Stewart Title Guaranty Co. v. Old Republic National Title Insurance

United States Court of Appeals,

Fifth Circuit.

No. 95-20524.

STEWART TITLE GUARANTY COMPANY, Plaintiff-Appellant,

v.

OLD REPUBLIC NATIONAL TITLE INSURANCE COMPANY, formerly known as
Title Insurance Co.; Land Title Company of Dallas, doing business
as Southwest Land Title Company, Defendants-Appellees.

May 29, 1996.

Appeal from the United States District Court for the Southern
District of Texas.

Before KING, DAVIS and BARKSDALE, Circuit Judges.

PER CURIAM:

Stewart Title Guaranty Company ("Stewart Title") appeals the

district court's granting of summary judgment against Stewart Title

and in favor of Old Republic National Title Insurance Company f/k/a

Southwest Title Insurance Company of Minnesota and Land Title

Company of Dallas d/b/a Southwest Land Title Company (collectively

"Southwest"), in a suit brought by Stewart Title to enforce certain

contractual rights purchased by Stewart Title from a bankruptcy

trustee and derived from a personal property lease agreement that

had been rejected by the trustee pursuant to 11 U.S.C. § 365. We

reverse.

I. BACKGROUND

With respect to their competing motions for summary judgment

in the district court, Stewart Title and Southwest stipulated to

certain facts. The stipulated facts may be summarized as follows:

In November 1970, Dallas Title Company ("Dallas Title"), as lessor,

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and Dallas-Texas-National Title Company ("DTNT"), as lessee,

entered into a thirty-two year lease agreement (the "Lease") for

the personal property in an abstract plant owned by Dallas Title.1

The abstract plant contained abstracts, records, files,

computer-stored material, and other property necessary to the

title-insuring and abstract business. In return for use of the

abstract plant, Dallas Title agreed to pay $3000 a month and

certain taxes levied or based on the plant, to purchase insurance,

and to maintain the plant by means of day-by-day posting of all

records pertaining to the business of abstracting. The agreement

provided that all additions to the plant became the property of the

lessor, but that, upon termination of the Lease, Dallas Title could

copy for its own use any of the records pertaining to matters filed

in Dallas County, Texas since November 30, 1961 (the "Reproduction

Rights").2 The Lease terminated a previous lease between Dallas

The Lease was incorporated by reference in the stipulated
facts. Certain other peripheral rights and duties were
enumerated in the Lease: Paragraph 6, for example, provided
that, pursuant to the provisions of a separate existing contract,
the lessee would act as exclusive agent for Dallas Title &
Guaranty Company [sic].

Paragraph Four of the Lease provided:

Upon termination of this lease for any reason (a)
Lessee at its cost and expense shall have the privilege
of making copies of any material constituting the
leased property to the extent that it pertains to
matters filed in Dallas County, Texas since November
30, 1961, and Lessee shall have the privilege for a
period of 30 days from date of termination of this
lease of reproducing all of the computer records and
thereafter retaining as its own property and for its
own unrestricted use all copies so made, even though
such computer records may include items bearing date
prior to November 30, 1961, and (b) Lessee shall have

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Title and DTNT dated November 1, 1966.

On June 20, 1990, DTNT filed for protection under Chapter 11

of the Bankruptcy Code. The proceeding was subsequently converted

to a Chapter 7 liquidation and a trustee was appointed. On June

10, 1991, in an agreed order signed by the bankruptcy court, the

trustee rejected the Lease pursuant to § 365 of the Bankruptcy

Code.3 The trustee held an auction to sell the Reproduction Rights

as a "potential asset" of the bankruptcy estate. Southwest, the

successor and assignee of Dallas Title, made an offer to purchase

the Reproduction Rights for $26,000. Stewart Title bid $30,000.

The bankruptcy trustee accepted Stewart Title's offer. The

bankruptcy court approved the sale of the Reproduction Rights to

Stewart Title, and on September 24, 1991, the trustee executed a

Bill of Sale.4

When Southwest refused to allow Stewart Title to exercise the

the right of examination, for use in connection with
the conduct of its business, for a period of five years
from date of termination, of all of the base title
files comprising a part of the leased property.

(emphasis added). The three words "for any reason"
apparently were added to the text at the last moment. They
were typed in above the body of the text and both parties to
the Lease initialed the addition.

