Taylor, Matter of, 89-5700
| Decision Date | 04 September 1990 |
| Docket Number | No. 89-5700,89-5700 |
| Citation | 913 F.2d 102 |
| Parties | , 23 Collier Bankr.Cas.2d 1035, 20 Bankr.Ct.Dec. 1515, Bankr. L. Rep. P 73,606 In the Matter of James TAYLOR, Debtor. DELIGHTFUL MUSIC LTD., Appellant, v. James TAYLOR, Appellee. |
| Court | U.S. Court of Appeals — Third Circuit |
Michael L. Moskowitz (argued), Richard E. Weltman, Weltman & Moskowitz, New York City, for appellant.
Paul S. Hollander (argued), Peter A. Pizzani, Jr., Okin, Cohen & Hollander, Fort Lee, N.J., for appellee.
Before SLOVITER and MANSMANN, Circuit Judges, and FULLAM, District Judge. *
James Taylor, as debtor-in-possession in this Chapter 11 bankruptcy proceeding, sought the bankruptcy court's approval of his decision to reject certain executory contracts, including a music-publishing agreement dated November 13, 1985, between the debtor and the appellant, Delightful Music, Ltd. The latter objected, moved to dismiss the bankruptcy petition, and requested the court to abstain from ruling on the rejection request.
The Bankruptcy Court granted permission to reject the executory contract, and refused to dismiss the bankruptcy petition or abstain. The district court upheld these rulings, In re Taylor, 103 B.R. 511 (D.N.J.1989), and Delightful now appeals.
Under 28 U.S.C. Sec. 158(d), this court has jurisdiction to review "final" orders. In the bankruptcy context, finality is accorded a somewhat flexible, pragmatic definition, see, In re Comer, 716 F.2d 168, 171 (3d Cir.1983). The order approving rejection of appellant's contracts fully and finally resolved a discrete set of issues, leaving no related issues for later determination; we conclude that that order is final and appealable for purposes of Sec. 158(d) and 28 U.S.C. Sec. 1291. See generally, Century Glove v. First Amer. Bank of N.Y., 860 F.2d 94, 97-99 (3d Cir.1988). The order refusing to dismiss the bankruptcy petition is likewise appealable, In the Matter of Christian, 804 F.2d 46 (3rd Cir.1986). 1
This appeal presents an issue which has not previously been addressed in any reported appellate decision, namely, whether executory contracts for the personal services of the debtor may be rejected under Sec. 365 of the Bankruptcy Code. Appellant argues that personal-service contracts are not, and cannot become, part of the estate being dealt with in the bankruptcy court, and therefore cannot be rejected or otherwise affected in a Chapter 11 proceeding. Alternatively, appellant argues that rejection should not have been permitted in this case because it was not sought in good faith and would not benefit the estate. A final argument is that the bankruptcy petition should have been dismissed because the debtor was not insolvent at the time the petition was filed, and lacked a genuine reorganization purpose, and because the petition was not filed in good faith.
James Taylor is a well-known professional musician and entertainer. From 1979 until mid-February 1988, he served as the lead singer and principal songwriter in a group known as "Kool and the Gang" ("The Group").
The services of The Group were furnished pursuant to various contracts arranged through "furnishing companies"--corporate entities in which various members of The Group held ownership interests. Thus, Quintet Associates, Ltd. was a corporation formed by the members of The Group to handle its recording contracts. Fresh Start Music, Inc. handled The Group's musical publishing business. A third corporation, variously known as Road Gang Enterprises, Inc. and/or Road Gang Associates, Ltd., arranged The Group's concerts and tours.
Until 1985, Quintet contracted to provide The Group's exclusive recording services to DeLite Recorded Sound Corp., and the individual members of The Group were required to furnish their recording services to Quintet so that Quintet could fulfill its contractual obligations to DeLite. In 1985, DeLite assigned its rights to Polygram Records, Inc., which entered into a new agreement with Quintet. Mr. Taylor and the other individual members of The Group executed "inducement letters" assenting to these arrangements. Concomitantly, Quintet entered into a music-publishing agreement with the appellant, Delightful Music, Ltd., which was a corporate affiliate of DeLite. This arrangement, too, was sanctioned by "inducement letters" executed by Mr. Taylor and other members of The Group.
