158 B.R. 629 (E.D.Va. 1993), 2:92cv793, In re Catron

Docket Nº:Civ. A. No. 2:92cv793.
Citation:158 B.R. 629
Party Name:. In re Curtis R. CATRON, Debtor. Ramon W. BREEDEN, Jr. and Ramon W. Breeden, Jr. and Marian R. Breeden, Trustees u/a Mary Jane Breeden, Plaintiffs/Appellees, v. Curtis R. CATRON, Defendant/Appellant.
Case Date:August 20, 1993
Court:United States District Courts, 4th Circuit, Eastern District of Virginia

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158 B.R. 629 (E.D.Va. 1993)


In re Curtis R. CATRON, Debtor.

Ramon W. BREEDEN, Jr. and Ramon W. Breeden, Jr. and Marian R. Breeden, Trustees u/a Mary Jane Breeden, Plaintiffs/Appellees,


Curtis R. CATRON, Defendant/Appellant.

Civ. A. No. 2:92cv793.

United States District Court, E.D. Virginia, Norfolk Division.

August 20, 1993

Page 630

Frank James Santoro, Joseph Todd Liberatore, Marcus, Santoro & Kozak, Portsmouth, VA, for defendant/appellant.

Peter G. Zemanian, Willcox & Savage, P.C., Norfolk, VA, for plaintiffs/appellees.



Curtis R. Catron (hereinafter "Catron"), the debtor, appeals from a bankruptcy order

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entered September 7, 1992. 158 B.R. 624. In its order the bankruptcy court held that a partnership agreement was an executory contract for personal services, that pursuant to 11 U.S.C. § 365(c) such contract was not assumable by Catron as a debtor in possession, and that cause existed to grant appellee's motion for relief from stay pursuant to 11 U.S.C. § 362(d). While Catron assigns four errors on appeal, the pivotal argument is that the bankruptcy court misinterpreted § 365(c)(1)(A). This court's jurisdiction is predicated on 28 U.S.C. § 158(a).

I. Background Facts

Catron, Ramon W. Breeden Jr. ("Breeden"), and Ramon W. Breeden Jr. and Marian R. Breeden, as Trustees under the Revocable Trust Agreement of Mary Jane Breeden ("Trustees"), comprise the partners in a partnership established by the Partnership Agreement of the Orchard Square Associates ("Partnership Agreement"). Catron, Breeden, and the Trustees created the partnership for the express purpose of acquiring a parcel of undeveloped land, constructing a shopping center on this land, and then managing the shopping center. Catron contributed to the partnership the parcel of undeveloped land on which the shopping center was subsequently constructed. Breeden, the managing general partner and an experienced developer, supplied expertise in development, financial strength, and the promise of an anchor tenant for the shopping center.

Unfortunately for the partnership, many of the financial projections upon which the partners proceeded were founded on the assumption that the local economy would continue to expand as it had done over the previous several years. As recent history suggests, a decline in the local economy precipitated by Operation Desert Storm upset these forecasts and the project fell short of its predicted lease-up levels and income goals. Consequently, the partnership could not pay its bills from the cash generated by the shopping center tenants. To meet the partnership's financial obligations, Breeden made two capital calls on the partners, one in 1990 and the other in 1991. On both occasions, Catron did not contribute his share as required by the Partnership Agreement. On October 17, 1991, Catron filed a petition for Chapter 11 Bankruptcy.

Breeden and the Trustees then filed under 11 U.S.C. § 362(d) for relief from the automatic stay imposed by operation of law when Catron filed a petition for bankruptcy. Breeden and the Trustees sought relief from the stay in order to exercise a buy-out option contained in the Partnership Agreement, which option was triggered by Catron's filing for bankruptcy. 1 The buy-out option allows the nonfiling partners to buy out the bankrupt partner at a price to be determined either by agreement or by an independent appraiser. The bankruptcy court granted relief from the stay and this matter is now before the court on appeal from that decision.

II. Standard of Review

Bankruptcy Rule 8013 provides that a district court, giving "due regard ... to the opportunity of the bankruptcy court to judge the credibility of the witnesses," shall not set aside the factual findings of the bankruptcy court unless they are clearly erroneous. Bankr.R. 8013. A bankruptcy court's finding of fact is "clearly erroneous"

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"when it is (1) not supported by substantial evidence; (2) contrary to the clear preponderance of the evidence; or (3) based upon an erroneous view of the law." In re Rape, 104 B.R. 741, 747 (W.D.N.C.1989) (quoting In re Bartlett, 92 B.R. 142, 143 (E.D.N.C.1988)). Cf. In re Hammer, 112 B.R. 341, 345 (Bankr. 9th Cir.1990) ("A trial court abuses its discretion if it rests its conclusions on clearly erroneous factual findings or an incorrect legal standard").

