Court Opinion

ID: 9893557
Source: CourtListenerOpinion
Date Created: 2023-10-27 18:00:39.575457+00
Date Added: 2024-06-11T09:04:28.813894
License: Public Domain

Case: 22-30757     Document: 00516946579       Page: 1    Date Filed: 10/27/2023

           United States Court of Appeals
                for the Fifth Circuit
                                                                 United States Court of Appeals
                                                                          Fifth Circuit

                                        FILED
                               ____________
                                                                 October 27, 2023
                                 No. 22-30757                      Lyle W. Cayce
                               ____________                             Clerk

   In the Matter of Thornhill Brothers Fitness, L.L.C.,

                                                                            Debtor,

   Anytime Fitness, L.L.C.,

                                                                        Appellant,

                                     versus

   Thornhill Brothers Fitness, L.L.C.; William Flynn;
   Billie Flynn,

                                                                         Appellees.
                  ______________________________

                  Appeal from the United States District Court
                     for the Western District of Louisiana
                           USDC No. 3:22-CV-2074
                  ______________________________

   Before Richman, Chief Judge, and Southwick and Oldham, Circuit
   Judges.
   Per Curiam:
         The question presented is whether 11 U.S.C. § 365(f), or any other
   portion of Title 11, authorizes a bankruptcy court’s approval of a debtor’s
   partial assignment of an executory contract. It does not. We reverse the
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                                    No. 22-30757

   bankruptcy court’s contrary order and remand for further proceedings
   consistent with this opinion.
                                         I.
          In November 2019, William Flynn attempted to use an “inversion
   table” located at an Anytime Fitness franchise location in Port Allen,
   Louisiana.    The   equipment    allegedly      failed,   and   Flynn   suffered
   neuromuscular injuries. In February 2020, Flynn filed a personal injury suit
   in Louisiana court against the franchise owner, Thornhill Brothers Fitness,
   LLC (“Thornhill”). An amended complaint named an additional defendant,
   franchisor Anytime Fitness, LLC (“Anytime”).
          Anytime fought the complaint, arguing that the presence of the
   inversion table at the Thornhill location was unauthorized by the Thornhill-
   Anytime franchise agreement and that Anytime was, for other various other
   reasons, not liable for Flynn’s injuries. A Louisiana trial court dismissed
   Anytime with prejudice. An intermediate Louisiana appellate court affirmed.
   See Flynn v. Anytime Fitness, LLC, 360 So.3d 860 (La. App. 1st Cir. 2022).
          But Flynn’s case against Thornhill continued. A Louisiana district
   court announced that a multi-day jury trial would begin on March 21, 2022.
   Five days beforehand, at 3:15 PM on March 16, 2022, Thornhill filed a
   voluntary petition for bankruptcy. The petition disclosed only one significant
   non-insider liability—Flynn’s litigation claim—in an “unknown” amount
   above $1 million.
          Events thereafter moved quickly. By 2:00 PM on Friday, March 18,
   2022, or less than 48 hours after the predicate bankruptcy, Thornhill’s
   counsel emailed the bankruptcy court announcing that “much negotiation”
   had produced a settlement. Counsel requested “a wet signature” from the
   bankruptcy judge to approve the settlement. That afternoon, the bankruptcy
   judge sent Thornhill’s counsel an SMS message with a photograph of the

