In re Worldcom, Inc.

• Decision Date: 13 February 2007
• Docket Number: No. 02-13533 (AJG).,02-13533 (AJG).
• Citation: 361 B.R. 675
• Parties: In re WORLDCOM, INC., et al., Reorganized Debtors.
• Court: U.S. Bankruptcy Court — Southern District of New York

361 B.R. 675

In re WORLDCOM, INC., et al., Reorganized Debtors.

No. 02-13533 (AJG).

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

February 13, 2007.

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Norman E. Beal, Esq., Mark A. Shaiken, Esq., Stinson Morrison Hecker LLP, Special Counsel, Kansas City, MO, for Reorganized Debtors.

Frederick J. Sperling, Esq., Eugene J. Geekie, Jr., Jason M. Torf, Schiff Hardin LLP, Chicago, IL, A. Peter Lubitz, Esq., New YorkCity, for Michael Jordan.

OPINION REGARDING CROSS-MOTIONS FOR SUMMARY JUDGMENT BROUGHT SEPARATELY BY MICHAEL JORDAN AND WORLDCOM, INC.

ARTHUR J. GONZALEZ, Bankruptcy Judge.

INTRODUCTION

Before the Court are cross-motions for summary judgment separately brought by Michael Jordan ("Jordan") and WorldCom, Inc. (hereafter referred to as the "Debtors" or "MCI").

BACKGROUND

On or about July 10, 1995, Jordan and the Debtors entered into an endorsement agreement (the "Agreement"). At, that time, Jordan was considered to be one of the most popular athletes in the world. The Agreement granted MCI a ten-year license to use Jordan's name, likeness, "other attributes," and personal services to advertise and promote MCI's telecommunications products and services beginning in September 1995 and ending in August 2005. The Agreement did not prevent Jordan from endorsing most other products or services, although he could not endorse the same products or services that MCI produced. In addition to a $5 million signing bonus, the Agreement provided an annual base compensation of $2 million for Jordan. The Agreement provided that Jordan would be treated as an independent contractor and that MCI would not withhold any amount from Jordan's compensation for tax purposes. The Agreement provided that Jordan was to make himself available for four days, not to exceed four hours per day, during each contract year to produce television commercials and print advertising and for promotional appearances. The parties agreed that the advertising and promotional materials would be submitted to Jordan for his approval, which could not be unreasonably withheld, fourteen days prior to their release to the general public. From 1995 to 2000, Jordan appeared in several television commercials and a large number of print ads for MCI.

On July 1, 2002, MCI commenced a case under chapter 11 of title 11 of the United States Code (the "Bankruptcy Code") in the Bankruptcy Court for the Southern District of New York. On January 16 2003, Jordan filed Claim No. 11414 in the amount of $2 million plus contingent and unliquidated amounts allegedly due under the Agreement. On July 18, 2003, the Debtors rejected the Agreement as of that date, pursuant to § 365(a) of the Bankruptcy Code. Following that rejection of the Agreement, Jordan filed Claim No. 36077 (the "Claim") in the amount of million — seeking $2 million for each of the payments that were due in June of 2002, 2003, 2004, and 2005. MCI does not object to the Claim to the extent Jordan seeks $4 million for the 2002 and 2003 payments under the Agreement. As of the rejection in July 2003, two years remained under the Agreement.

The Parties' Contentions¹

MCI asserts two bases for disallowance of the Claim. One, MCI contends that the Agreement is an "employment contract" within the meaning of section 502(b)(7) of the Bankruptcy Code and that Jordan's claim is "capped" pursuant to that section. Second, MCI argues that Jordan had an obligation to mitigate his damages and failed to do so. MCI argues that these two bases entitle it to summary judgment with respect to its objection to the Claim, and assert that either under section 502(b)(7) or as a result of Jordan's failure to mitigate damages following the Debtors' rejection, the Claim should be reduced to $4 million. MCI argues that it is under no obligation to pay Jordan for contract years 2004 and 2005.

Jordan argues for summary judgment allowing the Claim in full and overruling and dismissing MCI's objections to the Claim. Jordan argues that because he was not an "employee" of MCI and because the Agreement was not an "employment agreement," section 502(b)(7) does not apply to cap his claim. Regarding MCI's mitigation argument, Jordan argues that the objection should be overruled and dismissed for three independent reasons (1) Jordan was a "lost volume seller" and thus mitigation does not apply, (2) there is no evidence that Jordan could have entered into a "substantially similar" endorsement agreement, and (3) Jordan acted reasonably when he decided not to pursue other endorsements after MCI's rejection of the Agreement.

