Schokbeton Industries, Inc. v. Schokbeton Products Corp., 71-2629 Summary Calendar.

• Decision Date: 16 August 1972
• Docket Number: No. 71-2629 Summary Calendar.,71-2629 Summary Calendar.
• Citation: 466 F.2d 171
• Parties: In the Matter of Schokbeton Industries, Inc., Debtor. SCHOKBETON INDUSTRIES, INC., Debtor, and Arcrete, Inc., Appellants-Cross Appellees, v. SCHOKBETON PRODUCTS CORPORATION, Appellee-Cross Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

466 F.2d 171 (1972)

In the Matter of Schokbeton Industries, Inc., Debtor SCHOKBETON INDUSTRIES, INC., Debtor, and Arcrete, Inc., Appellants-Cross Appellees, v. SCHOKBETON PRODUCTS CORPORATION, Appellee-Cross Appellant.

No. 71-2629 Summary Calendar.^*

United States Court of Appeals, Fifth Circuit.

August 16, 1972.

COPYRIGHT MATERIAL OMITTED

Edmund L. Cogburn, Houston, Tex., Melvin A. Dow, Dow, Cogburn & Friedman, Houston, Tex., for Arcrete, Inc.

Jerry E. Bain, Tyner & Bain, Tyler, Tex., for Schokbeton Industries.

Charles F. Potter, Tyler, Tex., Roby Hadden, U. S. Atty., Stanley D. Bynum, Robert R. Reid, Jr., Birmingham, Ala., for Schokbeton Products Corp.; Bradley, Arant, Rose & White, Birmingham, Ala., of counsel.

Before JOHN R. BROWN, Chief Judge, and GOLDBERG and MORGAN, Circuit Judges.

JOHN R. BROWN, Chief Judge:

Following an arrangement proceeding under Chapter XI of the Federal Bankruptcy Act, 11 U.S.C.A. § 701 et seq., the District Court (i) dissolved an injunction entered by the referee to restrain Schokbeton Products Corp. (Products) from terminating an exclusive licensing agreement with the debtor in possession, Schokbeton Industries, Inc. (Debtor),¹ and (ii) affirmed the referee's confirmation of the plan of arrangement. Debtor and Arcrete, Inc., an intervenor which proposes to operate Debtor as a corporate subsidiary after acquiring all of its capital stock, appeal from the dissolution of the referee's injunction. Products cross appeals from the order approving the plan of arrangement. We affirm.

On December 26, 1964 Products granted Debtor an exclusive franchise to manufacture and sell precast concrete construction materials in Texas and parts of Louisiana, utilizing Products' unique dry concrete production method ("the Schokbeton process"). The licensing agreement required Debtor to make periodic royalty payments in return for the exclusive franchise and also provided that any default in the payment of such royalties for a period of sixty days following receipt of written notice from Products would justify termination of the contract.²

On November 13, 1970 Products mailed written notice of default for nonpayment of royalties.³ On December 8, 1970, before expiration of the sixty-day grace period for curing the default, Debtor filed a petition for an arrangement under Chapter XI. On January 16, 1971 Debtor was still in default and Products mailed a second written notice purporting to terminate the agreement. More than four months later, discovering that Products was attempting to grant its exclusive franchise to another licensee, Debtor sought injunctive relief from the referee on the theory that the Schokbeton process was its most valuable asset and that it would suffer irreparable financial damage if Products were permitted to disregard its license. The referee agreed and granted the injunction after concluding that the licensing agreement still subsisted as an asset of Debtor, that the filing of the arrangement petition postponed Debtor's obligation to cure the default in royalty payments, and that such default would be corrected "during an extended period as may be determined by this Court."

Debtor's Appeal: The Validity of the Injunction

We concede as indisputable the abstract assertion that the referee in a Chapter XI proceeding possesses plenary authority to protect the assets of a debtor in possession by means of an injunction. The jurisdiction is derived from a variety of sources—sections 2(a) (15)⁴ and 372⁵ of the Bankruptcy Act itself, the All Writs Act,⁶ and the inherent equity powers of a court of bankruptcy. Continental Illinois National Bank & Trust Co. of Chicago v. Chicago, Rock Island, & Pacific Railway Co., 1935, 294 U.S. 648, 675-676, 55 S.Ct. 595, 605-606, 79 L.Ed. 1110, 1128; 1 Collier, Bankruptcy, ¶ 2.61 (14th ed. 1970). No one disputes the general proposition that the power is there and that it may be exercised in an appropriate situation.

But generalizations seldom provide satisfactory solutions to specific problems. The facts of this case present two sharply defined and interrelated questions. First, did the concededly pervasive authority of the referee permit him to preserve Debtor's contractual rights by indefinitely postponing the performance required by the terms of the contract (i. e. the payment of past due royalties) ? We hold that it did not. Second, did the filing of the petition for an arrangement automatically extend the sixty-day period for curing the default? We hold that it did not.

