Pioneer Ford Sales, Inc., In re

• Decision Date: 06 March 1984
• Docket Number: No. 83-1479,83-1479
• Citation: 729 F.2d 27
• Parties: 10 Collier Bankr.Cas.2d 524, 11 Bankr.Ct.Dec. 1303, Bankr. L. Rep. P 69,740 In re PIONEER FORD SALES, INC. Ford Motor Company, Appellant.
• Court: U.S. Court of Appeals — First Circuit

Page 27

729 F.2d 27

10 Collier Bankr.Cas.2d 524, 11 Bankr.Ct.Dec. 1303,

Bankr. L. Rep. P 69,740

In re PIONEER FORD SALES, INC. Ford Motor Company, Appellant.

No. 83-1479.

United States Court of Appeals, First Circuit.

Argued Dec. 9, 1983.

Decided March 6, 1984.

Jay Kelly Wright, Washington, D.C., with whom Peter A. Barnes, Hughes Hubbard & Reed, Washington, D.C., Thayer Fremont-Smith, Paul M. Stein, and Choate, Hall & Stewart, Boston, Mass., were on brief, for Ford Motor Company.

Joshua Teverow, Providence, R.I., with whom Tasca, Rotelli & Teverow, Providence, R.I., was on brief, for Toyota Village, Inc.

John R. Allen, and Hinckley & Allen, Providence, R.I., on brief for Pioneer Ford Sales, Inc.

John F. Cuzzone, Jr., Louis A. Geremia, and Quinn, Cuzzone, Geremia & Pennacchia Providence, R.I., on brief for Creditors Committee.

Richard S. Mittleman, and Zietz, Mittleman & Webster, Providence, R.I., on brief for Fleet National Bank.

Before CAMPBELL, Chief Judge, and BOWNES and BREYER, Circuit Judges.

BREYER, Circuit Judge.

The Ford Motor Company appeals a federal district court decision, 30 B.R. 458, allowing a bankrupt Ford dealer (Pioneer Ford Sales, Inc.) to assign its Ford franchise over Ford's objection to a Toyota dealer (Toyota Village, Inc.). The district court decided the case on the basis of a record developed in the bankruptcy court. The bankruptcy court, 26 B.R. 116, had approved the transfer, which ran from Pioneer to Fleet National Bank (Pioneer's principal secured creditor) and then to Toyota Village. Fleet sought authorization for the assignment because Toyota Village will pay $10,000 for the franchise and buy all parts and accessories in Pioneer's inventory at fair market value (about $75,000); if the franchise is not assigned, Ford will buy only some of the parts for between $45,000 and $55,000. Thus, the assignment will increase the value of the estate. Fleet is the appellee here.

The issue that the case raises is the proper application of 11 U.S.C. Sec. 365(c)(1)(A), an exception to a more general provision, 11 U.S.C. Sec. 365(f)(1), that allows a trustee in bankruptcy (or a debtor in possession) to assign many of the debtor's executory contracts even if the contract itself says that it forbids assignment. The exception at issue reads as follows:

(c) The trustee [or debtor in possession] may not assume or assign an executory contract ... of the debtor, whether or not such contract ... prohibits assignment if--

(1)(A) applicable law excuses [the other party to the contract] from accepting performance from ... an assignee ... whether or not [the] ... contract ... prohibits ... assignment.

The words "applicable law" in this section mean "applicable non-bankruptcy law." See H.R.Rep. No. 95-595, 95th Cong., 1st Sess. 348 (1977), reprinted in [1978] U.S.Code Cong. & Ad.News 5787, 5963, 6304; S.Rep. No. 95-989, 95th Cong., 2d Sess. 59 (1978), reprinted in [1978] U.S.Code Cong. & Ad.News 5787, 5845. Evidently, the theory of this section is to prevent the trustee from assigning (over objection) contracts of the sort that contract law ordinarily makes nonassignable, i.e. contracts that cannot be assigned when the contract itself is silent about assignment. At the same time, by using the words in (1)(A) 'whether or not the contract prohibits assignment,' the section prevents parties from using contractual language to prevent the trustee from assigning contracts that (when the contract is silent) contract law typically makes assignable. Id. Thus, we must look to see whether relevant nonbankruptcy law would allow Ford to veto the assignment of its basic franchise contract "whether or not" that basic franchise contract itself specifically "prohibits assignment."

The nonbankruptcy law to which both sides point us is contained in Rhode Island's "Regulation of Business Practices Among Motor Vehicle Manufacturers, Distributors and Dealers" Act, R.I.Gen.Laws Sec. 31-5.1-4(C)(7). It states that

[N]o dealer ... shall have the right to ... assign the franchise ... without the consent of the manufacturer, except that such consent shall not be unreasonably withheld.

The statute by its terms, allows a manufacturer to veto an assignment where the veto is reasonable but not otherwise. The statute's language also indicates that it applies "whether or not" the franchise contract itself restricts assignment. Thus, the basic question that the case presents is whether Ford's veto was reasonable in terms of the Rhode Island law.