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   signed draft order approving the settlement. See Fed. R. Bankr. P.
   9019(a) (authorizing the bankruptcy court’s approval of a debtor’s litigation
   settlements).
          The settlement came in the form of several documents. One, which
   the parties call “the Stipulation,” bears emphasis and explanation. The
   Stipulation gave the Flynns $1 million and resurrected the Flynns’ ability to
   sue Anytime—notwithstanding the previous court order dismissing the
   Flynns’ claims against Anytime with prejudice. Specifically, Thornhill
   agreed that its insurer would pay the Flynns $1 million plus judicial interest—
   the maximum amount allowed by the insurance policy. Thornhill also agreed
   to sign a document dubbed the “Confession of Judgment,” to be entered in
   the Louisiana court where the Flynns’ personal injury lawsuit was pending.
   In this “confession,” Thornhill admitted to $7 million in total liability to the
   Flynns. Then Thornhill agreed to assign all rights it had “against Anytime
   Fitness LLC” to the Flynns, including any rights arising from “the indemnity
   agreement contained in the Franchise Agreement” between Thornhill and
   its franchise parent, Anytime. Thornhill otherwise retained the franchise
   agreement. The upshot: The Flynns recovered at least $1 million and as
   much as $7 million.
          Thornhill also made out like a bandit in the Settlement. The Flynns
   agreed that Thornhill would remain a defendant in the personal injury lawsuit
   “in name only.” That’s because Thornhill need only be included on a jury
   verdict form “for purposes of recovering against Anytime.” The Flynns
   would in any event “waive the right to pursue” Thornhill.
          All of this came as quite a shock to Anytime, which thought it escaped
   this case when it was dismissed with prejudice in state court. Anytime did not
   learn about the Settlement until April 1, 2022, two weeks after the bankruptcy
   judge signed it. On April 1, the Flynns filed what Anytime calls the “New

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   Suits” in Louisiana court. In the New Suits, the Flynns argued that
   Thornhill’s “confession,” the indemnity provisions of the Thornhill-
   Anytime franchise agreement, the assignment of Thornhill’s rights to Flynn,
   and the bankruptcy court’s approval of all the foregoing together operate to
   make Anytime liable to the Flynns for the “confessed” amount of $7 million.
   Anytime obviously confessed to nothing and knew nothing of the confession
   before the Flynns filed the New Suits. Anytime tried to win another dismissal
   in state court, but this time its efforts failed. And as of today, Anytime
   continues to defend against the New Suits.
          Anytime then protested in the bankruptcy court, arguing that the
   approval of the Stipulation, designed to facilitate “recover[y] against
   Anytime,” violated Anytime’s notice and hearing rights. See Fed. R.
   Bankr. P. 9019(a) (“On motion by the trustee and after notice and a hearing,
   the court may approve a compromise or settlement” (emphasis added));
   Mullane v. Cent. Hanover Bank & Trust Co., 339 U.S. 306, 314 (1950) (“An
   elementary and fundamental requirement of due process in any proceeding
   which is to be accorded finality is notice reasonably calculated, under all the
   circumstances, to apprise interested parties of the pendency of the action and
   afford them an opportunity to present their objections.”). The bankruptcy
   court vacated its prior order and allowed Anytime a hearing.
          But in July 2022, the bankruptcy court entered a new order ratifying
   the actions it took originally. Anytime appealed that July 2022 order, and the
   district court affirmed. We have jurisdiction to hear Anytime’s continuing
   appeal under 28 U.S.C. § 158(d). We review not the district court opinion
   but the bankruptcy court’s judgment. We apply clear error review to the
   bankruptcy court’s factual conclusions and de novo review to the bankruptcy
   court’s legal conclusions. See In re Pratt, 524 F.3d 580, 584 (5th Cir. 2008).

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                                         II.
          Anytime raises a variety of objections on appeal. Because we agree
   with Anytime that that the settlement violated 11 U.S.C. § 365’s provisions
   governing the treatment of executory contracts in bankruptcy, we decline to
   reach Anytime’s other arguments.
          We first (A) explain the Bankruptcy Code’s treatment of executory
   contracts. Then we (B) describe the Code’s all-or-nothing approach to
   assuming and assigning executory contracts. Last, we (C) explain the
   bankruptcy court’s error.
                                         A.
          The term “executory contract” refers to a contract that “neither
   party has finished performing.” Mission Product Holdings, Inc. v. Tempnology,
   LLC, 139 S. Ct. 1652, 1657 (2019). The parties to this appeal appear to agree
   that the Thornhill-Anytime franchise agreement is an executory contract.
   That acquiescence comports with the views of several of our sister circuits.
   See In re Pioneer Ford Sales, Inc., 729 F.2d 27, 28 (1st Cir. 1984) (Breyer, J.)
   (treating Ford dealership franchise agreement as executory); Cinicola v.
   Scharffenberger, 248 F.3d 110, 124 (3d. Cir. 2001) (holding sale of a franchise
   agreement triggered protections of 11 U.S.C. § 365); In re A&F Enterprises,
   Inc. II, 742 F.3d 763, 765−67 (7th Cir. 2014) (treating IHOP franchises and
   associated leases as executory); In re James Cable Partners, LP, 27 F.3d 534,
   537 (11th Cir. 1994) (describing “cable franchise agreement” as “an
   executory contract”). Although we hesitate to declare that franchise
   agreements must always and everywhere be treated as executory, it makes
   sense to consider them executory in the general case, because franchise
   agreements usually specify ongoing obligations that franchisees and
   franchisors have to each other.