Our conclusions are predicated upon the manifest Congressional policy that proceedings under Chapter XI incorporate, except where inconsistent, the principles applicable in bankruptcy proceedings generally, 11 U.S.C.A. § 702. A debtor in possession is thus the practical equivalent of a trustee in bankruptcy, 11 U.S.C.A. § 742, and so like the trustee usually acquires only those rights and assumes only those liabilities in existence when the petition is filed, 11 U.S.C.A. § 110(a).⁷

In the present context the most significant example of this parallelism is the statutory option afforded both trustees in bankruptcy⁸ and debtors in posssession⁹ to reject executory contracts. Given their identicality in this respect, the result here is almost foreordained because of the universally recognized rule that a trustee cannot accept the benefits of an executory contract without accepting the burdens as well. Hurley v. Atchison, Topeka, & Sante Fe Railway Co., 1909, 213 U.S. 126, 29 S.Ct. 466, 53 L.Ed. 729; Bank of America National Trust and Savings Association v. Smith, 9 Cir., 1964, 336 F.2d 528, 529; In re Italian Cook Oil Corp., 3 Cir., 1951, 190 F.2d 994, 997; 8 Collier, Bankruptcy, ¶3.15 6. As a logical result, a trustee's decision to adopt such a contract following the filing of a bankruptcy petition does not preclude the exercise of the other party's pre-existing right to terminate the agreement. Thompson v. Texas Mexican Railway Co., 1946, 328 U.S. 134, 141, 66 S.Ct. 937, 942, 90 L.Ed. 1132, 1137; Finn v. Meighan, 1945, 325 U.S. 300, 301, 65 S.Ct. 1147, 1148, 89 L.Ed. 1624, 1626; Hewit v. Berlin Machine Works, 1904, 194 U.S. 296, 24 S.Ct. 690, 48 L. Ed. 986; Kirby v. United States, 10 Cir., 1964, 329 F.2d 735, 737; Urban Properties Corp. v. Benson, 9 Cir., 1940, 116 F.2d 321; In re Lindy-Friedman Clothing Co., 5 Cir., 1922, 285 F. 22; Empress Theatre Co. v. Horton, 8 Cir., 1920, 266 F. 657; Greif Bros. Cooperage Co. v. Mullinix, 8 Cir., 1920, 264 F. 391, 397; Lindeke v. Associates Realty Co., 8 Cir., 1906, 146 F. 630, 640; In re Little & Ives Co., S.D.N.Y., 1966, 262 F.Supp. 719; 8 Collier, Bankruptcy, ¶ 3.154.¹⁰

Debtor attempts to distinguish these decisions by pointing out the fact that many of them¹¹ involved contracts that were by their own terms subject to termination upon the filing of a petition in bankruptcy. Since its agreement with Products explicitly provided that the mere filing of a Chapter XI petition would not terminate the contract (see note 2, supra), Debtor reasons that here contractual rights existed, were subject to the referee's equitable jurisdiction and were therefore enforceable on Debtor's behalf, whereas in the other cases the debtor could not change the fact that the petition had been filed (i. e. the defect was "non-curable").

We find the suggested distinction unpersuasive. In the first place the principle is in all instances the same—a contractual termination provision is unaffected by the filing of a petition in bankruptcy and may be enforced against the trustee or debtor in possession. In the second place there is no logical basis for distinguishing between the asserted authority of the referee to modify a contract by indefinitely extending the time for curing a default under it and equivalent authority to modify or nullify any other contractual provision. If a referee could grant relief on equitable grounds from compliance with a sixty-day grace period for paying past due royalties, he might as easily find it "inequitable" to enforce a forfeiture arising from the filing of a bankruptcy petition. In the third place, absent a concession of the referee's power to rewrite the contract between the parties, the grounds for termination here were as irreversible as those in each of the other cases. The sixty days elapsed. The royalties remained unpaid. Debtor's rights under the licensing agreement evaporated upon receipt of the written notice of termination, and neither the mere filing of the arrangement petition nor the referee's order purporting to "extend" the grace period for cure of the default nor a mystical combination of both could effect their recondensation.

Debtor's reliance on section 11(e) of the Bankruptcy Act is misplaced.¹² Obviously that statute permits a trustee, receiver or debtor in possession to avoid a statutory (and perhaps a contractual)¹³ time limitation that would otherwise bar a claim asserted on behalf of the debtor. United States v. Paul Hardeman, Inc., M.D. Fla., 1966, 260 F.Supp. 723; Henkin v. Rockower Bros., Inc., S.D.N.Y., 1966, 259 F.Supp. 202. It provides no basis for suspending the debtor's obligations under an executory contract while simultaneously holding the other party to the bargain.¹⁴

Debtor's reliance on In the Matter of Lane Foods, Inc., S.D.N.Y., 1963, 213 F. Supp. 133 is grossly misplaced. That decision and others like it¹⁵ stand for no more than the proposition that upon termination of a lease the referee may order that the debtor temporarily retain possession pending confirmation of the arrangement in order to avert the radical dislocation that would otherwise result from a forced eviction from the premises. More importantly, the Court in Lane Foods cites In re Walker, 2 Cir., 1937, 93 F.2d 281 to reaffirm the obvious fact that such an extraordinary holdover tenant has no more than equitable possession of the building. There is no contractual right to occupancy because the lease has...