Weathers v. Dutch Pharmacies,Inc.
Filing
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OPINION re 18 Order filed in U. S. Bankruptcy Court. Signed by Judge David W. Houston, III on 12/21/11. (Howell, Amanda)
UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF MISSISSIPPI
IN RE: AMY C. WEATHERS
CASE NO. 08-14547-DWH
CHAPTER 7
DUTCH PHARMACIES, INC.
PLAINTIFF
VERSUS
ADV. PROC. NO. 11-01 029-DWH
AMY C. WEATHERS
DEFENDANT
OPINION
On consideration before the court is a motion to alter or amend an order granting
summary judgment or for rehearing (referred to hereinafter as motion to alter or amend), filed on
behalf of the debtor/defendant, Amy C. Weathers, ("Weathers"); a response to said motion
having been filed by the plaintiff, Dutch Pharmacies, Inc., ("Dutch"); and the court, having
considered same, hereby finds as follows, to-wit:
I.
The court has jurisdiction ofthe parties to and the subject matter ofthis adversary
proceeding pursuant to 28 U.S.C. § 1334 and 28 U.S.C. § 157. This is a core proceeding as
defined in 28 U.S.C. § 157(b)(2)(A), (1), and (0).
On October 26, 2011, this court entered an opinion and order sustaining a motion for
summary judgment which had been filed by Dutch. As explained hereinbelow, in deciding the
motion to alter or amend, the court has reconsidered its earlier decision and has now determined
that a part of the aforementioned opinion and order, dealing with the liquidated damages
provision in Weathers' Employment Agreement, should be vacated and set aside. However, the
remaining part of the opinion and order, dealing with the non-compete provision in the
Employment Agreement, will not be disturbed and will remain in effect.
II.
LIOUIDATED DAMAGES PROVISION
Although Weathers acknowledged the potential viability of the liquidated damages
provision in her response to Dutch's motion for summary judgment, Weathers' attorney, in the
recently filed motion to alter or amend, adamantly asserted that Dutch had candidly conceded
that the liquidated damages provision in the Employment Agreement was not enforceable
because of Weathers' Chapter 7 discharge.
In complete disagreement, Dutch, in its response to the motion to alter or amend, states
that the comment of Weathers' attorney is "patently false." The court obviously never thought
that Dutch had conceded this issue, candidly or otherwise. The court was of the opinion that
Dutch sought the enforcement of the Employment Agreement "in its entirety." That was
expressly stated in Dutch's motion for summary judgment, and, in the opinion of the court, is
still a viable issue.
Weathers' attorney has now posited for the first time the argument that the liquidated
damages provision in the Employment Agreement is a pre-petition debt that Weathers was to
"work off' over a ten year period. To insure that this issue was not inadvertently overlooked, the
court reviewed again Weathers' initial response to the motion for summary judgment and
verified that this argument was not presented to the court earlier, but only in the most recently
filed motion to alter or amend.
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Weathers' attorney took issue, somewhat condescendingly, with this court's reliance on
the decision in In re Zuniga, 287 B.R. 201 (Bankr. E.D. Mo. 2001), arguing that Zuniga was no
longer good law as a result of a district court decision in Permacel Kansas City, Inc. v. Kohler
Co., 2010 WL 2516924 (W.D. Mo. 2010). The Permace/ decision did not discredit Zuniga, it
only acknowledged that the factual circumstances in Zuniga were distinguishable from those in
Permace/. Zuniga has never been reversed, so it is still good law.
Like Weathers, the debtor in Zuniga argued that the Chapter 7 trustee in her case did not
assume or reject the executory contract in question, and, therefore, the contract was deemed
rejected and the resulting damage claim was dischargeable as a pre-petition debt. The Zuniga
court disagreed with this argument and offered the following comment:
If the Chapter 7 trustee fails to assume or reject an executory contract, it is
deemed rejected. 11 U.S.C. §365(d)(l). An executory contract is not subject to
§365, however, when the debtor fails to disclose the existence of the contract on
her bankruptcy schedules. A trustee cannot be deemed to have rejected a contract
of which he was not aware and which was not listed in the debtor's schedules.
