Stevenson Associates, Inc., In re

• Decision Date: 15 November 1985
• Docket Number: No. 84-5162,84-5162
• Citation: 777 F.2d 415
• Parties: 14 Collier Bankr.Cas.2d 44, Bankr. L. Rep. P 70,857 In re STEVENSON ASSOCIATES, INC., Debtor. Charles W. STEVENSON, Appellant, v. STEVENSON ASSOCIATES, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 415

777 F.2d 415

14 Collier Bankr.Cas.2d 44, Bankr. L. Rep. P 70,857

In re STEVENSON ASSOCIATES, INC., Debtor Charles W. STEVENSON, Appellant, v. STEVENSON ASSOCIATES, Appellee.

No. 84-5162.

United States Court of Appeals Eighth Circuit.

Submitted June 14, 1985.

Decided Nov. 15, 1985.

Charles N. Nauen, Minneapolis, Minn., for appellant.

Thomas G. Lovett, Jr., Minneapolis, Minn., for appellee.

Before LAY, Chief Judge, JOHN R. GIBSON, Circuit Judge, and PHILLIPS, ^* Senior Circuit Judge.

JOHN R. GIBSON, Circuit Judge.

Charles W. Stevenson appeals from an order of the bankruptcy court, affirmed by the district court, disallowing his claim against the bankruptcy estate of Stevenson Associates, Inc. (Associates), for amounts of deferred compensation owed pursuant to an employment agreement. The bankruptcy judge without an evidentiary hearing concluded, and the district court agreed, that Stevenson's claim was invalid as a matter of law because the employment agreement provided explicitly for Associates' complete discharge from all contractual obligations in the event of its liquidation in bankruptcy. Stevenson presents arguments in this appeal based on contract law principles, due process, laches, and public policy. We conclude that the discharge provision does not present an absolute bar to Stevenson's recovery if, as Stevenson alleges, the liquidation in bankruptcy was caused by Associates' culpable misconduct. Therefore, we vacate the judgment of the district court and remand to the bankruptcy court for a determination of whether the liquidation of Associates was so caused.

Stevenson founded Stevenson Associates, Inc., an advertising agency, in 1954. On August 18, 1977, he sold his majority interest of 2,538 shares, valued at $63 per share, to officers of the agency. On the same day the parties entered into an employment agreement. Stevenson was to hold for five years the position of Founder Chairman. Basic compensation was set at $40,000 per year. In this position Stevenson was to act in an advisory capacity only; he was given no power to manage or vote on corporate matters. In addition, for the five years after his full retirement on August 18, 1982, provided he did not voluntarily leave Associates before that date, Stevenson was to receive deferred compensation in the amount of $40,000 per year. The contract stated that part of the consideration supporting Associates' promise to pay the deferred compensation was to be Stevenson's provision of employment services as Founder Chairman. In the event of Stevenson's disability or death during the first five-year period, the contract provided that he or his personal representative would receive deferred compensation at a rate of $10,000 per calendar-year quarter for the period of time equal to that during which he served as Founder Chairman. Stevenson also agreed not to work during the life of the employment contract for any business that competed with Associates. Finally, the contract contained the following clause:

10. Bankruptcy or Insolvency of Company. In the event Company liquidates due to insolvency or events resulting in active bankruptcy, this agreement shall terminate and shall be considered as fully and completely discharged.

On December 5, 1980, Associates filed for reorganization under Chapter 11 of the Bankruptcy Act. The Chapter 11 proceeding was converted into a Chapter 7 liquidation proceeding on June 12, 1981. At the time of the first filing, just over three years after the sale, the book value of Associates' stock had dropped to zero. Stevenson asserts in his brief, as he did throughout this litigation, that the new officers and directors, after purchasing Associates, became interested in other business, particularly the development of a commercial real estate project, and used their energies and Associates' resources, reputation, and credit record to amass funds to finance this venture. In the process, Stevenson alleges, they ignored the advertising business upon which Stevenson had built the agency, causing Associates' decline.

Stevenson timely filed five proofs of claim. The claim with which we here are concerned, filed on May 11, 1981, rests on indebtedness of $224,200 for unpaid deferred compensation. Initially, the trustee in bankruptcy determined this claim to be valid, and in his filing to the bankruptcy judge entitled "Objection to Allowance of Claims," specifically requested that the claim for unpaid deferred compensation be allowed. On December 9, 1983, the parties appeared in bankruptcy court. The bankruptcy judge, over protest by the trustee, challenged the allowance on the basis that Stevenson, as a member of Associates' board of directors, despite his having no control over Associates' affairs, was an insider under 11 U.S.C. Sec. 101(28)(A)(iv) (West Supp.1985). The bankruptcy judge, therefore, suggested that Stevenson's claim should be equitably subordinated to the claims of other unsecured creditors under 11 U.S.C. Sec. 510(b) (West Supp.1985). Stevenson's counsel, taken unawares by this sua sponte objection, requested 30 days to brief the issue. The bankruptcy judge set the hearing for December 14, 1983, five days later.

