Jenson v. Continental Financial Corp., 78-1123

• Decision Date: 02 February 1979
• Docket Number: No. 78-1123,78-1123
• Citation: 591 F.2d 477
• Court: U.S. Court of Appeals — Eighth Circuit
• Parties: Bankr. L. Rep. P 67,051 Lawrence JENSON et al., Appellants, v. CONTINENTAL FINANCIAL CORPORATION et al., Appellees.

Page 477

591 F.2d 477

Bankr. L. Rep. P 67,051

Lawrence JENSON et al., Appellants, v. CONTINENTAL FINANCIAL CORPORATION et al., Appellees.

No. 78-1123.

United States Court of Appeals,

Eighth Circuit.

Submitted Sept. 13, 1978.

Decided Feb. 2, 1979.

James H. Levy, St. Paul, Minn., for appellants; Charles S. Zimmerman, Simon, Schneider & Zimmerman, and Edward W. Glickman, Minneapolis, Minn., on briefs.

Sheridan J. Buckley, Jr., St. Paul, Minn., for appellees; Michael J. Iannacone, III, St. Paul, Minn., on brief.

Before VAN OOSTERHOUT, Senior Circuit Judge, LAY and BRIGHT, Circuit Judges.

VAN OOSTERHOUT, Senior Circuit Judge.

This is a timely appeal from orders of the district court ¹ filed December 20, 1977, as amended March 20, 1978. The December 20th order denies plaintiffs' motion for final approval of a settlement between class plaintiffs and defendants upon the ground that the settlement agreement is an executory contract within the meaning of 11 U.S.C. § 110(b), and that by reason thereof the trustees of the bankrupt defendants were entitled to and did reject the settlement. The amended order filed on March 20th declares that a security agreement entered into by the parties contemporaneously with the settlement agreement is null and void.

Lawrence Jenson and nineteen other named plaintiffs brought this class action on their own behalf and on behalf of all similarly situated customers of Continental Coin Exchange, Inc., who had purchased precious metals on margin and suffered damages as a result. The defendants include Continental Coin Exchange, Inc., Continental Financial Corporation, and other related companies, as well as their officers, directors and major stockholders. The complaint alleged violation of the Federal Securities Act of 1933, 15 U.S.C. § 77a, Et seq., and the Securities and Exchange Act of 1934, 15 U.S.C. § 78a, Et seq., as well as pendent state law violations. Partial summary judgment was entered against the defendants ² on the basis that the sale of precious metals on margin constituted the sale of securities under the federal statutes and that such securities were not registered as required. Jenson v. Continental Financial Corporation, 404 F.Supp. 792 (D.Minn.1975). The determination of liability is not in dispute here.

After the determination of defendants' liability, the parties entered into a settlement agreement on January 9, 1976. The settlement agreement provided in part that the settling defendants were to pay $300,000 in four installments, forgive approximately $300,000 indebtedness of the plaintiff class, and to pay administrative expenses as they become due. ³ In return, the plaintiffs were obligated to execute a covenant not to sue the settling defendants upon approval of the settlement agreement by the court and class. Due to the fact that the settlement agreement gave the defendants one year in which to pay the cash settlement amount, the settlement was secured by a mortgage and a security agreement. The security agreement provided that, in consideration of forebearance by the plaintiffs in moving for the immediate appointment of a receiver for the defendants, defendants granted to plaintiffs' trustee a security interest in specific property turned over as collateral including a boat, furniture, fixtures, equipment and $250,000 of inventory in dental supplies, precious metals and accounts receivables. The security agreement also provided that the security interest would not only secure the payments under the settlement agreement, but would also secure any judgment for money damages in the event that the settlement failed for any reason.

A stipulation which incorporated the settlement and security agreements received preliminary approval from the district court on January 15, 1976. Based upon the stipulation the court entered an order appointing Charles Zimmerman as trustee for the plaintiffs to hold the settlement proceeds and security interest as security for the settlement. Notice of the proposed settlement was directed to the class by an order of the district court dated March 16, 1976. This order also set June 7, 1976, as the date for a hearing on the fairness of the settlement to the absent class members pursuant to Rule 23, Fed.R.Civ.P.

