In re Future Graphics, Inc., Case No: 09-09272-8-JRL (Bankr.E.D.N.C. 5/17/2010)
| Decision Date | 17 May 2010 |
| Docket Number | Case No: 09-09272-8-JRL. |
| Court | U.S. Bankruptcy Court — Eastern District of North Carolina |
| Parties | In re: FUTURE GRAPHICS, INC., Chapter 11, Debtor. |
The matter before the court is Future Graphics, Inc.'s ("Future") Motion to Reject Executory Contract or Lease and the response in opposition to that motion by Legacy Graphics, Inc. ("Legacy"). The court conducted an evidentiary hearing on the motion on April 14, 2010 in Raleigh, North Carolina.
On September 15, 2008, the debtor and Legacy executed a series of contracts known collectively as the Recapitalization and Stock Purchase Agreements ("Agreements"). On October 23, 2009, Future filed a petition under Chapter 11 of the Bankruptcy Code ("Code"). Future filed a Motion to Reject Executory Contracts on December 22, 2009 pursuant to § 365 of the Code. In response, Legacy filed an Emergency Motion to Require Identification of Executory Contracts and Motion for Extension of Time to Respond on January 8, 2010. The court entered an order granting Legacy's motion and providing ten days for Future to specify the executory contracts sought to be rejected. On February 23, 2010, Future filed an Amended Motion to Reject Executory Contracts ("Amended Motion"). Paragraph 6 of the Amended Motion provides:
Under the blanket of documents entitled `Future Graphics, Inc. — Sale of Shares by Pete Reckert & Bobby Price' dated September 15, 2008, the Debtor rejects each and every agreement which it is a signatory of and has continued performance under including [binder documents]: 5, 7, 9, 10, 12, 14, 17, 18, 19, 20.
On March 9, 2010, Future and Legacy stipulated that these documents are the only contracts sought to be rejected by Future and the only documents to which Legacy must respond with regard to the Amended Motion.
Future seeks court approval to reject the ten stipulated contracts. However, before Future can be awarded the relief it seeks, it must show each individual contract included in the Agreements is (1) executory and may be rejected under § 365 and (2) it is in the best business judgment of Future to reject the executory contracts. Without both showings, no contract may be rejected.
Future requests that all Agreements be set aside. That request is based on the theory that all individual contracts comprising the Agreements stand as consideration for each other. Thus, the court should view them as a whole, not separate agreements, in determining whether the contracts are executory in nature. In the alternative, if not permitted to reject all Legacy contracts, Future requests it be (1) permitted to reject and receive relief from the stipulated agreements and (2) that the remaining parties' duties under those agreements remain enforceable by Future. In support of both requests, Future asserts that the majority of the benefits under the Agreements do not inure to Future but to Future's principals. Furthermore, it is their business judgment to reject the aforementioned stipulated agreements. According to Future, this assertion is factually supported by the fact that the sole benefit it is to receive under the agreements, the ongoing business with Legacy customers, has been abrogated by Legacy during the pendency of the chapter 11 proceeding leaving the principals of Future unable to met their contractual obligations under the "Stock Purchase Agreement — Sale by Bobby Price" (Binder Document 5) and the "Stock Purchase Agreement — Sale by Pete Reckert" (Binder Document 10).
In support of its motion, Future's vice-president, Kenneth M. Stancil ("Stancil") testified. He stated, in pertinent part, that the purpose of the agreements entered on September 15, 2008 was to allow the four shareholders of Future to come together and draft a comprehensive plan on how Future and Legacy could go forward as separate entities, but continue to work together. However, Future and Legacy are not currently working together and have not done so in three to four months. Legacy was providing 80% of Future's workload and now is diverting that work to other companies. Without the work from Legacy, Stancil testified, Future is unable to make the payments it is obligated to make under the "Shareholder Agreement," which is why that agreement along with others should be rejected. Finally, Stancil's counsel also argued that because each individual agreement is consideration for the others all of the agreements should be viewed as a collective whole and rejected as one comprehensive executory contract in accord with Future's business judgment. Id.
