In re Kilpatrick

• Decision Date: 03 May 1993
• Docket Number: Bankruptcy No. 91-20720.
• Citation: 160 BR 560
• Parties: In re Karen R. KILPATRICK and Bruce L. Kilpatrick, Jr., d/b/a Sunrise Disposal and d/b/a B & K Disposal, Debtors.
• Court: U.S. Bankruptcy Court — Eastern District of Michigan

160 B.R. 560 (1993)

In re Karen R. KILPATRICK and Bruce L. Kilpatrick, Jr., d/b/a Sunrise Disposal and d/b/a B & K Disposal, Debtors.

Bankruptcy No. 91-20720.

United States Bankruptcy Court, E.D. Michigan, Southern Division — Flint.

May 3, 1993.

COPYRIGHT MATERIAL OMITTED

Mark J. Vanepps, Owosso, MI, for debtor.

Mark S. Demorest, Troy, MI, for Pollard Disposal.

Carl L. Bekofske, Chapter 13 Trustee.

OPINION ON POLLARD DISPOSAL'S MOTION REGARDING AUTOMATIC STAY

ARTHUR J. SPECTOR, Bankruptcy Judge.

INTRODUCTION

On April 30, 1988, Bruce Kilpatrick (the "Debtor") entered into a written agreement in which he agreed to sell certain equipment to G & G Disposal Corporation. Pursuant to this agreement, the Debtor assigned to G & G all customer accounts belonging to the Debtor's company, B & K Disposal. The agreement contained a provision whereby the Debtor agreed not to compete with G & G's refuse-removal business for a period of five years in the counties of Shiawassee, Genesee, Livingston and Saginaw. The agreement required the Debtor to obtain the signatures of his co-debtor spouse and children on a separate covenant not to compete, which the Debtor did on May 1, 1988.

G & G subsequently brought a breach of contract action against the Debtor in Shiawassee County Circuit Court. On June 28, 1990, that court entered a preliminary injunction which enjoined the Debtor "from engaging in any form of activity related to refuse removal in Shiawassee County." The Debtor and his wife filed their joint petition for relief under chapter 13 of the Bankruptcy Code on June 12, 1991. Their plan, which was confirmed on December 19, 1991, contained a provision on page 4 stating that "the debtors reject all executory contracts or leases." Following plan confirmation, and notwithstanding the injunction, the Debtor commenced a refuse-removal business in Shiawassee County.

G & G assigned its rights under the contract to Pollard Disposal, Inc. and, on June 15, 1992, Pollard filed a "Motion for Declaratory Ruling and for Relief from Automatic Stay." In this motion, Pollard sought the following relief: (1) a determination that the circuit court's injunction is "valid and enforceable"; (2) a determination that the automatic stay does not prevent the circuit court from holding the Debtor in contempt for his post-petition violation of the injunction or, if it does, then an order lifting the stay; and (3) relief from the stay so that Pollard can enforce the covenant in state court. For the reasons which follow, the motion will be denied.

DISCUSSION

In opposing Pollard's motion, the Debtor raised the following arguments: (1) Pollard lacks standing to bring the motion; (2) rejection of the contract relieved the Debtor of his obligation to comply with the covenant not to compete; and (3) Pollard's remedy for breach of the covenant not to compete or violation of the injunction can be reduced to money damages, and therefore Pollard holds only a claim against the Debtor which is subject to discharge pursuant to § 1328(a). These arguments will be considered seriatim, followed by a discussion of the automatic stay.

1. STANDING

The Debtor argued that the assignment between G & G and Pollard violated Michigan law because he did not receive notice of the assignment as required by Mich.Comp. Laws § 440.6105.¹ As a result, the Debtor contended, the transfer was ineffective against him, and Pollard therefore lacks standing to sue him.

Since the Debtor's argument goes to the merits of Pollard's motion, rather than calling into question whether Pollard is "properly situated" to make the motion, it does not raise an issue as to Pollard's "standing." See Wright, Miller & Cooper, Federal Practice and Procedure: Jurisdiction 2d § 3531 (1992). In any event, I need not address the validity of the Debtor's defective-assignment argument. Pollard either has a claim against the estate, or it doesn't. A determination that Pollard has a claim will in all likelihood end the matter.²

Conversely, if Pollard doesn't have a claim, then the state-court proceedings would be the more appropriate context in which to challenge the effectiveness of the assignment. Cf. In re Sundale Assocs., 11 B.R. 978, 980-81 (Bankr.S.D.Fla.1981) (debtors' contention that mortgagee waived accrued interest should be litigated in the pending state-court foreclosure proceeding, rather than in connection with the mortgagee's request for relief from the automatic stay). I therefore assume that the assignment is valid for present purposes.³