Section 365(a) provides that a trustee may "assume or reject
any executory contract or unexpired lease of the debtor." 11
U.S.C. § 365(a).

Incorporated by reference in the stipulated facts, the Bill
of Sale provided that the trustee granted, bargained, sold and
transferred "all of his interest, if any, in the copy and
reproduction rights of computer title records as detailed in the
personal property lease agreement dated November, 1970, effective
December 1, 1970, through January 1, 2002, by and between [Dallas
Title] and [DTNT]."

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Reproduction Rights, Stewart Title brought suit against Southwest

in the 127th Judicial District Court of Harris County, Texas,

asserting a claim for breach of the Lease and seeking specific

performance. Southwest removed the case to the United States

District Court for the Southern District of Texas. The parties

filed cross motions for summary judgment on the limited legal issue

of the enforceability of the Reproduction Rights that Stewart Title

had purchased from the trustee.5 Finding that the trustee's

rejection of the Lease excused Southwest from its obligations to

the lessee, the district court concluded that the Reproduction

Rights were unenforceable. On June 9, 1995, the district court

entered an order granting summary judgment in favor of Southwest

and against Stewart Title. Three weeks later, Stewart Title timely

filed a notice of appeal.

II. ANALYSIS

We review the granting of summary judgment de novo, applying

the same criteria used by the district court in the first instance.

Norman v. Apache Corp., 19 F.3d 1017, 1021 (5th Cir.1994);

Conkling v. Turner, 18 F.3d 1285, 1295 (5th Cir.1994). First, we

consult the applicable law to ascertain the material factual

issues. King v. Chide, 974 F.2d 653, 655-56 (5th Cir.1992). We

then review the evidence bearing on those issues, viewing the facts

and inferences to be drawn therefrom in the light most favorable to

Stewart Title sought a partial summary judgment upholding
the enforceability of the Reproduction Rights, after which the
case would have proceeded against Southwest on the merits.
Southwest sought a final summary judgment on this limited legal
issue.

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the nonmoving party. Lemelle v. Universal Mfg. Corp., 18 F.3d

1268, 1272 (5th Cir.1994); FDIC v. Dawson, 4 F.3d 1303, 1306 (5th

Cir.1993), cert. denied, --- U.S. ----, 114 S.Ct. 2673, 129 L.Ed.2d

809 (1994). Summary judgment is proper "if the pleadings,

depositions, answers to interrogatories, and admissions on file,

together with the affidavits, if any, show that there is no genuine

issue as to any material fact and that the moving party is entitled

to judgment as a matter of law." Fed.R.Civ.P. 56(c).

The sole issue on appeal is whether the Reproduction Rights

acquired by Stewart Title are enforceable as a matter of law. It

is uncontested that, under applicable choice-of-law principles,

Texas law governs in this case because the subject matter of the

lease, the place of performance of the lease, and the residence and

place of business of the parties are all in Texas. Neo Sack, Ltd.

v. Vinmar Impex, Inc., 810 F.Supp. 829, 838-39 (S.D.Tex.1993)

(listing factors to consider in determining applicable law). The

district court concluded that under Texas law the Reproduction

Rights are not enforceable because the bankruptcy trustee's

rejection of the Lease constituted a material breach that excused

Southwest from its contractual obligations. Oil Country

Specialists, Ltd. v. Philipp Bros., Inc., 762 S.W.2d 170, 179

(Tex.App.—Houston [1st Dist.] 1988) (noting that when one party

materially breaches a contract, the other party is discharged from

his obligation to perform), writ denied, 787 S.W.2d 38 (Tex.1990).

Stewart Title maintains that the Reproduction Rights are

enforceable despite the trustee's rejection.

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 Stewart Title argues that the Lease consisted of two

severable agreements: (1) an executory agreement regarding the use

of the records and other materials contained in the abstract plant

(the "Use Rights"); and (2) an executed agreement regarding the

Reproduction Rights. Stewart Title contends that the Reproduction

Rights vested in the lessee on the effective date of the Lease and

thereafter were an enforceable and assignable asset. According to

Stewart Title, because the Reproduction Rights required no further

performance on the part of the lessee, the bankruptcy trustee's §

365 rejection pertained only to the Use Rights—the executory

portion of the Lease. Therefore, the first question we must answer

is whether the Lease was a severable contract such that the

fulfilled portion would remain enforceable, notwithstanding the

bankruptcy trustee's rejection.

