Peter Spooner, Jr.

UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF OHIO
WESTERN DIVISION
In Re:
Peter Spooner, Jr.,
Debtor.
) 	Case No. 11-31525
)
) 	Chapter 13
)
)
) 	JUDGE MARY ANN WHIPPLE
MEMORANDUM OF DECISION AND ORDER
DENYING CONFIRMATION OF AMENDED CHAPTER 13 PLAN
This case came before the court for hearing on confirmation of Debtor’s proposed Chapter 13 Plan
[Doc. # 2] and on the objection to confirmation filed by RAK Corrosion Control Inc. (“Objection”) [Doc.
# 21]. Counsel for Debtor, the Chapter 13 Trustee, and counsel for RAK Corrosion Control Inc. (“RAK”)
appeared in person. RAK objects to Debtor’s Plan to the extent that it provides for rejecting a non-compete
agreement entered into by Debtor, arguing that the agreement is not executory.1 The non-compete
agreement, and state court litigation relating to the agreement, was also the subject of a hearing previously
held on a motion for relief from stay filed by RAK. The parties agree that the court should rely on the
record developed at that hearing in determining issues relating to RAK’s objection to confirmation. For the
reasons that follow, the court will sustain RAK’s objection and deny confirmation of the Plan.
1 In the Objection, RAK also argues that the Plan is not feasible as it does not take into account RAK’s unsecured claim.
However, RAK has since withdrawn its proof of claim filed in this case.
the record of the United States Bankruptcy Court for the Northern District of Ohio.
of this court the document set forth below. This document has been entered electronically in
The court incorporates by reference in this paragraph and adopts as the findings and orders
Dated: March 16 2012
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BACKGROUND
Debtor was formerly employed by RAK. The terms and conditions of Debtor’s employment were
subject to a collective bargaining agreement between the International Brotherhood of Painters and Trades
AFL-CIO District Council No. 6 (“the Union”) and the Cleveland Chapter Painting and Decorating
Contractors of America, Inc., to which RAK was a signatory. On December 29, 2008, Debtor executed a
Confidentiality, Non-Disclosure and Non-Competition Agreement (“Agreement” or “the Non-Compete
Agreement”). [Cr. Ex. 2, Tab 1 & attached Ex. A]. Pursuant to the Agreement, in consideration of his
continued employment at RAK, Debtor agreed to not engage in any Competitive Activity or Competitive
Act as described therein for a period of two years commencing on the date Debtor’s employment is
terminated, which “shall be extended to include any period of time during which [Debtor] engages in any
activity constituting a breach of this Agreement and any period of time during which litigation transpires
wherein [Debtor] is held to have breached this Agreement.” [Id. at ¶¶ 1(f), 2(b)]. 	Debtor also agreed to
hold confidential information in strictest confidence at all times. [Id. at ¶ 2(a)]. The Agreement provides
that its “terms and conditions shall be in addition to any other terms and conditions agreed to by the parties
or imposed by [RAK]. 	[Id. at p. 1]. 	It further provides that Debtor’s duties and obligations under the
Agreement shall survive the termination of Debtor’s employment by either party, with or without cause and
that the Agreement is the entire agreement with respect to the subject matter thereof. [Id. at ¶¶ 5 & 7].
In February 2010, RAK filed a complaint in the Lorain County, Ohio, Court of Common Pleas
seeking injunctive relief against Debtor and another former employee in order to enforce the Non-Compete
Agreement. RAK alleged in the complaint that Debtor’s employment was terminated on May 13, 2009,
after RAK discovered evidence indicative of Debtor’s efforts to establish a competing enterprise. [Id.,
Complaint at ¶ 9]. RAK further alleged that, in February 2010, it learned that Debtor was employed by DLC
Janitorial Services, Inc. (“DLC”) as a general foreman performing services covered by the Non-Compete
Agreement. [Id. at ¶ 10]. 	Debtor filed a counterclaim seeking a declaration that the Non-Compete
Agreement was void as it was signed under duress and was contrary to the terms of the parties’ applicable
collective bargaining agreements. [Id. at Tab 27, ¶¶86-89].
After several hearings, the state court entered a temporary restraining order enjoining Debtor from
performing Competitive Activities, as described in the Non-Compete Agreement at any U.S. Steel facility,
RAK’s largest customer, located in the geographic region set forth in the Agreement. [Id. Tab 44]. After
conducting a hearing on November 3, 2010, the state court entered an order finding Debtor in contempt and
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banning him “from entering upon the premises of all U.S. Steel facilities, including any of its affiliates and
from communicating with any U.S. Steel officers or employees during the pendency of this action.” [Id.
