Waldron, In re

• Decision Date: 01 April 1986
• Docket Number: No. 85-5129,85-5129
• Citation: 785 F.2d 936,14 BCD 488
• Parties: , 14 Bankr.Ct.Dec. 488, Bankr. L. Rep. P 71,069 In re Edward J. WALDRON, et al., Debtors, SHELL OIL COMPANY, Plaintiff-Appellant, Cross-Appellee, v. Edward J. WALDRON and Elizabeth M. Waldron, his wife, Defendants-Appellees, Cross-Appellants.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 936

785 F.2d 936

54 USLW 2509, 14 Bankr.Ct.Dec. 488, Bankr.

L. Rep. P 71,069

In re Edward J. WALDRON, et al., Debtors SHELL OIL COMPANY, Plaintiff-Appellant, Cross-Appellee, v. Edward J. WALDRON and Elizabeth M. Waldron, his wife Defendants-Appellees, Cross-Appellants.

No. 85-5129.

United States Court of Appeals Eleventh Circuit.

April 1, 1986.

Lawrence S. Gordon, Alan T. Dimond, Greenberg, Traurig, Askew, Hoffman, Lipoff & Quentel, P.A., Miami, Fla., for plaintiff-appellant, cross-appellee.

Edward J. Waldron, Coral Gables, Fla., and Elizabeth M. Waldron, pro se.

Appeals from the United States District Court for the Southern District of Florida.

Before FAY and KRAVITCH, Circuit Judges, and HENLEY ^*, Senior Circuit Judge.

PER CURIAM:

The United States Bankruptcy Court for the Southern District of Florida permitted a financially secure individual and his wife to file a joint Chapter 13 petition in bankruptcy "for the sole purpose of rejecting an option agreement." The district court affirmed the bankruptcy court's order. We reverse.

I.

On June 24, 1983 Edward J. Waldron and his wife Elizabeth filed a joint voluntary petition under Chapter 13 of the Bankruptcy Code, 11 U.S.C. Secs. 1301-1330 (1982 & Supp. II 1984). The Chapter 13 petition listed one creditor, Shell Oil Company, but the Waldrons, in fact, owe no debts. ¹ The Waldrons are completely solvent, own a home in Coral Gables, Florida valued at $125,000.00 and an impressive portfolio of stocks. The Waldrons also own, subject to an option agreement, a parcel of land located at 2727 West Flagler Street in Miami, Florida.

On January 15, 1964 the Waldrons had granted Shell Oil the option to purchase this parcel of land. The option agreement provided that Shell Oil would have the right to exercise the option at a price of $40,000.00 "at any time after January 1, 1984" through December 31, 1993. The Waldrons granted Shell Oil this option as part of a single transaction in which Shell Oil purchased for $100,000 an adjacent parcel of land from Mr. Waldron's father and an easement in front of the parcel located at 2727 West Flagler Street. Shell had desired to purchase both parcels of land in 1964 to construct a full facility service station but agreed to the two step procedure to accommodate the Waldrons. The option agreement recited a consideration of $10.00 and Mr. Waldron later stipulated that he actually received the money. The option agreement, the easement granted to Shell Oil and the warranty deed for the adjacent parcel were recorded simultaneously in the Official Records of Dade County, Florida.

In their Chapter 13 petition, the Waldrons sought to reject the option agreement pursuant to 11 U.S.C. Sec. 365(a) (1982). ² Mr. Waldron, an attorney specializing in bankruptcy law, admitted that he "filed this Chapter 13 for the sole purpose of rejecting [the] option agreement." Financially secure and without any debts, the Waldrons thus set out to use the bankruptcy process in attempting to reject a contract which they felt might not be as profitable as it could be. ³ In essence, the Waldrons wanted to breach the option agreement and prevent Shell Oil from seeking specific performance in state court. ⁴

Initially, the bankruptcy court questioned the Waldrons' preposterous scheme. The court recognized that the Waldrons were not financially distressed and had no real need to invoke the protections of the bankruptcy laws. ⁵ Nevertheless, the bankruptcy court concluded that the bankruptcy laws were intended to be widely available and thus even a "trouble-free debtor" must not be "precluded from utilizing Chapter 13 solely to reject the option contract." In re Waldron, 36 B.R. 633, 636 (Bankr.S.D.Fla.1984). The district court upheld the bankruptcy court's order. This appeal promptly followed.

II.

