In Re: The City of Central Falls

Filing 19

DECISION AND ORDER re 2 Bankruptcy Appeal: Joseph Moran's appeal from the judgment entered by the Bankruptcy Court is DENIED. The Bankruptcy Courts decision that the Receiver acted properly in exercising his business judgment to reject the Contract is AFFIRMED. So Ordered by Chief Judge Mary M. Lisi on 5/4/2012. (Duhamel, John)

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF RHODE ISLAND

JOSEPH P. MORAN, III,
Appellant,
v.

C.A. No. 11-494-ML

CITY OF CENTRAL FALLS,
Appellee
DECISION AND ORDER
Mary M. Lisi, Chief Judge.
This case involves a dispute that arose during bankruptcy
proceedings

under

Chapter

9

initiated

by

the

state-appointed

receiver (the “Receiver”) for the City of Central Falls (the
“City”).

The matter before this Court is an appeal from a final

order (the “Order”) of the United States Bankruptcy Court for the
District of Rhode Island (the “Bankruptcy Court”).

The appeal

seeks reversal of the Bankruptcy Court’s Order authorizing the
Receiver to reject an employment contract (the “Contract”) between
the City and Joseph P. Moran, III (“Moran”), pursuant to which
Moran was engaged to serve as “Colonel” of the Central Falls Police
Department (“CFPD”) for a period of five years.
I. Factual Background and Procedural History
On March 23, 2010, Moran retired from his position as Chief of
Police of the CFPD and began collecting retirement benefits under
a pension plan maintained by the City.
1

City Mem. 1-1, n. 1.

On

March 24, 2010, the City entered into the Contract appointing Moran
as “Colonel” of the CFPD for the period of January 11, 2010 through
January 11, 2015.

Contract, Appellant Appx. 3a - 29a.

It is

undisputed that the Contract provided for compensation and benefits
that exceeded those of other non-union employees of the City,
including, inter alia, additional days for vacation, holidays,
personal leave, and sick leave, as well as annual bonuses for
longevity and the cost of obtaining a Masters Degree. City Mem. 1.
The Contract made Moran the only non-union City employee who could
not be terminated at will.

Id.

Moran was also continuing to

collect retirement benefits under the City’s pension plan, while
receiving compensation under the Contract.
The City, which had been in financial difficulties for some
time,1 petitioned for appointment of a receiver on May 18, 2010. In
the period between May 19, 2010 and July 16, 2010, Attorney
Jonathan Savage served as receiver for the City.

On July 16, 2010,

retired Superior Court Justice Mark Pfeiffer (“Pfeiffer”) was
appointed as receiver.

Pfeiffer informed the City’s

mayor that,

pursuant to R.I. Gen. Laws § 45-9-7,2 he had assumed the duties and
1

For details regarding the City’s financial situation and the
efforts by respective receivers to cut expenses, see Moreau v.
Flanders, 15 A.3d 565 (R.I. 2011).
2

R.I.Gen.Laws § 45-9-7 provides the Receiver with the following
powers:

2

functions of the office of mayor3 (including the function of public
safety director) and that the mayor’s responsibility would be
limited to serving in an advisory capacity at a reduced rate of
compensation.

Moreau v. Flanders, 15 A.3d at 572.

On February 1, 2011, retired Supreme Court Justice Robert
Flanders (hereinafter referred to as the “Receiver”) was appointed
as Receiver for the City.

On August 1, 2011, the Receiver, on the

City’s behalf, filed a petition for relief under chapter 9 of the
Bankruptcy Code.

Memorandum of Decision *2 In re City of Central

Falls, Case No. 11-13105-FJB, (Bkrtcy. D.R.I. Nov. 2, 2011).
By letter dated September 7, 2011, the Receiver informed Moran
that the Contract was terminated, rejected, and deemed immediately
unenforceable and that a motion to reject the Contract had been

(1) All powers of the fiscal overseer and budget commission under
§§ 45-9-2 and 45-9-6. Such powers shall remain through the period
of any receivership;
(2) The power to exercise any function or power of any municipal
officer or employee, board, authority or commission, whether
elected or otherwise relating to or impacting the fiscal stability
of the city or town including, without limitation, school and
zoning matters; and
(3) The power to file a petition in the name of the city or town
under Chapter 9 of Title 11 of the United States Code, and to act
on the city's or town's behalf in any such proceeding.
3

A subsequent attempt by the mayor and City council to
challenge the constitutionality of Chapter 9 of Title 45 was
rejected by the Supreme Court of the State of Rhode Island. Moreau
v. Flanders, 15 A.3d at 574-578 (holding that receivership
provisions do not alter the form of government of the City in
contravention of the Home-Rule Amendment of the Rhode Island
Constitution).
3

filed with the Bankruptcy Court. Appellant’s Appx. 206a.