In November 1986, similar arrangements were concluded between Fresh Start and Polygram for the services of Group members as songwriters; by this agreement, Polygram was required to pay royalties for songs written by Group members but not recorded by The Group.
In consequence of these contractual arrangements, appellant obtained the exclusive worldwide copyrights in all of the musical compositions of The Group, and of Mr. Taylor as a principal writer for The Group. Appellant was obliged to secure and protect copyrights, make master recordings and other audio-visual reproductions of The Group's compositions, print, publish and sell sheet music of The Group's compositions, market these products and issue licenses, and collect performance fees. And Mr. Taylor was contractually obligated to compose and perform, as a principal member of The Group, musical compositions sufficient to produce at least eight record albums (subject to various options). In the event Mr. Taylor should terminate his membership in The Group, he would remain personally liable to fulfill his remaining obligations as a solo artist--i.e., to compose and perform enough musical compositions to produce the required minimum number of albums--under a "leaving member clause" in the pertinent agreements.
Upon completion of a February 1988 tour of The Group, Mr. Taylor left The Group to pursue a solo career. The bankruptcy petition was filed on May 23, 1988. At that time, only one album had been released.
Beginning at least as early as 1985, The Group and its various related corporate entities experienced financial difficulties, apparently due in large part to life-styles involving unduly lavish expenditures, in excess of the substantial income generated by their performances. They borrowed money, from banks, their agent, and their pension funds, and these advances were secured by assignments of future revenues under the recording agreements, as well as by the personal guarantees of The Group members, including Mr. Taylor.
When the bankruptcy petition was filed, Mr. Taylor was in the following unenviable position: he was owed substantial amounts by Group entities, but with virtually no prospect of payment; he was contractually obliged to write and perform enough musical compositions to provide at least seven additional albums, but any revenues these efforts might generate would be retained by The Group's creditors; and he had personally guaranteed the obligations of The Group and its related entities in amounts greatly in excess of the remaining equity in his home, which was his only significant asset.
If the bankruptcy court and district court erred in refusing to dismiss the bankruptcy proceeding in its entirety, the issue of contract-rejection would be moot. We therefore first address the dismissal question.
In affirming the bankruptcy court's refusal to dismiss the petition, the district court found that the "debtor's current financial condition justifies the filing of a voluntary petition in bankruptcy". Taylor, 103 B.R. at 521. The court noted that the bankruptcy petition lists liabilities totaling $4,518,701.50 ($2,530,730 secured, $1,987,969.50 unsecured), and assets totaling only $734,215. The court further concluded that appellant had not established that the petition was filed in bad faith. We review the factual component of these findings under the clearly erroneous standard, and the legal component de novo.
Appellant contends that, if the personal liabilities of the debtor had not been improperly confused with the debts of the various Group entities, and if the debtor's personal liabilities had been properly evaluated to reflect their contingent nature, the debtor's financial picture would not be nearly bleak enough to warrant filing for bankruptcy; in addition, appellant argues, inter alia, that many of the listed liabilities are not enforceable against the debtor for various reasons: that the debtor was merely an accommodation-maker, whose liability was extinguished by the acts of the other parties; and that the debtor's obligations had been canceled by virtue of novations or settlement agreements. We reject these arguments.
Even if debtor's contingent liabilities (approximately $1.2 million in amount) were disregarded, his debts would greatly exceed his assets. 2 Moreover, appellant's argument rests upon an unduly optimistic view as to the remoteness of the contingency. The district court expressly found that the debtor was not a mere accommodation party--he was, after all, personally guaranteeing repayment of loans to Group entities (owned by The Group members) for the direct benefit of the members of The Group, himself included. Whether a novation occurred as to certain of these guaranty transactions depends upon the intent of the parties. This is a factual question, and the findings set forth in the record are not clearly erroneous. 3
In short, we conclude that the order appealed from, to the extent appellant's motion to dismiss the bankruptcy proceeding was denied, must be affirmed.
As set forth in Sec. 1107, a debtor-in-possession in a Chapter 11 proceeding has the same powers with respect to executory contracts as a trustee. And 11 U.S.C. Sec. 365 provides as follows:
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