## Facts

- Farm Credit Bank of Spokane (FCB) sold an Idaho farm to Heward Brothers, a farming partnership, under a land installment contract.
- Under the contract, Heward Brothers took possession and obtained equitable ownership of the farm while FCB retained legal title.
- FCB’s retained title was to be transferred by deed only after Heward Brothers completed all required payments, at which time FCB would deliver clean title.
- Heward Brothers began missing monthly installment payments.
- Soon after the payment defaults, Heward Brothers filed for Chapter 11 bankruptcy protection.
- FCB filed a motion asking the bankruptcy court to determine that the land installment contract was an executory contract within the meaning of 11 U.S.C. § 365.

## Issues

1. Whether the land installment contract for the farm, where the debtor-purchaser held possession and equitable title and the seller retained legal title until paid, was an executory contract subject to assumption or rejection under 11 U.S.C. § 365.

## Decision

- The court denied FCB’s motion and held the land installment contract was not an executory contract under § 365.
- The court treated the transaction as a secured real-property financing arrangement: Heward Brothers held equitable title, and FCB’s retention of bare legal title operated as a security device similar to a lien.
- As a result, FCB’s rights were those of a secured creditor to be addressed through Chapter 11 mechanisms governing secured claims (rather than through assumption/rejection remedies under § 365).

## Legal Principles

- Under the Countryman test, a contract is executory only if both parties have remaining obligations so unperformed that failure by either would be a material breach excusing the other’s performance.
- A land installment contract is not executory for § 365 purposes when the debtor has possession and equitable ownership and the seller’s main remaining obligation is to convey legal title only after full payment.
- State property law matters in characterizing the parties’ interests; under Idaho law, a purchaser in possession under a land sale contract commonly holds equitable title, while the seller’s retained legal title may be treated as bare title held for security.
- Bankruptcy distinguishes ongoing bilateral contracts from security arrangements; where the relationship is functionally debtor-and-collateral, the creditor is generally treated as holding a secured claim.
- Treating a land installment contract of this type as a security device avoids forfeiture-type results that can occur if the seller could force assumption/rejection and cut off the debtor’s accumulated equity.

## Conclusion

In In re Heward Brothers, the bankruptcy court held that the farm land installment contract was not an executory contract under § 365 because the debtor-purchaser already possessed the property and held equitable title, and the seller’s remaining duty to deliver a deed upon full payment was not the kind of ongoing, mutual performance § 365 addresses; instead, the seller’s retained legal title functioned as security, making the seller a secured creditor whose rights were governed by the Bankruptcy Code’s secured-claim and plan-treatment rules.


In re Heward Brothers, 210 B.R. 475 (1997)