The Bankruptcy Code expressly provides that a bankruptcy court may not confirm a Chapter 13 plan unless "the plan has been proposed in good faith and not by any means forbidden by law." 11 U.S.C. Sec. 1325(a)(3) (1982). Indeed, "the 'good faith' requirement of Sec. 1325(a) is the only safety valve available through which plans attempting to twist the law to malevolent ends may be cast out. The good faith test should be used accordingly." In re Leal, 7 B.R. 245, 248 (Bankr.D.Colo.1980). In this case, the bankruptcy court should have used the good faith test to cast out the Waldrons' malevolent scheme. ⁶

While it is difficult to discern the congressional intent behind section 1325(a)(3) because of a dearth of legislative history, the term "good faith" is certainly not new to bankruptcy law. Section 141 of the Bankruptcy Act of 1898, 11 U.S.C.A. Sec. 541 (West 1979) (repealed 1979), required that a Chapter X petition for corporate reorganization be filed in good faith or face dismissal. Section 146 of the Act, 11 U.S.C.A. Sec. 546 (West 1979) (repealed 1979), set forth four specific criteria of the term "good faith" but emphasized that the meaning of the term was not to be limited by these four tests. Cases interpreting sections 141 and 146 have therefore defined good faith broadly:

Basically, the general elements of good faith, undefined in the statute, mean that the petition must be filed with the honest intent and genuine desire to utilize the provisions of Chapter X for its intended purpose --to effectuate a corporate reorganization--and not merely as a device to serve some sinister and unworthy purpose of the petitioner.... The court cannot and will not tolerate such misuse of the reorganization process.

In re Southern Land Title Corp., 301 F.Supp. 379, 428 (E.D.La.1968) (emphasis added). See also Mongiello Brothers Coal Corp. v. Houghtaling Properties, Inc., 309 F.2d 925, 930 (5th Cir.1962) ("[i]n considering the presence or absence of good faith, it must be borne in mind that the Act is not to be abused by the extension of its privileges to those not within the contemplation of it...."). These discussions are equally applicable to the good faith provision in Chapter 13. See In re Leal, 7 B.R. 245, 247 (Bankr.D.Colo.1980).

In this case, the Waldrons admittedly filed their Chapter 13 petition for the sole purpose of rejecting the option agreement with Shell Oil. The Waldrons were not financially distressed and had no real need for the bankruptcy process. ⁷ The Waldrons' only motive was to enhance their financial coffers by manipulating and abusing the bankruptcy process. Their Chapter 13 petition should not have been confirmed.

"The bankruptcy laws are intended as a shield, not as a sword." In re Penn Central Transportation Co., 458 F.Supp. 1346, 1356 (E.D.Pa.1978). Congress could not have intended that the debt-free, financially secure Waldrons be permitted to engage the bankruptcy machinery solely to avoid an enforceable option contract. From all that appears, the contract was negotiated at arms length; if the Waldrons now feel that it is less attractive than it should be, the difference is attributable to changes in the economic climate not to the Waldrons' financial situation. See id. The bankruptcy laws were simply not intended to be used as a sword by the rapacious.

Nevertheless, the bankruptcy court permitted the Waldrons to reject the option contract because "it is clear that [the Waldrons] could readily refile their bankruptcy petition under Chapter 11." In re Waldron, 36 B.R. at 635. Apparently, the bankruptcy court relied on cases which hold "that it is not an abuse of the bankruptcy process to file a petition under Chapter 7 or 11 solely to reject an executory contract." Id. (citing In re Bofill, 25 B.R. 550 (Bankr.S.D.N.Y.1982) and also relying on In re Marina Enterprises, 14 B.R. 327 (Bankr.S.D.Fla.1981)). The bankruptcy court, however, failed to recognize the true import of these decisions. ⁸ In each case, rejection of the executory contract served a useful purpose for a debtor who was indeed financially troubled. In each case, rejection was permitted to serve the intended purpose of Chapter 11--to facilitate the adjustment of debts through reorganization.

For example, in In re Marina Enterprises, a Chapter 11 debtor-in-possession, whose sole asset was an undeveloped parcel of land subject to a lease, applied for rejection of the lease. The bankruptcy court permitted rejection, finding that "there can be no realistic anticipation of successful reorganization or rehabilitation without rejection of the lease." 14 B.R. at 333. The bankruptcy court also recognized that "the rent [the debtor-in-possession was to receive under the lease] will probably not cover debt service, much less give a realistic return on investment," id. at n. 4, and noted that the debtor-in-possession "was unable to obtain construction financing" because of the improvident lease. Id. at 333. Indeed, rejection was necessary to successfully reorganize the debtor-in-possession's business and allow the financially troubled debtor a "fresh start."

Similarly, the bankruptcy court in In re Bofill, cautioned that section 365 of the Bankruptcy Code "is not a 'legal loophole.' " 25 B.R. at 552 (citation omitted). Rejection of an executory contract under section 365 must therefore only be permitted to serve some useful purpose such as providing a troubled debtor with a "fresh start." See id. See also NLRB v. Bildisco & Bildisco, 465 U.S. 513, 527, 104 S.Ct. 1188, 1197, 79 L.Ed.2d 482 (1984) ("[s]ince the policy of Chapter 11 is to permit successful rehabilitation of debtors, rejection should not be permitted without a finding that that policy would be served by such action").

In this case, rejection of the option agreement with Shell Oil would serve no such policy or purpose. The Waldrons have no debts; they are financially secure. In fact, their liquid assets will be increased by $40,000 when Shell Oil exercises its option to purchase the land at 2727 West Flagler Street. The Waldrons' plan was thus proposed in a bad faith attempt to use and abuse Chapter 13...