Matter of Moody
| Decision Date | 02 June 1983 |
| Docket Number | Adv. No. 83-0113. |
| Citation | 31 BR 216 |
| Parties | In the Matter of Gerald W. MOODY and Jermoo's Incorporated, Debtors. Gerald W. MOODY and Jermoo's Incorporated, Plaintiffs, v. AMOCO OIL COMPANY, Defendant. |
| Court | U.S. Bankruptcy Court — Western District of Wisconsin |
Michael P. Erhard, Michael B. Van Sicklen, Foley & Lardner, Madison, Wis., for plaintiffs.
Gregory E. Scallon, Stafford, Rosenbaum, Rieser & Hansen, Madison, Wis., for defendant.
The chapter 11 debtor, Jermoo's, Inc., operates three retail gasoline stations under franchise-dealership contracts with Amoco Oil Co. The debtor is also a wholesale supplier of petroleum and related products under a jobbership contract with Amoco. The debtor has petitioned the court for a judgment declaring that the dealership and jobbership agreements are executory contracts which may be assumed pursuant to 11 U.S.C. § 365(a). In the alternative, the debtor seeks an injunction preventing Amoco from taking any action to terminate the agreements.
On January 26, 1983, First Bank (N.A.) (La Crosse Division) ("bank") seized the $62,300.16 balance in debtor's checking account, claiming a right to setoff against a promissory note given by the debtor. The bank then closed the account and dishonored all checks drawn on the account.1 Among the checks dishonored were 4 made payable to Amoco. On January 27 and 28, Amoco gave oral and written notice of the dishonor, and informed the debtor that it had 5 days in which to cure, pursuant to paragraph 5(b) of the dealership contracts.2
Representatives of the debtor and Amoco met on January 31, 1983 in an attempt to settle all disputes surrounding the dishonored checks. The debtor's attorney suggested that a chapter 11 filing was a possible option. Preliminary schedules and a chapter 11 petition had in fact been prepared and signed. Amoco made no promises at the meeting, and shortly thereafter rejected debtor's settlement proposals.
The debtor did not cure the defaults, and on February 3, 1983 Amoco sent notices that debtor's Mauston and Oakdale dealership contracts were terminated, effective 90 days from the date of the letter. The notices were sent by certified mail, postmarked at Brookfield, Wisconsin, February 3 and received by the debtor at Mauston February 4, 1983. Debtor continues to operate the stations, receiving gasoline from Amoco on a C.O.D. basis.
The debtor has been in arrears on his jobbership account since September of 1981. In August of 1982 Amoco first gave notice of its intent to terminate the jobbership contract, effective in November of 1982. After some negotiations wherein debtor informally agreed to give additional security and sell the Oakdale station, Amoco agreed not to proceed with the termination. Additional security was never provided, nor was Oakdale sold. On February 1, 1983, Amoco mailed notice of termination of debtor's jobbership contract, but gave the debtor 15 days in which to cure, as required by the jobbership contract.3 Debtor did not cure the arrearage during the following 15 days, or at any time thereafter.
On February 4, 1983, debtor filed its chapter 11 petition. On that date the 5 days in which the defaults under the dealership contracts could be cured had passed, but the effective date of termination, (90 days from the date of notice) had not passed. As of the date of filing, the 15 days in which the jobbership contract could be cured had not passed.
The court is presented with two separate questions: 1.) Are the dealership and jobbership contracts executory contracts which may be assumed by the debtor? 2.) Is the debtor entitled to injunctive relief? For the reasons set out below, the court concludes that both questions must receive a negative answer.
The initial question does not turn on the general character of the contracts and whether they were within the accepted definitions of executory contracts, but rather upon the vitality of those contracts under their own terms. The debtor may only assume a contract as it existed at the time of filing. If the contracts were not terminated before debtor filed, they may be assumed. In Re Varisco, 16 B.R. 634 (Bkrtcy. M.D.Fla.1981). If they were terminated, they may not be assumed. In Re Bronx-Westchester Mack Corp., 4 B.R. 730 (Bkrtcy.S.D.N.Y.1980). In Re Benrus Watch Co. Inc., 13 B.R. 331 (Bkrtcy.S.D.N. Y.1981).
