IN RE: BURNETT & ASSOCIATES, INC. CASE NO. 93-50431

UNITED STATES BANKRUPTCY COURT 

EASTERN DISTRICT OF KENTUCKY

LEXINGTON

 

IN RE:

BURNETT & ASSOCIATES, INC. CASE NO. 93-50431

DEBTOR

VAN METER INSURANCE, LEXINGTON, INC.

AND BURNETT & ASSOCIATES, INC. PLAINTIFF

VS. ADVERSARY NO. 93-5142

JOHN W. HAMPTON,

GARY STINGLE, AND

VINCENT A. HAMILTON DEFENDANTS

 

 

 

MEMORANDUM OPINION

 

This matter is pending on the separate motion of each of the defendants for summary judgment.

The complaint alleges that each of the defendants, John W. Hampton, Gary Stingle, and Vincent A. Hamilton, entered into a Sales Representative Employment Agreement with the debtor, Burnett & Associates, Inc., which contains a covenant not to compete. The complaint further alleges the defendants are willfully violating the covenant. The court is asked to enjoin the defendants from violating the covenant not to compete or, in the alternative, if it is determined that there is an adequate remedy at law, to require the defendants to pay damages for harm to the plaintiffs and to the status of the plan of reorganization.

The complaint alleges that the plaintiff, Van Meter Insurance, Lexington, Inc., purchased the assets of Burnett & Associates, Inc., including the employment contracts with the defendants as evidenced by a Bill of Sale, and thus has standing as the real party in interest. The complaint alleges the actions of the defendants have greatly impaired the business operations of Van Meter Insurance, Lexington, Inc., as successor to the debtor, and in turn are impairing the success of the debtor's plan of reorganization as confirmed by the court.

FINDINGS OF FACT:

The debtor, Burnett & Associates, Inc., an insurance agency, filed a petition for relief under chapter 11 of the Bankruptcy Code in this court on March 15, 1993.

Prior to or concurrently with the filing of the petition the debtor entered into a Purchase Agreement and a Management Agreement with Insurance Associates of Kentucky, Inc., a newly formed Kentucky corporation, the incorporators of which were H. Anthony Cecil, Jr. and Robert W. Hoenscheid, employees of the debtor. Disclosure Statement for Third Amended Plan, pages 15-16.

With the petition the debtor filed a plan of reorganization, a liquidation plan that incorporated the Purchase Agreement whereby Insurance Associates proposed to purchase the insurance policies, accounts receivable, cash, a certificate of deposit securing a letter of credit to American Bonding Company, the customer list and agency agreements of the debtor, free and clear of liens and encumbrances (hereinafter referred to as the "Purchased Assets"). The purchase price was to be paid out of future earnings of the agency over a seven year period by allocating a percentage of the earnings from renewal premiums during that period to the purchase price.

Under the Management Agreement, Insurance Associates of Kentucky, Inc. was to manage the affairs of the debtor until confirmation of the plan. Following a hearing on March 19, 1993 the court approved the agreement for Insurance Associates to manage the affairs of the debtor pending confirmation of the plan.

The debtor's plan of reorganization and the Purchase Agreement between the debtor and Insurance Associates were amended from time to time to take into account the fact that under a competitive bidding procedure approved by the court the price Insurance Associates was required to pay to outbid others for the Purchased Assets was substantially increased. It was apparently while this bidding procedure was in progress that Van Meter Insurance Agency, Inc. purchased 50% of the stock of Insurance Associates of Kentucky, Inc. and thereby provided an infusion of capital that made it possible for Insurance Associates to bid successfully for the Purchased Assets of the debtor. By order entered on May 20, 1993 the court authorized the sale of the Purchased Assets to Insurance Associates of Kentucky, Inc. pursuant to the terms of a revised offer in letter form dated May 14, 1993. The debtor in possession executed a Bill of Sale dated May 20, 1993 conveying the Purchased Assets to Insurance Associates of Kentucky, Inc. Subsequently, on October 15, 1993, an order was entered confirming the debtor's Third Amended Plan of Reorganization which provides for payment of the purchase price during the seven-year life of the plan from a percentage of renewal premiums to be accumulated and set aside for disbursement to creditors of the debtor by Insurance Associates of Kentucky, Inc.

Apparently, Insurance Associates of Kentucky, Inc. has transferred its rights under the Purchase Agreement to the plaintiff, Van Meter Insurance, Lexington, Inc., which now owns and operates an insurance agency at the location formerly occupied by the debtor, utilizing the Purchased Assets.

Paragraph 3.4 of the Purchase Agreement provides that one of the conditions precedent to the obligation of Insurance Associates of Kentucky, Inc. to pay the purchase price for the Purchased Assets was --

3.4 Covenants not to Compete, Waived. Full and complete waiver and release of employees, as of the Petition Date, identified by Associates, from any obligations contained and set forth in any covenant not to compete, by and between B&A and the employee or agent identified by Associates.

 

There is no indication in the record as to which employee may have been identified by Associates as released from the obligations of any covenant not to compete. Presumably, former employees of the debtor who now work for Insurance Associates or Van Meter Insurance, Lexington, Inc., who in the course of their employment solicit former customers of the debtor, should be released from the force and effect of the covenant.

