In re Sun Ray Bakery, Inc.

• Decision Date: 20 August 1980
• Docket Number: Bankruptcy No. 80-580-JG.
• Citation: 5 BR 670
• Parties: In re SUN RAY BAKERY, INC., Debtor.
• Court: U.S. Bankruptcy Court — District of Massachusetts

5 B.R. 670 (1980)

In re SUN RAY BAKERY, INC., Debtor.

Bankruptcy No. 80-580-JG.

United States Bankruptcy Court, D. Massachusetts.

August 20, 1980.

Gary Cruickshank, Riemer & Braunstein, Boston, Mass., for debtor.

Shirley A. Bedor, Andover, Mass., for Franklin Finley, John Stark & Bart Miller.

MEMORANDUM AND ORDER ON DEBTOR'S MOTION FOR AUTHORITY TO REJECT EXECUTORY CONTRACTS: EXCLUSIVE FRANCHISE AGREEMENTS WITH FRANKLIN FINLEY, JOHN STARK AND BART MILLER

JAMES N. GABRIEL, Bankruptcy Judge.

The debtor herein, Sun Ray Bakery, Inc. (Bakery) filed a voluntary petition for reorganization under Chapter 11. Subsequently, three motions for authority to reject executory contracts were submitted by the Bakery and set for hearing. Those applications have been consolidated for the purposes of this opinion as each contract is substantially the same. (Motion for Authority to Reject Executory Contract: Exclusive Franchise Agreement with Franklin Finley; Exclusive Franchise Agreement with John Stark; Exclusive Franchise Agreement with Bart Miller) The contracts, entitled "Consignment Agreement," granted to the respondents an exclusive franchise, within a stated territory, to distribute the Bakery's products.

The debtor contends these are executory contracts within the provisions of 11 U.S.C. Section 365 and may be rejected as onerous and burdensome to the Bakery. Section 365 provides in relevant part:

(a) Except as provided in Section 765 and 766 of this Title and in subsections (b), (c), and (d) of this Section, the Trustee, subject to the court\'s approval, may assume or reject any executory contract or unexpired lease of the debtor.

Respondents, however, have argued that, taken as a whole, the contracts are a purchase of exclusive distribution rights subject to conditions subsequent which have no actual bearing on the executory nature of the contracts.

The Code does not define executory contracts in Section 365. The legislative history, however, sheds light on the term by stating that executory contracts "generally includes contracts on which performance remains due to some extent on both sides." House Report No. 95-595, 95th Congress, 1st Session (1977) 347; Senate Report No. 95-989, 95th Congress, 2d Session (1978) 58, U.S.Code Cong. & Admin.News 1978, pp. 5787, 6303.

In the case at bar both parties were, at the time of filing, subject to an obligation of continuing performance under their respective contracts. The Bakery had an obligation to consign and deliver sufficient quantities of products for distribution, and the consignees had an obligation to distribute those goods according to contract terms and to pay the purchase price when invoiced.

In the context of bankruptcy, the concept of the executory contract must be defined in the light of the purpose for which the trustee is given the option to assume or reject. This court finds compelling the definition propounded by Professor Countryman, that an executory contract is one "under which the obligation of both the bankrupt and the other party to a contract are so far unperformed that failure of either to complete performance would constitute a material breach excusing the performance of the other." Countryman, Executory Contracts in Bankruptcy; Part I, 57 Minn.L.Rev. 439 at 460 (1973). See also: Countryman, Executory Contracts in Bankruptcy; Part II, 58 Minn.L.Rev. 479 (1974). In the instant case, in spite of full payment for the exclusive distributorship rights, if the contracts continued in effect, respondents still had material performance obligations.

This court therefore finds that the contracts are within the intended definition of executory contracts under Section 365 and accordingly, may be rejected.

Respondents have argued that the case of King v. Baer, 482 F.2d 552, cert. denied 414 U.S. 1068, 94 S.Ct. 577, 38 L.Ed.2d 437, can be distinguished. This court does not agree. In King, the court found that the contract for the purchase of an interest in an oil and gas exploration permit was executory. The court rejected the argument that the property interest in exploration permits had vested where neither party had completely performed and the obligations...