Hallahan, Matter of

• Decision Date: 10 July 1991
• Docket Number: No. 90-2054,90-2054
• Citation: 936 F.2d 1496
• Parties: , Bankr. L. Rep. P 74,066 In the Matter of Nelson Grant HALLAHAN, doing business as Nelson Hallahan and Associates, Debtor. N.I.S. CORPORATION and Ozark Life Insurance Company, Plaintiffs-Appellees, v. Nelson Grant HALLAHAN, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1496

936 F.2d 1496

60 USLW 2061, Bankr. L. Rep. P 74,066

In the Matter of Nelson Grant HALLAHAN, doing business as

Nelson Hallahan and Associates, Debtor.

N.I.S. CORPORATION and Ozark Life Insurance Company, Plaintiffs-Appellees, v. Nelson Grant HALLAHAN, Defendant-Appellant.

No. 90-2054.

United States Court of Appeals, Seventh Circuit.

Argued Feb. 22, 1991.

Decided July 10, 1991.

Mark G. Zellmer, Husch, Eppenberger, Donohue, Cornfeld & Jenkins, St. Louis, Mo. and Bret S. Babcock, Peoria, Ill., for appellees.

Nile J. Williamson, Peoria, Ill., for debtor-appellant.

Before CUMMINGS, RIPPLE and KANNE, Circuit Judges.

CUMMINGS, Circuit Judge.

The bankruptcy court found Nelson Hallahan's debt to N.I.S. Corporation ("N.I.S.") and its parent, Ozark Life Insurance Company ("Ozark"), to be non-dischargeable and in addition refused to honor Hallahan's demand for a jury trial to determine the dischargeability of the debt and the amount owed. We review the district court's affirmance of the bankruptcy court's ruling.

FACTS

Nelson Hallahan began selling insurance policies for Ozark in 1977. In 1981 he was promoted to manager, and at that time he signed a contract with N.I.S., the subsidiary of Ozark responsible for selling policies. The contract contained a covenant not to compete which stated:

If this Contract is terminated by either party for any reason, Agent agrees that he will not, for a period of four (4) years from the date of termination, within the county or counties in which Company is located or doing business at the time of termination or within the immediate adjoining counties: * * * (iii) Directly or indirectly, for himself or on behalf of any other person or firm, induce or attempt to induce any policyholder of any Insurance Company to cancel, surrender, apply N.I.S. terminated Hallahan in December 1983, and Hallahan went to work for a competing insurance company, Connecticut Mutual. Hallahan immediately began soliciting business from Ozark policyholders he had served while at Ozark.

for a policy loan under or to discontinue the payments or premiums on any policy issued by such Insurance Company.

Ozark brought suit in federal court in the Western District of Missouri in August 1984 seeking a permanent injunction that would prevent Hallahan from violating the terms of his contract. Hallahan agreed to the issuance of a preliminary injunction during discovery, and on September 21, 1984, the court entered an order enjoining Hallahan from selling Connecticut Mutual policies to Ozark policyholders.

In June 1985, Hallahan filed a voluntary petition for bankruptcy in the Central District of Illinois under Chapter 7 of the Bankruptcy Code. N.I.S. filed a proof of claim in the bankruptcy court and a complaint for nondischargeability pursuant to 11 U.S.C. Sec. 523(a)(6) (1988). Section 523(a)(6) provides that a debt "for willful and malicious injury by the debtor to another entity or to the property of another entity" cannot be discharged. Seeking injunctive relief as well as recovery of money damages, N.I.S. claimed that Hallahan had inflicted malicious and willful injury upon it by willfully violating the terms of his contract and by tortiously interfering with the business expectations of N.I.S. N.I.S. then filed in the district court below a motion to withdraw the matter from the bankruptcy court ¹ and transfer the adversary proceeding to the Western District of Missouri. Hallahan opposed the motion to transfer and the district court denied N.I.S.'s motion. Subsequently Ozark was added as a party plaintiff to the complaint filed in bankruptcy court, and the case proceeded in Illinois. The case in Missouri was eventually dismissed without prejudice in 1988.

All parties moved for summary judgment in the adversary proceeding in the bankruptcy court. Hallahan also requested a jury trial, arguing that because the underlying breach of contract action was a "suit at common law," the Seventh Amendment preserved his right to a jury trial, regardless of the fact that the suit was being tried as part of an equitable bankruptcy proceeding. The bankruptcy judge partially granted plaintiffs' motion for summary judgment, ruling that any debt due to Ozark and N.I.S. was non-dischargeable, because Hallahan had willfully breached his contract. Hallahan did not deny soliciting Ozark's customers. The court declined to discuss plaintiffs' claim of tortious interference, and it denied Hallahan's request for a jury trial, holding that "there is no right to a jury trial in the bankruptcy court in a dischargeability action."