Prior to the date set for the fairness hearing but more than four months after the parties had entered into the settlement and security agreements, an involuntary petition in bankruptcy was filed against the corporate defendants by a third party. ⁴ On August 12, 1976, the district court denied final approval of the settlement without prejudice based upon Section 11a of the Bankruptcy Act, 11 U.S.C. § 29(a), which stays litigation pending against a bankrupt prior to a discharge in bankruptcy.

Thereafter, the trustees of the bankrupt defendants moved the district court to declare that the legal relationship created by the settlement agreement, the security agreement, and the stipulation and order dated January 15, 1976, was an executory contract rejected by the trustees and that the security agreement purported to be created thereunder was null and void. The plaintiffs renewed their motion for final approval of the settlement pursuant to Rule 23. In its order dated December 20, 1977, as amended March 20, 1978, the district court denied final approval of the settlement and granted the motion of the bankrupts' trustees. The district court also ordered plaintiffs' trustee to account and deliver to the bankrupts' trustees all the property which had come into his possession in his capacity as trustee.

The proper resolution of the primary issue in this cause involves an inquiry into the meaning of the term "executory contract" in the context of Section 70b of the Bankruptcy Act, 11 U.S.C. § 110(b). Section 70b confers upon the trustee in bankruptcy the power to assume or reject the executory contracts of the bankrupt. The Act does not define the term "executory contract". In a general sense, as long as any part of a contract remains unperformed, the contract is executory. In the context of the Bankruptcy Act, however, the term "executory contract" takes on a more limited meaning in light of the purposes for which the trustee is given the option to assume or reject. Similar to the trustee's power to abandon or accept other property, this option is to be exercised in situations where the estate will be benefitted and not where the only effect of its exercise would be to convert a contractor's claim into a first priority expense of administration. V. Countryman, Executory Contracts in Bankruptcy: Part I, 57 Minn.L.Rev. 439, 450-52 (1973); 4A Collier on Bankruptcy P 70.43 (14th ed. 1976). In Northwest Airlines, Inc. v. Klinger, 563 F.2d 916 (8th Cir. 1977), this court adopted the following definition of an executory contract in the context of the Bankruptcy Act:

'a contract under which the obligations of both the bankrupt and the other party to the contract are so unperformed that the failure of either to complete performance would constitute a material breach excusing the performance of the other.' V. Countryman, Executory Contracts in Bankruptcy: Part I, 57 Minn.L.Rev. 439, 460 (1973). See also V. Countryman, Executory Contracts in Bankruptcy: Part II, 58 Minn.L.Rev. 749 (1974).

Id. at 917. ⁵ Thus, where the contractual obligations of the bankrupt and the other contracting party remain at least partially and materially unperformed at bankruptcy, the contract is executory. In re American Magnesium Co., 488 F.2d 147 (5th Cir. 1974); In re Universal Medical Services, Inc., 325 F.Supp. 890 (E.D.Pa.1971), aff'd 460 F.2d 524 (3d Cir. 1972); Gulf Petroleum, S. A. v. Collazo, 316 F.2d 257 (1st Cir. 1963); Workman v. Harrison, 282 F.2d 693 (10th Cir. 1960).

The Settlement Agreement.

Under the foregoing analysis it is clear that the settlement agreement entered into by the parties in the instant case is an executory contract subject to rejection by the bankrupts' trustees. As of the date of the filing of the involuntary petition in bankruptcy against the corporate defendants, the parties had substantial and material obligations to perform in the future under the terms of the settlement agreement. The defendants had yet to make the final installment payment of $125,000 while the plaintiffs had yet to execute a covenant not to sue the settling defendants. These duties were not only material but were the central obligations under the settlement agreement. Thus, the failure of either party to perform its obligation at this point would constitute a material breach excusing the performance of the other. Since the bankrupts had substantially performed but had not received a material benefit (i. e., the covenant not to sue) under the settlement agreement, the trustees in bankruptcy could properly reject it as executory under Section 70b. ⁶ Therefore we affirm that part of the district court's order declaring that the settlement agreement...