Matter of Isbell
| Decision Date | 04 March 1983 |
| Docket Number | 79-00686.,Bankruptcy No. 79-00685 |
| Citation | 27 BR 926 |
| Parties | In the Matter of Robert Charles ISBELL and Lorraine Ingrid Isbell, Debtors. Jerry J. ARMSTRONG, Trustee of the Estate of Robert Charles Isbell, and Lorraine Ingrid Isbell, Plaintiffs, v. Robert Charles ISBELL, Lorraine Ingrid Isbell, John F. Evans, Barbara Evans, Bank of Stoddard, a Wisconsin Banking Corporation, Defendants. |
| Court | U.S. Bankruptcy Court — Western District of Wisconsin |
James W. Bannen, Bannen & Bannen, LaCrosse, Wis., for defendant Bank of Stoddard.
Duane M. Peterson, Peterson & Thompson, Ltd., Winona, Minn., Bruce J. Brovold, Arcadia, Wis., for defendants John and Barbara Evans.
Jerry J. Armstrong, Madison, Wis., for plaintiff.
Galen W. Pittman, Johns, Flaherty & Gillette, S.C., LaCrosse, Wis., for defendants Robert and Lorraine Isbell.
In 1972, a partnership consisting of the defendant Robert C. Isbell (hereinafter "Isbell") and Eugene Fanello, purchased a tavern in La Crescent, Minnesota, known as the Crescent Inn, from John and Judith Dickson under a purchase agreement and a contract for deed (hereinafter "the 1972 agreements"). In 1973, the partnership was terminated and Fanello assigned all right, title and interest in the Crescent Inn real and personal property to Isbell who thereupon became sole owner of rights under the 1972 agreements. While owned by Isbell, the Crescent Inn served workers and fishers who preferred country and western music by day and a younger clientele who preferred rock music after 8:00 p.m.
On October 17, 1975, Isbell agreed to assign all of his interest in the Crescent Inn, real and personal property and all rights in the 1972 agreements to the defendant John P. Evans (hereinafter "the 1975 agreement"). In conjunction with the 1975 agreement the Dicksons released Isbell from all liability under the 1972 agreements. To secure payment of the balance of the purchase price for the 1975 agreement, John and Barbara Evans gave Robert and Lorraine Isbell a mortgage note dated October 17, 1975 in the sum of $33,000.00.
To further secure performance of the 1975 agreement and the payment of the $33,000.00 mortgage note, Evans gave Isbell the following:
a. A security interest in the business equipment and personal property at the Crescent Inn,
b. A mortgage on the real estate of the Crescent Inn, and
c. A first mortgage on Evans' real estate located in Waukesha County, Wisconsin.
Isbells recorded the mortgages in the counties where the properties are located, and filed a financing statement with the Secretary of State of Minnesota.
On March 14, 1977 the Isbells assigned to the Bank of Stoddard the October 17, 1975 mortgage note given them by Evans, (hereinafter "the bank assignment") to secure payment of a loan of $15,000.00 from the Bank to Isbells made that day. The bank assignment stated that the Isbells assigned a real estate mortgage and security agreement to the Bank. The assignment of the Isbells' security interest in the personal property at the Crescent Inn was not perfected by filing a financing statement with the Secretary of State of Minnesota. Nor was the assignment of the Isbells' mortgage against the Crescent Inn recorded in the office of the Register of Deeds for Houston County, Minnesota. However, after taking no action for two years, the Bank recorded an assignment of the mortgage on the Waukesha County real estate with the Register of Deeds for Waukesha County, on May 17, 1979.
Twenty days later on June 6, 1979 the Isbells filed their voluntary petitions in bankruptcy. The amount owed to the Isbells by Evans on the October 17, 1975 mortgage note was stipulated to be $28,408.48. Evans has made no payments on the debt to Isbells since the date the Isbells filed their bankruptcy petitions. As of February 23, 1982, 32 monthly payments of $400.49 each were due under the terms of the October 17, 1975 mortgage note and had not been paid to Isbells. However, Evans has been making monthly payments to an escrow account, which totalled $13,185.06 as of February 23, 1982. The right to receive those escrowed funds is dependent on the outcome of this proceeding.
On the basis of the recorded assignment of mortgage in Waukesha County, the Bank claims to have perfected a security interest to the extent of $12,941.16 plus interest in the $28,408.48 owed Isbells by Evans on the March 17, 1975 mortgage note. Except the trustee, no party to this action claims to be entitled to the difference between the $28,408.48 owed by Evans to Isbells at the time they filed their petitions and the $12,941.16 portion thereof claimed by the Bank. However, Evans by his counterclaim seeks to setoff an unspecified amount against the $28,408.48 he owes the Isbells.
