Andrews, In re

• Decision Date: 01 April 1996
• Docket Number: No. 93-2095,93-2095
• Citation: 80 F.3d 906
• Parties: , 28 Bankr.Ct.Dec. 1117, Bankr. L. Rep. P 76,993 In re John A. ANDREWS, Debtor. John A. ANDREWS, Plaintiff-Appellant, v. The RIGGS NATIONAL BANK OF WASHINGTON, D.C., Claimant-Appellee, Richard G. HALL, Trustee-Appellee, v. FIRST AMERICAN BANK OF VIRGINIA, Claimant.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 906

80 F.3d 906

64 USLW 2632, 28 Bankr.Ct.Dec. 1117,

Bankr. L. Rep. P 76,993

In re John A. ANDREWS, Debtor.

John A. ANDREWS, Plaintiff-Appellant, v. The RIGGS NATIONAL BANK OF WASHINGTON, D.C., Claimant-Appellee, Richard G. HALL, Trustee-Appellee, v. FIRST AMERICAN BANK OF VIRGINIA, Claimant.

No. 93-2095.

United States Court of Appeals Fourth Circuit.

Argued May 13, 1994.

Decided April 1, 1996.

Appeal from the United States District Court for the Eastern District of Virginia, at Alexandria. Claude M. Hilton, District Judge. (CA-93-655-A, BK-92-14879-AT)

ARGUED: Stephen Everett Leach, Tucker, Flyer & Lewis, P.C., Washington, D.C., for Appellant. Philip John Harvey, Shaw, Pittman, Potts & Trowbridge, Alexandria, Virginia, for Appellee.

Before WIDENER and WILKINS, Circuit Judges, and ELLIS, United States District Judge for the Eastern District of Virginia, sitting by designation.

Affirmed by published opinion. Judge ELLIS wrote the majority opinion, in which Judge WILKINS joined. Judge WIDENER wrote a dissenting opinion.

OPINION

ELLIS, District Judge:

This appeal requires us to decide whether payments to a bankrupt debtor pursuant to a non-competition agreement constitute "earnings from services performed" under 11 U.S.C. § 541(a)(6). The bankruptcy court found that the non-competition agreement was ancillary to a pre-petition transaction, and thus payments under the agreement did not fall within § 541(a)(6). The district court agreed. Because we concur, we affirm.

I.

Appellant John A. Andrews ("Andrews") worked in the ready-mix concrete business most of his life. In 1974, he and various partners formed a ready-mix concrete company in Herndon, Virginia. The company, which ultimately came to be known as AMAX Corporation ("AMAX"), grew to be quite successful, with annual sales of approximately thirty million dollars. As a part owner of AMAX, Andrews was personally active in the company and consequently developed numerous and substantial customer contacts and relationships in the concrete business. He expanded these contacts in 1980 by forming a real estate development company, which allowed him to participate in joint ventures with builders and developers.

In 1989, Andrews and the other owners of the company negotiated with Tarmac Acquisition, Inc. ("Tarmac") for the latter to purchase the assets of AMAX and related entities. Both sides to the negotiations retained independent experts to value AMAX's assets. The final sale price of nine million dollars was based on these expert valuations. Tarmac also purchased AMAX's customer list, representing the good will of the company, for an additional one million dollars. At the same time, the principal owners of AMAX, including Andrews, entered into separate non-competition agreements with Tarmac. These agreements were an express condition of the asset sale because Tarmac was concerned about the AMAX principals' substantial customer relationships and contacts in the ready-mix concrete business.

Andrews's non-competition agreement with Tarmac ("NCA"), dated July 17, 1989, provided that he would not compete with Tarmac in the ready-mix concrete business in Northern Virginia, the District of Columbia, or the adjacent portions of Maryland for a period of four years. In exchange, Andrews was to receive one million dollars. Absent setoff, ¹ this one million dollars was to be paid in quarterly installments of $62,500, plus ten percent annual interest. Andrews asserts that the payments were structured in this manner to approximate his AMAX salary. Yet, he also concedes that Tarmac arrived at the one million dollar figure based on its estimate of the value of eliminating future competition from Andrews.

Andrews treated his NCA payments as ordinary income for federal tax purposes. This treatment was not to his advantage, as the top tax rate on ordinary income was thirty-one percent, significantly more than the twenty-eight percent rate that would have been applicable had he claimed the payments as capital gain from the sale of assets. See 26 U.S.C. § 2. In addition, by claiming the NCA payments as ordinary income, Andrews became subject to an additional self-employment tax of between ten and fifteen percent. See 26 U.S.C. §§ 1401-1402.

