Andrews v. Riggs Natl Bank ( 1996 )

Filed: May 6, 1996
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 93-2095
(CA-93-655-A, BK-92-14879-AT)
John A. Andrews,
Plaintiff - Appellant,
versus
The Riggs National Bank of Washington, D.C.,
Claimant - Appellee.
O R D E R
The Court amends its opinion filed April 1, 1996, as follows:
On page 4, first full paragraph, line 2 -- "Chapter VII" is
corrected to read "Chapter 7."
For the Court - By Direction
/s/ Bert M. Montague
Clerk
PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
In Re: JOHN A. ANDREWS,
Debtor.
JOHN A. ANDREWS,
Plaintiff-Appellant,
v.
THE RIGGS NATIONAL BANK OF
No. 93-2095
WASHINGTON, D.C.,
Claimant-Appellee,
RICHARD G. HALL,
Trustee-Appellee,
v.
FIRST AMERICAN BANK OF VIRGINIA,
Claimant.
Appeal from the United States District Court
for the Eastern District of Virginia, at Alexandria.
Claude M. Hilton, District Judge.
(CA-93-655-A, BK-92-14879-AT)
Argued: May 13, 1994
Decided: April 1, 1996
Before WIDENER and WILKINS, Circuit Judges, and ELLIS,
United States District Judge for the Eastern District of Virginia,
sitting by designation.
_________________________________________________________________
Affirmed by published opinion. Judge Ellis wrote the majority opin-
ion, in which Judge Wilkins joined. Judge Widener wrote a dissenting
opinion.
_________________________________________________________________
COUNSEL
ARGUED: Stephen Everett Leach, TUCKER, FLYER & LEWIS,
P.C., Washington, D.C., for Appellant. Philip John Harvey, SHAW,
PITTMAN, POTTS & TROWBRIDGE, Alexandria, Virginia, for
Appellee.
_________________________________________________________________
OPINION
ELLIS, District Judge:
This appeal requires us to decide whether payments to a bankrupt
debtor pursuant to a non-competition agreement constitute "earnings
from services performed" under 11 U.S.C. § 541(a)(6). The bank-
ruptcy court found that the non-competition agreement was ancillary
to a pre-petition transaction, and thus payments under the agreement
did not fall within § 541(a)(6). The district court agreed. Because we
concur, we affirm.
I.
Appellant John A. Andrews ("Andrews") worked in the ready-mix
concrete business most of his life. In 1974, he and various partners
formed a ready-mix concrete company in Herndon, Virginia. The
company, which ultimately came to be known as AMAX Corporation
("AMAX"), grew to be quite successful, with annual sales of approxi-
mately thirty million dollars. As a part owner of AMAX, Andrews
was personally active in the company and consequently developed
numerous and substantial customer contacts and relationships in the
concrete business. He expanded these contacts in 1980 by forming a
real estate development company, which allowed him to participate
in joint ventures with builders and developers.
2
In 1989, Andrews and the other owners of the company negotiated
with Tarmac Acquisition, Inc. ("Tarmac") for the latter to purchase
the assets of AMAX and related entities. Both sides to the negotia-
tions retained independent experts to value AMAX's assets. The final
sale price of nine million dollars was based on these expert valua-
tions. Tarmac also purchased AMAX's customer list, representing the
good will of the company, for an additional one million dollars. At
the same time, the principal owners of AMAX, including Andrews,
entered into separate non-competition agreements with Tarmac. These
agreements were an express condition of the asset sale because Tar-
mac was concerned about the AMAX principals' substantial customer
relationships and contacts in the ready-mix concrete business.
Andrews's non-competition agreement with Tarmac ("NCA"),
dated July 17, 1989, provided that he would not compete with Tarmac
in the ready-mix concrete business in Northern Virginia, the District
of Columbia, or the adjacent portions of Maryland for a period of four
years. In exchange, Andrews was to receive one million dollars.
Absent setoff,1 this one million dollars was to be paid in quarterly
installments of $62,500, plus ten percent annual interest. Andrews
asserts that the payments were structured in this manner to approxi-
mate his AMAX salary. Yet, he also concedes that Tarmac arrived at
the one million dollar figure based on its estimate of the value of
eliminating future competition from Andrews.