2. EFFECT OF REJECTION

The Debtor contended that the covenant is unenforceable because the agreement of which it is a part was rejected, pursuant to 11 U.S.C. §§ 1322(b)(7) and 365(a), by the terms of the Debtor's confirmed plan. Although some courts lend credence to this theory, it is riddled with problems. First and foremost, it is difficult to reconcile such a contention with the fact that the nondebtor party to a rejected contract is deemed to have a breach-of-contract claim against the debtor under 11 U.S.C. § 365(g). A party would presumably have no such claim if the underlying contract were no longer valid. As has been persuasively argued by others, the theory that rejection somehow "vaporizes" the subject agreement serves no recognized policy, has no statutory or historical support, and inappropriately transforms the "power" to reject (i.e., decline to assume) a contract into some kind of avoiding power. See Andrew, Executory Contracts in Bankruptcy: Understanding "Rejection", 59 U.Colo.L.Rev. 845, 901-31 (1988); see also Westbrook, A Functional Analysis of Executory Contracts, 74 Minn.L.Rev. 227, 239 (1989) (lamenting the "step taken by a number of courts, positing that obligations owed to the Other Party can be rejected right out of existence"). I therefore "reject" the Debtor's contention that rejection under § 365 is tantamount to rescission. See In re Udell, 149 B.R. 908, 911 (N.D.Ind.1993); In re Drexel Burnham Lambert Group, 138 B.R. 687, 708-09, 26 C.B.C.2d 1128 (Bankr. S.D.N.Y.1992).

3. AVAILABILITY OF MONEY DAMAGES

The Debtor's third argument is that Pollard's rights under the covenant and injunction constitute a "claim" under 11 U.S.C. § 101(5). That being the case, the Debtor contended, Pollard cannot obtain specific performance of either the covenant or the injunction, but must instead accept the same treatment of its claim as any other unsecured creditor — namely, payment under the plan on a pro rata basis, with any unpaid balance being discharged. Because the analysis for each is somewhat different, I will first consider this argument as it relates to the covenant, and then discuss the injunction.

A. The covenant not to compete

The case law clearly supports the Debtor's contention that, if a nondebtor's rights under a noncompete agreement give rise to a claim, then the nondebtor is not entitled to specific performance of the agreement. See, e.g., Udell, 149 B.R. at 911; Silk Plants, Etc. Franchise Systems v. Register, 100 B.R. 360, 362-63 (M.D.Tenn.1989); In re May, 141 B.R. 940, 942 (Bankr.S.D.Ohio 1992); In re Oseen, 133 B.R. 527, 530 (Bankr.D.Idaho 1991); cf. Ohio v. Kovacs, 469 U.S. 274, 278-83, 105 S.Ct. 705, 707-10, 83 L.Ed.2d 649 (1985) (court order requiring the debtor to clean up polluted property gave rise to a claim dischargeable in bankruptcy). The real issue here is whether Pollard's right to enforce the covenant is tantamount to a claim.

A "claim" is defined under the Code as a:

(A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; or

(B) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured.

11 U.S.C. § 101(5). Thus any right which can be reduced to monetary damages is a "claim," even if that right could also be enforced by means of an "equitable remedy." See 124 Cong.Rec. 32,393 (1978) ("In some States, a judgment for specific performance may be satisfied by an alternative right to payment in the event performance is refused; in that event, the creditor entitled to specific performance would have a `claim' for purposes of a proceeding under title 11." (quoted in Kovacs, 469 U.S. at 280, 105 S.Ct. at 708)).

By rejecting the agreement, the Debtor committed a breach. 11 U.S.C. § 365(g). The question, then, is whether the Debtor's breach of the covenant not to compete gave Pollard "a right to payment." If it did, then Pollard holds a claim, and is entitled to specific performance of the covenant only if its claim was not discharged. See May, 141 B.R. at 942; In re Cox, 53 B.R. 829, 832, 13 C.B.C.2d 772 (Bankr.M.D.Fla. 1985). Before considering whether Pollard has a claim, however, two preliminary issues must be addressed. The first is whether I must look to state law or federal law in determining if a right to payment exists.

It is well established that the existence of a claim in bankruptcy is generally determined by state law. See Grogan v. Garner, 498 U.S. 279, 283, 111 S.Ct. 654, 657, 112 L.Ed.2d 755, 763 (1991) ("The validity of a creditor's claim is determined by rules of state law."); Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 918, 59 L.Ed.2d 136 (1979) ("Property interests are created and defined by state law. Unless some federal interest requires a different result, there is no reason why such interests should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding."); In re Udell, 149 B.R. 898, 903 (Bankr. N.D.Ind.1992), rev'd on other grounds, 149 B.R. 908 (N.D.Ind.1993). As suggested in Butner, an exception to this general rule may exist if "some federal interest so requires." Professor...