In re: Bruce Gilpin v. ( 2008 )

By order of the Bankruptcy Appellate Panel, the precedential effect
of this decision is limited to the case and parties pursuant to 6th
Cir. BAP LBR 8013-1(b). See also 6th Cir. BAP LBR 8010-1(c).
File Name: 08b0013n.06
BANKRUPTCY APPELLATE PANEL OF THE SIXTH CIRCUIT
In re: BRUCE AND SHEREE GILPIN, )
)
Debtors. )
__________________________________ )
)
MCS ACQUISITION CORP. d/b/a ) No. 07-8031
MOBILE CONTAINER SERVICE, )
)
Appellant, )
)
v. )
)
BRUCE GILPIN AND SHEREE GILPIN, )
)
Appellees. )
__________________________________ )
Appeal from the United States Bankruptcy Court
for the Northern District of Ohio, Eastern Division.
No. 07-40471
Argued: May 13, 2008
Decided and Filed: July 17, 2008
Before: FULTON, PARSONS, and SCOTT, Bankruptcy Appellate Panel Judges.
_____________________
COUNSEL
ARGUED: Jonathan P. Blakely, BERNLOHR WERTZ, L.L.P., Akron, Ohio, for Appellant. Frank
X. Gresley, LAW OFFICE OF FRANK X. GRESLEY, Parma, Ohio, for Appellees. ON BRIEF:
Jonathan P. Blakely, BERNLOHR WERTZ, L.L.P., Akron, Ohio, Kevin T. Fogerty, LAW OFFICES
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OF KEVIN T. FOGERTY, Allentown, Pennsylvania, for Appellant. Frank X. Gresley, LAW
OFFICE OF FRANK X. GRESLEY, Parma, Ohio, for Appellees.
____________________
OPINION
____________________
THOMAS H. FULTON, Bankruptcy Appellate Panel Judge. MCS Acquisition Corp. d/b/a
Mobile Container Service (“MCS”) appeals the bankruptcy court’s order denying its motion for relief
from the automatic stay in the bankruptcy case of Bruce and Sheree Gilpin. MCS sought relief to
enforce in Pennsylvania state court a previously issued injunction enjoining Mr. Gilpin from
violating a noncompetition agreement. Because we conclude that the bankruptcy court erred in
concluding that the equitable right to enforce the noncompetition agreement was a claim under
11 U.S.C. § 101(5)(B) and in failing to give full faith and credit to the state court’s determination
that the agreement was reasonable, we reverse and remand.
I. ISSUES ON APPEAL
The issues presented on appeal are (1) whether the bankruptcy court abused its discretion
when it adjudged that MCS’s equitable rights under the covenant not to compete constituted a claim
under 11 U.S.C. § 101(5)(B); and (2) whether the bankruptcy court abused its discretion in failing
to give full faith and credit to a prior state court order that adjudged the terms of the covenant to be
reasonable.
II. JURISDICTION AND STANDARD OF REVIEW
The Bankruptcy Appellate Panel of the Sixth Circuit (“BAP”) has jurisdiction to hear and
decide this appeal. 28 U.S.C. § 158(b)(1). The United States District Court for the Northern District
of Ohio has authorized appeals to the BAP, and neither party to this appeal has elected to have it
heard by the district court. 28 U.S.C. §§ 158(b)(6), (c)(1). A party may appeal a bankruptcy court’s
final order as a matter of right. 28 U.S.C. § 158(a)(1). An order denying stay relief under 11 U.S.C.
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§ 362(d) is a final order for purposes of 28 U.S.C. § 158(a)(1). In re Schaffrath, 214 B.R. 153, 154
(B.A.P. 6th Cir. 1997).
