Rainsdon v. Duncan Ltd. P'ship (In re Duncan)
| Decision Date | 24 February 2023 |
| Docket Number | 16-40205-JMM,Adv. Proceeding 20-8056-JMM |
| Parties | In Re: JASON HEPWORTH DUNCAN and TIFFANIE ANN DUNCAN, Debtors. v. DUNCAN LIMITED PARTNERSHIP, Defendant. GARY L. RAINSDON, Plaintiff, DUNCAN LIMITED PARTNERSHIP, Counterclaimant, v. GARY L. RAINSDON, Counterdefendant. |
| Court | U.S. Bankruptcy Court — District of Idaho |
R Kade Beorchia, WORST AND ASSOCIATES, P.C., Twin Falls, Idaho Attorney for Plaintiff/Counterdefendant.
Randall A. Peterman, GIVENS PURSLEY LLP, Boise, Idaho Attorney for Defendant/Counterclaimant.
Before the Court in this adversary proceeding is a motion for partial summary judgment[1] ("Motion") filed by the plaintiff /counterdefendant, Gary L. Rainsdon ("Trustee"). Doc. No. 106. A second motion, seeking a protective order, was filed by defendant/counterclaimant, Duncan Limited Partnership ("Partnership"). Doc. No. 98. The motion for protective order is not at issue today but will be set for hearing at the same time as a status conference following resolution of the Motion.
The Court heard oral argument on January 9, 2023, and thereafter took the Motion under advisement. Having now considered the record, briefs, and arguments of the parties, as well as the applicable law, the Court issues this decision which resolves the Motion. Fed.R.Bankr.P. 7052; 9014.[2]
Debtors Jason Hepworth Duncan and Tiffanie Ann Duncan ("Debtors") filed a chapter 7 bankruptcy petition on March 18, 2016. BK Doc. No. 1.[3] Trustee was appointed to administer the case.
In 1985, Partnership was created and registered under Idaho law. Beorchia Aff., Doc. No. 106-1 at Ex. A; Partnership's Stmt. of Undisputed Facts, Doc. No. 116 at p. 10. Debtor Jason Hepworth Duncan ("Duncan") held a limited partnership interest in Partnership at the time of the bankruptcy filing. Beorchia Aff., Doc. No. 106-1 at Ex. B, Duncan Aff., Doc. No. 71 at ¶ 3. All documents in the record indicate Duncan's interest in Partnership was 10.446%. See Peterman Dec., Doc. No. 117 at Ex. A. That interest became property of Debtors' bankruptcy estate under § 541(a). Response to Trustee's Statement of Facts, Doc. No. 116 at p. 13. On March 15, 2004, a Partnership Agreement was executed ("Agreement.") Doc. 106-1. The Agreement was in effect at the time the bankruptcy petition was filed. Trustee did not assume the Agreement pursuant to § 365, and because Debtors filed a petition under chapter 7, if the Agreement is executory, by operation of law it would have been rejected 60 days after the bankruptcy filing pursuant to § 365(d)(1).
Per the Agreement, "upon the written request of a Partner or an Assignee," the General Partners will make a distribution to the requesting partner or assignee of an amount "equal to the amount of federal and state income taxes incurred by that partner or Assignee on account of the allocation to the Partner or Assignee, directly or indirectly, of profits, losses, income, or gain." Agreement, Doc. No. 106-1 at ¶ 15. Following the bankruptcy filing, a distribution was made in 2018 on Duncan's behalf for the 2017 tax year in the amount of $46,153. Dec. of Paul Duncan, Doc. No. 71 at ¶ 6 & Ex. C. The check was made out to "Gary Rainsdon Trustee." Id. at Ex. C. In similar fashion, a distribution in the amount of $30,257 was made to Trustee on behalf of Duncan for tax year 2018. Id. at ¶ 10 & Ex. D. Beginning with tax year 2019, however, despite Trustee's requests, Partnership did not make any further distributions on behalf of Duncan, and Trustee commenced this adversary proceeding on September 10, 2020. The adversary complaint was amended twice,[4] and the third amended complaint was filed on August 17, 2021, to which Partnership filed an answer and counterclaim after which Trustee filed an answer to the counterclaim. Doc. Nos. 58; 90 & 91. It is based on this third amended complaint that the Court will consider the Motion.
