In re Mitchell, Bankruptcy No. 99 B 43035(SMB). Adversary No. 99-8589A.

• Decision Date: 24 May 2000
• Docket Number: Bankruptcy No. 99 B 43035(SMB). Adversary No. 99-8589A.
• Citation: 249 BR 55
• Parties: In re Carl T. MITCHELL, p/k/a Twista, Debtor. Creator's Way Associated Labels, Inc. and LB Entertainment, Plaintiffs, v. Carl T. Mitchell, p/k/a Twista, Defendant.
• Court: U.S. Bankruptcy Court — Southern District of New York

249 B.R. 55 (2000)

In re Carl T. MITCHELL, p/k/a Twista, Debtor Creator's Way Associated Labels, Inc. and LB Entertainment, Plaintiffs, v. Carl T. Mitchell, p/k/a Twista, Defendant.

Bankruptcy No. 99 B 43035(SMB). Adversary No. 99-8589A.

United States Bankruptcy Court, S.D. New York.

May 24, 2000.

COPYRIGHT MATERIAL OMITTED

O'Melveny & Myers LLP (Robert J. White, Deborah J. Saltzman, of counsel), Los Angeles, CA, for plaintiffs.

Lehman, Lehman & Gruber (Alan S. Maza, of counsel), Livingston, NJ, for defendant.

MEMORANDUM DECISION DENYING CROSS-MOTIONS FOR SUMMARY JUDGMENT

STUART M. BERNSTEIN, Chief Judge.

A chapter 7 discharge disposes of most pre-petition obligations, but leaves some unaffected. The principal question in this adversary proceeding involves the dischargeability of an exclusive performance obligation under a personal service recording contract. At my suggestion, each party moved for summary judgment, but I now conclude that neither party is entitled to judgment as a matter of law. Accordingly, the motions are denied.

BACKGROUND

In October 1996, Creator's Way Associated Labels, Inc. ("Creator's Way") entered into an exclusive recording agreement (the "Agreement") with Carl T. Mitchell p/k/a Twista ("Mitchell").¹ Mitchell agreed to record enough material for one album, and deliver the Master Recording to Creator's Way. (Agreement § 3.01.) Creator's Way could extend the Agreement for up to six consecutive periods obligating Mitchell to record and deliver an album during each period. (Id., §§ 1.02, 3.02.)

While the Agreement remained in effect, and subject to a limited exception, (see id., § 13.02.1), Mitchell was obligated to record "exclusively" for Creator's Way. (Id., §§ 2.01, 13.02(a)(3).) In addition, he expressly acknowledged that his personal services were "unique and extraordinary, and the loss thereof cannot be adequately compensated in damages, and Creator's Way shall be entitled to injunctive relief to enforce the provisions of this agreement." (Id., § 13.06.) Except for a termination for cause, the term of the Agreement was keyed to Mitchell's completion of his performance. (See id., § 1.01.) Thus, if Mitchell did not complete performance, the contract never ended, and Mitchell remained subject to the exclusive performance provisions. In this regard, the Agreement is still in effect. Finally, the parties selected New York as the governing law. (Id., § 19.08.)

After Mitchell filed his chapter 7 petition, the plaintiffs commenced this adversary proceeding. The complaint does not seek an injunction. Instead, it only seeks a declaration that the exclusive performance obligation is not discharged. The plaintiffs subsequently moved for summary judgment, relying on two arguments. First, the Agreement is not property of the estate or capable of assumption, and as a result, the performance obligations are not discharged. Second, the right to enforce the exclusive performance provision is not a "claim," or corresponding "debt," that is discharged under Code §§ 523 and 727. (Id., ¶ 19.) In his opposition and cross-motion, Mitchell insists that the Agreement is an executory contract that is property of the estate, it can be rejected pursuant to Code § 365, and as a result of rejection, the exclusive performance obligation is discharged.

DISCUSSION

The parties concur that the Agreement is a contract for personal services. (Plaintiffs Statement of Undisputed Material Facts, ¶ 4; Debtor's Statement of Material Facts to which Moving Party Contends there Is No Genuine Issue to Be Tried, ¶ 2). As such, it could not be assigned under New York law without the other party's consent, see Paige v. Faure, 229 N.Y. 114, 127 N.E. 898, 899 (1920); 6A N.Y.JUR.2D Assignments § 11, at 222 (1997), and Mitchell's trustee could not, therefore, assume or assign it to another performer without Creator's Way's consent. See 11 U.S.C. § 365(c)(1).² Since it was not assumed within sixty days after the order for relief, it was deemed rejected, 11 U.S.C. § 365(d)(1), and the rejection gave rise to a pre-petition breach. 11 U.S.C. § 365(g)(1). This much is certain.