A. Severability

A severable contract "includes two or more promises which can

be acted on separately such that the failure to perform one promise

does not necessarily put the promisor in breach of the entire

agreement." Black's Law Dictionary 1373-74 (6th ed. 1990).

Black's Law Dictionary defines divisible and severable contracts in

similar terms.6 Under Texas law, a contract is divisible, or

severable, when one party's performance consists of more than one

A divisible contract is defined as: "One which is in its
nature and purpose susceptible of division and apportionment,
having two or more parts in respect to matters and things
contemplated and embraced by it, not necessarily dependent upon
each other nor intended by the parties so to be." Black's Law
Dictionary 479 (6th ed. 1990). Virtually the same language is
used to define "severable contract." Id. at 1373-74.

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"distinct and separate item[ ] and the price paid by the other

party is apportioned to each item." In re Ferguson, 183 B.R. 122,

124 (Bankr.N.D.Tex.1995) (quoting Johnson v. Walker, 824 S.W.2d

184, 187 (Tex.App.—Fort Worth 1991, no writ)). No one test or rule

of law can be used to ascertain whether a contract is divisible or

indivisible. Johnson, 824 S.W.2d at 187. "Determination of the

issue depends primarily on the intention of the parties, the

subject matter of the agreement, and the conduct of the parties."

Id. (citations omitted).

The intent of the parties is the principal determinant of

divisibility. Lake LBJ Mun. Util. Dist. v. Coulson, 771 S.W.2d

145, 153 (Tex.App.—Austin 1988), rev'd on other grounds, 781 S.W.2d

594 (Tex.1989); see also Sheline v. Dun & Bradstreet Corp., 948

F.2d 174, 177 (5th Cir.1991) (finding that unenforceable covenant

not to compete could not be severed from the remainder of a

severance agreement because severability "is governed by the intent

of the parties"); Nat'l Iranian Oil Co. v. Ashland Oil, Inc., 817

F.2d 326, 333 (5th Cir.) (noting that "whether [an agreement] is

entire or severable turns on the parties' intent at the time the

agreement was executed, as determined from the language of the

contract and the surrounding circumstances"), cert. denied, 484

U.S. 943, 108 S.Ct. 329, 98 L.Ed.2d 356 (1987). In construing a

contract, its unambiguous language alone will generally be deemed

to express the intent of the parties. Norman v. Apache Corp., 19

F.3d 1017, 1024 (5th Cir.1994). "The issue as to severability is

whether or not the parties would have entered into the agreement

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absent the [severed] parts." McFarland v. Haby, 589 S.W.2d 521,

524 (Tex.Civ.App.—Austin 1979, writ ref'd n.r.e.) (holding that

contract was unseverable where party would not have signed contract

absent illegal parts).

In the instant case, the terms of the Lease evidence the

parties' intent that the Use Rights and the Reproduction Rights be

distinct and separate items. The Use Rights permitted the lessee

to use the abstract books, records, and equipment of the plant but

not to "duplicate in any manner any material constituting a part of

said plant or permit anyone to make copies therefrom." The

Reproduction Rights—the privilege to make copies after

termination—served as the natural complement to the Use Rights. In

exchange for these two sets of rights, the lessee agreed to provide

two kinds of consideration: (1) monetary outlays—payment of $3000

a month rent, taxes, and insurance premiums; and (2) material

additions to the plant—daily posting of new information relevant to

the business.

The district court surmised that severance of the Lease into

two separate agreements would lead to absurd results. The court

reasoned that:

Stewart's argument that the lease consists of two divisible
agreements would logically permit the lessee to have signed
the lease with the premeditated intention of not performing
its contractual obligations to pay rent, taxes, and
maintenance, to have breached the lease by continuing to
possess and use the plant until it expired or the lessor
terminated it, and then to enjoy a right to copy the title
plant, all for free.

We disagree.