The standards guiding the Court in considering a motion for summary judgment are well-settled. Summary judgment is properly granted when no genuine and disputed issues of material fact exist, and, when viewing the evidence most favorably to the non- moving party, the movant is entitled to prevail as a matter of law. Civil Rule 56, incorporated by Rule 7056; Herrera v. Scott (In re Scott), 588 B.R. 122, 128 (Bankr. D. Idaho 2018) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Far Out Prods., Inc. v. Oskar, 247 F.3d 986, 992 (9th Cir. 2001)).
In considering a summary judgment motion, the Court does not weigh the evidence but instead determines only whether a material factual dispute remains for trial. Covey v. Hollydale Mobilehome Estates, 116 F.3d 830, 834 (9th Cir. 1997). An issue is "genuine" if there is sufficient evidence for a reasonable finder of fact to find in favor of the non-moving party, and a fact is "material" if it might affect the outcome of the case. Far Out Prods., 247 F.3d at 992 (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248-49, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986)). The substantive law will identify which facts are material. Anderson, 477 U.S. at 248, 106 S.Ct. 2505.
The initial burden of showing there are no genuine issues of material fact rests on the moving party. Herrera, 588 B.R. at 128 (citing Esposito v. Noyes (In re Lake Country Invs.), 255 B.R. 588, 597 (Bankr. D. Idaho 2000) (citing Margolis v. Ryan, 140 F.3d 850, 852 (9th Cir. 1998))). If the non-moving party bears the ultimate burden of proof on an element at trial, that party must make a showing sufficient to establish the existence of that element in order to survive a motion for summary judgment. Id. (citing Celotex, 477 U.S. at 322-23, 106 S.Ct. 2548).
Trustee seeks summary judgment on three issues: 1) whether the Agreement is an executory contract for purposes of § 365; 2) whether Trustee was required to assume the Agreement pursuant to § 365; and 3) whether the Agreement remains valid and enforceable with regard to the bankruptcy estate's interest in the Partnership.[5] Doc. 106 at p. 2. These threshold questions affect the balance of the issues raised in the complaint and counterclaims. Because Trustee has so limited the scope of the Motion, the Court will consider only those issues in this decision.
Section 365 governs the treatment of executory contracts in a bankruptcy case. Relevant here, § 365(d)(1) states:
In a case under chapter 7 of this title, if the trustee does not assume or reject an executory contract or unexpired lease of residential real property or of personal property of the debtor within 60 days after the order for relief, or within such additional time as the court, for cause, within such 60-day period, fixes, then such contract or lease is deemed rejected.
Although the Bankruptcy Code does not define the characteristics of an executory contract, the standard understanding of the term "executory contract" in the bankruptcy context is the so-called "Countryman definition" that turns on whether the contract requires further performance from each party, the nonperformance of which would be a material breach. NLRB v. Bildisco & Bildisco, 465 U.S. 513, 522-23 n.6, 104 S.Ct. 1188, 79 L.Ed.2d 482 (1984); Vern Countryman, Executory Contracts in Bankruptcy: Understanding "Rejection," 57 Minn. L. Rev. 439, 446 (1973) (); Unsecured Creditors Comm. Of Robert L. Helms Constr. & Dev. Co. v. Southmark Corp. (In re Robert L. Helms Constr. & Dev. Co.), 139 F.3d 702, 705 (9th Cir. 1998) (en banc) (); 3 Collier on Bankruptcy, ¶ 365.02[2] () (an executory contract "generally includes contracts on which performance remains due to some extent on both sides."). The Countryman definition is the law of this circuit. Helms, 139 F.3d at 705; In re JZ L.L.C., 371 B.R. 412, 425 (9th Cir. BAP 2007).
In considering whether a contract is executory, the Court looks at the outstanding obligations at the time the petition is filed and asks whether both sides must still perform. In re Eutsler, 585 B.R. 231, 237 (9th Cir. BAP 2017). The materiality of the parties' remaining obligations depends on whether, under applicable state law, one party's nonperformance would excuse the other party's obligation to perform. Id. (citing Hall v. Perry (In re Cochise Coll. Park, Inc.), 703 F.2d 1339, 1348 n.4 (9th Cir. 1983)).
Initially, the Court notes that the issue of whether a contract is "executory" is generally a question of fact. Helms, 139 F.3d at 706 n.13. It appears, however, that there are no disputed facts and the question relies solely on the legal interpretation of the Agreement. Moreover, no party argues that there are disputed facts preventing the Court from deciding these narrow issues.
While Trustee views the Agreement as not executory, Partnership argues otherwise. It contends first that the right to distributions renders the Agreement executory, and second, that the right of first refusal is an executory provision. The Court will discuss each of these arguments.
The Court first examines the...
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