Three standards of review apply in this case. Legal conclusions are reviewed de novo; factual
findings are reviewed for clear error; and the denial of a motion for relief from the automatic stay
“for cause” under 11 U.S.C. § 362(d)(1) is an equitable determination reviewed for an abuse of
discretion. Fed. R. Bankr. P. 8013; AmeriCredit Fin. Servs., Inc. v. Nichols (In re Nichols), 440 F.3d
850, 856 (6th Cir. 2006); Spierer v. Federated Dept. Stores, Inc. (In re Federated Dept. Stores, Inc.),
328 F.3d 829, 832, 836 (6th Cir. 2003). An abuse of discretion occurs when a bankruptcy court
“relies on clearly erroneous findings of fact, or when it improperly applies the law or uses an
erroneous legal standard.” Lorain NAACP v. Lorain Bd. of Educ, 979 F.2d 1141, 1148 (6th Cir.
1992) (internal quotations omitted).
III. FACTS
MCS purchased Mobile Container Service, Inc. (“Mobile”) as an ongoing business from its
sole shareholder, Michael Sisselberger (“Sisselberger”) on March 25, 2002. Headquartered in
Allentown, Pennsylvania, Mobile provided services maintaining, repairing, and refurbishing waste
containers to clients in Pennsylvania, New Jersey, and Delaware, with minor business activities in
New York and Maryland. In order to effectuate the purchase as an ongoing operation, several of
Mobile’s key employees, including Sisselberger and Bruce Gilpin (the “Debtor”), were to remain
employed by Mobile (under new ownership) and sign noncompetition agreements. The agreement
signed by the Debtor stated in pertinent part the following:
2. NONCOMPETITION AND NONSOLICITATION - In consideration of [MCS’s]
employment, [Debtor] agrees that:
(a) For a period of two (2) years after [the Debtor] ceases employment with [MCS],
for whatever reason, whether voluntarily or involuntarily:
(i) [The Debtor] will not, directly or indirectly, engage or invest in, own,
manage, operate, finance, control or participate in the ownership, management,
operation, financing or control of, be employed by, associated with or in any manner
connected with, or render services or advice or other aid to, any person or entity
engaged in or planning to become engaged in the repair, refurbishing, or maintenance
of waste refuse containers, anywhere within a 100 mile radius of both Allentown, PA
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or anywhere else in Pennsylvania, Delaware, or New Jersey where [MCS] is
repairing, refurbishing, and maintaining waste refuse containers.
....
(b) In the event of a breach by [the Debtor] of any covenant set forth in Subsection
2(a) above, the term of such covenant will be extended by the period of the duration
of such breach. . . .
3. This agreement shall be governed by Pennsylvania law. In connection with
enforcing this Agreement, [MCS] may seek injunctive or equitable relief, in addition
to damages, and [MCS] shall be entitled to reasonable attorneys’ fees should it
prevail, either in part or in whole.
(J.A. at 140.) After the closing on March 25, 2002, the Debtor remained employed by MCS until
his resignation on June 6, 2003.
Subsequently, MCS became aware of business activities it believed amounted to violations
of the noncompetition agreements. Consequently, MCS sued the Debtor and others in the Court of
Common Pleas of Lehigh County, Pennsylvania (“State Court”), seeking damages and equitable
relief for the alleged breach of the noncompetition agreements. After a several-day bench trial, the
State Court issued a thirty-five page verdict on February 24, 2006, detailing its findings of fact and
conclusions of law. The State Court found that the Debtor and the other defendants had violated the
noncompetition agreements by forming Professional Container Services, Inc. (PCS), an entity that
engaged in the same business as MCS and within the same geographic area proscribed by the
noncompetition agreement. The State Court also found that after PCS ceased doing business in
August or September 2004, the Debtor started another company, Gilpin Welding and Repair, which
was essentially a continuation of the business of PCS, operating within the same prohibited area.
The State Court concluded that the noncompetition agreements were reasonable, and that MCS had
no adequate remedy at law. (J.A. at 100-01.)
