Udell v. Standard Carpetland USA, Inc.
| Citation | 149 BR 908 |
| Decision Date | 20 January 1993 |
| Docket Number | No. F 92-242.,F 92-242. |
| Parties | In the Matter of Barry Stuart UDELL, Appellant, v. The STANDARD CARPETLAND USA, INC., Appellee. |
| Court | U.S. District Court — Northern District of Indiana |
Robert Nicholson, Douglas Adelsperger, Beckman, Lawson, Sandler, Snyder & Federoff, Fort Wayne, IN, for appellee.
Mark A. Warsco, Warsco & Brogan, Fort Wayne, IN, for appellant.
This matter is before the court on Appellant/Debtor Barry Stuart Udell's appeal from the September 17, 1992 Order and Decision of the United States Bankruptcy Court for the Northern District of Indiana, the Honorable Robert E. Grant, Judge. Udell appeals the bankruptcy court's granting of a motion for relief from the automatic stay, which had been filed by the Standard Carpetland USA, Inc. ("Carpetland"). Udell filed his Appellant's Brief on November 20, 1992. Carpetland filed its Appellee's Brief on December 4, 1992, and in response, Udell filed a Reply Brief on December 14, 1992. The court heard oral argument in this matter on January 7, 1993, at which time it took the matter under advisement. For the following reasons, the decision and order of the bankruptcy court is REVERSED, and the matter is REMANDED to the bankruptcy court for proceedings consistent with this order.
Udell, the Vice President/General Manager of Carpetland, managed Carpetland's store located in Fort Wayne, Indiana. On August 21, 1989, Udell signed an employment contract which, at paragraph 11, included a covenant not to compete. That agreement provides that for three years after leaving Carpetland, Udell is prohibited from engaging in any business located within fifty miles of Fort Wayne which conducts business similar to Carpetland. The covenant contained the following provision concerning Carpetland's remedy in the event of possible breach by Udell:
In the event of Udell\'s actual or threatened breach of the provisions of this paragraph 11, Carpetland shall be entitled to an injunction restraining Udell as well as reimbursement for reasonably sic attorneys fees incurred in securing said judgment and stipulated damages in the sum of $25,000.00.
(punctuation as in original).
Among other matters, the employment contract required thirty days written notice by either party intending to terminate the contract, permitted Carpetland to immediately terminate Udell upon notice of Udell's intent to terminate, and permitted Carpetland to substitute pay in lieu of notice. The contract also contained a provision related to Udell's option to purchase an interest in Carpetland, and provisions related to redemption of Udell's shares in Carpetland.
Udell gave notice of his resignation from Carpetland on April 27, 1992. Shortly thereafter, on May 4, 1992, Carpetland dismissed Udell from employment. Udell promptly purchased a small, local carpet store, which he alleges does not compete in the same market as Carpetland. Udell then filed a state court action seeking damages for breach of the employment contract, and Carpetland counterclaimed, seeking damages and an injunction enforcing the restrictive covenant. The Allen Superior Court granted Carpetland's request for a preliminary injunction on June 9, 1992, which injunction Udell is presently appealing in the state appellate courts.
On June 13, 1992, a few days after the preliminary injunction issued, Udell filed a Chapter 13 bankruptcy petition.1 Wishing to enforce its preliminary injunction, and believing that Udell was violating the terms of that injunction, Carpetland promptly filed its motion for relief from the automatic stay on June 16, 1992. On September 17, 1992, United States Bankruptcy Court Judge Grant issued his decision and order, awarding Carpetland relief from the stay. Udell now appeals from that order.
The Bankruptcy Code permits a party in interest to receive relief from the automatic stay2 when necessary to protect the interests of that party. 11 U.S.C. § 362(d).3 In appealing the bankruptcy court's order granting Carpetland relief from the stay, Udell basically makes three arguments.4 First, he argues that the employment contract is an executory contract, which he has rejected in its entirety, and that rejection of the contract means that Carpetland cannot enforce its restrictive covenant through an injunction. Second, Udell argues that the right to enforce the restrictive covenant is a debt dischargeable under his proposed Chapter 13 plan, and therefore, Carpetland cannot enforce its alleged right to an injunction, and must pursue its remedy in bankruptcy as would any other unsecured creditor. Third, Udell argues that the bankruptcy court abused its discretion by not giving sufficient consideration to Udell's inability to get a "fresh start", or to the unequal treatment of other creditors which will result from the lifting of the stay.5 Therefore, Udell argues, the bankruptcy court should be reversed, and Carpetland should not be granted a stay which would permit it to enforce the preliminary injunction.