On October 14, 1992, Andrews filed a voluntary petition for relief under Chapter 7, 11 U.S.C. § 701 et seq., in the United States Bankruptcy Court for the Eastern District of Virginia. On December 4, 1992, Andrews instituted this contested proceeding against the estate trustee Richard G. Hall ("trustee") pursuant to Rule 9014, Fed.R.Bankr.P. The motion initiating the proceeding sought to exclude from Andrews's bankruptcy estate all post-petition payments due him under the NCA. The total of these payments is $250,000 plus interest. ² According to Andrews, the payments represented his only source of income while the NCA remained in effect because the NCA precluded him from engaging in the ready-mix concrete business. But for the NCA, Andrews asserts, he could have profitably re-entered the ready-mix concrete business.

The bankruptcy court denied Andrews's motion, holding that compliance with a non-competition obligation closely connected with the pre-petition sale of an asset does not constitute "services performed" under 11 U.S.C. § 541(a)(6). The district court affirmed, and this appeal followed.

II.

The question presented is whether the payments due Andrews under the NCA qualify as "earnings from services performed" under 11 U.S.C. § 541(a)(6). If so, they are excluded from Andrews's bankruptcy estate, and he may use and enjoy them free from the claims of his creditors. If not, the payments become part of the estate and hence available to satisfy outstanding creditors' claims.

Analysis properly begins with the language of the statute itself. See United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 1030, 103 L.Ed.2d 290 (1989). Section 541 of the Bankruptcy Code provides that the bankruptcy estate consists of certain broadly defined categories of property, ³ but specifically excludes "earnings from services performed by an individual debtor after the commencement of the case." 11 U.S.C. § 541(a)(1), (6). The phrase "services performed" is not defined in the statute. We are left, then, to construe the phrase in accordance with its ordinary meaning or, if that meaning be ambiguous, to give it the meaning most consistent with the statute's purpose. Crandon v. United States, 494 U.S. 152, 158, 110 S.Ct. 997, 1001-02, 108 L.Ed.2d 132 (1990); see also Kokoszka v. Belford, 417 U.S. 642, 645, 94 S.Ct. 2431, 2433, 41 L.Ed.2d 374 (1974) (stating that "purposes of the Bankruptcy Act must ultimately govern" in determining scope and limitations of term "property" in 11 U.S.C. 110a(5)).

As the parties' contentions reflect, the ordinary meaning of the phrase is infected with ambiguity. Thus, Andrews suggests that refraining from competition amounts to "performing services" because it confers a benefit on Tarmac. The trustee responds, more plausibly, that the phrase "services performed" is stretched out of shape if it is taken to include refraining from doing something, i.e., not competing, as contrasted with doing something or taking action. According to the trustee, performing a service implies doing an act, not refraining from doing an act. Although the contest of ordinary meanings tilts somewhat in favor of the trustee's construction, ordinary meaning simply does not answer decisively whether the phrase encompasses refraining from competing pursuant to a noncompetition agreement. We must therefore ascertain the purpose of the statutory provision so we can assign to the phrase the meaning most consistent with that purpose. See Crandon, 494 U.S. at 158, 110 S.Ct. at 1001-02. This inquiry, of course, is informed by the purposes underlying federal bankruptcy law as a whole.

Section 541, like the Bankruptcy Code generally, has two overarching purposes: (1) providing protection for the creditors of the insolvent debtor ⁴ and (2) permitting the debtor to carry on and rebuild his life, that is, to make a "fresh start." ⁵ The first purpose is effectuated through statutory provisions that marshal and consolidate the debtor's assets into a broadly defined estate ⁶ from which, in an equitable and orderly process, the debtor's unsatisfied obligations to creditors are paid to the extent possible. ⁷ The second purpose finds expression in the bright line the Bankruptcy Code draws between pre- and post-bankruptcy filing events. ⁸ Thus, § 541(a)(1) provides that the estate includes the debtor's legal and equitable interests "as of the commencement of the case," and leaves the bankrupt debtor free after that date to accumulate new wealth so that he might make a fresh start following bankruptcy. Similarly, the provision in issue here, § 541(a)(6), allows the debtor to exclude from his estate any compensation or salary he might earn after the date of the petition. Toward the same end, § 727 facilitates the fresh start by ultimately discharging the balance of the debtor's unpaid obligations after the estate is exhausted. See 11 U.S.C. § 727.

Sometimes the Bankruptcy Codes two purposes appear to conflict, as when a debtor claims property to aid his fresh start while his creditors claim the same property to satisfy the debtors obligations to them. Yet, this conflict is illusory, for by drawing the bright line between the debtor's pre- and post-petition assets, the Bankruptcy Code harmonizes the two purposes. And it is this bright-line harmonizing principle that provides the decisive clue to construing § 541(a)(6) in this context. This clue points convincingly to the conclusion that payments pursuant to a pre-bankruptcy non-competition agreement are not "earnings from services performed." Only this construction of § 541(a)(6) gives effect to the statutes purposeful distinction between a debtor's pre- and post-petition assets....