These parties knew each other and were bound by at least one

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preexisting contractual relationship. In addition to the agency

agreement mentioned in Paragraph 6, the Lease makes reference in

Paragraph 12 to a previous lease between the same parties dated

November 1, 1966. In light of the fact that all additions to the

plant became the property of the lessor, it is clear that the

parties included the Reproduction Rights in the Lease to preserve

the value to the lessee of the lessee's daily contributions to the

corpus of the abstract plant.

Moreover, we believe that the parties' purposeful addition to

the Lease of the words "for any reason," is strongly indicative of

their intent to preserve the lessee's sweat equity in the abstract

plant. Paragraph 4 of the Lease provides that the lessee shall

have the privilege of making copies of certain materials "[u]pon

termination of th[e] lease for any reason." By the terms of the

Lease, the parties intended to protect the rights of the lessee to

reproduce materials with which the lessee had enriched the plant

day-by-day, regardless of the circumstances that led to

termination. The parties expressly manifested their intention that

the lessee's Reproduction Rights survive breach and termination.

Thus, we find that the intent of the parties was that the lessee's

Reproduction Rights be severable.

The second of Johnson 's severability factors—the subject

matter of the agreement—weighs in favor of severability. Although,

a careless glance might suggest that the "subject matter" of the

Lease is uniform and undifferentiated, the two agreements

encompassed by the Lease are distinct and clearly defined. One

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deals with the use, but not the reproduction, of all of the

abstract materials; the other deals with the reproduction of only

the abstract materials added since 1961 and the presumably few

computer records predating 1961.

Finally, the third severability factor—the conduct of the

parties—also favors a finding of severability. In its conclusion

that severability would lead to absurd results, the district court

relied on a scenario wherein the lessee, in order to obtain the

Reproduction Rights "for free," might have signed the Lease with

the premeditated intention of immediately breaching it. In fact,

the district court's speculative conclusion is undermined by the

actual conduct of the parties. The parties enjoyed a presumably

healthy prior relationship as evidenced by the previous lease

referenced in Paragraph 12. Moreover, not only did the breach

contemplated by the district court not occur, but a history of

good-faith performance by both parties persisted for approximately

twenty years until the bankruptcy filing.

Additionally, a type of conduct that is particularly telling

in an inquiry such as this is the method of payment arranged by the

parties. See Ferguson, 183 B.R. at 126 (finding that parties

conducted themselves as though contract was unseverable where "both

parties contemplated an entire contract through the type of payment

they arranged"). "Where the subject matter of the contract is

divisible and the consideration is apportioned, these qualities are

consistent with and indicative of a severable contract." Id.; see

also Budge v. Post, 544 F.Supp. 370, 382 (N.D.Tex.1982) (finding

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that a settlement was not a divisible contract where "the

consideration supporting the [ ] Settlement was neither expressly

nor impliedly apportioned with respect to each promise made by the

parties"); Lake LBJ, 771 S.W.2d at 153 (holding that construction

contract was divisible where it provided for separate payments,

each roughly proportionate to separate kinds of work required).

In this case, the Lease called for two separate kinds of

consideration, each kind appropriate to one of the two types of

rights granted: monetary payments for the Use Rights; day-by-day

updating for the Reproduction Rights. We find that the parties, at

least impliedly, apportioned the consideration with respect to each

promise.

The district court bases its determination of the Lease's

indivisibility, in part, on two other factors: whether there was

a single assent to the entire transaction; and whether the

promises included in the contract "are so interdependent that the

parties would not have entered into one without the other." Budge,

544 F.Supp. at 381. We do not believe that these factors are

determinative in this instance. Far more compelling is the clear

intent of the parties, their conduct, and the subject matter of the

two major agreements contained within the lease.

We believe that a determination of indivisibility "would

result in a new and different contract not intended by the

parties." McFarland, 599 S.W.2d at 524. Thus, based on the way

that the parties structured the Lease, we conclude that the Lease

was a severable contract, divisible into two separate agreements.

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The next question is whether the trustee's rejection of the Lease,

pursuant to § 365, rendered the Reproduction Rights unenforceable

notwithstanding their severability.

