Computer Communications, Inc., In re
| Decision Date | 07 August 1987 |
| Docket Number | No. 86-6120,86-6120 |
| Citation | 824 F.2d 725 |
| Parties | 17 Collier Bankr.Cas.2d 556, 16 Bankr.Ct.Dec. 615, Bankr. L. Rep. P 71,933 In re COMPUTER COMMUNICATIONS, INC., Debtor. COMPUTER COMMUNICATIONS, INC., Plaintiff-Appellee, v. CODEX CORPORATION, Defendant-Appellant. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Peter Flynn and Myron M. Cherry, argued, Cherry & Flynn, Chicago, Ill., David M. Stern and Andrew S. Pauly, Stern & Miller, Santa Monica, Cal., for plaintiff-appellee.
Harvey M. Grossman, Los Angeles, Cal., and Paul F. Ware, Jr., Boston, Mass., for defendant-appellant.
Appeal from the United States District Court for the Central District of California.
Before TANG, ALARCON and KOZINSKI, Circuit Judges.
Codex Corporation (Codex) appeals a judgment of the district court affirming the bankruptcy court's determination that Codex violated the Bankruptcy Code's automatic stay provision, 11 U.S.C. Sec. 362 (1982), and breached its contract with Computer Communications, Inc. (CCI). Codex unilaterally terminated its contract to purchase computer equipment from CCI after CCI filed a petition for reorganization under Chapter 11.
Codex designs and manufactures communications equipment and networks used for transmitting information between complex computer systems. CCI is a manufacturer of computer equipment and software. In April 1979, Codex and CCI entered into a "Joint Marketing and Development Agreement." The heart of the Agreement provided that Codex would make minimum quarterly purchases of equipment and software from CCI for incorporation in Codex's products. The parties executed an Amended Agreement on November 4, 1980 for a term of four years commencing April 1979. The Agreement provided for enhanced price discounts retroactive to April 1979. It contained the usual provisions for invoicing, payment, delivery, performance and warranty. The value of the purchases under the Agreement aggregated $12.5 million. CCI agreed to provide technical support, training, and to make spare parts available. The Agreement also provided for co-development of a "single line interface system" (SLI) which would permit CCI products to operate with Codex products. Codex agreed to pay CCI up to $75,000 for the development of SLI in six incremental payments. Finally, the Agreement stipulated that certain events, including bankruptcy, constituted default; established termination procedures; and stated that Massachusetts law governed the Agreement.
On November 6, 1980, two days after the parties executed the Amended Agreement, CCI filed a petition under Chapter 11 of the Bankruptcy Code. On December 30, 1980, Codex notified CCI that it was terminating the Agreement pursuant to p 4.6.4 which provides:
In the event of the appointment of a trustee, receiver or liquidator for all or a major portion of the property of either party, the commission by either party of any act of bankruptcy as defined in the United States Bankruptcy Act, as amended, the filing by either party of any voluntary petition in bankruptcy, ... that party shall be in default upon actual notice to the other party of such event, and the other party may terminate this Agreement as provided in paragraph 4.6.2 or 4.6.3, as the case may be.
Codex failed to make its minimum purchase for the quarter ending December 31, 1980, and has failed to make its quarterly minimum purchase every quarter since.
CCI filed suit in bankruptcy court on January 30, 1981 for injunctive relief and damages asserting that Codex had wrongfully repudiated the contract and had violated the automatic stay provision of the Bankruptcy Code, 11 U.S.C. Sec. 362.
On February 23, 1981, Codex notified CCI that it was terminating purchases of equipment from CCI pursuant to p 4.6.1 of the Agreement. This clause provides:
In the event Codex gives CCI written notice at any time that Codex elects to terminate its obligation to purchase any Equipment pursuant to this Agreement, including the Minimum Commitment, (the "Codex Notice") then any obligation of Codex to purchase any Equipment pursuant to this Agreement, including the Minimum Commitment, shall thereupon terminate. Within sixty (60) days of the Codex Notice, but not thereafter based upon the Codex Notice, CCI may elect to terminate this Agreement by giving Codex written notice of CCI's election to terminate this Agreement (the "CCI Notice"). In the event CCI timely elects to terminate this Agreement based upon the Codex Notice: (i) this Agreement shall terminate; (ii) within one hundred and twenty days (120) of the CCI Notice or such additional period reasonably required to determine such amount, Codex shall pay to CCI an amount equal to ten percent (10%) of the portion which has not been ordered by Codex of the Minimum Commitment, reflecting the discount provided in Exhibit D, for the Buying Year in which the Codex Notice is given; provided, however, that such payment shall not be less than One Hundred Thousand Dollars ($100,000) and shall not be greater than Four Hundred Thousand Dollars ($400,000)....