Tab L].
On March 23, 2011, Debtor filed a petition for relief under Chapter 13 of the Bankruptcy Code.
In his Chapter 13 Plan, Debtor proposes to reject the Non-Compete Agreement. On June 29, 2011, the court
granted RAK relief from the automatic stay for the limited purpose of permitting it to continue the state
court action against Debtor in order to determine the validity of the Non-Compete Agreement and, to the
extent it is found to be valid, to obtain injunctive relief. 2 Although it does not appear that a final judgment
has been entered, on October 3, 2011, the state court entered an order granting RAK partial summary
judgment on the state court defendants’ counterclaim. [Doc. # 74, Ex. 1]. The state court concluded that
the Non-Compete Agreement is not void. [Id. at 3].
LAW AND ANALYSIS
The issue presented by the parties is whether the Non-Compete Agreement is an executory contract
such that it can be rejected under 11 U.S.C. § 365(a). That subsection provides that “a trustee, [or in this
case, a Chapter 13 debtor], subject to the court’s approval, may assume or reject any executory contract. .
. of the debtor.” 11 U.S.C. § 365(a).
The Bankruptcy Code does not define “executory contract.” A definition often quoted by courts
is the “Countryman” definition: “a contract under which the obligations 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.” Countryman, Executory Contracts in
Bankruptcy: Part I, 57 Minn. L. Rev. 439, 460 (1973). In Terrell v. Albaugh (In re Terrell), 892 F.2d 469
(6 th Cir. 1989), the court applied this definition in finding that a land installment contract was executory.
The court noted that “legislative history indicates that Congress intended the term “executory contract” to
be defined as a contract ‘on which performance remains due to some extent on both sides’” and that
“Congress apparently had in mind the [Countryman] definition of executory contracts.” Id. at 471 (quoting
S. Rep. No. 95-989, 95th Cong., 2d Sess. 58, reprinted in 1978 U.S.C.C.A.N. 5787, 5844; H.R. Rep. No.
95-595, 95th Cong., 1st Sess. 347, reprinted in 1978 U.S.C.C.A.N. 5787, 5963, 6303).
The Sixth Circuit has stated, however, that this definition is “helpful but not controlling in the
2 The motion for relief from stay was denied to the extent it sought relief to pursue damages and attorney fees or other
rights to payment that could be asserted as a claim in this case.
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resolution of what is an executory contract.” Rieser v. Dayton Country Club Co. (In re Magness), 972 F.2d
689, 694 (6th Cir. 1992) (citing Chattanooga Mem’l Park v. Still (In re Jolly), 574 F.2d 349 (6th Cir. 1978)
(hereinafter “Jolly”)). In Jolly, the court articulated what is known as the “functional approach” to defining
executory contracts. The court explained that the key to determining whether a contract is executory “is
to work backward, proceeding from an examination of the purposes rejection is expected to accomplish,”
namely, it is expected to “relieve the debtor of burdensome future obligations during the period that he is
trying to recover financially, and constitute a breach of the contract, making the other party to the contract
a creditor with a claim which may be incorporated into the Plan and ultimately discharged.” Jolly, 574 F.2d
at 350-51. 	If they have already been accomplished, or if they cannot be accomplished through rejection,
then the contract is not executory within the meaning of § 365(a). See id.
Under either the Countryman definition or the functional approach, the Non-Compete Agreement
at issue in this case is not executory. While Debtor has a continuing obligation under the Agreement not
to compete and to hold certain information in confidence, RAK’s only obligation under the Agreement was
to permit Debtor’s continued employment at RAK. Debtor does not dispute the fact that he engaged in
competitive activities that were proscribed by the Agreement and that his employment at RAK was
terminated for this reason. 	As there is no question that Debtor’s failure to refrain from engaging in
competitive activities was a material breach, RAK has no continuing obligation under the Agreement. See
Software Clearing House, Inc. v. Intrak, Inc., 66 Ohio App. 3d 163, 170 (Ohio App. 1990) (explaining that
a material breach discharges the obligations of the non-breaching party). Thus, under the Countryman
definition, the Non-Compete Agreement is not an executory contract within the meaning of § 365. Cf. In
re Hughes, 166 B.R. 103, 105 (S.D. Ohio 1994) (finding covenant not to compete was not executory under
the Countryman definition where the debtor’s employment had terminated prior to commencement of the
bankruptcy case).