The other effects of rejection are not. Although there is some contrary authority, it now appears to be well-settled that rejection does not terminate an executory contract, see Medical Malpractice Ins. Ass'n v. Hirsch (In re Lavigne), 114 F.3d 379, 386-87 (2d Cir.1997), or necessarily avoid the rights of the non-debtor party under the contract. Cohen v. Drexel Burnham Lambert Group, Inc. (Drexel Burnham Lambert Group, Inc.), 138 B.R. 687, 709 (Bankr.S.D.N.Y.1992) (quoting Andrew, Executory Contracts Revisited: A Reply to Professor Westbrook, 62 U.Colo.L.Rev. 1, 17 (1991)). Further, to determine the effect of the rejection, we look to state law. In re Lavigne, 114 F.3d at 387; In re Yasin, 179 B.R. 43, 50 (Bankr.S.D.N.Y.1995).

With this background, I turn to the parties' arguments. The plaintiffs contend that the contract is not property of the estate, and conclude from this proposition that the unperformed obligations are not discharged. Concededly, courts differ on the question of whether unassumable contracts, or contracts that are never assumed, become property of the estate. Compare Tonry v. Hebert (In re Tonry), 724 F.2d 467, 469 (5th Cir.1984) (contract rights become property of the estate only when the contract is assumed) with Computer Communications, Inc. v. Codex Corp. (In re Computer Communications, Inc.), 824 F.2d 725, 730 (9th Cir.1987) (contract rights become property of the estate when the case is commenced). The status of the Agreement as estate property is, however, beside the point. The plaintiff concedes that any pre-petition breach giving rise to a money damage claim in favor of Mitchell would vest in the estate under § 541(a). Accord Delightful Music Ltd. v. Taylor (In re Taylor), 913 F.2d 102, 106 (3d Cir.1990). Similarly, any pre-petition breach by Mitchell giving rise to a monetary claim for damages would be discharged. Thus, the appropriate inquiry is not whether the contract is estate property, but whether the debtor's statutory breach of his exclusive performance obligation gives rise to a "claim" that will be discharged under 11 U.S.C. § 727(b).³

According to § 101(5), a "claim" means

(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. . . .

The focus in this case is on subdivision (B). An equitable remedy, such as an injunction, will "give rise to a right to payment," and therefore be discharged, if payment of a monetary remedy is an alternative to the equitable remedy. In re Ben Franklin Hotel Assocs., 186 F.3d 301, 305 (3d Cir. 1999); In re Continental Airlines, 125 F.3d 120, 133 (3d Cir.1997), cert. denied, 522 U.S. 1114, 118 S.Ct. 1049, 140 L.Ed.2d 113 (1998); In re Udell, 18 F.3d 403, 408 (7th Cir.1994); United States v. LTV Corp. (In re Chateaugay Corp.), 944 F.2d 997, 1008 (2d Cir.1991) ("An injunction that does no more than impose an obligation entirely as an alternative to a payment right is dischargeable"); see Sheerin v. Davis (In re Davis), 3 F.3d 113, 116 (5th Cir.1993). State law, here New York, determines whether a party's breach gives rise to a right to payment. In re Udell, 18 F.3d at 408.

Under New York law, a court will not compel the specific performance of a personal service contract. Arias v. Solis, 754 F.Supp. 290, 293 (E.D.N.Y.1991); see Stiefel & Co. v. Blitz, No. 93 Civ. 6080(PNL), 1993 WL 526386, at *3 (S.D.N.Y. Dec.14, 1993). Nevertheless, a court may restrain its breach:

If the employee refuses to perform during the period of employment, was furnishing unique services, has expressly or by clear implication agreed not to compete for the duration of the contract and the employer is exposed to irreparable injury, it may be appropriate to restrain the employee from competing until the agreement expires.

American Broadcasting Cos., Inc. v. Wolf, 52 N.Y.2d 394, 438 N.Y.S.2d 482, 420 N.E.2d 363 (1981); accord Shubert Theatrical Co. v. Gallagher, 206 A.D. 514, 201 N.Y.S. 577 (N.Y.App.Div.1923). I assume that Mitchell refuses to perform. In addition, the Agreement states that he must perform exclusively for Creator's Way, Mitchell acknowledges that his services are unique and extraordinary, and he concedes that in the event of a breach, damages will not be adequate and Creator's Way will be entitled to an injunction.

The Court, however, is not bound by the contractual agreement. "Parties to an agreement cannot contract that courts will exercise their functions against or in favor of themselves. Whether or not a court will so exercise its powers is for the court to determine." Dockstader v. Reed, 121 A.D. 846, 106 N.Y.S. 795, 797 (N.Y.App.Div.1907); accord Arias v. Solis, 754 F.Supp. at 294 ("Even though a contract may expressly state that the employee's services are unique or extraordinary, as in this case, the Court is not bound by the statement, and it does not preclude the Court from making a finding to the contrary"); Frederick Bros. Artists Corp. v. Yates, 271 A.D. 69, 62 N.Y.S.2d 714, 715 (1946) ("The fact that the contract of hiring acknowledged that the defendant's abilities and capabilities were unique is not controlling upon a court of equity"), aff'd without op., 296 N.Y. 820, 72 N.E.2d 13 (1947); Magid v. Tannenbaum, 164 A.D. 142, 149 N.Y.S. 445, 446 (N.Y.App.Div. 1914) (court is not bound by admission that services are unique or extraordinary or consent to an injunction in the case of a breach, and must instead look to the facts); Hammerstein v. Mann, 137 A.D. 580, ...