Financial Corp. v. McCraw Candies, Inc., 347 F.Supp. 445 (N.D.Tex. 1972) ...
/d. at 206.
Weathers, also like the debtor in Zuniga, failed to list Dutch as a creditor or as a party to
an existing executory contract in her original schedules. Weathers' lack of candor should be
contrasted to that of her former business partners, William Coleman and James Gable, who both
scheduled Dutch as a creditor in their respective bankruptcy filings.
Weathers continued to work for Dutch without interruption during the administration of
her bankruptcy case and, thereafter, for approximately seventeen months after her case had been
closed. She was earning $100,000.00 per year, plus bonuses and benefits. After this lengthy
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post-discharge period, Weathers unilaterally terminated her employment with Dutch and began
employment with a competitor within the non-compete prohibited area in Lowndes County,
Mississippi.
After Dutch reopened Weathers' bankruptcy case and filed the current adversary
proceeding, Weathers, approximately six weeks later, filed an amended Schedule G, listed the
Employment Agreement with Dutch, and indicated that it was rejected. Whether Weathers is
estopped, either equitably or judicially, from belatedly rejecting the Employment Agreement is
being addressed and will be addressed by the court in the determination of this adversary
proceeding.
The court is well aware that an unscheduled pre-petition debt in a Chapter 7 bankruptcy
case can be subsequently considered a discharged debt, despite the provisions of§ 523(a)(3) of
the Bankruptcy Code, when the Chapter 7 case is a "no asset" case and the creditor would not
have benefitted even if its claim had been timely scheduled. See, In the Malter ofStone, 10 F.3d
285 (5th Cir. 1994). However, this court has never encountered a situation where this exception
to§ 523(a)(3) has been applied to an unscheduled post-petition debt. Consequently, whether the
liquidated damages provision should be considered a pre-petition debt or a post-petition debt is
critical to Weathers' liability. Thus, even though Weathers' most recent argument is somewhat
tardy, the court will give her a "second bite" to address this issue: "Is the liquidated damages
provision a pre-petition debt even though it was triggered by an event (Weathers unilateral
termination of her employment) that occurred seventeen months after Weathers' bankruptcy case
was closed?"
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Consequently, that part of the court's previous decision adjudicating the viability of the
liquidated damages provision will be vacated, and this issue will be reopened for further
proceedings.
III.
NON-COMPETE PROVISION
In deciding the issue of the covenant not to compete provision in the Employment
Agreement, the court, in addition to the Zuniga decision, mentioned hereinabove, relied on the
following decisions:
I.
Jackson Hewitt, Inc. v. Childress, 2008 WL 834386 (D. N.J. 2008).
2.
Sir Speedy, Inc. v. Morse, 256 B.R. 657 (D. Mass. 2000).
3.
In re Steaks To Go, Inc., 226 B.R. 35 (Bankr. E.D. Mo. 1998).
4.
In re Don & Lin Trucking Co., Inc., 110 B.R. 562 (Bankr. N.D. Ala. 1990).
5.
Carstens Health Industries v. Cooper (In re Cooper), 47 B.R. 842 (Bankr. W.O.
Mo. 1985).
Each of the listed decisions stands for the proposition that even if an executory contract is
rejected, a condition similar to the non-compete provision is still enforceable.
The aforementioned conclusion is consistent with a Fifth Circuit decision cited
coincidentally to this court by Weathers, Sheerin v. Davis (In the Matter of Davis), 3 F.3d 113
(5th Cir. 1993). Sheerin had been awarded a judgment for fraud against Davis in a Texas state
court. Thereafter, Davis filed bankruptcy, and Sheerin sought a determination that his judgment,
which included certain equitable remedies ordered by the state court, was non-dischargeable.
