Kip Kaler v. James Craig

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
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No. 97-1862
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In re: James M. Craig, *
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Debtor, *
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Kip M. Kaler, * Appeal from the United States
* Bankruptcy Court for the
Trustee - Appellee. * District of North Dakota.
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v. *
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James M. Craig, *
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Defendant - Appellant, *
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Carrington Health Center, *
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Defendant - - Appellee. *
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Submitted: November 18, 1997
Filed: June 11, 1998
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Before BEAM, HEANEY, and JOHN R. GIBSON, Circuit Judges.
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JOHN R. GIBSON, Circuit Judge.
Dr. James Craig appeals from the order entered by the district court1 affirming
the bankruptcy court's summary judgment order that a note given to Dr. Craig by
Carrington Health Center for $82,053.75 was not an executory contract and that it
should be included in the bankruptcy estate. Craig argues that the promissory note was
an executory contract which was never assumed by the Trustee and did not become the
property of the estate; that the note should be excluded from estate because the note's
only value was the result of services performed by Craig after he filed bankruptcy; that
the note had no value at the time Craig filed for bankruptcy because it was subject to
contingencies over which Craig and Security State Bank had control; and that the value
of the note was a factual issue making summary judgment inappropriate. We affirm the
judgment of the district court affirming the decision and order of the bankruptcy court.
Craig, a licensed physician, moved to Carrington, North Dakota in 1991 and
began working at Carrington Health Center. On July 19, 1993, he and the Center
formalized their relationship by entering an Independent Contractor Services
Agreement. On that same day, Craig gave the Center a promissory note for
$141,795.91, which was the balance Craig owed to the Center pursuant to a Physician
Search Agreement; this note provided that if Craig maintained a full-time medical
practice in Carrington until July 19, 1995, the Center would write off the remaining
balance. Also on that day, the Center purchased Craig's medical practice, including
accounts receivable and personal property, and gave Craig a promissory note for
$82,053.75.
In December 1993, Craig borrowed $82,000 from Security State Bank of North
Dakota to purchase a house and land. The bank would agree to the loan only if the
1
The District of North Dakota, Southern Division, Chief Judge Rodney Webb.
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Center guaranteed the Craig's indebtedness and pledged a certificate of deposit to
secure the guarantee. The Center agreed to the guarantee and pledge on the condition
that Craig deliver the Center's note to Craig for $82,053.75 to the Center and grant the
Center the right to offset its indebtedness to Craig against any amount it would have to
pay on the guarantee to Security State Bank. Craig further agreed that the Center's note
to him would not become due until the Center had no further liability to Security State
Bank on Craig's loan.
Craig filed for Chapter 7 bankruptcy on May 1, 1995. Craig owed the Center
on the $141,795.91 promissory note at this time, but on July 19, 1995, the Center
forgave this indebtedness because Craig completed his twenty-four month work
commitment to the Center.
In June 1996 the Trustee commenced an adversary proceeding seeking to have
the note held by the Center turned over to the estate and contending that the estate was
entitled to the net amount due Craig from the Center because of the $82,053.75 note.
Craig argued, however, that this note should be viewed with all of the other agreements
signed on July 19, 1993, as one overall contract. Craig contended that the overall
contract was executory in nature; that the Trustee was obligated to assume or reject it
within sixty days of filing; and since the Trustee did not do so, it was deemed rejected
and no part of it would come into the estate.
The bankruptcy court found that the payment on the $82,053.75 note was not an
executory contract, that the contingent nature of the Center's obligation to pay Craig did
not prevent its inclusion in the estate and, therefore, the promissory note for $82,053.75
should be turned over to the estate. The bankruptcy court further ruled that the Center
may validly set off the $72,791.42 which it paid Security State Bank for the amount it
owed Craig on his medical practice. As a result, the bankruptcy court granted summary
judgment to the Trustee and ordered the Center to turn over $21,808.84, the principal
and interest on the note minus the amount offset.
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The district court affirmed the bankruptcy court's order.
I.
We review the district court's disposition of the summary judgment motions de
novo. Barker v. Ceridian Corp., 122 F.3d 628, 632 (8th Cir. 1997). In doing so, we
view the evidence in the light most favorable to the party opposing the motion. See
Adickes v. S.H. Kress & Co., 398 U.S. 144, 158-59 (1970). Summary judgment is
appropriate if there is no genuine issue as to any material fact and the moving party is
entitled to a judgment as a matter of law. Fed.R.Civ.P. 56(c).
