In re Cho

• Decision Date: 13 March 2018
• Docket Number: Case No. 17–22057–MMH, Case No. 17–22058–MMH
• Citation: 581 B.R. 452
• Parties: IN RE: Byung Mook CHO, Debtor. In re The New Belvedere Cleaners, Inc., Debtor.
• Court: U.S. Bankruptcy Court — District of Maryland

581 B.R. 452

IN RE: Byung Mook CHO, Debtor.

In re The New Belvedere Cleaners, Inc., Debtor.

Case No. 17–22057–MMH

Case No. 17–22058–MMH

United States Bankruptcy Court, D. Maryland, at Baltimore.

Signed March 13, 2018

Michael Stephen Myers, Scarlett, Croll & Myers, P.A., Baltimore, MD, Christopher S. Young, Business & Technology Law Group, Columbia, MD, for Debtor.

MEMORANDUM OPINION

MICHELLE M. HARNER, U.S. BANKRUPTCY JUDGE

A debtor in possession may assume or reject an executory contract in a chapter 11 case.¹ The U.S. Bankruptcy Code² does not define the term "executory contract," and courts often struggle to determine executoriness under applicable case law. The dispute before the Court is no exception—the primary issue concerns the characterization of a prepetition settlement agreement as an executory contract, and the parties vehemently disagree regarding its executoriness. Although the Debtors dispute in the first instance that they are bound by the settlement agreement, the record suggests otherwise, requiring the Court to determine whether the Debtors may reject the settlement agreement as an executory contract under section 365 of the Code.

Whether a contract is executory depends on the facts of the particular matter, the language of the subject agreement, and the consequences under applicable nonbankruptcy law of either party ceasing to perform any ongoing or remaining obligations under the contract. Here, the core purpose of the settlement agreement was to resolve the pending legal disputes between the parties, providing certainty and finality to each affected party. In exchange for the transfer of a certain business and a cash payment, the parties agreed to dismiss the litigation between them; the non-debtor parties agreed to dismiss, and to take certain other action in, related litigation involving a third party; and the parties agreed to refrain from disparaging each other and their respective businesses.

Considering the totality of the circumstances and the core purpose of the settlement agreement, the Court determines that the settlement agreement is an executory contract and subject to rejection in the Debtors' chapter 11 cases. Notably, because the Debtors are seeking rejection, which simply constitutes a prepetition breach of the settlement agreement under section 365(g) of the Code, the parties' respective rights may not differ significantly from those available if the Court had found the prepetition settlement agreement to be non-executory and the Debtors refused to perform. This question is not, however, currently before the Court. Accordingly, for the reasons set forth below, the Court will grant the Motion and reserve judgment on the consequences of the Debtors' rejection of the settlement agreement.

I. Relevant Background

Prior to the petition date in these chapter 11 cases, on or about December 28, 2015, Chong Ok Lim and Young Jun Jun (the "Plaintiffs") filed a lawsuit against Byung Mook Cho and The New Belvedere Cleaners, Inc. ("New Belvedere" and collectively with Mr. Cho, the "Debtors"), the above-captioned debtors and debtors in possession, in the Circuit Court for Howard County, Maryland (the "State Court Action"). The State Court Action involved, among other things, allegations of fraud and fraudulent conveyance relating to the business of New Belvedere. November Hearing Transcript at 10, 14–16. On or about April 13, 2017, the Debtors and the Plaintiffs participated in a settlement conference before the Honorable Lynne Battaglia. That conference resulted in an oral settlement agreement that purported to resolve the pending disputes between the parties and that was subsequently memorialized in a written document (the "Settlement Agreement"). Pl. Ex. 8.

Mr. Cho would not sign the Settlement Agreement. Consequently, the Plaintiffs filed a Motion to Enforce Settlement Agreement (the "Motion to Enforce") in the state court. Pl. Ex. 1. The Honorable Dennis Sweeney conducted a hearing on the Motion to Enforce on June 29, 2017 (the "State Court Hearing"). At the State Court Hearing, the Plaintiffs requested an order enforcing the Settlement Agreement, and the Defendants argued that they should not be bound by, or required to sign, the Settlement Agreement. The parties presented evidence to support their respective positions. Judge Sweeney ultimately determined to enforce the Settlement Agreement. Pl. Ex. 2 at 19.

Mr. Cho still did not sign the Settlement Agreement. Accordingly, on July 24, 2017, the Plaintiffs filed a Petition for Show Cause for Constructive Civil Contempt ("Show Cause Petition"). Pl. Ex. 3. A hearing on the Show Cause Petition was set for September 12, 2017. That hearing did not go forward; it was stayed as a result of the filing of the Debtors' chapter 11 petitions on September 8, 2017.