Andrews treated his NCA payments as ordinary income for federal
tax purposes. This treatment was not to his advantage, as the top tax
rate on ordinary income was thirty-one percent, significantly more
_________________________________________________________________
1 Andrews's payments under the NCA were subject to setoff by Tarmac
if anyone involved with AMAX breached the main contracts for the asset
sale, or if Tarmac acquired an indemnification claim against Andrews or
the other AMAX principals. Setoffs against Andrews's payments
occurred. Specifically, the bankruptcy court found that Tarmac recovered
some $400,000 from Andrews through the NCA's setoff mechanism in
the years following the asset sale. Andrews agrees that Tarmac exercised
its right of setoff against Andrews's NCA payment in the amount of
$50,000 during the summer of 1992. He also asserts, however, that he
repaid the other $350,000 separately. The bankruptcy court's finding in
this regard is neither part of this appeal nor germane to it.
3
than the twenty-eight percent rate that would have been applicable
had he claimed the payments as capital gain from the sale of assets.
See 26 U.S.C. § 2. In addition, by claiming the NCA payments as
ordinary income, Andrews became subject to an additional self-
employment tax of between ten and fifteen percent. See 26 U.S.C.
§§ 1401-1402.
On October 14, 1992, Andrews filed a voluntary petition for relief
under Chapter 7, 11 U.S.C. § 701 et seq., in the United States Bank-
ruptcy Court for the Eastern District of Virginia. On December 4,
1992, Andrews instituted this contested proceeding against the estate
trustee Richard G. Hall ("trustee") pursuant to Rule 9014, Fed. R.
Bankr. P. The motion initiating the proceeding sought to exclude from
Andrews's bankruptcy estate all post-petition payments due him
under the NCA. The total of these payments is $250,000 plus interest.2
According to Andrews, the payments represented his only source of
income while the NCA remained in effect because the NCA pre-
cluded him from engaging in the ready-mix concrete business. But for
the NCA, Andrews asserts, he could have profitably re-entered the
ready-mix concrete business.
The bankruptcy court denied Andrews's motion, holding that com-
pliance with a non-competition obligation closely connected with the
pre-petition sale of an asset does not constitute "services performed"
under 11 U.S.C. § 541(a)(6). The district court affirmed, and this
appeal followed.
II.
The question presented is whether the payments due Andrews
under the NCA qualify as "earnings from services performed" under
11 U.S.C. § 541(a)(6). If so, they are excluded from Andrews's bank-
ruptcy estate, and he may use and enjoy them free from the claims of
his creditors. If not, the payments become part of the estate and hence
available to satisfy outstanding creditors' claims.
_________________________________________________________________
2 When Andrews filed his Chapter VII petition, there were four pay-
ments remaining under the NCA. These payments, which were due in
October 1992 and January, April, and July 1993, have been paid into
Andrews's estate. The NCA expired on July 16, 1993.
4
Analysis properly begins with the language of the statute itself. See
United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 241 (1989).
Section 541 of the Bankruptcy Code provides that the bankruptcy
estate consists of certain broadly defined categories of property,3 but
specifically excludes "earnings from services performed by an indi-
vidual debtor after the commencement of the case." 11 U.S.C.
§ 541(a)(1), (6). The phrase "services performed" is not defined in the
statute. We are left, then, to construe the phrase in accordance with
its ordinary meaning or, if that meaning be ambiguous, to give it the
meaning most consistent with the statute's purpose. Crandon v.
United States, 494 U.S. 152, 158 (1990); see also Kokoszka v.
Belford, 417 U.S. 642, 645 (1974) (stating that "purposes of the Bank-
ruptcy Act must ultimately govern" in determining scope and limita-
tions of term "property" in 11 U.S.C. 110a(5)).
As the parties' contentions reflect, the ordinary meaning of the
phrase is infected with ambiguity. Thus, Andrews suggests that
refraining from competition amounts to "performing services"
because it confers a benefit on Tarmac. The trustee responds, more
plausibly, that the phrase "services performed" is stretched out of
shape if it is taken to include refraining from doing something, i.e.,
not competing, as contrasted with doing something or taking action.
