Opinion ID: 547481
Heading Depth: 1
Heading Rank: 3

Heading: Rejection of Executory Contracts for Personal Services

Text: 23 As set forth in Sec. 1107, a debtor-in-possession in a Chapter 11 proceeding has the same powers with respect to executory contracts as a trustee. And 11 U.S.C. Sec. 365 provides as follows: 24 (a) Except as provided [in subsection (c) of this section], the trustee, subject to the court's approval, may assume or reject any executory contract or unexpired lease of the debtor. 25 ... 26 (c) The trustee may not assume or assign any executory contract or unexpired lease of the debtor ... if-- 27 (1)(A) applicable law excuses a party, other than the Debtor, to such contract or lease from accepting performance from or rendering performance to an entity other than the debtor or the debtor in possession ... and 28 (B) such party does not consent to such assumption or assignment. 29 It is clear that contracts for personal services fall within (c)(1)(A), since applicable law excuses the parties from accepting performance from, or rendering performance to, non-signatories. 30 Thus, Sec. 365(a) permits a trustee to assume or reject any executory contract, but Sec. 365(c) adds the limitation that a trustee may not assume or assign an executory contract for personal services unless the parties consent. 31 On its face, the statute places no restrictions on a trustee's right to reject a personal services contract. This is not in the least surprising, since, as we read the statute, it implicitly provides that any executory contract which is not assumed--either in the course of the proceedings, or in the reorganization plan approved by the court--is automatically rejected. See 11 U.S.C. Sec. 365(g)(1). 32 Appellant argues that this straightforward reading of the plain language of Sec. 365 is inappropriate, because it does not take into account other provisions of the Bankruptcy Code, most notably Sec. 541(a)(6) which, in defining property of the estate, makes clear that the proceeds of the debtor's post-petition personal services are excluded from the estate. Since an executory contract for the debtor's personal services is not part of the estate, the argument continues, such a contract is not within the jurisdiction of the trustee, and the trustee simply has no power to deal with such a contract. This line of argument rests upon some fundamental misconceptions. 33 To the extent that money is due the debtor for pre-petition services under a personal services contract, the debtor's claim for those sums is undoubtedly an asset of the estate which passes to the trustee/debtor-in-possession. And this is so regardless of whether the trustee later affirms or rejects the contract. Stated otherwise, the issue of affirmance or rejection relates only to those aspects of the contract which remained unfulfilled as of the date the petition was filed. It serves no useful purpose to speak generally about whether the contract becomes part of the estate. The real question is the status of the reciprocal rights and obligations of the contracting parties arising after the petition was filed. As to these, the assume or reject dichotomy means simply that if the trustee wishes to obtain for the estate the future benefits of the executory portion of the contract, the trustee must also assume the burdens of that contract, as an expense of bankruptcy administration (i.e., having priority over all pre-bankruptcy claims of creditors). 34 It is simply a non sequitur to suggest that a trustee may not reject an executory contract because it is not property of the estate. It is the trustee's decision (whether to assume or reject) that determines whether the benefits of an executory contract will or will not become property of the estate. And that decision is obviously within the power (jurisdiction) of the trustee. 35 Personal services contracts differ from other executory contracts only in that the consent of the parties is required before the trustee has authority to assume them--a qualification which reflects the peculiar nature of such contracts and the widespread distaste for involuntary servitude. On the other hand, the trustee's authority to reject extends to all executory contracts--including personal-services contracts. 36 When an executory contract is not assumed (is rejected), 11 U.S.C. Sec. 365(g) provides: 37 (g) ... The rejection of an executory contract ... constitutes a breach of such contract ... 38 (1) if such contract or lease has not been assumed under this section or under a plan confirmed under Chapter 9, 11 or 13 of this title, immediately before the date of the filing of the petition .... 39 Appellant has a claim against the debtor's estate for whatever damages the rejection/breach has occasioned. This claim, like the claims of other creditors, will have to be dealt with in the reorganization plan. 40 The parties' research has uncovered only two reported decisions directly pertinent to this appeal. In In re Noonan, 17 B.R. 793 (Bky.S.D.N.Y.1982), the court permitted the trustee to reject an executory personal-services contract in a Chapter 11 proceeding which had been voluntarily converted to a Chapter 7. In In re Carrere, 64 B.R. 156 (Bky.C.D.Cal.1986), the court ruled that a debtor in possession or trustee has no standing to reject a personal services executory contract (since the trustee has no interest in the contract, he has no standing to act at all under Sec. 365, 64 B.R. at 159). In Carrere, a TV actress contractually committed to perform in a daytime serial program was offered a more lucrative role on another program, and the court found that the sole purpose in filing for bankruptcy was to enable her to reject her existing contract and accept the new offer, in order to improve her financial position--a purpose not compatible with the true aim of the bankruptcy law. It seems probable that the principal basis for the court's decision was its conclusion that the bankruptcy proceeding itself might well have been dismissed. At any rate, for the reasons already discussed, we reject the notion that a trustee lacks power to deal with personal-service contracts. 41 The remaining issue is whether this particular executory contract was properly rejected. Since we are dealing with a personal-services contract which could not be assumed without the parties' consent, and which would therefore, sooner or later, be deemed rejected in the absence of such consent, the debtor-in-possession was confronted with an extremely limited choice: he could reject the contract, or he could defer decision pending formulation of a plan of reorganization--in case the parties might change their minds and consent to assumption of the contract in the plan itself. In these circumstances, the traditional business judgment test of benefit to the estate, see, Sharon Steel Corp. v. National Fuel Gas Distrib. Corp., 872 F.2d 36, 39-40 (3d Cir.1989) has only limited application. We have no hesitation in concluding that no useful purpose would have been served by delaying the rejection decision. Indeed, the task of formulating a successful reorganization plan is undoubtedly aided by promptly clarifying the potential availability of some or all of the revenues from the debtor's post-petition creative efforts.IV. Conclusion 42 The district court properly decided that the Bankruptcy Code permits a debtor-in-possession to reject an executory contract for personal services, with court approval; that rejection of appellant's contract was appropriate; and that the bankruptcy proceeding should not be dismissed. We affirm those rulings. To the extent the appeal challenges the refusal to abstain, the appeal is dismissed.