Davis, 3 F.3d at 114. The bankruptcy court for the Southern District of Texas concluded that the
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fraud debt was non-dischargeable pursuant to §523(a)(4) of the Bankruptcy Code, as well as, that
some of the equitable remedies were non-dischargeable because they were not "debts" within the
meaning of §§101(5) and (12) of the Bankruptcy Code. /d. Both the District Court and the Fifth
Circuit affirmed. /d. at 117. Davis had taken the position, much like Weathers, that his failure to
perform the obligations under the equitable remedies would justify an award of monetary
damages, so the remedies should be dischargeable in his bankruptcy case as pre-petition claims.
The Fifth Circuit declined to define "claim" so broadly. Judge Higginbotham, writing for the
court, offered the following comment which is pertinent to Weathers' non-compete obligation:
... The ability of a debtor to choose between performance and damages in some
cases is not the same as a debtor's liability for money damages for failing to
satisfy an equitable obligation. See In re Chateaugay Corp., 944 F.2d 997, 100708 (2nd Cir. 1991). While Section 101(5)(B) encourages creditors to select
money damages from among alternative remedies, it does not require creditors
entitled to an equitable remedy to select a sub-optimal remedy of money damages.
/d. at 116.
Indeed, the non-compete provision in Weathers' Employment Agreement is consistent
with the equitable remedies discussed in Sheerin v. Davis. Weathers' liability under the noncompete provision did not arise until she terminated her employment with Dutch and
commenced employment with a competitor in a contractually prohibited area. The non-compete
provision continues on a daily basis. It does not automatically translate into a specific monetary
amount because it cannot be readily liquidated or quantified. In addition, because of its
continuous nature, it cannot be categorized as a pre-petition obligation.
As noted hereinabove, Weathers did not schedule the Employment Agreement in her
original bankruptcy papers. She continued to enjoy the benefit of gainful employment pursuant
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to the agreement both during and long after the administration of her bankruptcy case. Until the
recent amendments to her schedules, occurring after this adversary proceeding had been filed, she
never affirmatively attempted to reject the Employment Agreement or even make the owners of
Dutch, who actually employed her, aware of her bankruptcy filing. Obviously, the Chapter 7
trustee had no notice that there was an executory contract in existence to either assume or reject,
and had no interest regardless. Even a deemed rejected executory contract can have
repercussions to the rejecting debtor as a result of the rejection damages that often arise. The
rejection is effective the date of the filing of the bankruptcy petition, so if the damages are purely
monetary, they could well be discharged as the debtor attempted to do in Sheerin v. Davis. The
non-breaching party might then receive nothing in compensation for the rejection damages if
there were no assets in the bankruptcy estate. This is precisely what Weathers is attempting to
orchestrate in this proceeding by having the liquidated damages provision, as well as, the noncompete provision classified as pre-petition monetary obligations. While there is a possibility
that Weathers may be successful insofar as the liquidated damages provision is concerned, the
non-compete provision is identical to those non-dischargeable equitable remedies in Sheerin v.
Davis. If the non-compete provision is otherwise validly enforceable pursuant to state law, it
survives the filing of this bankruptcy case. A conclusion to the contrary, considering the
circumstances of this proceeding, would pervert the intent of§ 365(d)(l) of the Bankruptcy
Code.
In summary. the covenant not to compete in the Employment Agreement will not be
considered rejected, deemed rejected, or discharged. Bankruptcy law, including the automatic
stay, since Weathers has received a discharge, does not preclude Dutch from filing a cause of
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action seeking to enforce the non-compete provision in a state court of competent jurisdiction.
This court, however, makes no comment regarding the actual merits of such a cause of action.
A separate order will be entered consistent with this opinion contemporaneously
herewith.
This the
ZI
sr
day of December, 20 II.
~Co(H£:;TO'/.rr ~ /LL
UNITED STATES BANKRUPTCY JUDGE
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