According to the trustee, performing a service implies doing an act,
not refraining from doing an act. Although the contest of ordinary
meanings tilts somewhat in favor of the trustee's construction, ordi-
nary meaning simply does not answer decisively whether the phrase
encompasses refraining from competing pursuant to a non-
competition agreement. We must therefore ascertain the purpose of
the statutory provision so we can assign to the phrase the meaning
most consistent with that purpose. See Crandon, 494 U.S. at 158. This
inquiry, of course, is informed by the purposes underlying federal
bankruptcy law as a whole.
_________________________________________________________________
3 For example, the estate will include all of the debtor's legal and equi-
table interests in property, § 541(a)(1), certain interests of the debtor and
the debtor's spouse in community property, § 541(a)(2), and any interest
in property the debtor acquires by way of inheritance or a divorce settle-
ment within 180 days of the filing of the bankruptcy petition,
§ 541(a)(5).
5
Section 541, like the Bankruptcy Code generally, has two overar-
ching purposes: (1) providing protection for the creditors of the insol-
vent debtor4 and (2) permitting the debtor to carry on and rebuild his
life, that is, to make a "fresh start."5 The first purpose is effectuated
through statutory provisions that marshal and consolidate the debtor's
assets into a broadly defined estate6 from which, in an equitable and
orderly process, the debtor's unsatisfied obligations to creditors are
paid to the extent possible.7 The second purpose finds expression in
the bright line the Bankruptcy Code draws between pre- and post-
bankruptcy filing events.8 Thus, § 541(a)(1) provides that the estate
includes the debtor's legal and equitable interests "as of the com-
mencement of the case," and leaves the bankrupt debtor free after that
date to accumulate new wealth so that he might make a fresh start fol-
lowing bankruptcy. Similarly, the provision in issue here, § 541(a)(6),
allows the debtor to exclude from his estate any compensation or sal-
ary he might earn after the date of the petition. Toward the same end,
§ 727 facilitates the fresh start by ultimately discharging the balance
of the debtor's unpaid obligations after the estate is exhausted. See 11
U.S.C. § 727.
Sometimes the Bankruptcy Codes two purposes appear to conflict,
as when a debtor claims property to aid his fresh start while his credi-
tors claim the same property to satisfy the debtors obligations to them.
Yet, this conflict is illusory, for by drawing the bright line between
the debtor's pre- and post-petition assets, the Bankruptcy Code har-
_________________________________________________________________
4 H.R. Rep. No. 595, 95th Cong., 1st Sess. 366-68 (1977); S. Rep. No.
95-989, 95th Cong., 2d Sess. 82-83 (1978).
5 See Segal v. Rochelle, 382 U.S. 375, 379 (1966).
6 For instance, § 541(a)(1) provides in pertinent part that property of
the estate includes "all legal or equitable interests of the debtor in prop-
erty" as of the time the bankruptcy petition is filed. 11 U.S.C.
§ 541(a)(1). Section 541(a)(6) further states that the estate is to include
any "proceeds, product, offspring, rents or profits of or from" the estate
that accrue even after the estate has been created. 11 U.S.C. § 541(a)(6).
7 Harman v. First American Bank of Maryland (In re Jeffrey Bigelow
Design Group, Inc.), 956 F.2d 479, 487 (4th Cir. 1992); see also H.R.
Rep. No. 595, 95th Cong., 1st Sess., 177-78 (1977).
8 See Goggin v. Division of Labor Law Enforcement, 336 U.S. 118,
125-26 (1949).
6
monizes the two purposes. And it is this bright-line harmonizing prin-
ciple that provides the decisive clue to construing § 541(a)(6) in this
context. This clue points convincingly to the conclusion that pay-
ments pursuant to a pre-bankruptcy non-competition agreement are
not "earnings from services performed." Only this construction of
§ 541(a)(6) gives effect to the statutes purposeful distinction between
a debtor's pre- and post-petition assets. Pre-petition assets, like the
NCA payments, are those assets rooted in the debtor's pre-petition
activities, including any proceeds that may flow from those assets in
the future. These assets belong to the estate and ultimately to the cred-
itors. Post-petition assets are those that result from the debtor's post-
petition activities and are his to keep free and clear of the bankruptcy
proceeding.
