Opinion ID: 660189
Heading Depth: 2
Heading Rank: 3

Heading: Applicability of Bankruptcy Code Sec. 365

Text: 31 Section 365(f)(1) 8 was designed to prevent anti-alienation or other clauses in leases and executory contracts assumed by the Trustee from defeating his or her ability to realize the full value of the debtor's assets in a bankruptcy case. Section 365(c) 9 provides an exception to this rule. 32 Before the bankruptcy court, plaintiffs argued that section 365(f) bars GM's exercise of its RFR. The court determined without reference to Sec. 365(c) that Sec. 365(f) does not defeat a RFR because the RFR does not prevent the debtor/trustee from maximizing the amount available to creditors through recovery of the value of assets of the estate in that whatever the sale amount the debtor/trustee would have received from a proposed transferee, it could nonetheless obtain from the franchisor, GM. 33 The district court conducted plenary review of this legal issue, and in its analysis, it necessarily undertook an examination of the exception in Sec. 365(c), thus correcting the bankruptcy court's apparent oversight. After reviewing Third Circuit dicta, the district court concluded that Sec. 365(c) exempts personal service contracts. See In re Taylor, 913 F.2d 102, 106 (3d Cir.1990); In re West Electronics Inc., 852 F.2d 79, 83 (3d Cir.1988). The court correctly observed that whether a contract is personal in nature depends  'upon the nature of the subject of the contract, the circumstances of the case and the intent of the parties to the contract.'  (quoting 2 Collier on Bankruptcy Sec. 365.05 (Lawrence P. King, ed., 15 ed. 1992)). Moreover, clauses in the contract ... attesting to a personal relationship will not be dispositive. Id. Among the circumstances to be considered and weighed are the extent of the franchisee's ownership interest in the specific franchise, the extent to which the nature of the dealership permitted personal service of the franchisee, the multi-franchise character of the operation, the number of employees in the entire dealership operation, and other relevant factors. Under this standard, the determination is one of fact and the district court, therefore, erred as a matter of law in making the determination in the first instance. 34 In addition, its reliance on Simmons, to bolster its conclusion that the franchise agreement is a personal service contract, is misplaced. First, whether the franchise agreement before us constitutes a personal service contract is determined under Michigan law in accordance with the choice of law provision in the contract, and not under New Jersey law. Second, the franchise agreement in Simmons is distinguishable in an important respect. In Simmons, the dealer was required to own the entire interest in the dealership. See Simmons, 435 A.2d at 1171. In the case sub judice, however, the dealer was only required to possess a fifteen percent interest. Therefore, the agreements are not analogous and the court's discussion in Simmons regarding the personal service nature of the contract is not determinative. 35 Because the district court's holding that Sec. 365 as a whole does not bar GM's exercise of its RFR was based on its conclusion that the franchise agreement was a personal service contract, it must be reversed. Appellants are entitled to the opportunity to develop the record demonstrating that the franchise agreement did not constitute a personal service contract. The court should make its determination under Michigan law.