The

letter further stated that “[i]f you elect to continue in your
position,

the

terms

of

your

employment

with

the

City

as

of

September 8, 2011 shall be as follows,” and set forth a number of
new compensation and benefit provisions. Id. at 206a. In essence,
the referenced benefits were brought in line with those afforded to
other non-union City employees. Inter alia, the annual base salary
was kept at the same level as under the Contract, but payments for
longevity and the Masters in Arts Degree were eliminated.

The

employee contributions for health care and dental insurance were
raised from 7% to 20%. Time for holidays, vacation, sick leave and
personal days was reduced.

Id. at 207a.

Instead of a five-year

term, Moran was to be designated “an exempt employee at will.” Id.
With respect to that particular provision, the letter stated:“ You
may elect to remain in your position and render services to the
City in accordance with these terms, as an employee at will,
subject to termination without notice and without cause.”

Id. at

207a-208a.
On September 8, 2011, the City filed a motion with the
Bankruptcy Court seeking an order authorizing rejection of the
Contract as of July 31, 2011, the day prior to the bankruptcy
filing. Memorandum of Decision 2. The City represented that Moran
was the only non-union employee whose employment was not at will
and that the Contract impeded the City’s ability to modify the

4

terms of his employment in order to treat all City employees
consistently and fairly. Id.

According to the City, it had

concluded, “[i]n the exercise of its business judgment,” that the
Contract was burdensome.

Such determination was based, in part,

“on the recommendation contained in a certain public safety report”
that the positions of police and fire chief be eliminated and
consolidated into one position.

Id.

The City’s motion was

limited, however, to rejection of the Contract; it did not seek
approval of the contemplated consolidation.
The

referenced

report,

dated

Id. n. 2.

September

6,

2011,

(the

“Report”), is a 45-page document on staffing requirements for the
City’s Police and Fire Departments issued by the Public Safety
Strategies Group (“PSSG”), a private management consulting firm.
Appellant’s Appx. 209a to 255a.

The Report was based on PSSG’s

review of documents including Collective Bargaining Agreements, IMC
Data

Records

information.

1995

-

April

Id. at 211a.

2011,

Budgets,

and

other

related

The Report noted that it was based on

document review only and that PSSG did not rely on interviews,
review of job descriptions or surveys. Id. In the Report summary,
PSSG concluded that the City could “reduce its budget in the short
term through the reduction of command positions on both the police
and fire departments.”
PSSG

strongly

Id. at 255a.

recommended

(1)

For a long term strategy,

consolidation

of

police/fire

administration, (2) merger of police and fire services with a

5

neighboring town, and/or (3) consolidating with dispatch on the
state level or with a neighboring community.4
On September 8, 2011, the Receiver filed a motion with the
Bankruptcy Court seeking (1) an order authorizing the City’s
rejection of the Contract pursuant to 11 U.S.C. § 365(a), and (2)
a

further

order

specifying

that

the

Contract

was

terminated

effective on July 31, 2011. Memorandum of Decision at 2.

The City

pointed out that it had negotiated significant benefit reductions
with its other employees in an effort to navigate through the
bankruptcy.

It also asserted that the Contract restricted the

City’s ability to modify employment terms for Moran - who was the
City’s only non-union employee whose employment was not at will and that it was “necessary to treat all City employees consistently
and fairly.”

Id.

The City stated further that, in its business

judgment, based, in part, on the Report, it had concluded that the
Contract was burdensome and should be rejected. Id.

According to

the City, Moran’s compensation and benefits were excessive and
fiscally too expensive.

Id.

The City’s conclusions were further

supported by declarations of Gayle Corrigan (“Corrigan”), the
Receiver’s chief of staff (who functioned as the City’s day-to-day
manager), who added that terminating the Contract would save the

4

The Court notes that the City’s 19,000 inhabitants live within
a 1.2 square mile area. Moreau v. Flanders, 15 A.3d at 569.

