729 F.2d 27 (1st Cir. 1984), 83-1479, In re Pioneer Ford Sales

Docket Nº:83-1479.
Citation:729 F.2d 27
Party Name:In re PIONEER FORD SALES, INC. Ford Motor Company, Appellant.
Case Date:March 06, 1984
Court:United States Courts of Appeals, Court of Appeals for the First Circuit

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729 F.2d 27 (1st Cir. 1984)


Ford Motor Company, Appellant.

No. 83-1479.

United States Court of Appeals, First Circuit

March 6, 1984

Argued Dec. 9, 1983.

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,

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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.

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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...

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