Nevertheless, citing In re Ritchey, 84 B.R. 474 (Bankr. N.D. Ohio 1988), Debtor argues that the
Agreement is executory because RAK has continuing obligations under the collective bargaining agreement
that it entered into with the Union and that Debtor contends was incorporated by reference into the Non-
Compete Agreement. In In re Ritchey, the court considered whether a contract for the sale of a business was
one entire contract that the Debtors could assume or reject or whether it was divisible into several separate
contracts, some of which could be assumed and some rejected. Finding that resolution of the issue depended
on the intent of the parties to the contract, the court found that the contract at issue was not divisible.
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In this case, Debtor’s argument is based upon language in the introductory paragraph of the
Agreement that its terms and conditions “shall be in addition to any other terms and conditions agreed to
by the parties or imposed by [RAK].” The court initially notes that the collective bargaining agreement
involves different parties. It is a contract agreed to by RAK and the Union, not Debtor. Nevertheless,
nothing in the language of this provision indicates an intent to incorporate the entire collective bargaining
agreement into the Non-Compete Agreement. Rather, to the extent that this language refers to terms and
conditions of the collective bargaining agreement, it is clear and unambiguous – the plain language merely
clarifies that the terms and conditions of the Non-Compete Agreement are in addition to, and do not
supersede or displace, any terms or conditions in the collective bargaining agreement. 	See Blair v.
McDonagh , 177 Ohio App.3d 262, 278 (2008) (stating that where the language of a contract is clear and
unambiguous, courts must simply give effect to the plain language of a contract).
Rejection of the Non-Compete Agreement also does not accomplish any purpose that rejection is
expected to accomplish. By rejecting the Agreement, Debtor seeks to relieve himself of the obligation to
not engage in competitive activities and, thus, relief from any order of the state court enjoining him from
engaging in such activities. However, rejection does not terminate all of the rights and obligations of parties
under a contract. In re Noco, Inc., 76 B.R. 839, 844 (Bankr. N.D. Fla. 1987); In re Hughes, 166 B.R. at 105
(stating that ‘rejection of a contract does not rescind a contract or the obligations found therein (e.g., a
restrictive covenant)”) . Rejection simply constitutes a breach of those obligations that is deemed to have
occurred immediately before the date of filing the petition. Id. (citing 11 U.S.C. § 365(g)(1)). As the Sixth
Circuit stated, although Congress allows debtors to reject executory contracts, they do so “only at the cost
of any damages rejection may cause.” Jolly, 574 F.2d at 351. Thus, the court in In re Noco, Inc., explained:
[R]ejection under the Bankruptcy Code only affects the monetary rights of the creditor. It
does not disturb equitable, non-monetary rights that the creditor may have against the debtor
because of the breach of contract. 	These rights include the creditor’s right to seek an
injunction so that the debtor can not breach the negative promise not to compete.
In re Noco, Inc., 76 B.R. at 844; see In re Annabel, 263 B.R. 19, 28 (Bankr. N.D.N.Y. 2001) (finding
creditor entitled to relief from the discharge injunction to pursue injunctive relief in state court to enforce
a covenant not to compete where the debtor had rejected an executory contract that included such covenant).
As such, relieving Debtor of the burdensome obligation of refraining from engaging in competitive activities
cannot be accomplished by rejecting the Non-Compete Agreement, which would then result in no benefit
to the bankruptcy estate. See Phar-Mor, Inc. v. Strouss Bldg. Assoc., 204 B.R. 948, 953 (N.D. Ohio 1997)
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(stating that “working backwards” under the functional approach, the court must determine whether the
debtor has material unfulfilled obligations extending into the future and whether rejection might reasonably
benefit the estate).
Furthermore, the second purpose identified in Jolly for rejecting a contract, that is, making the other
party to the contract a creditor with a claim that may be incorporated into the Plan and ultimately
discharged, also cannot be accomplished. 	As was the case in Jolly, Debtor had already breached the
Agreement prepetition. Rejection, therefore, is not necessary to accomplish the purpose of making RAK
a creditor with a claim in this case. Using the functional approach articulated by the Sixth Circuit in Jolly,
because neither of the purposes of rejection can be accomplished, the court finds that the Non-Compete
Agreement is not an executory contract that can be rejected in Debtor’s Chapter 13 Plan.
THEREFORE, for the foregoing reasons, good cause appearing,
IT IS ORDERED that RAK’s Objection [Doc. # 21] be, and hereby is, SUSTAINED; and
IT IS FURTHER ORDERED that confirmation of Debtor’s proposed Chapter 13 Plan [Doc. # 2]
be, and hereby is, DENIED; and
IT IS FURTHER ORDERED that Debtor is granted leave to file another proposed amended
Chapter 13 plan on or before April 19, 2012; and
IT IS FURTHER ORDERED that a further confirmation hearing will be held on May 22, 2012,
at 2:00 p.m.
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