In Bronx-Westchester a truck dealer operated under a distributorship agreement with Mack Trucks, Inc. The dealer's account with Mack was approximately $150,000.00 past due, so the two parties met in an attempt to resolve the dealer's financial problems. At the meeting Mack's representatives expressly agreed not to send a termination notice before their next meeting when more financial information would be available. Shortly thereafter, Mack sent a notice terminating the distributorship agreement, effective immediately. The debtor then filed its chapter 11 petition. The debtor sought to assume the distributorship contract arguing that it could "cure," or that Mack was estopped from terminating the contract. Judge Schwartzberg found no right to cure under the bankruptcy law:
Since this court holds that it does not have the power to permit a pre-petition contract termination to be cured in the same fashion as a pre-petition default under an existing contract, it necessarily follows that Bankruptcy Code § 365(b), which deals with the curing of defaults under existing contracts is of little comfort to the debtor.
Id. at 733. Applying its equitable powers however, the court held that Mack was estopped from relying on the termination notice since the debtor's attorney had delayed filing in reliance on Mack's promise not to terminate the contract. Although the evidence in this case suggests that the debtor delayed filing after meeting with Amoco, there is no evidence that Amoco invited that delay by any promise to postpone or forego its right to terminate. No basis for estopping Amoco's termination has been presented in this case.
In Benrus Watch the debtor was in default of an agreement to pay royalties. Pursuant to the terms of a license agreement, the debtor was notified that it had 30 days in which to cure defaults, and failing that, the agreement would be terminated. When debtor did not cure, the contract was terminated. Debtor then filed its chapter 11 petition and challenged the termination. Judge Babitt found that the agreement could not be revived stating:
It is a settled principle of law that a contractual termination provision survives the filing of a petition in bankruptcy and neither a trustee nor a debtor in possession acquires any rights to otherwise alter the terms of the contract or to revive it. In short, contracts that have been effectively terminated prior to the filing of a chapter 11 petition cannot be revived by the bankruptcy court.
Id. at 334 (citations omitted). See also In Re L J P, Inc., 22 B.R. 556, 558 (Bkrtcy.S.D. Fla.1982).
The present case is more complex than those discussed above because of the 90-day effective period for the dealership termination. However, similar principles have been found to be controlling. In In Re Beck, 5 B.R. 169 (Bkrtcy.D.Haw.1980) the debtor operated a beauty salon under a license from J.C. Penney Co. The contract specified that it could be terminated on 60 days notice. J.C. Penney gave notice, debtor then filed a chapter 11 petition before the 60 days had elapsed. The bankruptcy court ruled that the termination was effective. Under the terms of the agreement, nothing but the passage of time remained until the termination was complete. The court found no authority for the debtor in possession to extend that time, nor was the time tolled by 11 U.S.C. § 362.4 In the present case, as in Beck, nothing remains to be done concerning the dealership termination. The fact that the 90 days had not passed as of the date of filing does not make the dealership contracts subject to extension beyond the 90-day period. If assumed during the period, the assumption would be for the remainder of the 90 days.
Where the remainder of the contract term is contingent on effecting a cure, 11 U.S.C. § 108(b)5 must also be considered. In In Re Physique Forum Gym, Inc., 27 B.R. 691 (Bkrtcy.D.Md.1982) the debtor was in arrears on rent payments, and the lessor gave notice that if debtor failed to cure by September 24, 1982, the lease would be terminated effective September 30, 1982. Debtor failed to cure by September 24th, or at any time thereafter. Debtor filed on September 29, after time for cure had passed, but before the effective termination date. Judge Evans first acknowledged the right to cure executory contracts under 11 U.S.C. § 365(b), but then concluded that there was no right to cure, on the facts presented:
The debtor\'s right to cure such default must, however, also be read in conjunction with 11 U.S.C. Section 108(b). Even if Section 108(b) is construed most favorably to the debtor, the debtor\'s right to cure its default was extended only until November 28, 1982, sixty days after the order for relief. Because the debtor did not cure the past arrearages, the Lease expired no later than November 28, 1982. Accordingly, with the termination of the Lease, there is no interest in the Lease to assume pursuant to 11 U.S.C. Section 365.
Id. at 693 (footnote omitted). On its facts Physique Forum is like Beck, in both cases, the time for cure had passed. The court's approach in Physique Forum was different however, in that it turned to § 108(b) and considered the possibility of curing default. Even under this expansive application, 11 U.S.C. § 108(b) is of no help to the present debtor on the dealership contracts since it did not cure within 60 days of filing.
Another case which considered the effect of tolling the time for termination under 11 U.S.C. § 108(b) was In Re Santa Fe Development & Mortgage Corp., 16 B.R. 165 (Bkrtcy.App. 9th Cir.1...
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