DISCUSSION

A. Summary Judgment Standard

Under Federal Rule of Civil Procedure 56(c), made applicable to this proceeding by Federal Rule of Bankruptcy 7056, summary judgment is only appropriate where the record shows that "there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." See Fed. R. Civ. 56(c); see also Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986). A genuine issue of material fact exists, where "there is sufficient evidence favoring the nonmoving party for a jury to return a verdict for that party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S.Ct. 2505, 2511, 91 L.Ed.2d 202 (1986). In determining whether such an issue exists, "the court is required to resolve all ambiguities and draw all permissible factual inferences in favor of the party against whom summary judgment is sought." Stem v. Trustees of Columbia Univ., 131 F.3d 305, 312 (2d Cir.1997). The court's role is "not to weigh the evidence or make determinations of credibility but to `determine whether there is a genuine issue for trial.'" Village of Kiryas Joel Local Dev. Corp. v. Ins. Co. of N. America, 996 F.2d 1390, 1392 (2d Cir.1993) (quoting. Anderson, 477 U.S. at 249, 106 S.Ct. at 2511). It is well established that a party opposing a motion for summary judgment "may not rest upon mere conclusory allegations or denials." See Colavito v. N. Y. Organ Donor Network, Inc., 438 F.3d 214, 222 (2d Cir.2006) (quoting Markowitz v. Republic Nat'l Bank of N.Y., 651 F.2d 825, 828 (2d Cir.1981)). When cross-motions for summary judgment are made, as here, courts use the same standard as for individual motions for summary judgment — each motion must be considered independently of the other and the court must consider the facts in the light most favorable to the non-moving party for each. See Heublein, Inc. v. United States, 996 F.2d 1455, 1461 (2d Cir.1993). In such a situation, the court is not required to grant judgment as a matter of law for one side or the other. See id.

B. Application of Section 502(b)(7)

Jordan argues that section 502(b)(7) does not apply to his claim because he was an independent contractor and not an employee of MCI. MCI argues that section 502(b)(7) does apply to the Claim because the Agreement was an Employment Contract and Jordan was an "employee" within the meaning of that statute.

Section 502(b)(7) provides

(b) [T]he court, after notice and a hearing, shall determine the amount of ... [a] claim ... as of the date of the filing of the petition, and shall allow such claim in such amount, except to the extent that....

(7) if such claim is the claim of an employee for damages resulting from the termination of an employment contract, such claim exceeds—

(A) the compensation provided by such contract, without acceleration, for one year following the earlier of —

(i) the date of the filing of the petition; or

(ii) the date on which the employer directed the employee to terminate, or such employee terminated, performance under such contract; plus

(B) any unpaid compensation due under such contract, without acceleration, on the earlier of such dates;

11 U.S.C. § 502(b)(7).

This section caps an employee's claim for damages resulting from the termination of an employment agreement when the employer has filed for bankruptcy to (1) one year's compensation provided by such agreement measured from the earlier of the date of the filing of the bankruptcy petition or the date of termination, plus (2) any unpaid compensation due on such date. See, e.g., In re Protarga, Inc., 329 B.R. 451, 465 (Bankr.D.Del. 2005). The statutory language shows Congress's intent to limit the amount of damages that are recoverable from a debtor employer when each of two conditions is present — the claim must be that of an "employee" and the damages sought are for the termination of an "employment contract." See In re Lavelle Aircraft Co., No. 94-17496DWS, 1996 WL 226852, at *3 (Bankr.E.D.Pa. May 2, 1996). Neither "employee" nor "employment contract" is defined in the statute or legislative history. See id., at *4.

When originally enacted, subsection (b)(7) did not contain the phrase "of an employee." That language was added in 1984.² See In re Continental Airlines, 257 B.R. 658, 665 (Bankr.D.Del.2000). One commentator has stated that the 1984 addition was made to eliminate the possibility of third parties, such as third party contractors, asserting a claim against the estate. See id. (citing Norton Bankruptcy Code Pamphlet, 1994-95 Edition (Revised) § 502(b), Editor's Comment at 379 (1995)).

The cases that have discussed the issues of whether a person was an "employee" and whether the parties had an "employment contract" pursuant to section 502(b)(7) have considered a varied, non-exhaustive list of factors. The factors evidencing an employment contract include (a) how the agreement is entitled, (b) if the agreement identifies job responsibilities, (c) if the agreement provides the terms for compensation and benefits, (d) if withholding taxes and social security benefits are deducted from pay, (e) if the agreement constrains the "employee" from certain other activities, (f) if the agreement is not assignable, (g) if the debtor had the right to control the...