6

City

$115,340

annually.

Id.

at

2-3.

Although

the

City

acknowledged that it would not be able to follow the recommendation
in the Report that it consolidate the positions of chief of police
and fire chief unless the Contract was first rejected, it did not
seek

approval

from

the

Bankruptcy

consolidation at that time.

Id.

Court

to

engage

in

such

n. 2.

In opposition to the City’s motion, Moran argued that (1)
rejection of the Contract and elimination of his position violated
provisions of the Rhode Island Constitution and City Home Rule
Charter; (2)

the

City exceeded

its

authority

by

deeming

the

Contract rejected prior to entry of an order approving rejection;
and (3) rejection of the Contract was not based on sound business
judgment, but on “whim and caprice,” because it was based, at least
in part, on the Report that Moran considered unsound.

Id. at 3.

On September 15, 2011, Moran wrote an 8-page letter to the
Receiver regarding the Report, with copies to the Rhode Island U.S.
Senators and Congressmen, the U.S. Attorney, the State Attorney
General, the State Police Superintendent and the President of the
Fraternal Order of Police Lodge #2.

Appx. 256a - 264a.

issue

with

with

PSSG’s

methods

and

all

of

the

Moran took
Report’s

recommendations,5 and he suggested that PSSG “visit the police and

5

The letter does not address the terms the Receiver set out for
Moran’s continued employment, nor is there any indication that
Moran responded directly to the Receiver’s September 7, 2011
letter. However, at a hearing before the Bankruptcy Court on
7

fire departments, prior to making blind recommendations based on
statistical data, and speak with several personnel, including the
respective Chiefs.”

Id. at 263a.

With respect to the suggestion

that the position of police and fire chiefs be consolidated into a
Public Safety Director position, Moran noted that “[t]here is no
discussion on the qualifications or job description that the
position of Public Safety Director would do relating to the Police
and

Fire

Department.

This

study

also

does

cost/benefit analysis relating to that position.

not

provide

a

Currently, the

acting Fire Chief, and Police Chief live in the city of Central
Falls for the first time in about twenty-five or so years.”

Id. at

262a.
On September 22, 2011, the Receiver, on behalf of the City,
filed a Plan (the “Plan”) for the Adjustment of Debts, which
included a five-year projected budget.

Appx. 265 - 342a. The Plan

dramatically6 decreased the benefits of police, fire and municipal
retirees with respect to health insurance, accidental disability,
and annual pension plans.

Id. at 280a - 281a.

The Plan also

provided that, regarding any executory contracts “the City elects

October 19, 2011, Moran’s counsel stated that, with respect to that
letter, Moran “never objected to that” and that “if they had asked
him to take [$] 20,000 less, he may have accepted that.” Tr. 34:79.
6

Under the Plan, at least one class of retirees “would receive
an annual pension benefit of 45% of their prior pension benefit.”
Id. at 281a.
8

to reject, the City shall file a Rejection Motion within 60 days
from the Effective Date7, which if granted shall cause the City to
reject

such

contracts

Bankruptcy Court.”

.

.

.

pursuant

Id. at 290a.

to

[an]

order

of

the

Any executory contract for which

no explicit assumption/assignment motion was filed was also deemed
to be rejected.

Id. at 291a.

By letter dated September 23, 2011, the Receiver informed
Moran that, effective immediately, Moran was relieved of duty and
his employment with the City was terminated.

Appx. 343a.

On October 19, 2011, the Bankruptcy Court held a hearing on
the City’s motion to reject the Contract.
Appx. 30a - 62a.

See Transcript (“Tr.”)

At the hearing, the City asserted that, based on

the Report and Corrigan’s assessment, it had determined that the
positions of chief of police and fire chief could be consolidated
without compromising public safety.

Tr. 14:2-15:8.

The City

argued that its business judgment should not be substituted by the
Bankruptcy Court’s judgment.

Tr. 15:21-25.

The City rejected

Moran’s suggestion that consolidating the two positions would
constitute a permanent alteration of the City’s form of government,
thereby violating the Rhode Island Constitution and the Home Rule
Charter.

Id. 17:8-12.

