Judd, Thomas, Smith & Co. v. Wofford (In re Wofford)

• Decision Date: 30 September 2019
• Docket Number: Adv. Proc. No. 18-4055,Case No. 18-40533
• Citation: 608 B.R. 494
• Parties: IN RE: Deward Dale WOFFORD, Debtor. Judd, Thomas, Smith & Company, Plaintiff, v. Deward Dale Wofford and Christopher Moser, Trustee, Defendants.
• Court: U.S. Bankruptcy Court — Eastern District of Texas

608 B.R. 494

IN RE: Deward Dale WOFFORD, Debtor.

Judd, Thomas, Smith & Company, Plaintiff,

v.Deward Dale Wofford and Christopher Moser, Trustee, Defendants.

Case No. 18-40533

Adv. Proc. No. 18-4055

United States Bankruptcy Court, E.D. Texas, Sherman Division.

Signed September 30, 2019

Allison L. Grossman, Anderson Grossman, PLLC, Dallas, TX, for Plaintiff.

Robert D. Lybrand, Robert D. Lybrand, P.C., Coppell, TX, Kenneth A. Hill, Quilling, Selander, et al, Dallas, TX, for Defendants.

MEMORANDUM OPINION

HONORABLE BRENDA T. RHOADES, UNITED STATES BANKRUPTCY JUDGE

On May 22, 2019, this Court conducted a trial on the "Original Complaint for Interpleader" filed by Judd, Thomas, Smith & Company ("JTS ") against Deward Dale Woffard (the "Debtor ") and Christopher J. Moser as Chapter 7 Trustee (the "Trustee "). The Court exercises its core jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334 and 157(b)(2). This Memorandum Opinion embodies the Court's findings of fact and conclusions of law. See FED. R. BANKR. P. 7052.¹

RELEVANT FACTS

On March 13, 2018, the Debtor filed a petition for relief under Chapter 7 of the Bankruptcy Code. The Court appointed Christopher J. Moser as the Chapter 7 Trustee for the Debtor's estate. The Debtor received his bankruptcy discharge on June 29, 2018.

The Debtor is a certified public accountant. Prior to bankruptcy, he operated an accounting practice as a sole proprietorship known as Dale Woffard, CPA. The Debtor sold his business to JTS in July 2016. The Debtor, as seller, and JTS, as buyer, executed an Asset Purchase Agreement ("APA ") whereby JTS purchased the business and engaged the Debtor as a consultant. JTS agreed to pay the Debtor 20% of annual collections for five years, which the APA defined as the "term" of the agreement.

As relevant to this proceeding, Article IV, Section (6) of the APA contained the following a non-compete agreement:

During the Term, and notwithstanding any earlier termination of the Consulting Agreement, Seller shall not compete with Buyer in the performance of accounting and bookkeeping, tax compliance, tax planning, tax return preparation, professional or management consulting, attestation or other services previously provided by Seller for clients located in whole or in part in any of Dallas, Denton, Collin or Tarrant County, or any county adjoining such counties. Services for the Excluded Client Accounts are excluded from the previous sentence. Seller shall also not solicit any current or future clients, employees or contractors of Buyer.

In addition, Article VI of the APA addressed default and remedies as follows:

If Buyer or Seller fails to perform any of the material terms, covenants, conditions, representations or obligations of this Agreement then the other party, subject to the requirements of notice provided herein, may pursue any remedy provided at law or in equity. The parties agree and acknowledge that money damages may not be an adequate remedy for any breach of the provisions of this Agreement, including, without limitation, Section (6) of Article IV, and that any party may in its sole discretion apply to any court of law or equity of competent jurisdiction for specific performance and/or other injunctive relief in order to enforce or prevent any violations of the provisions of this Agreement. Notwithstanding anything contained herein to the contrary, all parties shall be entitled to a written notice of default and 15 days to cure before the other party may seek to exercise and remedies.

The Debtor did not list the APA in his bankruptcy schedules or seek to assume the APA as an executory contract under the Bankruptcy Code.

After the Debtor filed for bankruptcy, JTS made two payments to the Debtor under the terms of the APA totaling $4,120. On May 4, 2018, the Trustee made written demand on JTS to pay the Trustee all future payments owed to the Debtor under the APA. On May 24, 2018, the Debtor, through his attorney, gave written notice to JTS that the Debtor disputes the Trustee's position and demanded that JTS pay the Debtor all future payments owed to the Debtor under the APA

JTS initiated this adversary proceeding by filing an "Original Complaint for Interpleader" on June 12, 2018. The Trustee answered the Complaint and asserted a counterclaim against JTS for turnover of all past and future payments owed to the Debtor under the APA that JTS had not already paid the Debtor. The Trustee also asserted crossclaims against the Debtor for (1) a judgment declaring that all payments the Debtor would be entitled to receive under the APA after filing for bankruptcy are property of his bankruptcy estate, and (2) turnover of the two payments the Debtor received after filing for bankruptcy.