The Supreme Court, in an analogous setting, acknowledged this
bright line in Segal v. Rochelle, 382 U.S. 375 (1966). There, the ques-
tion presented was whether loss-carryback tax refunds should be
included in the debtors estate under § 70a(5) of the Bankruptcy Act,
11 U.S.C. § 110a(5).9 The refunds stemmed from losses incurred by
the debtor prior to the bankruptcy filing. On these facts, the Supreme
Court held that the refunds were properly included in the debtor's
estate because they were "sufficiently rooted in the pre-bankruptcy
past and so little entangled with the bankrupts' ability to make an
unencumbered fresh start." Segal, 382 U.S. at 380.
Seen in this light, the NCA payments due Andrews fall clearly on
the pre-bankruptcy or "past" side of the bright line. These payments
are plainly rooted in, and grow out of, Andrews's pre-petition activi-
ties. Thus, it is undisputed that the NCA was more than just contem-
poraneous with Tarmac's purchase of the AMAX assets; it was an
integral part of that purchase.10 This is precisely what the bankruptcy
_________________________________________________________________
9 Section 541 is the successor provision to § 70a(5), and the legislative
history of the Bankruptcy Reform Act of 1978 indicates that the result
of Segal remains valid under the current Bankruptcy Code. See H.R.
Rep. No. 595, 95th Cong., 1st Sess. at 367-68 (1977); S. Rep. No. 989,
95th Cong., 2d Sess. 82-83 (1978).
10 Andrews, seeking to avoid this conclusion, makes much of the fact
that the two experts on whom Tarmac and the AMAX principals relied
7
judge meant when he found that the NCA was "ancillary" to the sale
of the business: but for the asset sale, there would have been no NCA
and no quarterly payments to Andrews. Tarmac's right to set off
amounts owed it for breach of the purchase agreements from pay-
ments to Andrews under the NCA, as well as the express condition
of sale that Andrews enter into such an agreement, further evidence
the synergistic relationship between these contracts. Given this close
connection between the NCA and the pre-petition sale of the debtor's
share in the concrete business, we are persuaded that the payments
were well "rooted in the pre-bankruptcy past." See Segal, 382 U.S. at
380. We think they were also "so little entangled with the bankrupt's
ability to make a fresh start" that they should be included in
Andrews's estate. See id.11
_________________________________________________________________
to value the sale reached a figure of nine million dollars, the ultimate sale
price. Because this figure included one million dollars for good will (in
the form of customer lists), Andrews argues that the NCA payments were
not in fact payments for good will that should be considered part of the
sale and thus part of his estate. This argument misses the point. Tarmac
made the NCA a condition of the sale, and made the payments thereun-
der, to protect and maintain the good will it purchased from AMAX. See
Unsecured Creditor's Committee v. Prince (In re Prince), 127 B.R. 187,
192 (N.D. Ill. 1991) (holding that agreement not to compete provided in
conjunction with sale of business is agreement not to undermine value
of good will that has been sold); In re Mid-West Motors, Inc., 82 B.R.
439, 441 (Bankr. N.D. Tex. 1988) ("Such [non-competition] provisions
are necessary to secure the goodwill purchased by the buyer of the busi-
ness."). Because of the nature and extent of Andrews's experience in the
ready-mix concrete business, AMAX's going concern value would likely
have been worth little, if anything, absent the NCA.
11 It is true that, at the time of the payments, Andrews could not have
competed with Tarmac in the ready-mix concrete business in this area
without breaching the NCA. Yet, the NCA expired in mid-1993, less
than one year after Andrews filed his Chapter VII petition. He was free
to re-enter the business after that time. Moreover, the NCA left Andrews
free to pursue a fresh start in any area other than ready-mix concrete.
Significantly, Andrews had previously been involved in the real estate
development business. Although it is unclear whether he maintained this
business after filing his bankruptcy petition, there is no evidence that he
could not have done so in order to obtain funds for his fresh start.