Legacy asserts that the stipulated agreements should not be rejected for four principal reasons. First, Legacy disagrees with Future that the collective agreements entered into on or about September 15, 2009 should be seen as one overarching agreement because the individual agreements do not stand as consideration for each other. All contracts were entered on the same day, but set forth consideration unique to each. Legacy asserts Future has failed to meet its burden that the contracts should be rejected because there has not been a showing that the agreements at issue are in fact executory contracts. Second, the rejection would not be a sound exercise of Future's business judgment because with rejection Legacy and its principals' rights to a claim, arguably a substantial claim, for damages against Future are not disturbed. Third, no purpose would be served by the court approving the rejection because regardless of whether Future can reject, Legacy and its principals will continue to have an equitable claim against Future and its principals, which may be pursued in state court. Fourth and finally, Legacy asserts that the inequitable and unfair outcome that would come of allowing rejection of any of the Agreements exceeds the purpose of § 365.
In opposition to the motion, Legacy's president, Pete Reckert testified. In pertinent part, Reckert testified that in 2007 the four shareholders of Future decided it would be best for Price and Reckert to leave Future and create another company. Among the Agreements of September 15, 2008, a "Shareholder Agreement" was executed and was to include only the shareholders individually, i.e. Philip Killete ("Killete"), Price, Reckert, and Stancil, not Future (Binder Document 17). Reckert went on to say that payments were made under the Shareholder Agreement for some time, but for an unidentified reason the payments stopped. Future was never obligated to make the payments. At all times, the payments were to be made by Killette and Stancil as individuals. In contrast, the Confidentiality/Non-Disclosure Agreement (Binder Document 19) was contemplated and did include all parties individually and the respective corporate entities. On cross-examination, Reckert assented that it was incorrect to assume all of the individual contracts provided consideration for the others and should be looked at as one agreement. Instead, each agreement should be examined separately to determine the rights and obligations of the parties to that individual agreement.
[The] trustee, 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). With some limitations a debtor-in-possession has the same rights as a trustee serving in chapter 11 cases. 11 U.S.C. § 1107(a).
Before approval, the debtor must satisfy a two-step analysis. The first step, referred to as the "material breach" step, requires the court to determine whether the contract at issue is executory. Then, in the "business judgment" step, the court must determine if allowing the debtor to assume or reject the contract would be in the debtor's best business judgment. In re Sandman Associates, L.L.C., 251 B.R. 473 (Bankr. W.D. Va. 2000); Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043, 1045 (4th Cir. 1985). Discerning whether a contract is executory is a question of law that "may be freely reviewed by successive courts" based on the facts of each case. Lubrizol, 756 F.2d at 1045. In making a decision on whether the rejection of a contract is in the best business judgment of a debtor, the court "acts in its fact-finding role." In re Sandman, 251 B.R. at 481.
The Code does not define executory contract, but Congress has ratified the application of the Countryman definition. Gloria Mfg. Corp. v. International Ladies' Garment Workers' Union, 734 F.2d 1020, 1022 (4th Cir. 1984); Lubrizol, 765 F.2d at 1043 (). Countryman defines an executory contract as:
A contract under which the obligations of both the bankrupt and the other party to the contract are so far unperformed that the failure of either to complete the performance would constitute a material breach excusing the performance of the other.
Gloria Mfg. Corp., 734 F.2d at 1022 (quoting Countryman, "Executory Contracts in Bankruptcy: Part I," 57 Minn. L. Rev. 439, 460 (1973)). Countryman divided potentially executory contracts into three categories: (1) those in which the non-bankrupt has performed fully, (2) those in which the bankrupt has performed fully and (3) those in which neither party has performed fully. Id. at 1022. In applying the Countryman definition of executory contracts, factual situations where only one party has completely performed [or is required to perform] are excluded from the grasp of § 365 of the Code. In re Chateaugay Corp., 102 B.R. 335, 345 (S.D.N.Y 1989). There is not a clear formula to be employed in determining what an executory contract is; instead, each contract must be reviewed within the contours of precedent and an eye towards promoting the policies of the Bankruptcy Code. In re Richmond Metal Finishers, Inc. 34 B.R. 521 (Bankr. Va. 1983).
This court has examined each...
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