At the December 14th hearing, the trustee for the first time stated--he had not submitted a brief to the bankruptcy judge, nor has he done so at any subsequent stage of this litigation--that after examining the employment contract, he objected to Stevenson's claim for unpaid deferred compensation. The objection was based on the contract's discharge provision at paragraph 10. Stevenson's counsel had been advised of the trustee's changed position by telephone only the previous day and objected to the lack of adequate notice. He thus requested that he be afforded 30 days' notice and an evidentiary hearing to respond to the objection, procedural measures which he asserted were required by the due process provisions of the Bankruptcy Act and Rules. He also complained that the mismanagement of Associates by the new owners, causing the agency's eventual decline, should render inoperative the discharge provision. The bankruptcy judge denied the request for additional notice and hearing. In addition, observing that the claim was facially invalid because the employment agreement explicitly provided that all of Associates' obligations would be fully discharged and Stevenson's rights terminated in the event of liquidation in bankruptcy, the bankruptcy judge sustained the objection and denied the claim.

The district court affirmed the decision of the bankruptcy judge. Under 11 U.S.C. Sec. 502(a) (West Supp.1985), a properly filed claim is deemed allowed unless a party in interest objects. If a claim is challenged, the claimant, under 11 U.S.C. Sec. 502(b) (West Supp.1985), must be given notice of the objection and a hearing. A written copy of the objection along with notice of the hearing must be delivered to the claimant at least 30 days before the hearing. Bankr.R. 3007 (West 1984). The court conceded that the procedures employed by the bankruptcy judge were "technically defective." Stevenson v. Stevenson Associates, 3-84 Civ. 184, slip op. at 4 (D.Minn.1984). Nevertheless, it concluded that despite the bankruptcy judge's disregard of these requirements, the procedural defects did not "reach the level of constitutional denial of due process." Slip op. at 4. The court reasoned that the disallowance was based on a legal conclusion to which an evidentiary hearing would have been immaterial. Since Stevenson had received some notice and some opportunity to be heard, due process had been satisfied. The court also rejected arguments based on contract law principles, laches, and public policy. Finally, the court concluded that the bankruptcy judge's determination that liquidation in bankruptcy fully discharged Associates' obligations under the employment contract was correct and affirmed this disallowance.

I.

On this appeal, Stevenson reiterates the arguments advanced throughout these proceedings. Some of these arguments seek remand for an evidentiary hearing; others call for outright reversal of the district court's disallowance. These arguments require us to review the district court's interpretation and application of the various provisions of the Bankruptcy Act and Rules, and its construction of the language of the employment contract. We thus consider the scope of our review of the district court's conclusions.

A court of appeals exercises plenary review of a district court's interpretation and application of federal statutes or regulations; these raise questions only of law. United States v. Singer Manufacturing Co., 374 U.S. 174, 193, 83 S.Ct. 1773, 1783, 10 L.Ed.2d 823 (1963); United States v. Parke, Davis & Co., 362 U.S. 29, 43-45, 80 S.Ct. 503, 511-12, 4 L.Ed.2d 505 (1960). Similarly, where an adjudication of parties' rights and obligations under a contract rests solely upon a reading of the contract itself, and involves no findings of fact or questions of credibility, we review the district court's conclusions of law free of the clearly erroneous standard of Fed.R.Civ.P. 52(a). Western Contracting Corp. v. Dow Chemical Co., 664 F.2d 1097, 1100 (8th Cir.1981); Swanson v. Baker Industries, 615 F.2d 479, 483 (8th Cir.1980); Teamsters, Local No. 688 v. Crown Cork & Seal Co., 488 F.2d 738, 740 (8th Cir.1973).

Stevenson's challenges based on due process and on the effect of the contract's discharge clause both were rejected without an evidentiary hearing. Judgment as a matter of law based solely on the effect of statutory or contract provisions, like summary judgment, may be entered only when it is clear that the truth is known and that there are no disputed material issues of fact requiring resolution by evidentiary hearing. See Trnka v. Elanco Products, 709 F.2d 1223, 1225 (8th Cir.1983); St. Louis County Bank v. United States, 674 F.2d 1207, 1209 (8th Cir.1982). We therefore must view such a...