Matter of Central Watch, Inc.
| Decision Date | 28 July 1982 |
| Docket Number | Bankruptcy No. 80-02639,Adv. No. 81-1173. |
| Parties | In the Matter of CENTRAL WATCH, INC., Debtor. CENTRAL CONTROL ALARM CORP., Plaintiff, v. Gary T. BLACK, individually and d/b/a Security Consultants, Defendant. |
| Court | U.S. Bankruptcy Court — Eastern District of Wisconsin |
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Thomas G. Ryan, Minahan & Peterson, Milwaukee, Wis., for plaintiff.
Jeffrey S. Schuster, Stupar, Gollin & Schuster, Milwaukee, Wis., for defendant.
The issues before the court involved the rights of the reorganized Chapter 11 debtor, Central Control Alarm Corp., (Central) and Gary Black, its former president, under a prepetition employment contract which was neither assumed nor rejected in the Chapter 11 proceeding. In its amended complaint, filed on November 5, 1981, Central essentially sought to enforce a restrictive covenant provision in the employment contract. Gary Black on the other hand contended that the restrictive covenant should not be enforced because it was an unreasonable restraint of employment which was not needed to protect Central's legitimate business interests and that it is contrary to § 103.465, Wis.Stat. Black also argued that enforcement of the covenant would be inequitable because of lack of mutuality in the employment contract and because of an alleged breach of a hold harmless provision in the contract.
The matter was tried by the court, and the parties filed proposed findings of fact and conclusions of law as well as briefs on the various issues.
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The facts may be summarized as follows:
Central Control Alarm Corporation is engaged in providing protective security systems and related monitoring services in essentially a five county area of Southeastern Wisconsin, including Milwaukee, Ozaukee, Washington, Waukesha and Racine. The defendant, Gary Black, co-founded the company in 1975 under the name Central Watch, Inc.; was a director and president of the corporation from its inception through November of 1980; was one of its principal shareholders until August 28, 1980; and served as its president until November 15, 1980.
Black's responsibilities included soliciting, negotiating and executing customer contracts. Consequently, he had extensive contact with Central's actual and potential customers and was cognizant of the terms and lengths of their contracts.
From time to time Central experienced financial problems which resulted in Black and all other shareholders selling their shares in the corporation to new investors and Central securing loans to sustain its operations. It was in that context that Black and Central entered an employment contract continuing Black as president of the corporation at a first year salary of $30,000.
Among the provisions of the contract were a restrictive covenant and a hold harmless covenant which provided, in pertinent part:
On October 24, 1980, approximately two months later, Central filed a petition for reorganization under Chapter 11 of the Bankruptcy Code. And less than a month afterward Central terminated Black's employment.
Within a month, and without Central's consent, Black, along with his mother and Mark Jones, began Security Consultants, a firm engaged in providing security systems and monitoring services throughout the Milwaukee metropolitan area. Black has since served as president and treasurer of Security Consultants, Inc.; — which was incorporated in April of 1981 — and has performed essentially the same duties that he performed for Central.
On August 28, 1981, Central's reorganization plan was confirmed without it having taken any steps to assume or reject Black's employment contract. Two months afterward, Central filed the complaint in this case (under its new name).
Although the parties have framed the issues in their pleadings as primarily ones arising from alleged breaches of the employment contract, it was not until the end of the trial that they raised the executory contract issues — i.e., whether or not the contract in question is an executory contract, within the meaning of 11 U.S.C. § 365, whether the debtor has assumed or rejected the contract, and whether confirmation of the Chapter 11 plan, absent assumption or rejection, may bar this court from determining the breach of contract issue.
It is clear that when Black was terminated, he and Central still had obligations under the employment contract. Black was to refrain from competition with Central and Central was to hold Black harmless for liabilities he incurred in the good faith performance of his duties as an officer of the corporation. Thus, as of November 15, 1980, the employment contract was an executory contract "under which the obligation of both the bankrupt and the other party to the contract . . . was so far unperformed that the failure of either to complete performance would constitute a material breach excusing the performance of the other."1
However, due to the confirmation of Central's Chapter 11 plan it must be determined whether the contract is still enforceable. Although 11 U.S.C. §§ 365(a) and (d)(2)2 provide that a debtor may, with the court's approval, assume or reject an executory contract at any time prior to confirmation, the Code does not specifically address the effects of inaction. Nevertheless, courts have generally held that executory contracts continue in force until expressly assumed or rejected.
In In re Shopper's Paradise, Inc.,3 the Chapter 11 debtor in possession filed a post-petition claim against Masters, Inc. for rent under a shopping center lease. Prior to the Chapter 11, Shoppers had commenced a summary proceeding seeking removal of Masters, but Masters contested the eviction proceedings and rent was kept in escrow. One of the issues was whether or not the lease was terminated at the time of the filing. Other issues were whether or not the executory contract should have been assumed and whether "Shoppers' adversary proceeding seeking to recover postpetition rentals . . . was tantamount to an assumption of the lease."4 The court held that:
Judge Schwartzberg's ruling in the Shoppers Paradise case was very persuasive and accordingly it is held that Black's employment contract remains enforceable.
It was uncontroverted that Black's employment by Security Consultants violated the terms of his employment contract. Therefore, the issues which must be decided with respect to the employment contract are whether (A) the covenant is enforceable under Wisconsin law, (B) whether Central breached the contract's hold harmless covenant so as to preclude the enforcement of the restrictive covenant and (C) whether equitable grounds exists to bar enforcement of the restrictive covenant.
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Section 103.465, Wis.Stat. addresses the subject of restrictive covenants and provides:
A covenant by an assistant, servant or agent not to compete with his employer or principal during the term of the employment or agency, or thereafter, within a specified territory and during a specified time is lawful and enforceable only if the restrictions imposed are reasonably necessary for the protection of the employer or principal. Any such restrictive covenant imposing an unreasonable restraint is illegal, void and unenforceable...
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