JTS, through its counsel, is holding the payments that have come due each month under the APA since May 31, 2018. The total amount of the monthly payments was $20,685.51 as of February 2019.

DISCUSSION

A. Property of the Estate Generally – 22 USC § 541 (a)(1)

Section 541(a)(1) of the Bankruptcy Code provides that, with limited exceptions, "all legal or equitable interests of the debtor in property as of the commencement of the case" constitute property of the bankruptcy estate. 11 U.S.C. § 541(a)(1). A chapter 7 bankruptcy estate generally does not include future earnings or assets acquired after the filing of the petition. Harris v. Viegelahn, ––– U.S. ––––, 135 S.Ct. 1829, 1835, 191 L.Ed.2d 783 (2015). However, when a pre-petition agreement provides for post-petition payments, courts historically looked to whether the post-petition payments were sufficiently rooted in the debtor's pre-bankruptcy past rendering such payments property of the estate. See Segal v. Rochelle , 382 U.S. 375, 86 S.Ct. 511, 15 L.Ed.2d 428 (1966).

In In re Burgess , 438 F.3d 493, 498–99 (5th Cir. 2006), the Fifth Circuit explained that the enactment of the Bankruptcy Code in 1978 made the two-part Segal inquiry unnecessary. Section 541 now governs what is considered property of the bankruptcy estate, and unlike former § 70(a)(5) of the Bankruptcy Act, § 541 expressly defines property "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541. Thus, in Burgess , the Fifth Circuit concluded that the debtor's disaster relief for pre-petition crop loss was not property of the estate, because there was no legal right to relief at the time in which he filed bankruptcy, the legislature having not yet enacted a provision for disaster relief. Id. at 500.

B. Exclusions from Property of Estate – 11 U.S.C. § 541(a)(6)

While § 541(a)(1) broadly defines property of the estate, certain assets are expressly excluded. As relevant to this case, § 541(a)(6) excepts from property of the estate "earnings from services performed by an individual debtor after commencement of the case." 11 U.S.C. § 541(a)(6). According to the Debtor, the payments due under the APA are excluded from the bankruptcy estate by § 541(a)(6) because the Debtor's agreement not to compete is a personal services contract.

"A personal services contract has been defined as ‘[a] contract which contemplates the performance of personal services involving the exercise of special knowledge, judgment, taste, skill, or ability.’ " Doltz v. Harris & Assocs. , 280 F.Supp.2d 377, 388 (E.D. Pa. 2003) (quoting In re Compass Van & Storage Corp. , 65 B.R. 1007, 1011 (Bankr. E.D.N.Y. 1986) ). Some examples of a personal services contract are "a contract to paint a portrait, write a novel, or perform other work requiring ‘rare genius’ and ‘extraordinary skill.’ " Mehul's Inv. Corp. v. ABC Advisors, Inc., 130 F.Supp.2d 700, 705 (D. Md. 2001). Because a trustee may not assume or assign an executory contract for personal services without the parties' consent, see Delightful Music Ltd. v. Taylor (In re Taylor) , 913 F.2d 102, 106–07 (3rd Cir. 1990), some courts have held such a contract is excluded from the bankruptcy estate, see, e.g. , Skiba v. Bimber (In re Bimber) , 318 B.R. 297, 299 (Bankr. W.D. Pa. 2004) (collecting cases).

When a pre-petition contract imposes an affirmative obligation to provide personal services in order to receive post-petition payments, courts have generally found that the payments are not property of the estate. In In re Haynes , 679 F.2d 718 (7th Cir. 1982), for example, the Seventh Circuit was faced with the issue of whether a military retiree's retirement pay constituted proceeds for services performed post-petition. Id. at 719. In exchange for retiree pay, the debtor was required to perform up to two months of active duty training every four years, if ordered to do so by the Secretary of the Navy, and to report to the Navy for a physical exam at least once every four years. Id. The Haynes court found that because the debtor had continuing required duties, his military retirement pay was more like wages than a pension, constituted compensation for "reduced current services," and thus was not property of the estate. Id.

Various courts have recognized a difference between a personal services contract and a non-compete agreement. The former requires affirmative actions by the employee, whereas the latter requires only that they refrain from certain actions. Managed Health Care Assocs. v. Kethan , 209 F.3d 923, 929–30 (6th Cir. 2000) (collecting authority). The Eighth Circuit recently held that payments made pursuant to an employment contract are property of the estate when the debtor did not have to perform any post-petition services to receive them. Longaker v. Boston Scientific Corp. , 715 F.3d 658, 662-63 (8th Cir. 2013) ). See also In re Andrews , 80 F.3d 906, 912 (4th Cir. 1996) ("Although the Thirteenth Amendment prohibits a court from specifically enforcing a personal service contract, an agreement not to compete is specifically enforceable if it is reasonable."); Symphony Diagnostic Servs. No. 1 Inc. v. Greenbaum , 828 F.3d 643, 647 (8th Cir. 2016) ("the fact that Greenbaum and Tabanag...