In re Johnson, BAP No. SC-93-2212-HJR. Bankruptcy No. 93-04467-B7.
| Decision Date | 27 February 1995 |
| Docket Number | BAP No. SC-93-2212-HJR. Bankruptcy No. 93-04467-B7. |
| Citation | 178 BR 216 |
| Parties | In re A.P. JOHNSON and R.N. Johnson, Debtors. A.P. JOHNSON and R.N. Johnson, Appellants, v. Harold S. TAXEL, Chapter 7 Trustee, Appellee. |
| Court | U.S. Bankruptcy Appellate Panel, Ninth Circuit |
Charles A. Bird, San Diego, CA, for appellants.
Kevin J. Hoyt, San Diego, CA, for appellee.
Before HAGAN, JONES and RUSSELL, Bankruptcy Judges.
Chapter 7 debtors, Alan P. Johnson and R.N. Johnson (the "Debtors"), filed a motion seeking an order to the effect that certain payments due post-petition under an anticompetition covenant are not property of the bankruptcy estate. The bankruptcy court held the payments were property of the estate. The Debtors appeal.
Alan P. Johnson ("Johnson"), an ex-race car driver, was the sole shareholder of Alan Johnson Inc., a California corporation ("Johnson Corp"). Johnson Corp. held a franchise agreement with Porsche Cars North America, Inc. The dealership was located in San Diego, California.
On or about September 5, 1990, Johnson, Johnson Corp., Pioneer Centers of San Diego, Inc., a California corporation ("Pioneer Centers"), and Matthew J. Brewer ("Brewer"),1 entered into an "Agreement For Sale of Automobile Dealership Assets Together With Goodwill" (the "Agreement") whereby Pioneer Centers purchased the dealership from Johnson Corp.
The Agreement provided that as part of the sale of the dealership's good will, Johnson Corp. would not compete with Pioneer Centers. In addition the Agreement included Johnson's separate covenant not to compete with Pioneer Centers for a period of five years within a sixty mile radius of the dealership. Specifically Johnson agreed not to sell Porsches or to own an interest in or work for an entity which sells Porsches.
As consideration for Johnson's individual covenant not to compete, Pioneer Centers and Brewer agreed to pay Johnson $630,000 payable at the rate of $10,500.00 per month for a period of sixty (60) months. Payment may be accelerated upon: (1) any two successive late monthly payments; (2) the sale of more than 40% of Pioneer Center's stock or more than 50% of its assets; or (3) Brewer's death. Brewer and Pioneer Centers are required to make the payments even if Johnson dies before the payments are complete. Pioneer Centers and Brewer have the right to offset damages arising out of Johnson Corp.'s performance under the Agreement against the payments to Johnson.
The Agreement also provides that if Johnson breaches the covenant not to compete, Pioneer Centers and Brewer can offset their damages against the monthly payments and that Pioneer Centers and Brewer are entitled to specific performance and injunctive relief.
On April 28, 1993, the Debtors filed a voluntary petition for relief under Chapter 7 of Title 11 of the United States Code. Harold S. Taxel (the "Trustee") was duly appointed Chapter 7 trustee.
On July 23, 1993, the Debtors filed a motion for an order determining that the postpetition payments due under the Agreement are "earnings from services performed by an individual" and are therefore not property of the estate. See 11 U.S.C. § 541(a)(6). At the time Johnson filed his motion, he was in compliance with the Agreement and Pioneer Centers was current on its payments. Johnson was then earning about $2,500.00 a month as a consultant. He contended the additional $10,500.00 per month in anti-competition payments was necessary for the support of his family.
The bankruptcy court held the payments were property of the estate.
Pursuant to 28 U.S.C. § 158(b)(1), the bankruptcy appellate panel has jurisdiction to hear appeals from final orders of the bankruptcy courts. See Strowski v. Von Wittenburg (In re Strowski), 96 B.R. 1007, 1008 (9th Cir. BAP 1989). The bankruptcy court has issued a final order determining that the payments are property of the estate. This is a core proceeding under 28 U.S.C. §§ 157(b)(2)(A), (B), (E) and (O). Accordingly, we have jurisdiction.
A bankruptcy court's findings of fact must be upheld by the reviewing court unless they are clearly erroneous. Pizza of Hawaii, Inc. v. Shakey's, Inc. (In re Pizza of Hawaii, Inc.), 761 F.2d 1374, 1377 (9th Cir. 1985); Fed.R.Bankr.P. 8013. A bankruptcy court's conclusions of law are subject to de novo review. In re Pizza of Hawaii, 761 F.2d at 1377. If the bankruptcy court does not specifically address issues of law necessary to an order, implicit conclusions of law are likewise entitled to de novo review. In re Commercial Western Finance Corp., 761 F.2d 1329, 1333 (9th Cir.1985).