On July 25, 2006, the State Court entered judgment against the Debtor, awarding
compensatory damages, punitive damages and attorneys’ fees, and permanently enjoining him and
the other defendants from violating their noncompetition agreements with MCS. The judgment also
contained a declaratory judgment that the restrictive covenants in the Debtor’s noncompetition
agreement were extended up through and including May 6, 2007. The Debtor did not file any post
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judgment motions or appeals, and the judgment against him became final. See MCS Acquisition
Corp. v. Mobile Container Serv., Inc., No. 2003-E-61 (Pa. Ct. C. P., Lehigh County Jul. 25, 2006)
(J.A. at 66-106.).
On March 7, 2007, the Debtor and his wife, Sheree Gilpin, filed a petition for bankruptcy
relief under chapter 7. On April 13, 2007, MCS moved for relief from the automatic stay, 11 U.S.C.
§ 362(d)(1), alleging that the Debtor had continued to violate the noncompetition agreement and
seeking leave to request that the State Court enforce its July 25, 2006 order by extending the
injunction against the Debtor for an additional two-year period. MCS specifically stated in its
motion that it was not seeking to enforce any provision of the judgment relating to an award of
damages nor was it seeking further monetary relief.
The Debtor filed an objection to MCS’ motion for relief, and a hearing on the motion was
conducted on May 17, 2007. At the hearing, counsel for the Debtor argued that the injunction was
a dischargeable claim under 11 U.S.C. § 101(5) that had expired two weeks prior to the hearing.
Counsel also argued that substantial legal fees had been incurred in the State Court and that the
Debtor had suffered unduly under the “stranglehold of some unreasonable noncompete agreement
which was . . . extended well past where it should have been extended.” (J.A. at 176.)
On May 21, 2007, the bankruptcy court entered an order denying MCS’s motion for stay
relief. The court’s order did not set forth the basis of its decision, but the statements made by the
court at the conclusion of the May 17, 2007 hearing indicate the court’s legal conclusions:
I guess I’m very concerned about what MCS Acquisition Corp. is attempting
to do here.
It does appear that it has a claim. If there has been a breach of the judgment
that it obtained in Pennsylvania, it seems like it can be quantified in some sort of
monetary damages.
The injunction has expired, the extension of the judgment, and the purpose
of a noncompete agreement is not to deprive the other party of the ability to earn a
living, but is to protect the parties, such as your client, from unfair competition.
This sale occurred in 2002 or 2003. It is now 2007. If there have been
damages from the breach of that noncompete, they have already occurred. Ohio will
only enforce a noncompete agreement if it is reasonable in duration and in geographic
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area, and MCS appears to want to have an injunction that goes on indefinitely as long
as it can prove any violation at all of the original noncompete, and I happen to agree
with the debtor in this case, that this claim can be reduced to money damages. I think
that the debtors will incur expenses in trying to defend themselves.
Your comment that it failed to appear or they failed to appear in other
hearings really only indicates that they may not have been able to afford to do so, and
that puts them at a very bad disadvantage, that either they concede that the injunction
will be extended for another two years, if that’s what your client asks for, or they
incur costs. It is not a zero sum gain here.
So, there doesn’t appear to be cause to provide MCS Acquisition Corp. with
relief from stay. To the extent that your client believes that there are reasons, and I’m
not sure if this is still within the applicable statutory period, but your client can
always file an adversary proceeding with respect to the dischargeability of its own
debt, or the discharge of the debtors in general, which is what I’m actually hearing
you argue with respect to the honest debtor.[1]
So it is not really at a disadvantage if it has grounds to do so and it is timely,
and I have not looked to see whether it is still timely. This is an ‘07 case, so it is
likely to be, but I don’t know.
So I’m going to deny the motion, and I’m going to ask debtors’ counsel to
submit an order.
This appeal timely followed the court’s ruling.
IV. DISCUSSION
A. Injunction as “Claim” under 11 U.S.C. § 101(5)(B)
The injunction issued by the State Court had not expired when the Debtor filed his
bankruptcy petition, or when MCS filed its motion for relief. Accordingly, for purposes of this
analysis, the injunction order extending the terms of the noncompetition agreement is deemed not
to have terminated. 11 U.S.C. § 108(c); see also Young v. United States, 535 U.S. 43, 49, 122 S. Ct.
