the total damage amount of $12,518.50.

Debtors moved for new trial or for amendment of judgment contending that the court failed to consider the payments due from November, 1977, when C & W ceased making payments, until the time of rejection; and that the damage award should be reduced by the fair rental value of the land during the time C & W was in possession.⁵  The bankruptcy court denied debtors' motion on the ground that debtors breached the contract by refusing tender of the $750.00 payment November 3, 1977, and by filing the foreclosure action, thereby releasing C & W from the obligation to tender further payments.⁶  The court concluded, based on equitable considerations, that debtors were not entitled to interest on the amount due or to fair rental value.

The district court affirmed the findings and conclusions of the bankruptcy court with the exception of the attorney fees representing the defense of the Murphy foreclosure.⁷  The bankruptcy court subsequently entered its final decree on October 3, 1981, in accord with the district court's decision.⁸ 

On appeal, debtors contend that the bankruptcy judge erred in awarding damages because C & W did not file a proof of claim; and in assessing damages based on a concept of rescission. The issue of the proof of claim filing requirement was first presented to the district court, where it was concluded that a formal proof of claim was not necessary in the context of this adversary proceeding because it would only duplicate the information contained in the pleadings. In the absence of evidence showing any prejudice to debtors or other creditors, we will not disturb this conclusion.

With respect to debtors' contention concerning the bankruptcy court's basis for assessing damages, we note that the argument has been modified somewhat since debtors' motion for new trial. Although debtors initially argued that they were entitled to fair rental value and interest, thus implying an acceptance of rescission as the basis for computation, debtors are now arguing that the bankruptcy court erroneously applied principles of rescission.⁹  Instead, debtors now assert, the court should have applied section 63(c) of the Bankruptcy Act which states that rejection of an executory contract constitutes a breach of contract as of the date the petition is filed.

We agree that rejection of an executory contract in accordance with applicable provisions of the Bankruptcy Act is not the equivalent of rescission. Consolidated Oil & Gas, Inc. v. Sun Oil Co. of Pennsylvania, 16 B.R. 490, 493 (D.C., D.Co.1981). Rather, as stated, rejection constitutes a breach of contract, and a person injured thereby is deemed a creditor and is entitled to assert a claim for damages. Bankruptcy Act Sec. 458.¹⁰  However, we need not determine whether the bankruptcy judge did, in fact, apply principles of rescission in computing the award to C & W, because debtors have not shown that a damage award based on any established measures of damages for breach of contract would result in a significantly different amount. On the contrary, there is some evidence that a computation of damages properly based on the fair market value of the property would yield substantially the same amount.¹¹ 

We conclude that the amount awarded by the bankruptcy judge was not clearly erroneous. Accordingly, the decree of the bankruptcy court is affirmed.