Andrews v. Riggs National Bank (In re Andrews)
80 F.3d 906, 1996 WL 144406 (1996)
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Rule of Law:
Payments received by a debtor post-petition pursuant to a non-competition agreement are not 'earnings from services performed' under 11 U.S.C. § 541(a)(6), and thus are property of the bankruptcy estate, if the agreement is ancillary to a pre-petition sale of a business and the payments are rooted in the debtor's pre-petition activities.
Facts:
- John A. Andrews was a part-owner of AMAX Corporation, a successful ready-mix concrete company.
- In 1989, Andrews and the other owners sold the assets of AMAX to Tarmac Acquisition, Inc. ('Tarmac') for nine million dollars.
- As an express condition of the asset sale, Tarmac required Andrews to enter into a separate non-competition agreement (NCA).
- The NCA stipulated that Andrews would not compete with Tarmac in the ready-mix concrete business in a specific geographic area for four years.
- In exchange for this promise not to compete, Tarmac agreed to pay Andrews one million dollars in quarterly installments over the four-year period.
- Tarmac calculated the one-million-dollar payment based on its estimate of the value of eliminating future competition from Andrews.
Procedural Posture:
- John A. Andrews filed a voluntary petition for Chapter 7 bankruptcy in the United States Bankruptcy Court for the Eastern District of Virginia.
- Andrews filed a motion in the bankruptcy court against the estate trustee, Richard G. Hall, to exclude post-petition payments from his non-competition agreement from the bankruptcy estate.
- The bankruptcy court denied Andrews's motion, holding that the payments were property of the estate.
- Andrews appealed the bankruptcy court's decision to the United States District Court.
- The district court affirmed the bankruptcy court's ruling.
- Andrews, as appellant, appealed the district court's decision to the United States Court of Appeals for the Fourth Circuit, with Hall as the appellee.
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Issue:
Do payments received by a debtor after filing for bankruptcy, pursuant to a non-competition agreement that was an integral part of a pre-petition sale of a business, constitute 'earnings from services performed' under 11 U.S.C. § 541(a)(6) that are excludable from the bankruptcy estate?
Opinions:
Majority - Ellis, District Judge
No, payments received under a non-competition agreement that is integral to a pre-petition business sale do not constitute 'earnings from services performed' and are therefore property of the bankruptcy estate. The court's reasoning is grounded in the principle that the bankruptcy estate includes all assets 'sufficiently rooted in the pre-bankruptcy past.' The court determined that the NCA was not a contract for post-petition services but was an integral and ancillary part of the pre-petition sale of AMAX's assets, designed to protect the goodwill Tarmac purchased. Applying the 'bright line' test from Segal v. Rochelle, the court found the payments were rooted in Andrews's pre-petition activities and were not essential for his 'fresh start.' The court also reasoned that construing forbearance as 'services performed' would stretch the ordinary meaning of the statutory language and create a loophole for debtors to shield assets from creditors by structuring sale proceeds as non-competition payments.
Dissenting - Widener, Circuit Judge
Yes, payments received under the non-competition agreement constitute 'earnings from services performed' and should be excluded from the bankruptcy estate. The dissent argues that the NCA is a classic executory contract, as defined by this circuit's precedent in Lubrizol, because performance (Andrews's forbearance and Tarmac's payments) remained due from both sides post-petition. The dissent contends that ongoing forbearance is a form of performance or service, and because Andrews must continue to perform his obligation post-petition to receive payment, the resulting income is post-petition earnings for his fresh start. Furthermore, the dissent argues the trustee cannot logically receive the benefits of the contract because, under 11 U.S.C. § 365(c)(1), the trustee is prohibited from assuming a personal service contract that can only be performed by the debtor, Andrews.
Analysis:
This decision solidifies the 'rooted in the pre-bankruptcy past' test for determining whether assets are part of the bankruptcy estate under § 541. It specifically carves out payments from non-competition agreements linked to business sales, treating them as proceeds of a pre-petition transaction rather than post-petition wages. This holding prioritizes maximizing the estate for creditors over a debtor's expansive view of post-petition earnings, preventing debtors from using such agreements to shield assets. The case highlights a significant tension between the definition of estate property under § 541 and the treatment of executory contracts under § 365, as the dissent forcefully argues.