The basis of Evans' asserted right of setoff is his claim of damages suffered from the Isbells' alleged breach of an agreement not to compete. Paragraph 8 of the 1975 agreement is a non-compete clause which provides:
As additional consideration for this agreement, Isbell, and his wife, agree that they shall not own, manage, operate or in any way be involved or related to the operation of a tavern, night club, or business of a like nature as the Crescent Inn, either directly or indirectly, and agree not to be involved in any business which dispenses beer, liquor, or alcoholic beverages, or any type of restaurant business which dispenses beer or alcoholic beverage, and generally, not to compete in any way with Evans in the conduct of the business of the Crescent Inn. This agreement not to compete shall be effective for a period of five years from October 6, 1975, and shall extend to physical limits of the City of La Crescent, Minnesota, and a radius of ten miles extending from the city limits of La Crescent.
After assigning his interest in the Crescent Inn to Evans, Isbell worked as food manager and as general manager of the Townhouse, a restaurant which his parents purchased in a different part of La Crescent. His responsibilities were primarily related to food service but on occasion he helped briefly at the bar. Under his general managership and with his physical presence notable, the lower portion of the premises was given over to use as a discotheque which attracted many of the young people who may have previously patronized the Crescent Inn after 8:00 p.m.
On March 2, 1978 the district judge, Third Judicial District, Houston County, Minnesota entered a partial summary judgment against the Isbells finding them in violation of paragraph 8 of the 1975 agreement. There was no evidence presented at trial in this case which indicates that the legal determination of the Minnesota district judge should be upset. The sole question that remains for this court in connection with Evans' claim under paragraph 8 of the 1975 agreement is the amount of damages which Evans should be allowed to offset against his indebtedness to the Isbells.
The right to setoff under the Bankruptcy Act which Evans seeks to invoke is set out in § 68 of the Bankruptcy Act which states:
This provision requires an initial determination of the amount of Evans' provable and allowable claim. Evans was listed as unsecured creditors (disputed) on Isbells' bankruptcy schedule A-3. Evans did not file a complaint with the Bankruptcy Court to determine the dischargeability of the Isbells' debt, pursuant to Section 17c(2) of the Bankruptcy Act. The Isbells were discharged from their debts by a discharge dated September 25, 1979. On August 12, 1981 Evans filed a claim for the sum of $40,000.00 as an unsecured claim for breach of the non-compete term of the 1975 agreement. Such a claim is undisputably provable in this bankruptcy. The amount allowable must, however, be determined.
The general rule of damages in cases where one party has breached a contract not to compete, is that the nonbreaching party is entitled to recover the loss he has sustained which naturally results from the breach, Bradford & Carson v. Montgomery Furniture Co., 115 Tenn. 610, 92 S.W. 1104 (1906), Peltz v. Eichele, 62 Mo. 171 (1876). The damages are measured by the loss to the buyer, not the gain to the seller, although these figures may coincide, Noble v. Wilder, 25 Tex.Civ.App. 31, 61 S.W. 325 (1901). If no loss can be shown to have been caused by the breach, the buyer is entitled only to nominal damages. Bradford & Carson, supra, McGinnis v. Hardgrove, 163 Mo.App. 20, 145 S.W. 512 (1912). The buyer of the business is entitled to recover all damages which have accrued up until the time of the trial, Kochenrath v. Christman, 180 Ky. 799, 203 S.W. 738 (1918).
Uncertainty of the amount of damages appears to be a common problem in actions for breach of contracts not to compete. Most courts do not require damages to be proven to a mathematical certainty, but will allow inferences to be drawn from circumstantial evidence. Salinger v. Salinger, 69 N.H. 589, 45 A. 558 (1899), Scotton v. Wright, 32 Del. 192, 121 A. 180 (1923), Galucha v. Naso, 147 Iowa 309, 126 N.W. 146 (1910), Hedrick v. Perry, 102 F.2d 802 (10th Cir.1939). To quote one such case:
Facts, circumstances, and data appear from which the jury were warranted in finding the amount of damages they did. In cases of this character it is not required...
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In re Smith
...the debt of the debtor to the creditor must have arisen and "be owed" prior to the commencement of the case. Armstrong v. Isbell (In re Isbell), 27 B.R. 926 (Bankr.W.D. Wis., 1983). Claims arising after the commencement of the case lack the requisite mutuality for setoff because the post-pe......