The district court reviews de novo conclusions of law. In re Bryson Properties, XVIII, 961 F.2d 496, 499 (4th Cir.1992); see also, Brown v. Mt. Prospect State Bank (In re Muncrief), 900 F.2d 1220, 1224 (8th Cir.1990); Arizona Appetito's Stores, Inc. v. Paradise Village Inv. Co. (In re Arizona Appetito's Stores, Inc.), 893 F.2d 216, 218 (9th Cir.1990); Finney v. Smith, 141 B.R. 94, 97 (E.D.Va.1992) (citing, e.g., United States Trustee v. Kinser, 128 B.R. 417, 418 (W.D.Va.1991)); Bangert v. McCauley (In re McCauley), 105 B.R. 315, 318 (E.D.Va.1989).

III. Analysis

On appeal Catron assigns four grounds of error. First, he contends that the bankruptcy court misconstrued 11 U.S.C. § 365(c)(1)(A), which restricts the types of executory contracts a bankruptcy trustee or debtor in possession may assume or assign. The bankruptcy court concluded that a partnership agreement constituted the type of executory contract that 11 U.S.C. § 365(c)(1)(A) barred the debtor, Catron, from assuming. Second, Catron disputes the bankruptcy court's holding that as a debtor in possession, he was a separate and distinct legal entity from the prepetition debtor for purposes of 11 U.S.C. § 365(c). Third, Catron maintains that the bankruptcy court erroneously held that 11 U.S.C. § 365(e)(1) did not invalidate the provision in the Partnership Agreement permitting the nonbankrupt partners to buy out his interest. Catron contends that the buy-out provision, because it is triggered by a partner's filing for bankruptcy, constitutes an impermissible "ipso facto" clause and is thus voidable under the Bankruptcy Code. Finally, he argues that the bankruptcy court erred when it found cause to lift the mandatory stay imposed pursuant to § 362(a). The court addresses each of these assignments of error in the opinion that follows.

1. Interpretation of § 365(c)

The court must first determine whether § 365(c) permits Catron, as a debtor in possession, to assume the rights and duties of the Partnership Agreement. The interpretation of a statute is a question of law, and thus this court's review is de novo.

The relevant portion of § 365(c) states:

The trustee may not assume or assign any executory contract ... of the debtor, ... if--

(1)(A) applicable law excuses a party, other than the debtor, to such contract ... from accepting performance from or rendering performance to an entity other than the debtor or the debtor in possession, whether or not such contract ... prohibits or restricts assignment of rights or delegation of duties; and

(B) such party does not consent to such assumption or assignment....

11 U.S.C. § 365(c)(1) (emphasis added). For purposes of clarification, the court notes that while the statute speaks only of trustees, § 1107(a) makes clear that it also applies to debtors in possession. 2

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Catron contends that his status as a debtor in possession exempts him from the sweep of § 365(c), permitting him to assume the Partnership Agreement. Specifically, he argues that the language in subsection (1)(A) should not be construed literally. A literal reading of the statute prohibits assumption or assignment of executory contracts by the trustee or debtor in possession if 1) the contract is nonassignable under "applicable law" and 2) the nondebtor parties to the contract, i.e., Breeden and the Trustees, do not consent to its assumption or assignment. Rather, he asserts that the statute was meant to prohibit the assumption or assignment of contracts only when the nondebtor parties to the contract would actually be forced to accept performance from or render performance to a party other than the debtor or the debtor in possession. Appellant's Br. at 7, 9, 17.

In response, the appellees argue that 365(c) proscribes the assumption of this "type" of agreement and that this proscription also applies to Catron because he is a debtor in possession. Briefly, they contend that § 365(c)(1)(A) articulates a hypothetical test for determining when a contract may be assumed or assigned by a trustee or debtor in possession. In this case, the Partnership Agreement constitutes the type of contract that may not be assumed or assigned under the hypothetical test without the consent of Breeden and the Trustees. For the reasons explained herein, this court concurs with the appellee's position and thus AFFIRMS the bankruptcy court's interpretation of § 365(c).

To understand the position embraced by the bankruptcy court, the court finds it helpful to "walk through" the language of the statute in a "step-by-step" fashion. At this stage, the court will interpret the language of § 365(c) literally in the manner followed by the bankruptcy judge and suggested by the appellees. The statute begins "[t]he trustee may not assume or assign...." (emphasis added). As noted previously, this prohibition on assumptions and assignments also applies to a debtor in possession. 3 Thus, the first issue the court must consider is the legal status of the appellant, Catron, in order to determine whether the statute applies to him.

Before Catron filed for bankruptcy, he was simply a partner in the Orchard Square Partnership, with the concomitant rights and obligations afforded partners by the Partnership Agreement. Upon filing a petition, however, he became a "debtor in possession." The term "debtor in possession"...

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