1036, 1040 (2002) (“It is hornbook law that limitations periods are customarily subject to equitable
tolling, unless tolling would be inconsistent with the text of the relevant statute.”) (internal
quotations omitted); cf. Ohio Farmers Ins. Co. v. Leet (In re Leet), 274 B.R. 695, 700 (B.A.P. 6th
1
Subsequently, MCS did file an adversary proceeding against the Debtor on June 15, 2007,
seeking a determination of nondischargeability of the damages owed to MCS by the Debtor under
11 U.S.C. § 523(a)(6) (willful and malicious injury).
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Cir. 2002) (distinguishing jurisdictional time limitations, which are “immutable and not affected by
equitable defenses or considerations”). MCS filed its motion for relief prior to the expiration of the
injunction, and, but for the automatic stay, MCS could have returned to the State Court and sought
another extension of the terms of the injunction before it expired by its own terms.
Section 101(12) of title 11 of the Bankruptcy Code defines “debt” as “liability on a claim.”
The Bankruptcy Code defines a “claim” as follows:
(5) The term “claim” means—
(A) right to payment, whether or not such right is reduced to judgment, liquidated,
unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal,
equitable, secured, or unsecured; or
(B) right to an equitable remedy for breach of performance if such breach gives rise
to a right to payment, whether or not such right to an equitable remedy is reduced to
judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or
unsecured.
11 U.S.C. § 101(5) (emphasis added). The consensus among the various circuits for the United
States Courts of Appeals is that a right to an equitable remedy does not give rise to a right to
payment under § 101(5)(B) when the right to equitable relief is an alternative to a right to payment.
See, e.g., In re Udell, 18 F.3d 403, 409-10 (7th Cir. 1994); In re Torwico Electronics, Inc., 8 F.3d
146, 150 (3d Cir. 1993) (holding that state cleanup order is not a dischargeable claim under 11
U.S.C. § 101(5)(B) because neither the statute nor the court order at issue provided a right to
payment); United States v. LTV Corp. (In re Chateaugay Corp.), 944 F.2d 997, 1008 (2d Cir. 1991)
(distinguishing between injunction requiring cleanup for past pollution, which may give rise to
alternative right to payment under CERCLA, and one enjoining future pollution, which provides no
“option to accept payment in lieu of continued pollution”); see generally Maids Int’l, Inc. v. Ward
(In re Ward), 194 B.R. 703 (Bankr. D. Mass. 1996) (setting forth the varying analytical approaches
among bankruptcy courts to the dischargeability of a debtor’s obligations under a covenant not to
compete).
With respect to the dischargeability of an injunction imposed against a debtor by a state court
order, the Sixth Circuit Court of Appeals has adopted the majority rule. “The right to equitable relief
constitutes a claim only if it is an alternative to a right to payment or if compliance with the equitable
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order will itself require the payment of money.” Kennedy v. Medicap Pharmacies, Inc. (In re
Kennedy), 267 F.3d 493, 497 (6th Cir. 2001).
The facts of Kennedy are similar to those in the case sub judice. In Kennedy, the debtors
were subject to a covenant not to compete that arose from a franchise agreement with Medicap
Pharmacies (“Medicap”). Medicap filed suit in an Iowa state court seeking an injunction against the
debtors to enforce the terms of the noncompetition agreement. Before the state court issued a final
ruling on the injunction, the debtors filed a bankruptcy petition in a bankruptcy court in the Western
District of Kentucky. In re Kennedy, 267 F.3d at 495.