The City suggested that the position of

7

Effective Date is defined as “the thirtieth (30th) day after
the [Bankruptcy] Court enters a Final order confirming this Plan.”
Id. at 272a.
9

chief of police did not fall within the framework of the local
government, Tr. 17:19-23, and that, moreover, any changes made in
the course of the receivership would only be temporary.

Tr. 21:3-

18.
At

that

point

in

the

proceedings,

the

Bankruptcy

Court

clarified that the motion before him was limited to the City’s
request for authorization to reject the Contract.

Tr. 21:19-22.

The Court noted that the City had not sought approval of any aspect
of the submitted Plan, including the possible consolidation of the
fire chief/chief of police positions.8

Tr. 21:22-22:7.

The Court

also pointed out that the City could conceivably ask for approval
to reject the Contract and then hire a new chief of police or
renegotiate with Moran, but that “everything that’s being said
about home rule, to my way of thinking, isn’t really relevant.”
Tr. 22:12-14.
Moran, disagreeing with the Court’s assessment regarding the
relevancy of home rule discussions, Tr. 23:21-24, suggested that
the broad powers of the Receiver should conform with Rhode Island
State laws, the Rhode Island Constitution, and the City’s Home Rule
Charter.

Tr. 24:18-23.

Moran also appeared to suggest that bad

faith and gross abuse of power were involved in the decision to

8

The position of fire chief had already been eliminated by
attrition and the police and fire departments were managed by
majors within the respective departments. Tr. 22:23-23:14.
10

reject the Contract and/or consolidate the two positions because
the two previous receivers had limited their budgetary measures to
reducing costs and staff after conferring with Moran.
26:4.
company

Tr. 25:16-

By contrast, the current Receiver had engaged an outside
which

assessed

the

City’s

discussions or interaction with Moran.

staffing

needs

without

Tr. 26:5-7, 27:20-23.

Moran asserted that the rejection of the Contract prior to Court
approval constituted gross abuse of the position of the Receiver
and that, moreover, the termination of Moran’s employment was a
breach of the terms of the Contract.

Tr. 30:7-15.

Moran further

argued that the Contract was rejected and his employment terminated
because the City planned to consolidate two positions into that of
a public safety director, but that “the Home Rule Charter does not
provide for this at all, so clearly it’s a violation of the Home
Rule Charter.” Tr. 30:16-23.

According to Moran, the appointment

of a public safety director was “a complete change in restructuring
of the affairs how the City of Central Falls is managed and
operates. It’s not temporary. It’s not incidental.” Tr. 33:11-18.
In response, the City reiterated that the issue before the
Bankruptcy Court was limited to determining “whether or not the
receiver has the power and the City has the power to reject this
contract if it determines that it’s burdensome.” Tr. 36:8-11. The
Bankruptcy Court only had to decide whether

“there was a business

judgment, was there a basis for the business judgment, not whether

11

the Court agrees with the business judgment.”

Tr. 37:13-15.

The

City also rejected Moran’s assertion, made without further factual
support, that the proposed change was permanent.

Tr. 37:16-20.

With respect to the City’s request that the termination of the
Contract be made effective as of July 31, 2011, the City explained
that, pursuant to 11 U.S.C. § 365, Moran would have a claim
regarding the terminated Contract as of the date of the bankruptcy
filing (August 1, 2011).

Tr. 39:18-40:3.

Moran objected to the

proposed date and suggested that, if the termination were to be
granted, it should be effective on the date the Bankruptcy Court
granted the order.

Tr. 40:18-20.

The Bankruptcy Court took the City’s motion under advisement.
On October 20, 2011, the Court granted the motion.

The Bankruptcy

Court noted that it made no ruling as to the effective date of the
rejection, except that it was effective no later than the entry
date of the order. October 20, 2011 Order, Appellant’s Brief at 29
-30.
On October 24, 2011, Moran filed an appeal of the Order,
electing to opt out of the Bankruptcy Appellate Panel for the First
Circuit and requesting that his appeal be heard by this Court.
(Docket # 1).
On November 2, 2011, the Bankruptcy Court issued a Memorandum
of

Decision,

noting

repeatedly

that

the

City

had

not

sought

approval of the planned consolidation of the fire chief and the

12

chief of police positions.