After Codex answered, CCI moved for partial summary judgment on the grounds that Codex's termination violated the automatic stay provision of 11 U.S.C. Sec. 362; and that the bankruptcy default clause in the agreement, p 4.6.4, was void under 11 U.S.C. Sec. 365(e) (1982) (). In response, Codex argued that under 11 U.S.C. Sec. 365(e)(2) (state law exception), the contract was not subject to assumption by the trustee in bankruptcy and therefore, the automatic stay provision did not bar termination.
The bankruptcy court granted CCI's motion for summary judgment from the bench on April 30, 1981 and proceeded to hold a trial on the breach and damages issues. The findings and conclusions filed May 6, 1982 held that 11 U.S.C. Sec. 365(e)(1) made the bankruptcy default clause unenforceable, the automatic stay of 11 U.S.C. Sec. 362 prohibited Codex from unilaterally terminating the Agreement under either p 4.6.1 or p 4.6.4, Codex should have applied to the court for relief from the automatic stay, and Codex willfully violated the automatic stay. The court awarded general damages of $4,750,000 plus $250,000 in punitive damages.
Codex appealed to the district court pursuant to the transitional provisions of the Bankruptcy Amendments and Federal Judgeship Act of 1984. The district court affirmed the general damage award and reversed the punitive damage award. Codex timely appeals.
On June 28, 1982, the Supreme Court in Northern Pipeline Constr. Co. v. Marathon Pipe Line Co. held that the broad grant of jurisdiction to the bankruptcy courts contained in Sec. 241(a) of the Bankruptcy Reform Act violated Article III of the Constitution. 458 U.S. 50, 87, 102 S.Ct. 2858, 2880, 73 L.Ed.2d 598 (1982) (plurality); id. at 91, 102 S.Ct. at 2881 (Rehnquist, J. concurring). The majority stated that since the grant of authority challenged in Northern Pipeline was not severable from the remaining grant of authority in Sec. 241(a), no purported exercise of judicial authority by the bankruptcy court under Sec. 241(a) was valid. See id. at 87 n. 40, 102 S.Ct. at 2880 n. 40 (plurality opinion); id. at 91-92, 102 S.Ct. at 2881-2882 (Rehnquist, J., concurring). The majority explicitly limited its holding to prospective effect, however, and stayed its judgment until October 4, 1982. Id. at 88, 102 S.Ct. at 2880 (plurality); id. at 92, 102 S.Ct. at 2882 (Rehnquist, J., concurring). The bankruptcy court in this case entered judgment nearly two months before Northern Pipeline was decided.
Codex argues that it should be permitted to challenge the jurisdiction of the bankruptcy court despite the prospective effect of Northern Pipeline. The basis of Codex's argument is that the Supreme Court failed to define what it meant by "prospectively" but cited Insurance Corp. of Ireland, Ltd. v. Compagnie Des Bauxites De Guinee, 456 U.S. 694, 102 S.Ct. 2099, 72 L.Ed.2d 492 (1981), and Chicot County Drainage Dist. v. Baxter State Bank, 308 U.S. 371, 60 S.Ct. 317, 84 L.Ed. 329 (1940), in support of the ruling. Northern Pipeline, 458 U.S. at 88 n. 41, 102 S.Ct. at 2880 n. 41. These cases bar retroactive application because it would conflict with principles of res judicata. Codex argues that res judicata problems do not arise in this case because Codex raised the jurisdiction issue prior to judgment. It argues that the Supreme Court merely intended to prevent attempts to reopen judgments or raise jurisdictional challenges for the first time on appeal of currently pending bankruptcy cases.
We reject Codex's interpretation of Northern Pipeline and sustain the bankruptcy court's jurisdiction. In holding that Northern Pipeline would apply prospectively, the Supreme Court explained that "retroactive application would ... surely visit substantial injustice and hardship upon those litigants who relied upon the Act's vesting of jurisdiction in the bankruptcy courts." Id. at 88, 102 S.Ct. at 2880. The litigants in this case so relied. Furthermore, the Court cited Buckley v. Valeo, 424 U.S. 1, 96 S.Ct. 612, 46 L.Ed.2d 659 (1976), in support of prospective application in addition to the cases emphasized by Codex. Buckley v. Valeo did not rely on a res judicata analysis but instead accorded de facto validity to prior administrative actions to allow for uninterrupted enforcement while Congress adopted valid legislation. Id. at 142, 96 S.Ct. at 693. This reasoning applies equally to the case at bar. Finally, this and other circuits have construed Northern Pipeline to validate judgments entered by bankruptcy courts before October 4, 1982. See In re Burley, 738 F.2d 981, 984 (9th Cir.1984); In re Jones, 804 F.2d 1133, 1137 (10th Cir.1986). In In re Jones, the Tenth Circuit rejected an argument similar to the one advanced by Codex.
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