Matter of Smith Jones, Inc.
| Decision Date | 29 November 1982 |
| Docket Number | 4-81-1871 and 4-81-1872.,Bankruptcy No. 4-81-568 |
| Citation | 26 BR 289 |
| Parties | In the Matter of SMITH JONES, INC., SJC Corporation, and Frigiking, Inc., Debtors. |
| Court | U.S. Bankruptcy Court — District of Minnesota |
Steven B. Nosek, Minneapolis, Minn., Gary Greene, Thomas G. Barry, Jr., Minnetonka, Minn., Larry B. Ricke, Minneapolis, Minn., for Smith Jones, Inc.
Robert J. Tennessen, Minneapolis, Minn., for Smith Jones, Inc., William E. Kingswell, Inc.
Willard L. Wentzel, Jr., Minneapolis, Minn., for Wileo Plumbing & Heating Supply Co.
Thomas H. Bennin, Minneapolis, Minn., for Kings Highway Mobile Industries, Inc.
Miggie E. Cramblit, Fridley, Minn., for Climate Control Corp.
David C. Beman, Minneapolis, Minn., for Consolidated Industries, Hajoca Corp., National Mills, Inc.
Paul J. Scheerer, Minneapolis, Minn., for Progressive Wholesale, Langendorf Supply.
James H. Levy, St. Paul, Minn., for Vamac, Inc.
Rolfe A. Worden, Minneapolis, Minn., for Gruber Supply Corp.
Robert G. Share, Minneapolis, Minn., for Graybow-Daniels Co. and Capitol Supply Co.
Edward B. Silberman, Minneapolis, Minn., for Flame Air, Inc., Phoenix Wholesale, Inc., Heating & Air Conditioning and Plumbing Supply, Inc.
Lorna P. Gleason, Minneapolis, Minn., for Air Cold Supply Co., R.E. Micheal Co., Noland Co.
William I. Kampf, Elizabeth L. Zerby, St. Paul, Minn., for Standard Supply Co., Inc.
W. Scott Davis, Lincoln, Neb., for Capitol Supply Co.
David W. Evans, Minneapolis, Minn., for Eckstein Co., Woodson & Bozeman, Inc., Varner Supply.
After notice as prescribed by the court, a hearing was held in this consolidated proceeding under Chapter 11 of the Bankruptcy Code on the debtors' application for rejection of executory contracts. The appearances on behalf of and in opposition to the application are as stated in addendum hereto.
The debtor, pursuant to 11 U.S.C. Section 1107(a), armed with the powers of a trustee, seeks to reject certain executory contracts of warranty pursuant to 11 U.S.C. Section 365(a) so as to effect a breach of such contracts effective "immediately before the date of the filing of the petition". (11 U.S.C. Section 365(g)(1)).
The debtor is a conglomerate of enterprises which, prior to commencement of this case, acquired from the Tappan Company a building and manufacturing facility in Elyria, Ohio, in which it manufactured furnaces and air conditioners for sale through distributors and others. In connection with such operation, it issued certain limited written warranties to accompany the product into the hands of the ultimate purchaser. It essentially provided that for a period of time, varying as to the particular product and part, that replacement parts would be made available or provided for those becoming defective. Collateral to such warranties, the debtor made provision in its contractual arrangements with numerous distributors of product for processing warranty claims and supplying replacement parts.
The warranty, as material here, principally relates to the replacement of heat exchangers and heating elements in furnaces and replacement of defective compressors in air cooling units. The warranty purports to be in lieu of all other warranties, but the validity of that provision is not an issue at this time. The application of the debtor seeks only to reject or invalidate the precise warranties extended by the writing and does not seek any such relief with respect to obligations of an implied, or imposed by law, nature incident to the production and sale of the primary products. Accordingly, even if the written limited warranties be rejected, other types of obligations and responsibilities incident to sale may remain. The debtor also has conceded that its present application is not intended to affect any of its contractual relations with its distributors. Accordingly, its intended effect is to be isolated solely to its written contractual warranty accompanying the product into the hands of the ultimate user.
There is no complete or adequate documentation of the individuals to be affected by any action with respect to the warranties and, accordingly, application was made to this court seeking a definition of an appropriate notice under the circumstances. The court determined that the most adequate notice would encompass mailing to the some 3,600 entities revealed in the schedules and for publication of notice in newspapers and trade journals in the broad areas of product distribution. Notice was accordingly published in many newspapers having general circulation and in two trade journals. Included in the newspaper coverage is publication in several newspapers known to the court to have a very broad, general regional circulation. The publications were accomplished as provided in the court's order and, in the court's view, constitute a sufficient notice under the circumstances.
It is evident that an "executory" contract is one under which some further performance is due. Any further refinement of definition is, of course, a mere gloss on the statutory term. Among other things, it is well recognized that where all elements of performance have been accomplished, leaving only an obligation for the payment of money, the contract is not executory within the meaning of the statute. Such a contract then entails a mere debt, and such debt was claimable both under the former Bankruptcy Act and under the present Bankruptcy Code. The liability to pay money on the part of the debtor constitutes a liability which becomes present and any other express time of performance immaterial because the Act and the Code accelerate such liabilities. The present warranties require other performances than the payment of money and so they are not disqualified on that theory.
It is sometimes said that to qualify as an executory contract there must be some further performance to be rendered by each party so that such remaining obligations are bilateral in nature. The essence of that concept is that there be a bilateral involvement in the full performance of the contract.
In the present case, the obligation of the debtor to supply replacement parts as failures may occur constitutes a future commitment and is in itself executory until performed. That obligation to supply replacements for defective parts, however, is conditioned upon the occurrence of certain events and compliance on the part of the user with certain conditions as to use. The warranty provides, for example, that it should be voided if the unit involved is not installed and operated in accordance with directions and recommendations, that incompatible components or accessories have not been used with or attached to the unit, that the user has in some manner abused or failed to maintain the unit or has removed it from its place of original installation, or that the defect or damage complained of was not caused by the manufacturer. All of these performances or conditions, while outside the obligation of the debtor, must be responded to by the ultimate consumer or user. While the obligations of the consumer or user are not absolutely promissory on the part of the user, they nevertheless constitute conditions which lie within the effective control of the user and a substantial failure of such conditions would constitute a material breach and clearly excuse performance of the warranty. In this situation, there is a bilateral involvement of the parties which in its essentials complies with the requirement that the contract be "executory".
There is little authority to guide this court in making the determination that such "warranties" of the nature present in this case fall within the definition of executory contracts. The court does know, however, that such warranties have been effectively rejected in at least one case in this district. The debtor in In Re Arctic Enterprises, Inc., filed February 11, 1981, in the Third Division of this District of Minnesota, Case No. 3-81-0280, in its plan of reorganization rejected as executory contracts, so describing them, its warranties relating to snowmobiles manufactured and sold by debtor. The plan of reorganization was confirmed by the court on December 4, 1981, and pursuant to the Code, became...
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