Medicap then filed an adversary proceeding objecting to discharge of the injunctive relief and
seeking relief from the automatic stay on the ground that the debtors’ obligations under the
injunction were nondischargeable. The bankruptcy court granted summary judgment in favor of
Medicap and terminated the automatic stay so that Medicap could continue its suit for injunctive
relief against the debtors in state court. In re Kennedy, 267 F.3d at 495. The Sixth Circuit Court of
Appeals affirmed, reasoning that because compliance with the injunction would not require the
expenditure of money, rather it required only that the debtors cease violating the terms of the
covenant not to compete going forward, Medicap’s right to injunctive relief did not “equate to being
a claim.” Id. at 497-98.
As in Kennedy, MCS is not seeking damages as a result of the Debtor’s alleged violations
of the State Court injunction. Rather, MCS seeks relief from the automatic stay so that it can return
to the State Court and enforce the terms of the noncompetition agreement by obtaining an extension
of the injunction. Under the noncompetition agreement, “the terms of [any covenant breached by
the Debtor] will be extended by the period of the duration of such breach.” The State Court enforced
this provision once already, extending the proscriptions of the Debtor’s noncompetition agreement
to May 6, 2007. If MCS’s allegations are true that the Debtor consistently violated the terms of the
noncompetition agreement between August 15, 2005, and March 6, 2007, then the terms of the
noncompetition agreement that would otherwise have expired in May 2007 could presumably be
extended an additional nineteen months.
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The fact that the Debtor will need to pay for legal services to defend his actions in the State
Court does not equate to the expenditure of money in connection with the injunction. Legal fees are
not the type of expenditure to which the Sixth Circuit Court of Appeals was referring in Kennedy.
The payment of money to which the Sixth Circuit refers is to comply with the injunction. In re
Kennedy, 267 F.3d at 497. Compliance with the relief sought by MCS would not require the
payment of money by the Debtor. Rather, the Debtor would be required only to cease his alleged
violation of the noncompetition agreement and the injunction granted in connection therewith.
MCS’s right to enforce its noncompetition agreement by equitable relief does not constitute
a claim under 11 U.S.C. § 101(5)(B). The bankruptcy court’s ruling to the contrary was erroneous
and, therefore, an abuse of discretion.
B. Collateral Estoppel
The bankruptcy court held that the noncompetition agreement signed by the Debtor was
unreasonable and thus unenforceable under Ohio law because of its duration and geographic scope.2
Because the State Court had already adjudicated the reasonableness and enforceability of the
noncompetition agreement with respect to the Debtor, the bankruptcy court was collaterally estopped
from revisiting this determination.
Property interests are created and defined by state law even when an interested party is
involved in a bankruptcy proceeding, unless some federal interest requires a different result. Butner
v. United States, 440 U.S. 48, 55, 99 S. Ct. 914, 918 (1979). Although a debtor’s obligation under
a noncompetition agreement might be dischargeable in bankruptcy, a property interest that results
from a noncompetition agreement—entitlement to equitable relief, in this case—does not conflict
with bankruptcy law and is governed by state law. See, e.g., In re Kennedy, 267 F.3d at 493; In re
2
For the reasons stated in this opinion, as well as the choice of law provisions in the
employment and noncompetition contracts at issue, Ohio law is inapplicable to any inquiry as to the
enforceability of the noncompetition agreements as well as the question of collateral estoppel. See
generally 28 U.S.C. § 1738; Schulke Radio Prods., Ltd. v. Midwestern Broad. Co., 453 N.E.2d 683,
685-86 (Ohio 1983); Restatement (Second) of Conflict of Laws §§ 187-88 (2008).
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Hawes, 73 B.R. 584, 587 (Bankr. E.D. Wis. 1987); In re Cox, 53 B.R. 829, 832 (Bankr. M.D. Fla.
1985); In re Cooper, 47 B.R. 842, 845 (Bankr. W.D. Mo. 1985).
In the case sub judice, the noncompetition agreement between the Debtor and MCS provided
that Pennsylvania law governed the contract. In its July 25, 2006 opinion, the State Court adjudged
the terms of the noncompetition agreement signed by the Debtor to be reasonable in temporal and
geographic scope, and reasonably necessary to protect MCS’s goodwill. (J.A. at 100.)