8
In sum, § 541(a)(6)'s purpose, aided by its more plausible ordinary
meaning, compels the conclusion that "earnings from services per-
formed" should not be construed to include payments made under the
NCA between Andrews and Tarmac. Were the rule otherwise, debtors
would be able, indeed invited, to circumvent the bankruptcy laws
through clever use of agreements not to compete. Specifically, a
debtor selling a business, yet anticipating filing bankruptcy, could
divert sale proceeds from the bankruptcy estate by shifting these pro-
ceeds from pre-petition sales payments to post-petition non-
competition payments. There, as here, the post-petition non-
competition payments are not part of the debtor's fresh start efforts,
but rather payments that are rooted in the debtor's pre-petition con-
duct. As such, these are payments that § 541(a)(6) contemplates
should be included in the bankruptcy estate.
No other circuits appear to have confronted this precise question.12
Among lower courts that have done so, however, we find ample sup-
port for our conclusion.13 And the only cited contrary authority is
inapposite or unpersuasive. First, Andrews urges that the decision in
Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc., 756
F.2d 1043 (4th Cir. 1985), compels a different result from that
reached here. That decision, however, is largely irrelevant to the
instant case. Lubrizol merely held that continuing duties of notice and
forbearance could render a contract executory for the purposes of
§ 365, a bankruptcy provision that applies in a context different from
that of § 541. See Lubrizol, 756 F.2d at 1045. From this, Andrews
argues that the NCA is executory in nature and therefore that post-
petition payments were made in exchange for post-petition forbear-
ance. The argument is unconvincing. Even assuming the NCA may
_________________________________________________________________
12 As the dissenting opinion correctly notes, the terse reference to this
issue in Matter of Walden, 12 F.3d 445 (5th Cir. 1994), is dictum.
13 See, e.g., In re McDaniel, 141 B.R. 438, 440 (Bankr. N.D. Fla. 1992)
(finding payments to former employee in exchange for non-competition
agreement not made for services performed and thus not excluded from
estate under § 541(a)(6)); In re Prince, 127 B.R. at 192 (holding consid-
eration for covenant not to compete contained in purchase agreement for
sale of business not tantamount to "earnings from services performed"
post-petition); In re Bluman, 125 B.R. 359, 363 (Bankr. E.D.N.Y. 1991)
(same).
9
be characterized as an executory agreement,14 it does not thereby fol-
low that the contract is one for the performance of services15 within
the meaning of § 541(a)(6). Furthermore, Congress, in enacting § 365,
clearly indicated that rejected executory agreements fall on the pre-
petition side of the bright line by providing that the rejection will be
deemed to have occurred just prior to the filing of the petition. See
11 U.S.C. 365(g); see also H.R. Rep. No. 595, 95th Cong., 1st Sess.
349 (1977) and S. Rep. No. 989, 95th Cong., 2d Sess. 60 (1978) (stat-
ing that purpose of § 365(g) "is to treat rejection claims as pre-
petition claims"). In sum, the purposes underlying the Bankruptcy
Code in general, and § 541 in particular, persuasively support the con-
clusion that the NCA payments are not excludable from the bank-
ruptcy estate, even if the NCA is an executory agreement for purposes
of § 365.
One district court has held that payments pursuant to a non-
competition agreement are not "property" within the meaning of
§ 541(a)(1). See In re Hammond, 35 B.R. 219 (Bankr. W.D. Okla.
_________________________________________________________________
14 Lubrizol involved a licensing agreement, not a non-competition cov-
enant. See Lubrizol, 756 F.2d at 1045. Significant authority holds that an
obligation to refrain from competition does not render a contract execu-
tory for the purposes of § 365. See, e.g., In re Hughes, 166 B.R. 103, 105
(Bankr. S.D. Ohio 1994); In re Paveglio, 1995 WL 465339 at *5 (Bankr.
M.D. Pa. 1993); In re Drake, 136 B.R. 325, 327-28 (Bankr. D. Mass.
1992); In re Oseen, 133 B.R. 527, 529 (Bankr. D. Idaho 1991); In re
Bluman, 125 B.R. at 362; In re Cutters, 104 B.R. 886, 890 (Bankr. M.D.