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          The Bankruptcy Code gives special attention to a bankrupt debtor’s
   executory contracts. The Code’s initial premise is that a trustee in control of
   a post-petition debtor may, “subject to the court’s approval,” “assume or
   reject any executory contract” of the pre-petition debtor. 11 U.S.C. § 365(a).
          But to assume an executory contract, the debtor must clear various
   statutory hurdles. For example, if there has been a default under the contract,
   the debtor must “cure[], or provide[] adequate assurance that the trustee will
   promptly cure . . . default,” and provide “adequate assurance of future
   performance under such contract,” 11 U.S.C. § 365(b)(1), unless the default
   stems from some exempted origin, see id. § 365(b)(2). Exemptions include
   the mere financial circumstance of insolvency or the happenstance of
   bankruptcy. Id. If the debtor successfully assumes an executory contract,
   then the contract “will remain in effect through and then after the
   completion of the reorganization.” In re Nat’l Gypsum Co., 208 F.3d 498, 505
   (5th Cir. 2000).
          A debtor in bankruptcy may also assign its rights and obligations under
   an executory contract to others, but again subject to various statutory
   hurdles. See 11 U.S.C. § 365(f)(1). The debtor must first “assume[] such
   contract or lease in accordance with the provisions of this section.” Id.
   § 365(f)(2)(A). And, even when enabled by a prior assumption, a debtor’s
   power of assignment is not unqualified. The non-bankrupt party to the
   contract, the erstwhile contractual counterparty of the debtor-assignor, must
   be given “adequate assurance” of the assignee’s “future performance.” Id.
   § 365(f)(2)(B). Further, assignment can be precluded where “applicable law
   excuses” the counterparty from accepting performance by anyone other than
   the debtor. Id. § 365(c)(1)(A).

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                                         B.
          But what happens if, say, a debtor wishes to retain only part of an
   executory contract? May a debtor keep the wheat and not the chaff? No.
   When it comes to assuming an executory contract, we have been clear that
   it’s all or nothing: “An executory contract must be assumed or rejected in its
   entirety.” Matter of Provider Meds, LLC, 907 F.3d 845, 851 (5th Cir. 2018)
   (citation omitted). “Where an executory contract contains several
   agreements, the debtor may not choose to reject some agreements within the
   contract and not others.” Stewart Title Guar. Co. v. Old Republic Nat’l Title
   Ins. Co., 83 F.3d 735, 741 (5th Cir. 1996) (per curiam) (citation omitted). A
   debtor cannot use § 365 to create a different deal than the one it had
   originally.
          Does a different rule apply to assigning an executory contract? In
   Provider Meds, we all but said no, assignments are likewise all-or-nothing. See
   907 F.3d at 851 (noting assignment can occur only after assumption in
   entirety and citing § 365(f)). And § 365(f), which governs a debtor’s ability
   to assign an executory contract, refers to “an executory contract,” and uses
   the phrase “such contract” five times. The words “an” and “such” suggest
   the whole, not the part. And that makes sense. After all, a § 365(f) assignment
   “is intended to change only who performs an obligation, not the obligation to
   be performed.” In re Fleming Companies, Inc., 499 F.3d 300, 308 (3d. Cir.
   2007) (quotation and citation omitted). If a debtor could strategically divide
   up its executory contracts via partial § 365(f) assignments, then the debtor
   could both change the nature of the contracts’ obligations and evade our
   requirement that it take any retained executory contracts “cum onere,” with
   all their benefits and burdens. Nat’l Gypsum Co., 208 F.3d at 506.
          We reiterate our prior holdings: a debtor assuming an executory
   contract cannot separate the wheat from the chaff. And we make clear that,