11 U.S.C. § 541 provides in relevant part:
11 U.S.C. § 541(a)(6).
In construing section 541(a)(6) the Ninth Circuit Court of Appeals stated:
Section 541(6) of the Code includes in the bankruptcy estate after-acquired property consisting of "proceeds, product, offspring, rents, and profits of or from property of the estate, except such as are earnings from services performed by an individual debtor after the commencement of the case." 11 U.S.C. 541(a)(6). . . . Under the Bankruptcy Act, the test was whether the after-acquired property was "sufficiently rooted in the prebankruptcy past and so little entangled in the debtor\'s ability to make a fresh start that it should not be excluded from property of the estate." Segal v. Rochelle, 382 U.S. 375, 380, 86 S.Ct. 511, 515, 15 L.Ed.2d 428 (1966).2 The Code follows Segal insofar as it includes after-acquired-property "sufficiently rooted in the prebankruptcy past" but eliminates the requirement that it not be entangled with the debtor\'s ability to make a fresh start. See S.Rep. No. 989, supra at 82, reprinted in 1978 U.S.Code Cong. & Ad.News 5868.
Rau v. Ryerson (In re Ryerson), 739 F.2d 1423, 1425-26 (9th Cir.1984).
The circuit court then noted that even though after-acquired property is sufficiently rooted in the pre-bankruptcy past to be property of the estate, it may still be subject to the "earnings from personal services performed by an individual post-petition" exception to section 541(a)(6). In re Ryerson, 739 F.2d at 1426.
Applying the Segal test to the present case it is clear the anti-competition payments are sufficiently rooted in the pre-bankruptcy past to be included in the estate. The Agreement was entered into pre-petition. The anti-competition payments are a method of paying for the value of Johnson's name, and for insuring that Pioneer Centers will receive all of the good will previously owned by Johnson Corp. The good will and the value of Johnson's name in the Porsche business were established pre-petition. Thus, the payments are sufficiently rooted in the pre-bankruptcy past to make them property of the estate.
According to Ryerson, the next step is to exempt any portion of the anti-competition payments which are "earnings from services performed by an individual" post-petition. The Court of Appeals for the Ninth Circuit has not yet considered whether compliance with a anti-competition agreement is "services performed by an individual."
The Debtors cite In re Hammond, 35 B.R. 219 (Bankr.W.D.Okla.1983) for the proposition that if the payments are conditioned upon the Debtors' performance, the anti-competition payments are not property of the estate. The Hammond court held:
Hammond need do no more than not compete with PQ in order that he may receive a substantial sum of money. The question becomes, is this "services performed" as envisioned by the drafters of the Bankruptcy Code? The "crucial analytical key" is not to be found "in an abstract articulation of the statute\'s purpose, but in an analysis of the nature of the asset involved in light of those principles." Kokoszka v. Belford, . . . 417 U.S. 642, at 646, 94 S.Ct. 2431, at 2434, 41 L.Ed.2d 374 (1974). In our opinion, Hammond has not done all the acts necessary to accrue his right to the future payments. . . . Hammond must abide by the agreement. We cannot force Hammond to comply. "The bankrupt . . . cannot be compelled to perform work or services for the benefit of his creditors or his trustee in bankruptcy." 3 Remington on Bankruptcy § 1228.25 (1941). It is a foil which trusts both ways. Hammond is therefore performing a service which is not "sufficiently rooted" in the bankruptcy past so as to render the payments property of the estate.
In re Hammond, 35 B.R. at 223.3
We reject the In re Hammond test. The interpretation of a statutory provision must begin with the plain meaning of its language. Pennsylvania Public Welfare Dept. v. Davenport, 495 U.S. 552, 557, 110 S.Ct. 2126, 2130, 109 L.Ed.2d 588 (1990). Where statutory language is unambiguous the judicial inquiry is complete. Connecticut Nat. Bank v. Germain, 503 U.S. 249, 252-54, 112 S.Ct. 1146, 1149, 117 L.Ed.2d 391 (1992). . . . When the statutory scheme is coherent and consistent, there generally is no need for a court to inquire beyond the plain language. United States v. Ron Pair Enterp., Inc., 489 U.S. 235, 240-41, 109 S.Ct. 1026, 1029-30, 103 L.Ed.2d 290 (1988).
Bonner Mall Partnership v. U.S. Bancorp Mortgage Co. (In re Bonner Mall Partnership), 2 F.3d 899, 908 (9th Cir.1993), subsequent appeal dismissed as moot, ___ U.S. ___, 115 S.Ct. 386, 130 L.Ed.2d 233 (1994). The clause "services performed by an individual" plainly does not include services not performed. Two other bankruptcy courts have reached this conclusion. In In re Prince, 127 B.R....
To continue reading
Request your trial