Tenn. 1989). Notably, a number of these decisions came in jurisdictions
that had adopted the same definition of executory contracts under § 365
that was adopted by this circuit in Lubrizol. See In re Paveglio, 1995 WL
465339 at *5; In re Oseen, 133 B.R. at 529; In re Bluman, 125 B.R. at
362; In re Cutters, 104 B.R. at 890.
15 It is principally here that we part company from the dissenting opin-
ion, which appears to assume that an executory contract is necessarily a
contract for the performance of services that falls within § 541(a)(6).
Yet, the assumption seems unwarranted, for it is at best ambiguous --
even after Lubrizol -- whether a continuing duty of forbearance, suffi-
cient to render a contract executory, is equivalent to a continuing obliga-
tion to perform a service. Given the balance of policies reflected in
§ 541(a), the ambiguity is best resolved in favor of including in the debt-
or's estate income the debtor receives from his forbearance to compete.
10
1983). The reasoning behind the Hammond court's decision was
apparently its conclusion that the debtor had "not done all acts neces-
sary to accrue his right to the future payments." Hammond, 35 B.R.
at 223. The court went on to assert that, in order to receive the pay-
ments, "Hammond must abide by the agreement. We cannot force
him to comply." Id. This statement, however, is manifestly incorrect.
Although the Thirteenth Amendment prohibits a court from specifi-
cally enforcing a personal service contract, an agreement not to com-
pete is specifically enforceable if it is reasonable. See, e.g., Blue
Ridge Anesthesia & Critical Care, Inc. v. Gidick, 239 Va. 369, 371,
389 S.E.2d 467 (1990). Thus, a bankruptcy court could issue a nega-
tive injunction prohibiting a person from engaging in activity viola-
tive of a non-competition agreement. The reasoning of Hammond is
therefore fatally flawed. No "services" or acts were actually required
before Hammond -- or Andrews here -- could acquire a right to pay-
ment under the agreement not to compete. In fact, all the debtor had
to do to acquire that right was not perform any act that would consti-
tute competition.
Accordingly, we hold that the payments due Andrews under the
NCA do not fall within the definition of "earnings from services per-
formed" under 11 U.S.C. § 541(6). These payments were thus prop-
erly included in his estate. The judgment of the district court is
affirmed.16
AFFIRMED
WIDENER, Circuit Judge, dissenting:
I respectfully dissent.1
_________________________________________________________________
16 This holding does not, as the dissenting opinion claims, result in the
trustee's assumption of the NCA. The trustee never assumed any duty to
abstain from competing with Tarmac in the ready-mix concrete business.
The only consequence of the holding here is that the remaining NCA
payments are included in the debtor's estate, a result consistent with the
statute's language and purpose.
1 In the only other opinion from a court of appeals analyzing the precise
problem in this case, the Fifth Circuit, in Matter of Walden, 12 F.3d 445(5th Cir. 1994), by way of dictum, agrees with the conclusion that I
would reach here: post-petition non-competition payments are not prop-
erty of the bankruptcy estate under 11 U.S.C. § 541(a)(6).
11
I am of opinion that since only Andrews can perform the non-
competition agreement, performance that only he can render, then the
right to receive Tarmac's payments is not the property of the trustee,
for the payments themselves are excluded from property of the estate.
They are "earnings from services performed by an individual debtor
after the commencement of the case." 11 U.S.C. § 541(a)(6).
The substance of the majority decision is found on page 9-10 of the
slip opinion and is:
From this, Andrews argues that the . . . [non-competition
agreement] is executory in nature and therefore that post-
petition payments were made in exchange for post-petition
forbearance. The argument is unconvincing. Even assuming
the . . . [non-competition agreement] may be characterized
as an executory agreement, it does not thereby follow that
the contract is one for the performance of services within the
meaning of § 541(a)(6). (footnote omitted)
I.
In view of this holding, it is well to briefly recount the relevant
facts.
Andrews and the other owners sold the assets of their concrete
business, called AMAX, to Tarmac for $9 million under the terms of
a purchase money agreement.
