Anytime Fitness v. Thornhill Brothers ( 2023 )

Case: 22-30757 Document: 00516946579 Page: 1 Date Filed: 10/27/2023
United States Court of Appeals
for the Fifth Circuit
United States Court of Appeals
Fifth Circuit
FILED
____________
October 27, 2023
No. 22-30757 Lyle W. Cayce
____________ Clerk
In the Matter of Thornhill Brothers Fitness, L.L.C.,
Debtor,
Anytime Fitness, L.L.C.,
Appellant,
versus
Thornhill Brothers Fitness, L.L.C.; William Flynn;
Billie Flynn,
Appellees.
______________________________
Appeal from the United States District Court
for the Western District of Louisiana
USDC No. 3:22-CV-2074
______________________________
Before Richman, Chief Judge, and Southwick and Oldham, Circuit
Judges.
Per Curiam:
The question presented is whether 11 U.S.C. § 365(f), or any other
portion of Title 11, authorizes a bankruptcy court’s approval of a debtor’s
partial assignment of an executory contract. It does not. We reverse the
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bankruptcy court’s contrary order and remand for further proceedings
consistent with this opinion.
I.
In November 2019, William Flynn attempted to use an “inversion
table” located at an Anytime Fitness franchise location in Port Allen,
Louisiana. The equipment allegedly failed, and Flynn suffered
neuromuscular injuries. In February 2020, Flynn filed a personal injury suit
in Louisiana court against the franchise owner, Thornhill Brothers Fitness,
LLC (“Thornhill”). An amended complaint named an additional defendant,
franchisor Anytime Fitness, LLC (“Anytime”).
Anytime fought the complaint, arguing that the presence of the
inversion table at the Thornhill location was unauthorized by the Thornhill-
Anytime franchise agreement and that Anytime was, for other various other
reasons, not liable for Flynn’s injuries. A Louisiana trial court dismissed
Anytime with prejudice. An intermediate Louisiana appellate court affirmed.
See Flynn v. Anytime Fitness, LLC, 360 So.3d 860 (La. App. 1st Cir. 2022).
But Flynn’s case against Thornhill continued. A Louisiana district
court announced that a multi-day jury trial would begin on March 21, 2022.
Five days beforehand, at 3:15 PM on March 16, 2022, Thornhill filed a
voluntary petition for bankruptcy. The petition disclosed only one significant
non-insider liability—Flynn’s litigation claim—in an “unknown” amount
above $1 million.
Events thereafter moved quickly. By 2:00 PM on Friday, March 18,
2022, or less than 48 hours after the predicate bankruptcy, Thornhill’s
counsel emailed the bankruptcy court announcing that “much negotiation”
had produced a settlement. Counsel requested “a wet signature” from the
bankruptcy judge to approve the settlement. That afternoon, the bankruptcy
judge sent Thornhill’s counsel an SMS message with a photograph of the
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signed draft order approving the settlement. See Fed. R. Bankr. P.
9019(a) (authorizing the bankruptcy court’s approval of a debtor’s litigation
settlements).
The settlement came in the form of several documents. One, which
the parties call “the Stipulation,” bears emphasis and explanation. The
Stipulation gave the Flynns $1 million and resurrected the Flynns’ ability to
sue Anytime—notwithstanding the previous court order dismissing the
Flynns’ claims against Anytime with prejudice. Specifically, Thornhill
agreed that its insurer would pay the Flynns $1 million plus judicial interest—
the maximum amount allowed by the insurance policy. Thornhill also agreed
to sign a document dubbed the “Confession of Judgment,” to be entered in
the Louisiana court where the Flynns’ personal injury lawsuit was pending.
In this “confession,” Thornhill admitted to $7 million in total liability to the
Flynns. Then Thornhill agreed to assign all rights it had “against Anytime
Fitness LLC” to the Flynns, including any rights arising from “the indemnity
agreement contained in the Franchise Agreement” between Thornhill and
its franchise parent, Anytime. Thornhill otherwise retained the franchise
agreement. The upshot: The Flynns recovered at least $1 million and as
much as $7 million.
Thornhill also made out like a bandit in the Settlement. The Flynns
agreed that Thornhill would remain a defendant in the personal injury lawsuit
“in name only.” That’s because Thornhill need only be included on a jury
verdict form “for purposes of recovering against Anytime.” The Flynns
would in any event “waive the right to pursue” Thornhill.
All of this came as quite a shock to Anytime, which thought it escaped
this case when it was dismissed with prejudice in state court. Anytime did not
learn about the Settlement until April 1, 2022, two weeks after the bankruptcy
judge signed it. On April 1, the Flynns filed what Anytime calls the “New
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Suits” in Louisiana court. In the New Suits, the Flynns argued that
Thornhill’s “confession,” the indemnity provisions of the Thornhill-
Anytime franchise agreement, the assignment of Thornhill’s rights to Flynn,
and the bankruptcy court’s approval of all the foregoing together operate to
make Anytime liable to the Flynns for the “confessed” amount of $7 million.