The issue of whether the employment contract is an executory contract which, by means of rejection, has canceled Carpetland's right to an injunction, and the issue of whether the preliminary injunction constitutes a debt dischargeable in bankruptcy are issues of law. This court reviews such matters of law de novo. United States v. Stowe, 121 B.R. 549, 551 (N.D.Ind.1990).
Pursuant to 11 USC § 365, a bankruptcy estate may reject an executory contract, a contract under which the obligations of the debtor and the creditor are substantially unperformed. Carpetland argues that the employment contract is not executory since Udell had already terminated his employment under it. The bankruptcy court did not address this matter, instead, finding that for purposes of ruling on the motion for relief from the stay, whether the employment contract was executory and could be rejected was of no consequence. Carpetland essentially agrees with this finding.
Udell argues that the bankruptcy court erred in finding that it does not matter whether the employment contract was executory. Udell maintains that the effect of his asserted rejection of the allegedly executory contract is to relieve him of the burden of any further performance under the entire contract, including relief from the burden of the restrictive covenant found therein.
This court agrees with the bankruptcy court's conclusion that rejection of a contract does not rescind the contract or the obligations found therein, but rather, rejection constitutes nothing more than a pre-petition breach of the contract. As another bankruptcy court recently reasoned:
Consistent with the bankruptcy law\'s general deference to state-law rights in or to specific property, rejection of a contract does not terminate such rights that arise from rejected contracts. Rejection is not itself an avoiding power. Rights in property that arise from a contract may, however, be terminated by bankruptcy law\'s normal avoiding powers.
In re: Drexel Burnham Lambert Group, Inc., 138 B.R. 687, 709 (Bankr.S.D.N.Y. 1992), quoting Andrew, Executory Contracts Revisited: A Reply to Professor Westbrook, 62 U.Colo.L.Rev. 1, 17 (1991).
Therefore, as the bankruptcy court held, regardless of whether the contract is executory and could be rejected by Udell, the case turns on whether Udell's potential Chapter 13 discharge would encompass the restrictive covenant's obligation, since rejection does not destroy the contract obligations.
The central issue in this appeal concerns whether the covenant not to compete obligation is a "claim" dischargeable in Udell's Chapter 13 plan. Relief from the automatic stay is granted only when necessary to protect the interests of a party in interest. 11 USC § 362(d), supra at n. 3. If the restrictive covenant is a "claim", Carpetland may seek to protect its interests and pursue its remedy as would any other creditor involved in a bankruptcy proceeding, and therefore, Carpetland would have no right to relief from the stay.
A Chapter 13 discharge applies to "all debts provided for in the plan." 11 USC § 1328(a). The Bankruptcy Code defines "debt" as "liability on a claim". 11 USC § 101(12). The Code further defines "claim" as the:
11 USC § 101(5) (emphasis added).
Thus, if upon Udell's breach of the restrictive covenant, Carpetland's right to an injunction for breach does not also enable Carpetland to seek payment for that breach, the right to an injunction is not a claim, and consequently, not a debt dischargeable in Udell's proposed Chapter 13 plan. If Carpetland's right is not a dischargeable "debt", Carpetland may be entitled to relief from the stay in order to enforce its preliminary injunction, as such relief would be necessary to protect Carpetland's interest. If, however, upon Udell's breach of the restrictive covenant, Carpetland's right to an injunction for breach also enables Carpetland to seek payment for that breach, Carpetland's right to an injunction to enforce the restrictive covenant is a claim, and consequently, is a debt dischargeable in Udell's proposed Chapter 13 plan. Then, Carpetland would be forced to seek protection of its interest as would any other creditor, and relief from the stay would be improper.
Courts should broadly construe the term "claim" when determining whether the particular interest at issue gives rise to a right to payment. Johnson, ___ U.S. at ___, 111 S.Ct. at 2154 (...
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