By virtue of a separate non-competition agreement Andrews agreed
not to compete in the concrete business with Tarmac within Tarmac's
business territory for a period of four years. The consideration for this
separate agreement was $1 million, payable in quarterly installments
of $62,500, plus interest. The execution of the non-competition agree-
ment was an express condition of the sale "because Tarmac was con-
cerned about the AMAX principals' substantial customer
relationships and contacts in the ready-mix concrete business." Slip
p.3. ". . . Tarmac arrived at the one million figure based on its esti-
mate of the value of eliminating future competition from Andrews."
Slip p.3. The order of the bankruptcy court, affirmed by the district
12
court and the panel, not only held that the payments under the non-
competition agreement were not the property of Andrews, it held that
". . . all payments under the non-competition agreement are property
of the bankruptcy estate pursuant to 11 U.S.C. § 541." A.12.
II.
The first proposition I examine is whether or not the non-
competition agreement was an executory agreement.
That agreement, in pertinent part, provides:
1. Non-competition. In consideration of the payment set
forth in § 2 of this agreement by purchaser[Tarmac], for a
period of four (4) years after the closing, . . .[Andrews]
shall not (i)engage . . . directly or indirectly, in the ready-
mix concrete business within the counties (or cities) [nam-
ing certain counties or cities in Northern Virginia, Maryland
and the District of Columbia] . . . . A.111.
****
2. Payments. In consideration of the obligations of . . .
[Andrews] set forth in § 1 of this agreement, [ . . . Tarmac]
shall pay to [Andrews] . . . the sum of $1,000,000 payable
in quarterly installments of $62,500 each, together with
quarterly interest . . . . A.112.
So the obligation of Andrews not to compete extended for four
years after the sale, and the obligation of Tarmac to make the pay-
ments extended for a like period of time.
In Lubrizol Enter., Inc. v. Richmond Metal Finishers, Inc., 756
F.2d 1043 (4th Cir. 1985), we decided under the Bankruptcy Code
whether or not the contract involved in that case was executory. That
contract was a non-exclusive license agreement to utilize a metal
coating process in which the licensor (RMF) agreed to give the
licensee (Lubrizol) notice of any patent infringement suit or any other
use or licensing of the process, and not to license the same to anyone
13
else at a lower royalty payment. The licensee owed to the licensor the
duty of accounting for and paying royalties for the life of the contract.
The licensor filed a petition in bankruptcy and sought to reject the
licensing agreement in order that it might sell or license the technol-
ogy unhindered.
Among others, we held that the following question had to be
decided: "first, whether the contract is executory." 756 F.2d at 1045.
We decided that under 11 U.S.C. § 365(a) ". . . a contract is execu-
tory if performance is due to some extent on both sides." 756 F.2d at
1045. We quoted with approval Professor Countryman's definition
that a contract is executory if the "``"obligations of both the bankrupt
and the other party to the contract are so far unperformed that the fail-
ure of either to complete the performance would constitute a material
breach excusing the performance of the other."'" 756 F.2d at 1045.
We held that the contract was executory because of the "unperformed
continuing duty of forbearance", 756 F.2d at 1046, on the part of the
licensor, as well as other contingent duties, and also the "unperformed
and continuing duty of accounting for and paying royalties for the life
of the agreement", 756 F.2d at 1046, on the part of the licensee.
In the case at hand, Andrews had the unperformed and continuing
duty not to compete with Tarmac for a period of four years, which
had not expired at the time he filed his petition in bankruptcy. Tarmac
had the unperformed and continuing duty during that same period of
making the $62,500 payments so long as Andrews was performing his
duty not to compete.
In my opinion, the non-competition agreement at issue here is a
perfect example of an executory agreement under the definition of the
same in Lubrizol. Performance was due to some extent on both sides
for a period of four years. Competing by Andrews or non-payment by
Tarmac would undoubtedly have been a material breach of the con-
tract excusing performance by the other.