Anytime obviously confessed to nothing and knew nothing of the confession
before the Flynns filed the New Suits. Anytime tried to win another dismissal
in state court, but this time its efforts failed. And as of today, Anytime
continues to defend against the New Suits.
Anytime then protested in the bankruptcy court, arguing that the
approval of the Stipulation, designed to facilitate “recover[y] against
Anytime,” violated Anytime’s notice and hearing rights. See Fed. R.
Bankr. P. 9019(a) (“On motion by the trustee and after notice and a hearing,
the court may approve a compromise or settlement” (emphasis added));
Mullane v. Cent. Hanover Bank & Trust Co., 339 U.S. 306, 314 (1950) (“An
elementary and fundamental requirement of due process in any proceeding
which is to be accorded finality is notice reasonably calculated, under all the
circumstances, to apprise interested parties of the pendency of the action and
afford them an opportunity to present their objections.”). The bankruptcy
court vacated its prior order and allowed Anytime a hearing.
But in July 2022, the bankruptcy court entered a new order ratifying
the actions it took originally. Anytime appealed that July 2022 order, and the
district court affirmed. We have jurisdiction to hear Anytime’s continuing
appeal under 28 U.S.C. § 158(d). We review not the district court opinion
but the bankruptcy court’s judgment. We apply clear error review to the
bankruptcy court’s factual conclusions and de novo review to the bankruptcy
court’s legal conclusions. See In re Pratt, 524 F.3d 580, 584 (5th Cir. 2008).
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II.
Anytime raises a variety of objections on appeal. Because we agree
with Anytime that that the settlement violated 11 U.S.C. § 365’s provisions
governing the treatment of executory contracts in bankruptcy, we decline to
reach Anytime’s other arguments.
We first (A) explain the Bankruptcy Code’s treatment of executory
contracts. Then we (B) describe the Code’s all-or-nothing approach to
assuming and assigning executory contracts. Last, we (C) explain the
bankruptcy court’s error.
A.
The term “executory contract” refers to a contract that “neither
party has finished performing.” Mission Product Holdings, Inc. v. Tempnology,
LLC, 139 S. Ct. 1652, 1657 (2019). The parties to this appeal appear to agree
that the Thornhill-Anytime franchise agreement is an executory contract.
That acquiescence comports with the views of several of our sister circuits.
See In re Pioneer Ford Sales, Inc., 729 F.2d 27, 28 (1st Cir. 1984) (Breyer, J.)
(treating Ford dealership franchise agreement as executory); Cinicola v.
Scharffenberger, 248 F.3d 110, 124 (3d. Cir. 2001) (holding sale of a franchise
agreement triggered protections of 11 U.S.C. § 365); In re A&F Enterprises,
Inc. II, 742 F.3d 763, 765−67 (7th Cir. 2014) (treating IHOP franchises and
associated leases as executory); In re James Cable Partners, LP, 27 F.3d 534,
537 (11th Cir. 1994) (describing “cable franchise agreement” as “an
executory contract”). Although we hesitate to declare that franchise
agreements must always and everywhere be treated as executory, it makes
sense to consider them executory in the general case, because franchise
agreements usually specify ongoing obligations that franchisees and
franchisors have to each other.
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The Bankruptcy Code gives special attention to a bankrupt debtor’s
executory contracts. The Code’s initial premise is that a trustee in control of
a post-petition debtor may, “subject to the court’s approval,” “assume or
reject any executory contract” of the pre-petition debtor. 11 U.S.C. § 365(a).
But to assume an executory contract, the debtor must clear various
statutory hurdles. For example, if there has been a default under the contract,
the debtor must “cure[], or provide[] adequate assurance that the trustee will
promptly cure . . . default,” and provide “adequate assurance of future
performance under such contract,” 11 U.S.C. § 365(b)(1), unless the default
stems from some exempted origin, see id. § 365(b)(2). Exemptions include
the mere financial circumstance of insolvency or the happenstance of
bankruptcy. Id. If the debtor successfully assumes an executory contract,
then the contract “will remain in effect through and then after the
completion of the reorganization.” In re Nat’l Gypsum Co., 208 F.3d 498, 505
(5th Cir. 2000).
A debtor in bankruptcy may also assign its rights and obligations under
an executory contract to others, but again subject to various statutory
hurdles. See 11 U.S.C. § 365(f)(1). The debtor must first “assume[] such
contract or lease in accordance with the provisions of this section.” Id.§ 365(f)(2)(A). And, even when enabled by a prior assumption, a debtor’s
power of assignment is not unqualified. The non-bankrupt party to the
contract, the erstwhile contractual counterparty of the debtor-assignor, must
be given “adequate assurance” of the assignee’s “future performance.” Id.