II.
Dr. Craig argues that the promissory note was not property in the bankruptcy
estate because it was an executory contract which was not assumed by the Trustee.
Under the Bankruptcy Code, if a trustee does not assume an executory contract within
sixty days after the order for relief, or within such additional time as the court fixes,
then the contract is deemed rejected. 11 U.S.C.A. § 365(d)(1) (1994). In this case, the
Trustee took no such action. Dr. Craig contends that the promissory note was therefore
not part of the bankruptcy estate.
This circuit has defined an executory contract as "'a contract under which the
obligation of both the bankrupt and the other party to the contract are so far
unperformed that the failure of either to complete performance would constitute a
material breach excusing the performance of the other.'" Northwest Airlines, Inc. v.
Klinger (In re Knutson), 563 F.2d 916, 917 (8th Cir. 1977) (quoting V. Countryman,
Executory Contracts in Bankruptcy: Part I, 57 Minn.L.Rev. 439, 460 (1973)). Under
this definition, the $82,053 promissory note was not an executory contract because the
promisee, Dr. Craig, had already performed by turning over his ownership interest in
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his existing medical practice and was merely awaiting payment.
Dr. Craig, however, argues that the two promissory notes, a purchase agreement,
an option agreement, and the Independent Contractor Services Agreement combined
to form a series of interrelated executory contracts, none of which could be executed
until all of them could be fully executed. Dr. Craig bases this argument on a North
Dakota statutory provision which states, "Several contracts relating to the same matters
between the same parties and made as parts of substantially one transaction are to be
taken together." N.D. Cent. Code § 9-07-07 (1997). The North Dakota Supreme
Court, however, stated in First National Bank of St. Thomas v. Flath, 86 N.W. 867,
870 (1901), that "[t]he requirement that the several contracts are to be 'taken together'
does not mean that they are to be joined, and thereby become a single contract, but
plainly means that they are to be 'taken together' for the purpose of interpreting, either
the transaction to which they relate, or the several contracts themselves. It does not
purport to destroy the separate identity of the several contracts, and does not do so in
effect."
Nothing in any of the documents suggests that the validity of the $82,053
promissory note was contingent upon the performance of Dr. Craig's duties under the
other contracts. Thus, whether interpreted individually or in the context of the other
documents, the $82,053 promissory note was not an executory contract.
III.
Dr. Craig further contends that the $82,053 promissory note had no value as of
May 1, 1995, the date on which he filed bankruptcy, and so could not have been part
of the bankruptcy estate. Dr. Craig argues that the $82,053 note was valueless
because, at the time, the Center held a $141,796 promissory note against Dr. Craig.
Dr. Craig also argues that the $82,053 note was valueless because, as of May 1995, it
was being held by the Center as security for the Center's guarantee on an $82,000 loan
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from Security State Bank to Dr. Craig.
We are unpersuaded. Neither the $141,796 note nor the Center's security
interest in the $82,053 note diminished the value of the $82,053 note. The Center had
a right to offset its debt to Dr. Craig against the $141,796 note or against its obligation
to Security State Bank on Dr. Craig's behalf. Dr. Craig, however, had a corresponding
right to offset his debts to the Center against the $82,053 note. Thus, even if it could
not have been realized in the form of a cash payment, the $82,053 promissory note had
value in that it could be used to reduce any claims by the Center against Dr. Craig or
against the bankruptcy estate. A debtor's right to setoff is property of the bankruptcy
estate. See 5 Collier on Bankruptcy ¶ 553.03[7][b] (Lawrence P. King ed., 15th ed.
1998) We therefore reject this argument.
IV.
Finally, Dr. Craig maintains that, even if the $82,053 note was part of the
bankruptcy estate, an issue of fact remains as to the note's value on the day he filed
bankruptcy. Dr. Craig contends that it is only that value which should be included in
the bankruptcy estate. As discussed above, the value of the promissory note at issue
was not affected by the other transactions between Dr. Craig and the Center.
Therefore, the value of the promissory note was always dictated by its own terms, and
no genuine issue of fact remains.
Accordingly, we affirm the district court's grant of Trustee's motion for summary
judgment and denial of Dr. Craig's motion for summary judgment.
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A true copy.
Attest:
CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT
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