Memorandum of Decision at 2 n. 1, at 5

(“The City asks the Court to approve rejection of Moran’s contract,
nothing more”), and at 6 (“The only matter before the Court for
approval is the City’s rejection of Moran’s contract”).
The Bankruptcy Court approved the Receiver’s rejection of the
Contract after making the following determinations: (1) Pursuant to
11 U.S.C. § 365, “the trustee, subject to the court’s approval, may
assume or reject any executory contract or unexpired lease of the
debtor.” Memorandum of Decision at 5.

(2) Moran conceded that the

Contract was executory. Id. (3) Rejection of the Contract is
appropriate if the City “has concluded, in the sound exercise of
its business judgment, that rejection is in the best interest of
the estate.”9
Moran

has

not

Id. at 7. (4) “On facts the City has alleged and
disputed,

the

City

has

established

that

the

Receiver’s decision to reject Moran’s contract is well within his
business judgment.” Id. at 8.

The Bankruptcy Court noted that

“Moran’s opposition goes entirely to the legal and practical
soundness of the Receiver’s plan to replace the fire and police
chiefs with a Director of Public Safety,” but it concluded that the
established facts, on their own, justified the Receiver’s decision.
Id.
9

The Bankruptcy Court held that the same standard applied in a
Chapter 9 case as in cases under Chapter 7 or Chapter 11 and it
rejected the City’s suggestion that “a court should be even more
reticent to substitute its judgment for that of a municipal
debtor.” Id. at 7.
13

With respect to the effective date of the City’s rejection of
the Contract, the Bankruptcy Judge noted that, with the assent of
both parties, he would make no ruling, “reserving that question for
a

later

decision

only

if

and

when

it

disposition of a rejection-related claim.”

becomes

relevant

to

Id. at 5.

Following the October 24, 2011 preliminary filing of the
bankruptcy appeal (Docket #1), Moran filed a Notice of Appeal in
this Court on December 20, 2011.

(Docket #2).

On February 23,

2012, the parties submitted briefs setting out their respective
positions (Appellant’s Brief, Docket #16; Appellee’s Brief, Docket
#15).

On March 8, 2012, the City responded with a reply brief.

(Docket #18).
II. Standard of Review
Pursuant to 28 U.S.C. § 158, this Court has jurisdiction to
hear appeals from final orders of a bankruptcy court.
158(a).

28 U.S.C. §

The Court reviews rulings of law de novo and findings of

fact for clear error.

In a de novo review, the Court is required

to “make a judgment independent of the bankruptcy court’s, without
deference

to that

court’s

analysis

and

conclusions.”

In

re

Guilbert, 176 B.R. 302, 305 (D.R.I. 1995)(citation omitted).
A bankruptcy court’s findings of fact are not set aside
“unless they are clearly erroneous . . . A finding of fact is
clearly erroneous, although there is evidence to support it, when
the reviewing court, after carefully examining all the evidence, is

14

‘left with the definite and firm conviction that a mistake has been
committed.’” Palmacci v. Umpierrez, 121 F.3d 781, 785 (1st Cir.
1997)(Citations omitted).

If the parties “‘do not specifically

contest the bankruptcy court’s finding of fact,’” the reviewing
court will not disturb such rulings on appeal.
F.3d 700,

702

(10th

Cir.

2005)(citation

In re Joelson, 427

omitted);

In

re

PMC

Marketing Corp, 447 B.R. 71, 75 (D.P.R. 2011).
III.

The Parties’ Positions

Moran argues that the Receiver exceeded his power by rejecting
the Contract and terminating Moran’s employment because it “permits
the reorganization of the structure of government in the City of
Central Falls” by “eliminating the position of Chief of Police and
Fire Chief to be consolidated into a[n] entirely newly created
position of Director of Public Safety.”

Moran Mem. at 11-12.

Moran asserts that the Receiver’s acts are “in violation of the
intent and purpose of Chapter 9 of the Bankruptcy Code, Article
XIII of the Rhode Island Constitution and the Home Rule Charter of
the City of Central Falls.”

Id. at 12.