The majority disposes of Lubrizol as "largely irrelevant to the
instant case." Slip p.9. It justifies not following Lubrizol for the rea-
son that Lubrizol was decided under 11 U.S.C. § 365, ". . . a bank-
ruptcy provision that applies in a context different from § 541." Slip
14
p.9. What the majority does not mention is that the reason for the
existence of 11 U.S.C. § 365 is executory contracts. The section even
has as its catch line the following: "Executory contracts and unex-
pired leases." (Italics added.) That section, which takes up almost 13
pages of Norton's reprint of the Bankruptcy Code, is devoted entirely
to executory contracts and unexpired leases under the Bankruptcy
Code. The section is not limited to any particular executory contract,
but as to the treatment of executory contracts in general under the
Bankruptcy Code, as well as unexpired leases, which latter has no
application here.
I therefore suggest that the holding of the majority, that Lubrizol
is largely irrelevant, is patent error. If that definition of an executory
contract, under the section of the Bankruptcy Code dealing with exec-
utory contracts, is not relevant, obtaining a relevant decision under
any circumstances would be unlikely. In my opinion, the definition of
executory contract in Lubrizol is circuit precedent and should bind us.
The contract between Tarmac and Andrews fits exactly within the
definition of Lubrizol.
III.
Since the contract between Andrews and Tarmac is not executory,
the reasoning of the majority goes, Andrews' refraining from compe-
tition with Tarmac is not "services performed" within the meaning of
§ 541(a)(6) as those "performed by an individual debtor after the
commencement of the case." It reasons that "the phrase ``services per-
formed' is stretched out of shape if it is taken to include refraining
from doing something, i.e., not competing, as contrasted with doing
something or taking action." Slip p.5. That question was also
addressed in Lubrizol. We followed Fenix Cattle Co. v. Silver (In Re:
Select-A-Seat Corp.), 625 F.2d 290, 292 (9th Cir. 1980), for its hold-
ing that "an obligation of a debtor to refrain from selling software
packages under an exclusive licensing agreement made a contract
executory as to the debtor notwithstanding the continuing obligation
was only one of forbearance." 756 F.2d at 1045-46. We then
addressed the question at hand in that case and held: "[a]lthough the
license to Lubrizol was not exclusive RMF owed the same type of
unperformed continuing duty of forbearance arising out of the most
favored licensee clause running in favor of Lubrizol. Breach of that
15
duty would clearly constitute a material breach of the agreement." 756
F.2d at 1046.
That holding of Lubrizol also is, of course, contrary to the majority
opinion in this case which has held that forbearance is not a service
under the statute.2
IV.
The decision of the majority is that the Trustee has the benefit of
Andrews' non-competition contract with Tarmac because payments
under the contract are ordered to be given to the Trustee. Thus the
effect of the majority decision is that the Trustee has assumed the
executory contract in order that he might receive the benefits under
it, that is to say, the $62,500 payments. What the majority does not
mention, however, is 11 U.S.C. § 365 (c)(1), the pertinent text of
which is:
(c) The trustee may not assume . . . any executory contract
. . . if--
(1) (A) Applicable law excuses a party, other
than the debtor, to such contract . . . from accept-
ing performance from or rendering performance to
an entity other than the debtor . . . and
(B) Such party does not consent to such . . .
assumption.
The non-competition agreement in this case can be performed only
by Andrews. Indeed, the majority opinion clearly recites that Tarmac
was concerned about the AMAX principals' (including Andrews')
substantial customer relationships and contacts in the ready-mix con-
crete business and that the consideration for the agreement was based
on Tarmac's estimate of the value of "eliminating future competition
from Andrews." (Italics added.) Slip p.3. There is nothing in the non-
_________________________________________________________________
2 The common law is to like effect: "Withholding competition, when
not opposed to public policy, is a sufficiently binding consideration."
Camden v. Dewing, 34 S.E. 911, 912 (W.Va. 1899).
16
competition agreement about Tarmac accepting performance from
anyone other than Andrews. There is no finding of the bankruptcy
court that performance of the non-competition agreement by anyone
other than Andrews was acceptable to Tarmac. Indeed, nothing along
that line is even suggested.
Therefore, the attempted assumption of the non-competition agree-
ment by the Trustee, in order to get the payments, is a violation of 11
U.S.C. § 365(c)(1)(A) and (B).
17