§ 365(f)(2)(B). Further, assignment can be precluded where “applicable law
excuses” the counterparty from accepting performance by anyone other than
the debtor. Id. § 365(c)(1)(A).
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B.
But what happens if, say, a debtor wishes to retain only part of an
executory contract? May a debtor keep the wheat and not the chaff? No.
When it comes to assuming an executory contract, we have been clear that
it’s all or nothing: “An executory contract must be assumed or rejected in its
entirety.” Matter of Provider Meds, LLC, 907 F.3d 845, 851 (5th Cir. 2018)
(citation omitted). “Where an executory contract contains several
agreements, the debtor may not choose to reject some agreements within the
contract and not others.” Stewart Title Guar. Co. v. Old Republic Nat’l Title
Ins. Co., 83 F.3d 735, 741 (5th Cir. 1996) (per curiam) (citation omitted). A
debtor cannot use § 365 to create a different deal than the one it had
originally.
Does a different rule apply to assigning an executory contract? In
Provider Meds, we all but said no, assignments are likewise all-or-nothing. See
907 F.3d at 851 (noting assignment can occur only after assumption in
entirety and citing § 365(f)). And § 365(f), which governs a debtor’s ability
to assign an executory contract, refers to “an executory contract,” and uses
the phrase “such contract” five times. The words “an” and “such” suggest
the whole, not the part. And that makes sense. After all, a § 365(f) assignment
“is intended to change only who performs an obligation, not the obligation to
be performed.” In re Fleming Companies, Inc., 499 F.3d 300, 308 (3d. Cir.
2007) (quotation and citation omitted). If a debtor could strategically divide
up its executory contracts via partial § 365(f) assignments, then the debtor
could both change the nature of the contracts’ obligations and evade our
requirement that it take any retained executory contracts “cum onere,” with
all their benefits and burdens. Nat’l Gypsum Co., 208 F.3d at 506.
We reiterate our prior holdings: a debtor assuming an executory
contract cannot separate the wheat from the chaff. And we make clear that,
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when a trustee relies on § 365(f) to assign an executory contract in
bankruptcy, it must assign the contract in whole, not in part.
Although the plain language of § 365(f) suffices for our holding, other
authorities reinforce it.
For example, the Supreme Court has said “Section 365 reflects a
general bankruptcy rule: the estate cannot possess anything more than the
debtor itself did outside bankruptcy.” Tempnology, 139 S. Ct. at 1663 (citation
omitted). In Tempnology, the Court considered the effect of rejection of an
executory contract under § 365(a) and (g). And the Court held that a
trustee’s (or debtor’s) rejection of a contract constituted a breach of it, not a
rescission. Id. at 1661. That is so, the Court explained, because the debtor’s
contractual counterparty should retain the same rights under § 365 in
bankruptcy as it would have outside of bankruptcy. See id. at 1663 (“By
insisting that the same counterparty rights survive rejection as survive
breach, the rule prevents a debtor in bankruptcy from recapturing interests it
had given up.”); accord D. Baird, Elements of Bankruptcy 97 (6th
ed. 2014) (Whatever “limitation[s] on the debtor’s property [apply] outside
of bankruptcy[] appl[y] inside of bankruptcy as well. A debtor’s property
does not shrink by happenstance of bankruptcy, but it does not expand,
either.”).
So too with assignments under § 365(f). If the trustee (or debtor)
could use the Code to assign a fraction of a contract that could not be assigned
outside of bankruptcy, the trustee (or debtor) would arrogate to itself
property it did not have before the petition. It would likewise derogate the
counterparty’s contractual rights that would have existed outside of
bankruptcy. The all-or-nothing assignment rule under § 365(f) prevents both
inequities.
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We do not construe any other provision of the Code to permit
circumvention of our interpretation of § 365(f). It’s true that the Code
contains various catch-all provisions. But we have held that those catch-alls
do not create substantive powers not committed to the bankruptcy court by
some other section. For example, § 105 authorizes a bankruptcy judge to
“issue any order, process, or judgment that is necessary or appropriate to
carry out the provisions of this title.” 11 U.S.C. § 105(a). But we have already
decided that § 105 “does not authorize the bankruptcy courts to create
substantive rights that are otherwise unavailable.” United States v. Sutton,
786 F.2d 1305, 1308 (5th Cir. 1986). A bankruptcy court’s decisions and
orders must rest on specific authorization from Title 11, not general efficacy
or technocratic desirability, because § 105 does not convey “roving
commission to do equity.” Id.; accord Matter of Ward, 978 F.3d 298, 303 (5th
Cir. 2020) (“[B]ankruptcy courts cannot use their equity powers under § 105
to fashion substantive rights and remedies.”) (quotation and citation
omitted). Our understanding of the Code’s catch-alls comports with an ever-
lengthening thread of Supreme Court precedent limiting the substantive
power of bankruptcy courts. See N. Pipeline Constr. Co. v. Marathon Pipeline
Co., 458 U.S. 50, 88 (1982) (holding unconstitutional part of the “broad grant
of judicial power” given to bankruptcy judges by the Bankruptcy Act of
1978); Stern v. Marshall, 564 U.S. 462, 503 (2011) (rejecting even “slight
encroachments” and “silent approaches” by bankruptcy courts on Article
III (quotation omitted)); Radlax Gateway Hotel, LLC v. Amalgamated Bank,
566 U.S. 639, 645−47 (2012) (rejecting reliance on § 105 where more specific
provisions of Title 11 could be read as controlling).