Moreover, Moran suggests

that rejection of the Contract is not the result of sound business
judgment, “but rather is the product of bad faith, whim and
caprice,” based on an “unreliable, flawed Report.” Id.
At the outset, the City submits that Moran failed to raise the
issue he now submits on appeal: whether Chapter 9 of the Bankruptcy
Code “permits the re-organization of the structure of municipal

15

government,
affairs.”

as

opposed

to

City Mem. at 4.

re-organization

of

its

financial

The City further argues that the

Bankruptcy Court’s decision was limited to determining whether the
City appropriately rejected the executory Contract and that such
rejection has no bearing on the structure of municipal government.
Id.

The Receiver’s authority to reject the Contract pursuant to

Section 365(a) of the Bankruptcy Code, once such rejection has been
factually supported, is limited only by the Bankruptcy Court’s
approval. Id.

Neither the City’s Home Rule Charter nor the Rhode

Island Constitution were violated by rejection of the Contract
because

the

government.

rejection

does

Id. at 5.

not

affect

the

City’s

form

of

While the City satisfied the business

judgment standard for rejection of executory contracts, Moran
failed to demonstrate that the City’s rejection of the Contract was
based on bad faith, whim or caprice.

Id.

IV. Discussion
(A) The Issue Framed
As the Bankruptcy Judge repeatedly pointed out during the
October 19, 2011 hearing and reiterated in his detailed November 2,
2011

memorandum,

the

motion

before

him

was

limited

to

the

Receiver’s request for approval to reject the Contract the City had
entered into with Moran just prior to seeking receivership.

See,

e.g., Tr. 21:20-22:15; BR Memorandum at 6 (“The only matter before

16

the

Court

for

contract.”)

approval

is

the

City’s

rejection

of

Moran’s

No decision was sought or delivered with respect to

the City’s contemplation of eliminating the positions of chief of
police

and

fire

chief

and

consolidating

their

respective

responsibilities by hiring a “Public Safety Director.”

B.R.

Memorandum at 2 n.2.
The question which Moran now raises on appeal, whether Chapter
9 of the Bankruptcy Code “permits the re-organization of the
structure of a municipal government as opposed to reorganization of
its financial affairs” was not before the Bankruptcy Court and
cannot be raised, for the first time, on appeal.

See, e.g. In re

Watson, 403 F.3d 1, 7 (1st Cir. 2005)(“The rule that a party may
not

raise

an

argument

for

the

first

time

on

appeal

is

elemental.”)(quoting In re Carp, 340 F.3d 15, 26 (1st Cir. 2003)).
Although
Contract,

at

the
least

City

based

in

part,

its
on

decision
the

to

terminate

recommendation

that

the
the

positions of fire chief and chief of police be eliminated and
consolidated, the legality of that potential restructuring was not
before the Bankruptcy Court. Regardless of any future plans the
City had for Moran’s position, it first had to support its decision
to terminate the Contract under 11 U.S.C. § 365(a) in order to gain
approval of that rejection from the Bankruptcy Court.

17

(B) Rejection of the Moran Contract
Pursuant to Subsection 365(a) of the Bankruptcy Code, a
debtor-in-possession

(or,

as

in

this

case,

the

Receiver)

is

authorized, subject to the bankruptcy court’s approval, to assume
or

reject

365(a)10.

any

pre-petition

executory

contract.

11

U.S.C. §

As stated by the U.S. Supreme Court, “the authority to

reject an executory contract is vital to the basic purpose to a
Chapter 119 reorganization because [it] can release the debtor’s
estate from burdensome obligations that can impede a successful
reorganization.” N.L.R.B. v. Bildisco and Bildisco, 465 U.S. 513,
528, 104 S.Ct. 1188, 79 L.Ed.2d 482 (1984)(noting that the debtorin-possession has “a broad power to assume or reject executory
contracts,” (subject to certain situations which are inapplicable
in the instant case)).

The debtor-in-possession “may make this

decision at any time prior to the confirmation of the plan” which
allows

the

debtor-in-possession

“to

determine

which

of

the

prepetition executory contracts are beneficial to the estate and
which should be assumed or rejected.”

In re FBI Distrib. Corp.,

10

Section 365(a) provides:
Except as provided in Sections 765 and 766 of this title and
in subsections (b), (c), and (d) of this section, the trustee,
subject to the court’s approval, may assume or reject any executory
contract or unexpired lease of the debtor. 11 U.S.C. § 365(a).
9

Section 365 applies in a Chapter 9 case.