B. Section 365

Section 365 of the Bankruptcy Code provides that the

bankruptcy trustee may reject any executory contract or unexpired

lease of the debtor. 11 U.S.C. § 365(a). "This provision allows

a trustee to relieve the bankruptcy estate of burdensome agreements

which have not been completely performed." In re Murexco

Petroleum, Inc., 15 F.3d 60, 62 (5th Cir.1994). The Code states

that, except in certain narrowly circumscribed instances,7

rejection of an executory contract or lease constitutes a material

breach.8 11 U.S.C. § 365(g). As a legal fiction, such a breach is

deemed to have occurred on the day immediately prior to the

commencement of the bankruptcy so rejection claims are treated as

prepetition claims, 11 U.S.C. §§ 365(g)(1) & 502(g), and because

the parties' rights are deemed prepetition, state law governs the

rights stemming from the breach.9 In re Audra-John Corp., 140 B.R.

Section 365(g) notes that rejection constitutes breach
except as provided in subsections (h)(2) and (i)(2). 11 U.S.C. §
365(g). These subsections deal with the rejection of timeshare
plans and contracts for the sale of real property. 11 U.S.C. §
365(h)(2) & (i)(2).

Under § 365, such a breach does not result in the automatic
termination of the contract or lease. In re Austin Dev. Co., 19
F.3d 1077, 1082 (5th Cir.) (citing In re Continental Airlines,
981 F.2d 1450, 1459 (5th Cir.1993)), cert. denied, --- U.S. ----,
115 S.Ct. 201, 130 L.Ed.2d 132 (1994).

In the case at bar, Paragraph 7 of the Lease provided that
in the event that the lessee defaulted in any of the required
payments the lessor would have the right to terminate the

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752, 757 (Bankr.D.Minn.1992).

"It is well established that as a general proposition an

executory contract must be assumed or rejected in its entirety."

In re Camptown, Ltd., 96 B.R. 352, 355 (Bankr.M.D.Fla.) (citations

omitted), order amended on other grounds, 98 B.R. 596

(Bankr.M.D.Fla.1989). Where an executory contract contains several

agreements, the debtor may not choose to reject some agreements

within the contract and not others. In re Cutters, Inc., 104 B.R.

886, 888 (Bankr.M.D.Tenn.1989) (citation omitted).

Although the Code does not define "executory contract,"

generally an agreement is considered executory "if at the time of

the bankruptcy filing, the failure of either party to complete

performance would constitute a material breach of the contract,

thereby excusing the performance of the other party." Murexco, 15

F.3d at 62-63. There is no dispute that the Use-Rights portion of

the Lease was executory. As to the Reproduction Rights, arguably

the lessee had substantially performed its obligations at the time

of the bankruptcy filing and the Reproduction Rights agreement

could be considered executed.

If a single contract contains separate, severable agreements

the debtor may reject one agreement and not another. Cutters, 104

B.R. at 889 (citation omitted). "[T]he issue of assumption or

rejection of such contracts relates only to those aspects of the

contracts which remain unfulfilled as of the date the petition is

filed." In re Tomer, 128 B.R. 746, 756 (Bankr.S.D.Ill.1991)

contract.

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(citation omitted), aff'd, 147 B.R. 461 (S.D.Ill.1992). Thus,

where a single document embraces several distinct agreements, some

of which are executory and some of which are fully or substantially

performed, only the executory portions of the document are subject

to rejection.

Where a trustee rejects a severable contract containing both

an executed and an executory agreement, such rejection is not

equivalent to the breach or rescission of the executed agreement.

Id. Nor does it "require the undoing or reversal of already

executed portions of the contract[ ]. Rather, the executed

portions of the contract[ ] remain intact, and property rights

acquired under the contract[ ] prior to filing became property of

the estate despite the trustee's rejection of unperformed

obligations of the contract[ ]." Id. (citation omitted) (holding

that debtor's claim to money owed for prepetition services under

personal services contract was an asset of debtor's estate which

passed to trustee despite trustee's subsequent rejection of the

contract).

Thus, in the instant case, when the bankruptcy trustee

rejected the Lease pursuant to § 365 the debtor materially breached

the Lease only to the extent that the Lease remained

executory—i.e., only in regard to the Use Rights. We conclude

that, as a matter of law, the rejection of the Lease did not render

the Reproduction Rights acquired by Stewart Title unenforceable.

III. CONCLUSION

For the foregoing reasons, the judgment of the district court

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is REVERSED and the case is REMANDED for further proceedings not

inconsistent with this opinion.

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