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   when a trustee relies on § 365(f) to assign an executory contract in
   bankruptcy, it must assign the contract in whole, not in part.
          Although the plain language of § 365(f) suffices for our holding, other
   authorities reinforce it.
          For example, the Supreme Court has said “Section 365 reflects a
   general bankruptcy rule: the estate cannot possess anything more than the
   debtor itself did outside bankruptcy.” Tempnology, 139 S. Ct. at 1663 (citation
   omitted). In Tempnology, the Court considered the effect of rejection of an
   executory contract under § 365(a) and (g). And the Court held that a
   trustee’s (or debtor’s) rejection of a contract constituted a breach of it, not a
   rescission. Id. at 1661. That is so, the Court explained, because the debtor’s
   contractual counterparty should retain the same rights under § 365 in
   bankruptcy as it would have outside of bankruptcy. See id. at 1663 (“By
   insisting that the same counterparty rights survive rejection as survive
   breach, the rule prevents a debtor in bankruptcy from recapturing interests it
   had given up.”); accord D. Baird, Elements of Bankruptcy 97 (6th
   ed. 2014) (Whatever “limitation[s] on the debtor’s property [apply] outside
   of bankruptcy[] appl[y] inside of bankruptcy as well. A debtor’s property
   does not shrink by happenstance of bankruptcy, but it does not expand,
   either.”).
          So too with assignments under § 365(f). If the trustee (or debtor)
   could use the Code to assign a fraction of a contract that could not be assigned
   outside of bankruptcy, the trustee (or debtor) would arrogate to itself
   property it did not have before the petition. It would likewise derogate the
   counterparty’s contractual rights that would have existed outside of
   bankruptcy. The all-or-nothing assignment rule under § 365(f) prevents both
   inequities.

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          We do not construe any other provision of the Code to permit
   circumvention of our interpretation of § 365(f). It’s true that the Code
   contains various catch-all provisions. But we have held that those catch-alls
   do not create substantive powers not committed to the bankruptcy court by
   some other section. For example, § 105 authorizes a bankruptcy judge to
   “issue any order, process, or judgment that is necessary or appropriate to
   carry out the provisions of this title.” 11 U.S.C. § 105(a). But we have already
   decided that § 105 “does not authorize the bankruptcy courts to create
   substantive rights that are otherwise unavailable.” United States v. Sutton,
   786 F.2d 1305, 1308 (5th Cir. 1986). A bankruptcy court’s decisions and
   orders must rest on specific authorization from Title 11, not general efficacy
   or technocratic desirability, because § 105 does not convey “roving
   commission to do equity.” Id.; accord Matter of Ward, 978 F.3d 298, 303 (5th
   Cir. 2020) (“[B]ankruptcy courts cannot use their equity powers under § 105
   to fashion substantive rights and remedies.”) (quotation and citation
   omitted). Our understanding of the Code’s catch-alls comports with an ever-
   lengthening thread of Supreme Court precedent limiting the substantive
   power of bankruptcy courts. See N. Pipeline Constr. Co. v. Marathon Pipeline
   Co., 458 U.S. 50, 88 (1982) (holding unconstitutional part of the “broad grant
   of judicial power” given to bankruptcy judges by the Bankruptcy Act of
   1978); Stern v. Marshall, 564 U.S. 462, 503 (2011) (rejecting even “slight
   encroachments” and “silent approaches” by bankruptcy courts on Article
   III (quotation omitted)); Radlax Gateway Hotel, LLC v. Amalgamated Bank,
   566 U.S. 639, 645−47 (2012) (rejecting reliance on § 105 where more specific
   provisions of Title 11 could be read as controlling).
                                         C.
          We turn now to the facts of our case. The franchise agreement forbids
   assignment without Anytime’s consent. Anytime withheld consent. So, if
   Thornhill wished to assign the contract’s indemnity rights to the Flynns,