Notwithstanding this prior determination, the bankruptcy court stated during the May 17,
2007 hearing: “Ohio will only enforce a noncompete agreement if it is reasonable in duration and
in geographic area, and MCS appears to want to have an injunction that goes on indefinitely as long
as it can prove any violation of the original noncompete . . . .” (J.A. at 179.) However, under 28
U.S.C. § 1738, a federal court must give full faith and credit to the order of a prior state court if
another court in the state from which the judgment originated would give it preclusive effect.
Marrese v. Am. Acad. of Orthopaedic Surgeons, 470 U.S. 373, 380, 105 S. Ct. 1327, 1331-32
(1985); Bay Area Factors v. Calvert (In re Calvert), 105 F.3d 315, 317 (6th Cir. 1997). A federal
court should look to the preclusion law of the state in which the original judgment was rendered for
the proper standard to apply. Marrese, 470 U.S. at 380; In re Calvert, 105 F.3d at 317; cf. Monsanto
Co. v. Trantham (In re Trantham), 304 B.R. 298, 305 (B.A.P. 6th Cir. 2004) (“Federal common law
governs the claim-preclusive effect of all federal court judgments.”).
Under Pennsylvania law:
The doctrine of collateral estoppel precludes relitigation of an issue
determined in a previous action if: (1) the issue decided in the prior case is identical
to the one presented in the later action; (2) there was a final adjudication on the
merits; (3) the party against whom the plea is asserted was a party or in privity with
a party in the prior case; (4) the party or person privy to the party against whom the
doctrine is asserted had a full and fair opportunity to litigate the issue in the prior
proceeding; and (5) the determination in the prior proceeding was essential to the
judgment.
Office of Disciplinary Counsel v. Kiesewetter, 889 A.2d 47, 50-51 (Pa. 2005) (citing Office of
Disciplinary Counsel v. Duffield, 644 A.2d 1186, 1189 (Pa. 1994)).
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Applying the factors mandated by Pennsylvania’s law on collateral estoppel, the State Court’s
final order enforcing the noncompetition agreement between the Debtor and MCS was entitled to
full faith and credit by the bankruptcy court. The State Court decided the precise issue revisited by
the bankruptcy court, viz., whether the noncompetition agreement at issue was reasonable and
enforceable. The prior trial reached a final adjudication on the merits. The Debtor was a party in
the previous litigation, and there is no suggestion that the Debtor was deprived of a “full and fair”
opportunity to litigate the issue in the State Court action. Finally, the determination regarding the
reasonableness and enforceability of the noncompetition agreement was essential to resolution of the
previous litigation. Because these conclusions are entitled to full faith and credit, the bankruptcy
court was collaterally estopped from entering a ruling to the contrary. See 28 U.S.C. § 1738; In re
Calvert, 105 F.3d at 317.
V. CONCLUSION
The denial of a motion for relief from the automatic stay “for cause” under 11 U.S.C.
§ 362(d)(1) is an equitable determination reviewed for an abuse of discretion. An abuse of discretion
occurs when a bankruptcy court “relies on clearly erroneous findings of fact, or when it improperly
applies the law or uses an erroneous legal standard.” Lorain NAACP v. Lorain Bd. of Educ, 979 F.2d
at 1148 (internal quotations omitted). In this case, the bankruptcy court improperly applied the law
in concluding that MCS’s right to equitable relief under the noncompetition agreement and the State
Court’s injunction constituted a “claim” under 11 U.S.C. § 101(5)(B). The bankruptcy court also
improperly applied the law in evaluating the enforceability of the noncompetition agreement under
Ohio law since it was collaterally estopped from doing so. Accordingly, the bankruptcy court abused
its discretion in denying MCS’s motion for relief from the automatic stay. The bankruptcy court’s
order is REVERSED and this case is REMANDED to the bankruptcy court for further proceedings
consistent with this opinion.
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