Matter of Central Watch, Inc., Bankruptcy No. 80-02639

CourtUnited States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Eastern District of Wisconsin
Writing for the CourtC.N. CLEVERT
Citation22 BR 561
PartiesIn the Matter of CENTRAL WATCH, INC., Debtor. CENTRAL CONTROL ALARM CORP., Plaintiff, v. Gary T. BLACK, individually and d/b/a Security Consultants, Defendant.
Decision Date28 July 1982
Docket NumberBankruptcy No. 80-02639,Adv. No. 81-1173.

22 B.R. 561 (1982)

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.

Bankruptcy No. 80-02639, Adv. No. 81-1173.

United States Bankruptcy Court, E.D. Wisconsin.

July 28, 1982.


22 BR 562
COPYRIGHT MATERIAL OMITTED
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Thomas G. Ryan, Minahan & Peterson, Milwaukee, Wis., for plaintiff

Jeffrey S. Schuster, Stupar, Gollin & Schuster, Milwaukee, Wis., for defendant.

MEMORANDUM DECISION

C.N. CLEVERT, Bankruptcy Judge.

I. INTRODUCTION

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.

* * * * * *

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:

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Restrictive Covenant. Black agrees, that because of his knowledge and experience in the detailed operation of alarm systems, related activities, and development of customers for the Company that he will not without the written consent of the Company for a period of 2 years after termination of his employment, for whatever reason, engage directly or indirectly in any capacity, whatsoever, including but not limited to, as an investor, owner, employee, agent, representative or consultant in competition with then business activities of the Company in the following Counties located in the State of Wisconsin, to-wit: Milwaukee, Ozaukee, Racine, Washington and Waukesha. In addition to any other rights or remedies available to the Company for breach of the terms of this agreement, the Company shall be entitled to obtain enforcement of this restriction by Court injunction.
* * * * * *
Hold Harmless. Company and its Board of Directors agree jointly and severally in the event of Black\'s termination of employment, to hold Black harmless from and against any and all claims, actions, liabilities, causes and the like arising out of a good faith performance as an officer and director of Central Watch, Inc., and Wisconsin Central Watch, Inc.

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.

II. EFFECTS OF INACTION REGARDING EMPLOYMENT CONTRACT

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

22 BR 565
(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:

Until assumed or rejected, an executory contract or unexpired lease remains in force and if neither assumed nor rejected, passes with other property of the debtor to the reorganized corporation. Consolidated Gas Electric Light & Power Co. v. United Railways & Electric Co., 85 F.2d 799, 805 (4th Cir. 1936) cert. den. 300 U.S. 663, 57 S.Ct. 493, 81 L.Ed. 871 (1937). See Smith v. Hill, 317 F.2d 539 (9th Cir. 1963); Federal\'s Inc. v. Edmonton Investment Company, 404 F.Supp. 68, 71 (E.D. Mich.1975) aff\'d 555 F.2d 577 (6th Cir. 1977); 8 Collier on Bankruptcy ¶ 3.15(6) at 204 (14th Ed. 1978).
Thus, although Code § 365(a) expressly requires court approval before a debtor-in-possession may assume or reject a contract or an unexpired lease, (and it is not disputed that Shoppers never obtained court approval to assume the lease), it does not follow that Masters is relieved of its obligation to pay rent. Even where court approval was not obtained the debtor-in-possession may be deemed to have adopted the contract or lease where it received benefits and when the issue presented is whether or not such benefits should be entitled to an administration expense claim. See In re Unishops, 553 F.2d 305 (2 Cir. 1977); In re W.T. Grant Co., 474 F.Supp. 788 (S.D.N.Y.1979) aff\'d 620 F.2d 319 (2 Cir. 1980).5

Judge Schwartzberg's ruling in the Shoppers Paradise case was very persuasive and accordingly it is held that Black's employment contract remains enforceable.

III. RESTRICTIVE COVENANT

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

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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

* * * * * *

A. Enforceability under Wisconsin Law

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
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