C.
We turn now to the facts of our case. The franchise agreement forbids
assignment without Anytime’s consent. Anytime withheld consent. So, if
Thornhill wished to assign the contract’s indemnity rights to the Flynns,
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Thornhill must rely on § 365(f). See Provider Meds, 907 F.3d at 851(interpreting § 365(f) to permit assignment despite an anti-assignment
provision).
But Thornhill did not assign the entirety of the franchise agreement to
the Flynns. Rather, Thornhill assigned rights “applicable under the terms
and conditions of the indemnity agreement contained in the franchise
agreement.” Thornhill otherwise kept the franchise agreement. Since we
hold § 365(f) does not encompass such dissection, Thornhill’s partial
assignment is not authorized by Title 11.
The bankruptcy court bypassed Anytime’s § 365 objection by noting
that Thornhill assigned to the Flynns only whatever rights Thornhill had
against Anytime. What if Thornhill had none? If Thornhill lacked any rights
to assign, then (suggests Thornhill) the assignment of nothing offended
nothing. Nemo dat quod non habet. The bankruptcy court accepted this logic.
It also declined to interpret the franchise agreement and discern whether the
set of assigned rights was empty, reasoning that the job of interpreting the
franchise agreement belonged to “another forum.”
We disagree. The job of discerning what if anything can be assigned
under § 365(f) decidedly belongs to the bankruptcy judge, the district court,
and by extension, us. The bankruptcy court applied § 365(f) to authorize
something the Code forbids—the partial assignment of an executory
contract. The Flynns then used that partial assignment to revivify its claims
against Anytime in the New Suits. If the Louisiana state court were to find
assigned indemnity rights were not a null set, the state court could not then
refuse to honor the unlawful partial assignment. It instead would be bound by
the bankruptcy court’s unlawful approval of the partial assignment. That’s
because the bankruptcy court already gave Thornhill a preclusive judgment
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authorizing that partial assignment. If we were to affirm that judgment, then
the § 365 toothpaste could not be put back in the tube.
Thornhill separately argues that any defect in the bankruptcy court’s
order was cured by the order’s compliance with In re Jackson Brewing Co.,
624 F.2d 599 (5th Cir. 1980).* In Jackson Brewing, we prescribed a balancing
test that governs a bankruptcy court’s approval of a Rule 9019 compromise.
See id. at 602 (indicating a settlement must reflect (1) “the [debtor’s]
probability of success in litigation,” (2) “[t]he complexity and likely duration
of the litigation and any attendant expense, inconvenience and delay,” and
(3) “[a]ll other factors bearing on the wisdom of the compromise.”); Fed.
R. Bankr. P. 9019. In later cases, we further refined this test. See In re Age
Refining, 801 F.3d 530, 540 (5th Cir. 2015) (noting that the third, “all other”
bucket includes variables like “the best interest of the creditors” and “the
extent to which the settlement is truly the product of arms-length bargaining,
and not of fraud or collusion.”). But we have never held that obedience to
Jackson Brewing substitutes for compliance with Title 11.
On the contrary, when we prescribe tests or other guidance for a
bankruptcy court’s exercise of discretion, we expect that subsequent
bankruptcy court orders will comply with both our precedent and the
Bankruptcy Code. An order that clears one hurdle still faces the other. See In
re Moore, 608 F.3d 253, 266 (5th Cir. 2010) (requiring that a potential
compromise involving an asset sale clear both 11 U.S.C. § 363 and our
requirements for Rule 9019). Since the bankruptcy court order at issue here
does not satisfy § 365, it does not matter whether it satisfied Jackson Brewing.
_____________________
*
Anytime disputes the proposition that the bankruptcy court’s July 2022 order
complies with In re Jackson Brewing Co., 624 F.2d 599 (5th Cir. 1980). Because this case
can be resolved on other grounds, we do not reach Anytime’s argument.
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* * *
We REVERSE the bankruptcy court’s July 2022 order and
REMAND for further proceedings consistent with this opinion.
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