In re Spradlin

• Decision Date: 18 March 2002
• Docket Number: No. 98-20611.,98-20611.
• Citation: 274 B.R. 701
• Parties: In re Robert Cecil SPRADLIN, Debtor.
• Court: U.S. Bankruptcy Court — Eastern District of Michigan

274 B.R. 701

In re Robert Cecil SPRADLIN, Debtor.

No. 98-20611.

United States Bankruptcy Court, E.D. Michigan, Northern Division.

March 18, 2002.

Donald F. Baty, Jr., David B. Cade, Andrew S. Doctoroff, Honigman, Miller, Schwartz and Cohn LLP, Michael C. Hammer, Ralph E. McDowell, Detroit, MI, Howard S. Sher, Troy, MI, for creditors.

Susan M. Cook, Bay City, MI, Donald J. Hutchinson, Detroit, MI, Andrew J. Munro, Troy, MI, for debtors.

Daniel C. Himmelspach, Saginaw, MI, George E. Jacobs, Bay City, MI, for trustees.

OPINION REGARDING VALIDITY OF NONCOMPETITION AGREEMENT

ARTHUR J. SPECTOR, Chief Judge.

Introduction

Facts pertinent to this contested matter are set forth in an opinion of the Court issued in an adversary proceeding involving the same parties.

1. Robert C. Spradlin was the sole or controlling shareholder in two companies, Contract Interiors, Inc., and Contract Interiors of Ohio, Inc.

2. These companies operated in Michigan and Ohio as dealerships of office furniture manufactured by Steelcase, Inc.

3. The dealerships defaulted on various obligations held by Steelcase Financial Services, Inc. ("SFSI").

4. Some of these obligations were personally guaranteed by Spradlin. 5. On October 28, 1996, Spradlin and the dealerships entered into a "Surrender and Settlement Agreement" with Steelcase, SFSI, and Lakestates Workplace Solutions, Inc. [(These latter 3 companies will be referred to collectively as the "Steelcase Parties.")]

....

6. Under the terms of the foregoing agreement, Spradlin and the dealerships surrendered to SFSI assets securing the unpaid obligations and SFSI accepted the collateral in satisfaction of those obligations....

7. By way of separate agreement, SFSI was to convey to Lakestates the assets acquired from Spradlin and the dealerships....

8. On October 28, 1996, the parties identified in ¶ 5 above also signed a "Noncompetition Agreement." [(hereafter, the "NCA")] ...

9. Pursuant to the ... [NCA], Spradlin and the dealerships agreed that they would "not compete, directly or indirectly, in any manner with [Lakestates] ... in any part of [Michigan or Ohio] ... in the contract office and commercial furniture businesses." ... [NCA] at ¶ 1A (internal quotation marks deleted). [(Exhibit C of Spradlin's Brief)]

10. The agreement not to compete was to run for a period of five years, commencing from the date the ... [NCA] was executed. Id.

11. The following consideration was to be paid by the Steelcase Parties in exchange for the covenants set forth in the ... [NCA]: (i) $900,000 and $100,000 to the dealerships and Spradlin, respectively, upon execution of the ... [NCA]; and (ii) $500,000 to the dealerships on October 28, 2001. Id. at ¶ 3.

...

13. In June of 1997, Lakestates' interest in the ... [NCA], along with other Lakestates assets, was purchased by The Holland Group, L.L.C. [("Holland")] ...

14. On March 13, 1998, Spradlin filed a petition for relief under title 11 of the United States Code. The case is currently pending under chapter 7 of the Bankruptcy Code.

Lakestates Workplace Solutions, Inc. v. Spradlin, A.P. No. 98-2065, slip opinion at 2-4 (Bankr.E.D. Mich. May 15, 2000); aff'd No. 00-CV-72649 (E.D.Mich. Jan. 5, 2001).

The Steelcase Parties and Holland (collectively, the "Creditors") filed a proof of claim based in part upon breach of the NCA. Spradlin, against whom the Creditors have a pending action seeking denial of discharge pursuant to various provisions under 11 U.S.C. § 727(a), objected to allowance of the claim. See generally, e.g., In re Willard, 240 B.R. 664, 668 (Bankr.D.Conn.1999) ("While in a Chapter 7 case a debtor typically lacks standing to object to claims because the debtor is not aggrieved, ... [an exception is] recognized ... where the claim involved may not be discharged."); cf. In re Dow Corning Corp., 270 B.R. 393, 399 (Bankr.E.D.Mich.2001) ("Disallowance pursuant to [11 U.S.C. § 502(b)(1)] ... might very well bar the claim-holder from attempting to enforce the claim in subsequent proceedings against the debtor."). Each side has filed a motion for partial summary judgment based solely on the breach-of-contract issue. A hearing on the motions was held, and the Court took the matter under advisement.