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   Thornhill must rely on § 365(f). See Provider Meds, 907 F.3d at 851
   (interpreting § 365(f) to permit assignment despite an anti-assignment
   provision).
          But Thornhill did not assign the entirety of the franchise agreement to
   the Flynns. Rather, Thornhill assigned rights “applicable under the terms
   and conditions of the indemnity agreement contained in the franchise
   agreement.” Thornhill otherwise kept the franchise agreement. Since we
   hold § 365(f) does not encompass such dissection, Thornhill’s partial
   assignment is not authorized by Title 11.
          The bankruptcy court bypassed Anytime’s § 365 objection by noting
   that Thornhill assigned to the Flynns only whatever rights Thornhill had
   against Anytime. What if Thornhill had none? If Thornhill lacked any rights
   to assign, then (suggests Thornhill) the assignment of nothing offended
   nothing. Nemo dat quod non habet. The bankruptcy court accepted this logic.
   It also declined to interpret the franchise agreement and discern whether the
   set of assigned rights was empty, reasoning that the job of interpreting the
   franchise agreement belonged to “another forum.”
          We disagree. The job of discerning what if anything can be assigned
   under § 365(f) decidedly belongs to the bankruptcy judge, the district court,
   and by extension, us. The bankruptcy court applied § 365(f) to authorize
   something the Code forbids—the partial assignment of an executory
   contract. The Flynns then used that partial assignment to revivify its claims
   against Anytime in the New Suits. If the Louisiana state court were to find
   assigned indemnity rights were not a null set, the state court could not then
   refuse to honor the unlawful partial assignment. It instead would be bound by
   the bankruptcy court’s unlawful approval of the partial assignment. That’s
   because the bankruptcy court already gave Thornhill a preclusive judgment

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   authorizing that partial assignment. If we were to affirm that judgment, then
   the § 365 toothpaste could not be put back in the tube.
          Thornhill separately argues that any defect in the bankruptcy court’s
   order was cured by the order’s compliance with In re Jackson Brewing Co.,
   624 F.2d 599 (5th Cir. 1980).* In Jackson Brewing, we prescribed a balancing
   test that governs a bankruptcy court’s approval of a Rule 9019 compromise.
   See id. at 602 (indicating a settlement must reflect (1) “the [debtor’s]
   probability of success in litigation,” (2) “[t]he complexity and likely duration
   of the litigation and any attendant expense, inconvenience and delay,” and
   (3) “[a]ll other factors bearing on the wisdom of the compromise.”); Fed.
   R. Bankr. P. 9019. In later cases, we further refined this test. See In re Age
   Refining, 801 F.3d 530, 540 (5th Cir. 2015) (noting that the third, “all other”
   bucket includes variables like “the best interest of the creditors” and “the
   extent to which the settlement is truly the product of arms-length bargaining,
   and not of fraud or collusion.”). But we have never held that obedience to
   Jackson Brewing substitutes for compliance with Title 11.
          On the contrary, when we prescribe tests or other guidance for a
   bankruptcy court’s exercise of discretion, we expect that subsequent
   bankruptcy court orders will comply with both our precedent and the
   Bankruptcy Code. An order that clears one hurdle still faces the other. See In
   re Moore, 608 F.3d 253, 266 (5th Cir. 2010) (requiring that a potential
   compromise involving an asset sale clear both 11 U.S.C. § 363 and our
   requirements for Rule 9019). Since the bankruptcy court order at issue here
   does not satisfy § 365, it does not matter whether it satisfied Jackson Brewing.

          _____________________
          *
             Anytime disputes the proposition that the bankruptcy court’s July 2022 order
   complies with In re Jackson Brewing Co., 624 F.2d 599 (5th Cir. 1980). Because this case
   can be resolved on other grounds, we do not reach Anytime’s argument.

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                               *        *         *
         We REVERSE the bankruptcy court’s July 2022 order and
   REMAND for further proceedings consistent with this opinion.

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