After a trial addressing the amount of liability, the bankruptcy court found that plaintiffs were entitled to $208,111.28 in money damages for lost profits. The court also awarded attorney's fees of $43,723.24, making the total non-dischargeable debt $251,834.52.

Hallahan appealed to this Court after the district court affirmed the bankruptcy court's findings. 113 B.R. 975. Three issues are presented: 1) whether the restrictive covenant in Hallahan's contract is unenforceable under Missouri law; 2) whether damages were sufficiently proven; and 3) whether the bankruptcy court erred in denying Hallahan's request for a jury trial. We take these questions in turn. ²

The Enforceability of the Restrictive Covenant

Hallahan urges this Court to find that the covenant not to solicit contained in his employment contract was unenforceable. The bankruptcy court noted that if the covenant was valid, Hallahan breached it with sufficient willfulness to support the finding of non-dischargeability under Section 523(a)(6) of the Bankruptcy Code, 11 U.S.C. Sec. 523(a)(6) (1988). Hallahan apparently concurs in this view, for he does not contend that his actions were not willful. ³

In their contract, the parties agreed that Missouri law would govern questions regarding contract interpretation. Hallahan advances four reasons that the restrictive covenant is unenforceable under Missouri law. First, he believes that Ozark did not have a protectable interest in its customer lists and thus that he was free to use them to solicit Ozark policyholders after he began working for Connecticut Mutual. Second, Hallahan argues that the scope of the covenant not to solicit was too broad geographically and in duration to be enforceable. Third, Hallahan interprets Missouri case law to hold that restrictive covenants cannot bind agents like him though they can be enforced against employees. Finally, he contends that the contract was one of adhesion.

None of these contentions has enough merit to warrant extended discussion. Hallahan's first argument about the propriety of his use of Ozark's customer lists is simply beside the point. Hallahan cites cases involving a former employee's common law duties not to reveal trade secrets. See, e.g., American Wheel & Engineering Co. v. Dana Molded Products, Inc., 132 Ill.App.3d 205, 87 Ill.Dec. 299, 476 N.E.2d 1291 (1st Dist.1985). Ozark and N.I.S. do not seek to recover damages for Hallahan's breach of a common law duty to protect customer lists. Instead they allege breach of a contract provision designed to protect their interests in the customers themselves. Such covenants have been enforced in Missouri courts even in the absence of any improper use of customer lists. See Prentice v. Rowe, 324 S.W.2d 457, 462 (Mo.Ct.App.1959) (employee can be held liable for violation of reasonable restrictive covenant aimed at discouraging attempts by former employee to entice away customers even if employee did not use trade secrets or customer lists).

Hallahan likewise cannot prevail in his arguments relating to the reasonability of the covenant. In Missouri, a covenant not to solicit is valid so long as plaintiff demonstrates its reasonableness. Mills v. Murray, 472 S.W.2d 6, 11 (Mo.Ct.App.1971). Post-employment restrictions generally must be qualified as to time and area and be no greater than fairly required to protect the employer. Id. Hallahan's contract specified that his solicitations would be restricted for four years after termination within any counties in the United States where Ozark did business. Missouri appellate courts have enforced covenants not to solicit extending to a five-year duration. See Garlichs Agency Co. v. Anderson, 226 S.W. 978 (Mo.Ct.App.1920) Hallahan tries to escape the obligation imposed by the covenant not to solicit by formalistically separating agents from employees. He notes that Missouri law defines the purpose of the restrictive covenant as the protection of "an employer from unfair competition by a former employee." Continental Research Corp. v. Scholz, 595 S.W.2d 396, 399 (Mo.Ct.App.1980). Hallahan takes these and other similar statements in the relevant case law to mean that restrictive covenants cannot be enforced unless made in the context of an employer-employee relationship. Hallahan's own agency contract with the plaintiffs stated emphatically that the terms of his contract would not "be construed to create a relationship of an employer and employee."

(defendant enjoined from engaging in insurance business for five years); see also Mills, 472 S.W.2d at 12 (collecting cases). A geographic limitation of the type contained in Hallahan's contract similarly is not unreasonable under Missouri law. See Alldredge v. Twenty-Five Thirty-Two Broadway Corp., 509 S.W.2d 744 (Mo.Ct.App.1974) (enforcing covenant restricting competition in any state in U.S. in which plaintiff does business). The contours of the covenant were drawn fairly to protect Ozark and N.I.S. and Hallahan's challenges are not aided by a consideration of the applicable law.

A fair reading of Missouri common law supports the enforcement of reasonable restrictive covenants imposed upon agents. The cases naturally most often discuss covenants binding employees. However, the general notion favoring the enforcement of covenants not to solicit applies equally to agents and employees. The aim is to...