Shortly after filing these cases, on September 13, 2017, each of the Debtors filed a Motion Pursuant to 11 U.S.C. § 365 to Reject Executory Contract (collectively, the "Motion") [ECF 15 in Case No. 17–22057; ECF 12 in Case No. 17–22058]. By the Motion, the Debtors seek to reject the Settlement Agreement. The Plaintiffs filed an Objection to the Motion in each of these cases (collectively, the "Objection") [ECF 22 in Case No. 17–22057; ECF 14 in Case No. 17–22058].³ The Court held a hearing on the Motion on November 21, 2017 (the "November Hearing"). The parties then submitted post-hearing briefs in December 2017 [ECF 45, 46], and offered closing arguments at a hearing before the Court on January 18, 2018 (the "January Hearing").

II. Jurisdiction and Legal Standards

The Court has jurisdiction over this proceeding pursuant to 28 U.S.C. § 1334, 28 U.S.C. § 157(a), and Local Rule 402 of the United States District Court for the District of Maryland. This proceeding is a "core proceeding" under 28 U.S.C. § 157(b)(2).

Section 365(a) of the Code provides that a trustee or debtor in possession, "subject to the court's approval, may assume or reject any executory contract or unexpired lease of the debtor." 11 U.S.C. § 365(a). "A debtor may reject an executory contract if it is advantageous to the debtor to do so." In re Auto Showcase of Laurel, LLC , 2011 WL 4054839, at *5 (Bankr. D. Md. Sept. 12, 2011) (citing Lubrizol Enters., Inc. v. Richmond Metal Finishers, Inc. , 756 F.2d 1043, 1046 (4th Cir. 1985) ). Thus, a debtor in possession or the trustee must show that the proposed rejection of the executory contract or unexpired lease provides a benefit to, or eliminates burdensome obligations on, the estate. See, e.g., In re Alpha Natural Resources, Inc. , 555 B.R. 520, 530 (Bankr. E.D. Va. 2016).

A debtor in possession's decision to assume or reject an executory contract or unexpired lease is subject to a business judgment standard, and "should be ‘accorded the deference mandated by the sound business judgment rule as generally applied by courts to discretionary actions or decisions of corporate directors.’ " Alpha Natural Resources , 555 B.R. at 529–530 (quoting Lubrizol , 756 F.2d at 1046 ) ). Courts generally refrain from second-guessing a debtor in possession's business judgment regarding a proposed assumption or rejection of an executory contract or unexpired lease. See, e.g., Alpha Natural Resources , 555 B.R. at 530 (noting deference by courts to a debtor in possession's business judgment "unless there is a showing of bad faith or gross abuse of discretion"). The rejection of an executory contract or unexpired lease that was not previously assumed in the case "constitutes a breach of such contract or lease ... immediately before the date of the filing of the petition." 11 U.S.C. § 365(g)(1).

III. Analysis

The Debtors argue that they never signed the Settlement Agreement and that, even if they are bound by it, the Settlement Agreement is "onerous and burdensome" on their estates. Motion at 2. They also allege that the terms of the agreement cannot be completed as drafted. Id. Accordingly, the Debtors seek a determination that the Settlement Agreement either is not a contract, or that it is an executory contract subject to rejection under section 365 of the Code. The Plaintiffs, on the other hand, assert that the Settlement Agreement is enforceable and is not an executory contract for purposes of the Code. The Court considers each of the parties' respective arguments below.

A. The Existence of the Settlement Agreement

The Debtors and the Plaintiffs have been involved in litigation for several years. The genesis of this litigation appears to be a dry-cleaning business once owned by the Plaintiffs and now owned and operated by the Debtors. The Plaintiffs allege fraud and fraudulent conveyance claims against the Debtors with respect to the events leading up to the Debtors' ownership of the business. Specifically, the Plaintiffs allege that, after they obtained a judgment against Hee Sook Paik, Ms. Paik and Mr. Cho "conspired to fraudulently convey the business" to Mr. Cho. Pl. Post–Hearing Brief [ECF 45] at 16. Mr. Cho denies these allegations. The Settlement Agreement purports to resolve those claims and the related disputes among the parties concerning the dry-cleaning business. Settlement Agreement, Pl. Ex. 8 ¶ E.

At the State Court Hearing to enforce the Settlement Agreement, the issue before the state court was whether Mr. Cho should be compelled to execute the Settlement Agreement. Judge Sweeney accepted evidence on this issue. Mr. Cho did not deny the existence of the Settlement Agreement. Pl. Ex. 2 at 10. Rather, Mr. Cho testified that, at some point after the parties' settlement conference, the Plaintiffs allegedly violated the non-disparagement provision of the Settlement Agreement, which upset Mr. Cho and caused him to change his mind as to the prudence of the Settlement Agreement. Id. at 11–14. As such, Mr. Cho did not execute the agreement or take any action under it. Id. Judge Sweeney ultimately concluded, based on the evidence presented, that "the settlement agreement should be enforced and...