In Re Carrere
1986 Bankr. LEXIS 5679, 64 B.R. 156, 14 Bankr. Ct. Dec. (CRR) 977 (1986)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
Under Chapter 11 of the Bankruptcy Code, a personal services contract is not property of the estate and therefore cannot be assumed or rejected by the debtor-in-possession under § 365. Furthermore, a debtor cannot use bankruptcy in bad faith for the primary purpose of rejecting a personal services contract to pursue a more lucrative opportunity.
Facts:
- In August 1985, Tia Carrere entered into a personal services contract with American Broadcasting Company (ABC) to perform in the television series 'General Hospital' until August 1988.
- The ABC contract stipulated that Carrere would be paid between $600 and $700 for each 60-minute program in which she performed.
- While the ABC contract was still in effect, Carrere was offered a significantly more lucrative contract to appear on the show 'A Team' by Steven J. Cannell Productions.
- Carrere acknowledged that her primary motivation for filing for bankruptcy was to reject the less profitable ABC contract so she could accept the A Team contract.
- Carrere stated she only agreed to the A Team contract after receiving advice that bankruptcy would allow her to reject the existing ABC contract.
Procedural Posture:
- American Broadcasting Company (ABC) filed a breach of contract suit against Tia Carrere in state court.
- On March 4, 1986, Carrere filed a voluntary petition for Chapter 11 bankruptcy in the U.S. Bankruptcy Court.
- The following day, Carrere filed a motion in the bankruptcy court to reject her executory contract with ABC.
- ABC opposed Carrere's motion to reject and filed its own motion to dismiss her Chapter 11 proceeding, alleging it was filed in bad faith.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does § 365 of the Bankruptcy Code permit a debtor-in-possession in a Chapter 11 case to reject a personal services contract to accept a more lucrative opportunity?
Opinions:
Majority - Mund, J.
No. Section 365 of the Bankruptcy Code does not permit a debtor-in-possession to reject a personal services contract because such a contract is not property of the bankruptcy estate. The court's reasoning is threefold. First, under 11 U.S.C. § 541(a)(6), post-petition earnings from personal services are excluded from the property of the estate in a Chapter 11 case. Citing precedent like In re Noonan, the court extends this exclusion to the contract itself, meaning the contract never comes under the bankruptcy court's jurisdiction. As the debtor-in-possession's powers under § 365 only extend to property of the estate, they lack standing to assume or reject the contract. Second, as a court of equity, the court found it would be inequitable to allow a debtor to use bankruptcy protections for the primary purpose of escaping a contract for a better one, deeming such a motivation to be in bad faith. Third, even if rejection were permitted, it would not achieve the debtor's goal, as rejection only affects monetary rights, creating a pre-petition claim for damages. It does not disturb the non-debtor party's equitable, non-monetary rights, such as the right to seek a negative injunction under state law to prevent the debtor from performing for a competitor.
Analysis:
This decision significantly clarifies that personal services contracts are outside the scope of a debtor's rejection powers in Chapter 11 bankruptcy. It prevents artists, athletes, and other professionals from using bankruptcy as a strategic tool to void unfavorable contracts and pursue more profitable opportunities. The ruling reinforces the principle that bankruptcy is a shield for the honest but unfortunate debtor, not a sword for opportunistic contract-breaking. By also affirming that equitable remedies like injunctions survive rejection, the court limits the practical utility of attempting such a maneuver, thereby preserving the stability of personal services agreements.