18

11 U.S.C. § 901(a).

330 F.3d 36, 42 (1st Cir. 2003).
Although

the

Bankruptcy

Code

does

not

define

“executory

contract,” legislative history indicates that the term refers to a
contract “‘on which performance is due to some extent on both
sides.’”

In re FBI Distrib. Corp., 330 F.3d at 40 n.5 (citation

omitted). In this case, it is undisputed that performance under the
Contract had occurred only for a fraction of the five year term.
Moreover,

Moran

has

executory in nature.

previously

conceded

that

See BR Memorandum at 3,

the

Contract

is

5.

The decision of a receiver to reject an executory contract is
reviewed under the business-judgment rule, which consists of a
determination of what is “in the best interest of the estate.”
Butler v. Resident Care Innovation Corp., 241 B.R. 37, 44-45 (D.R.I.
1999)(holding that “in confronting the question of rejection, a
court looks to see whether the decision to reject an executory
contract is in the best interest of the estate under the ‘business
judgment test’)(citing Group of Institutional Investors v. Chicago,
Milwaukee, St. Paul & Pacific R. Co., 318 U.S. 523, 550, 63 S.Ct.
727, 87 L.Ed. 959 (1943)).
The Bankruptcy Court’s review of the Receiver’s decision to
reject the Contract was limited to a determination whether such
decision was made with sound business judgment.

In re Orion

Pictures Corp., 4 F.3d 1095, 1099 (2d Cir. 1993)(citing Matter of

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Minges, 602 F.2d 38, 43 (C.A. Conn. 1979)(bankruptcy court reviewing
decision to assume or reject executory contract “should examine a
contract and the surrounding circumstances and apply its best
‘business judgment’ to determine if it would be beneficial or
burdensome to the estate”).

In other words, “the bankruptcy court

sits as an overseer of the wisdom with which the bankruptcy estate’s
property is being managed by the trustee or debtor-in-possession and
not, as it does in other circumstances, as the arbiter of disputes
between creditors and the estate.” Id. “‘The business judgment rule
requires the Court to determine whether a reasonable business person
would make a similar decision under similar circumstances.’”
Helm,

335

B.R.

528,

538-539

(Bankr.

S.D.N.Y.

In re

2006)(citation

omitted).
Once the debtor or trustee has established that the rejection
benefits the estate, “‘the non debtor party bears the burden of
proving that the debtor’s decision derives from bad faith, whim or
caprice.’” Id. (quoting In re Cent. Jersey Airport Servs., LLC, 282
B.R. 176, 183 (Bankr. D.N.J. 2002)).
The facts in this case are essentially undisputed.
has been in a financial crisis for some time.

The City

The five-year

Contract between the City and Moran was entered into less than two
months before the Mayor and City Council filed a petition for
receivership in Rhode Island state court. Pursuant to the Contract,

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Moran, who was also collecting retirement benefits under a pension
plan maintained by the City, was the only non-union City employee
whose employment was not “at will.”

Moran’s compensation and

benefits under the Contract were significantly more favorable than
those provided to other City employees.

As such, not only did the

Contract, by its terms, constitute a significant financial burden
on the City, it also presented difficulties for the City’s efforts
in restructuring its fiscal obligations in a fair and consistent
manner.
By contrast, Moran’s allegation that the Receiver’s rejection
of the Contract was the result of “bad faith, whim, or caprice ” are
entirely unsupported.

Neither Moran’s personal disagreement with

the Report recommending consolidation of two positions into that of
a Public Safety Director nor the fact that previous receivers had
not

elected

to

reject

the

Contract

serve

to

bolster

such

allegations.
In sum, the Bankruptcy Court applied the correct legal standard
in reviewing the City’s request for approval to reject the Contract.
Moreover, the facts in this case, as they pertain to the City’s
determination that the Contract was “burdensome,” are essentially
undisputed and fully support the Bankruptcy Court’s conclusion that
the City had met its burden under the business judgment test.

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Conclusion
For the foregoing reasons, Moran’s appeal from the judgment
entered by the Bankruptcy Court is DENIED.

The Bankruptcy Court’s

decision that the Receiver acted properly in exercising his business
judgment to reject the Contract is AFFIRMED.

SO ORDERED.
/s/ Mary M. Lisi
Mary M. Lisi
Chief United States District Judge
May 4, 2012

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