Neither the district court nor the bankruptcy court specifically addressed this question. Their failure apparently arose out of their belief that 11 U.S.C Sec. 365(c)(1)(A) refers only to traditional personal service contracts. But in our view they were mistaken. The language of the section does not limit its effect to personal service contracts. It refers generally to contracts that are not assignable under nonbankruptcy law. State laws typically make contracts for personal services nonassignable (where the contract itself is silent); but they make other sorts of contracts nonassignable as well. See, e.g., N.Y.State Finance Law Sec. 138 (1974) (making certain government contracts unassignable); N.Y.General Municipal Law Sec. 109 (1977) (same); N.C.Gen.Stat. Sec. 147-62 (1978) (same). The legislative history of Sec. 365(c) says nothing about "personal services." To the contrary, it speaks of letters of credit, personal loans, and leases--instances in which assigning a contract may place the other party at a significant disadvantage. The history thereby suggests that (c)(1)(A) has a broader reach.

The source of the "personal services" limitation apparently is a bankruptcy court case, In re Taylor Manufacturing, Inc., 6 B.R. 370 (Bkrtcy.N.D.Ga.1980), which other bankruptcy courts have followed. The Taylor court wrote that (c)(1)(A) should be interpreted narrowly, in part because it believed that (c)(1)(A) conflicted with another section, (f)(1), which states in relevant part:

Except as provided in subsection (c) ..., notwithstanding a provision ... in applicable law that prohibits ... the assignment of [an executory] contract ... the trustee may assign [it]....

As a matter of logic, however, we see no conflict, for (c)(1)(A) refers to state laws that prohibit assignment "whether or not" the contract is silent, while (f)(1) contains no such limitation. Apparently (f)(1) includes state laws that prohibit assignment only when the contract is not silent about assignment; that is to say, state laws that enforce contract provisions prohibiting assignment. See 1 Norton, Bankruptcy Law and Practice Sec. 23.14. These state laws are to be ignored. The section specifically excepts (c)(1)(A)'s state laws that forbid assignment even when the contract is silent; they are to be heeded. Regardless, we fail to see why a "conflict" suggests that (c)(1)(A) is limited to "personal services."

The Taylor court cites 2 Collier on Bankruptcy Sec. 365.05 and the Commission Report, H.R.Doc. No. 93-137, 93rd Cong., 1st Sess. 199 (1973), in support. Both of these sources speak of personal services. However, they do not say that (c)(1)(A), was intended to be limited to personal services. Indeed, since it often is difficult to decide whether or not a particular duty can be characterized by the label "personal service," it makes sense to avoid this question and simply look to see whether state law would, or would not, make the duty assignable where the contract is silent. Thus, the Fifth Circuit has found no reason for limiting the scope of (c)(1)(A) to personal service contracts. In re Braniff Airways, Inc., 700 F.2d 935, 943 (5th Cir.1983). Fleet concedes in its brief that "the exception to assignment [of Sec. 365(c)(1)(A) ] is not limited to personal services contracts." We therefore reject the district court's conclusion in this respect.

Although the district court did not explicitly decide whether Ford's veto was reasonable, it decided a closely related question. Under other provisions of Sec. 365 a bankruptcy court cannot authorize assignment of an executory contract if 1) the debtor is in default, unless 2) there is "adequate assurance of future performance." Sec. 365(b)(1)(C). Pioneer is in default, but the bankruptcy and district courts found "adequate assurance." For the sake of argument, we shall assume that this finding is equivalent to a finding that Ford's veto of the assignment was unreasonable. And, we shall apply a "clearly erroneous" standard in reviewing the factual element in this lower court finding. Fed.R.Civ.P. 52. On these assumptions, favorable to Fleet, we nonetheless must reverse the district court, for, in our view, any finding of unreasonableness, based on this record, is clearly erroneous.

Our review of the record reveals the following critical facts. First, in accordance with its ordinary business practice and dealer guidelines incorporated into the franchise agreement, Ford would have required Toyota Village, as a dealer, to have a working capital of at least $172,000, of which no more than half could be debt. Toyota Village, however, had a working capital at the end of 1981 of $37,610; and its net worth was $31,747. Although the attorney for Fleet at one point in the bankruptcy proceedings said Toyota Village could borrow some of the necessary capital from a bank, he made no later reference to the point, nor did he ever specifically state how much Toyota Village could borrow. Since the tax returns of Toyota Village's owner showed gross income of $27,500 for 1981, there is no reason to believe that the owner could readily find the necessary equity capital.

Second, at a time when Japanese cars have sold well throughout the United States, Toyota Village has consistently lost money. The financial statements in the record show the following operating losses:

                        1977      1978      1979       1980       1981
                      --------  --------  ---------  ---------  ---------
                Loss

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