Discussion

A claim against the bankruptcy estate must be disallowed "to the extent that ... [it] is unenforceable against the debtor ... under ... applicable law." 11 U.S.C. § 502(b)(1). The parties agree that Michigan provides the "applicable law" for purposes of determining whether the NCA is enforceable. See NCA at ¶ 11("This Agreement shall be governed by ... the laws of the State of Michigan...."). They also agree that this determination can be made in the context of a motion for summary judgment. But of course they disagree as to what the determination should be: The Creditors contend that the NCA is enforceable, while Spradlin argues that it is not.

In addition to the common issue of enforceability, each side claims a right to summary judgment with respect to a separate issue. Spradlin argues that the Steelcase Parties lack standing to seek damages for breach of the NCA, while the Creditors assert that such damages amount to at least $100,000. The Court will consider these subsidiary issues before addressing the larger question of the NCA's validity.

(i) Standing

There are "both constitutional limitations on federal-court jurisdiction and prudential limitations on its exercise." Warth v. Seldin, 422 U.S. 490, 498, 95 S.Ct. 2197, 45 L.Ed.2d 343 (1975). Prudential standing is based on the principle "that the plaintiff generally must assert his own legal rights and interests, and cannot rest his claim to relief on the legal rights or interests of third parties." Id. at 499, 95 S.Ct. 2197. Cf. F.R.Civ.P. 17(a) ("Every action shall be prosecuted in the name of the real party in interest."¹).

It was never disputed that Lakestates assigned its interests under the NCA to Holland, and the Court so found in prior litigation. Thus the Court agrees with Spradlin that Lakestates lacks prudential standing to enforce the NCA.

With regard to Steelcase and SFSI, the Creditors point out that these entities were also parties to the NCA, and that neither of them assigned its rights thereunder. The problem with this argument is that Steelcase and SFSI essentially had no rights to assign.

As indicated earlier, the consideration for Spradlin's covenant not to compete was to be paid by Steelcase and SFSI (along with Lakestates). See NCA at ¶ 3. But the covenant itself precludes competition only with Lakestates. See id. at ¶ 1 A. The NCA also provides:

4. Remedies. ... [Spradlin and the dealerships] expressly acknowledge that, because of the unique nature of the covenants set forth in this Agreement, it would be impossible to measure in money the damages suffered if [they] ... were to fail to comply with any of the obligations imposed by this Agreement and that, if [they] ... fail to comply with this Agreement, [Lakestates] ... shall be irreparably damaged and will not have an adequate remedy at law. Accordingly, the parties agree that, in addition to withholding all remaining payments owed to [Spradlin and the dealerships] ... under this Agreement and any other remedy to which [Lakestates] ... may be entitled, [Lakestates] ... shall be entitled to injunctive and other equitable relief with respect to a breach of this Agreement by [Spradlin and the dealerships] ... and to specifically enforce the provisions of this Agreement....

...

6. Binding Effect and Benefits. This Agreement shall be binding upon, inure to the benefit of, and be enforceable by and against the heirs and legal representatives, successors and assigns of [Spradlin and the dealerships] ... and the successors and assigns of ... [Lakestates]. Nothing in this Agreement, express or implied, is intended to confer upon any other person any rights or remedies under or by reason of this Agreement except as expressly stated in this Agreement.

7. Amendments and Waivers. This Agreement may be amended, modified, superseded, or canceled, and any of the terms of this Agreement may be waived, only by a written instrument signed by ... [Spradlin and the dealerships] and ... [Lakestates] and approved by ... [Lakestates'] Board of Directors. The failure of ... [Lakestates] at any time to require performance of any provision of this Agreement shall not affect the right of ... [Lakestates] at a later time to enforce that or any other provision....

Id. at ¶¶ 4, 6 & 7 (emphasis added).

These provisions suggest that Steelcase and SFSI have the right to withhold the $500,000 lump-sum payment owed to Spradlin's dealerships in the event of a breach. See id. at ¶¶ 3 & 4. But this right is irrelevant: Spradlin is not seeking such payment, nor are Steelcase/SFSI seeking a declaration that they are absolved of that liability.

The question raised by the standing argument is whether the NCA gives Steelcase/SFSI the right to recover damages should Spradlin violate the covenant not to compete. The portions of the NCA quoted above indicate quite clearly that this right vested solely in Lakestates.

For these reasons, we conclude that Steelcase/SFSI have no contractual right to recover damages for breach of the NCA. As stated earlier, Lakestates no longer has such a right. Spradlin's motion will therefore be granted insofar as it seeks a ruling that the Steelcase Parties lack prudential standing to prosecute this action.

(ii) Damages

Spradlin acknowledges that he violated the covenant not to compete. See Spradlin Response at ¶ 5A. The Creditors argue that in compensation for this breach, Spradlin "must return the $100,000 paid to him ... in exchange for his entering into the agreement." Creditors' Brief in Opposition at p. 9. Spradlin counters that if the Court were to rule that the NCA is enforceable and that "one or more of the [Creditors] ... was damaged by" its breach, he would "agree[ ] ... that payment...