In Schedule G to its petition for relief under chapter 11 of the Bankruptcy Code the debtor did not list the employment agreements with the defendants as executory contracts.

It appears from the record that the defendant John W. Hampton was employed as a sales representative by the debtor from May 1990 until February 18, 1993. He resigned his position approximately one month prior to the March 15, 1993 commencement date of the debtor's chapter 11 case. See Hampton's affidavit filed November 18, 1994 in support of his motion for summary judgment. Hampton began working for Powell-Walton-Milward Insurance Agency of Lexington, Kentucky, in February 1993. Deposition of Hampton, Jan. 25, 1995, pg. 30.

The defendant Gary Stingle began his employment with the debtor on January 1, 1985. He voluntarily terminated his employment with the debtor on June 15, 1993. He began work at the Lexington office of Schmidt Insurance Agency on June 16, 1993. Deposition of Stingle, Jan. 25, 1995, pgs. 12-13.

The defendant Vincent A. Hamilton worked as a sales representative for the debtor from September 1990 until March 19, 1993, on which date he became employed by the Underwriters Group at Anchorage, near Louisville, Kentucky. Deposition of Hamilton, Jan. 24, 1995, pgs. 10, 23-26.

In September of 1992, approximately six months prior to the commencement of the debtor's chapter 11 case, each of the defendants signed a Sales Representative Employment Agreement with the debtor, which provides:

 

WHEREAS, Burnett is in the business of selling insurance products in the Commonwealth of Kentucky (the "Business");

 

WHEREAS, Burnett possesses and uses technical methods, special sales techniques, confidential and proprietary customer lists, confidential and proprietary information, Trade Secrets (as defined in the Uniform Trade Secrets Acts and judicial interpretations thereunder) in its Business; and

 

WHEREAS, Employee desires to be trained and/or employed as a sales representative for Burnett and be exposed to Burnett's special technical methods, special sales techniques, confidential and proprietary customer lists, confidential and proprietary information and Trade Secrets used by Burnett in its Business.

 

NOW THEREFORE, in consideration of the mutual promises herein contained, the parties hereto agree as follows:

 

1.0 Employment of Employee. Burnett hereby employs Employee to perform the Duties hereinafter defined, and Employee hereby accepts such employment and agrees to perform such Duties, on and subject to the terms and conditions hereinafter set forth.

 

2.0 Term of Employment. The term ("Term") of Employee's employment by Burnett shall commence on the date first above written and terminate on the date as provided for herein.

 

. . . .

 

6.0 Termination of Employment. The Term, and Burnett's employment of Employee shall end on the date of the occurrence of any one or more of the following events:

 

(a) the death of Employee; or

 

(b) Burnett determines Employee shall have become so disabled so as to be unable to perform Employee's Duties; or

 

(c) the liquidation, or discontinuance of a substantial portion or all of the business, of Burnett; or

 

(d) the mutual written consent of the parties; or

 

(e) Burnett determines Employee shall have willfully failed to perform Employee's Duties; or

 

(f) the election of Burnett to terminate the Term and Burnett's employment of Employee, and fifteen (15) days following the date of notice of such election from Burnett to Employee; or

 

(g) the election of Employee to terminate the Term and Employee's employment with Burnett, and fifteen (15) days following the date of notice of such election term Employee to Burnett.

 

7.0 Employee's Records - Property of Burnett. Upon the termination of the Term and of Burnett's employment of Employee, all records, books of account, customer lists, sales information, supplier lists, Trade Secrets, sales techniques, technical methods, technical information and the like utilized by Employee in the performance of Employee's Duties shall remain the property of Burnett and Employee shall not be entitled to make any copies of such records.

 

8.0 Non-Competition Covenant.

 

8.1 Employee agrees that for and during the period beginning on the date of termination ("Termination Date") of the Term and of Employee's employment under this Agreement (regardless of the basis for the termination of the Term and Employee's employment hereunder) and ending on the [^] 180th day following the 2nd anniversary thereof ("Non-compete Term"), Employee shall not during the Non-Compete Term:

 

(a) within the Commonwealth of Kentucky (i) sell, solicit, offer for sale, or broker, insurance products, or (ii) provide related services in connection with the sale, brokerage or solicitation of insurance products [^] to Persons whom acquired any insurance products from Burnett at any time during the three hundred sixty-five (365) day period immediately preceding the Termination Date [^]; or

 

(b) induce any Person to cease or diminish such Person's purchase or use of insurance products or services from, by or through Burnett by any means whatsoever, or to make negative comments regarding Burnett's business; or

 

(c) own, manage, operate, control, be employed by, participate in, or be connected in any manner with the ownership, management, operations or control of, or work in any capacity, directly or indirectly, for any [^] Person, which sells, solicits, offers for sale, any insurance products to any Person who acquired any insurance products from Burnett at any time during the three hundred sixty-five (365) day period immediately preceding the Termination Date; or

 

(d) except as provided for in Paragraph 8.2 hereof, directly or indirectly, actually or constructively, utilize, the Proprietary Information to any Person, or disclose the Proprietary Information to any Person.

 

8.2 Proprietary Information. In order to effectively execute Employee's responsibilities pursuant to this Agreement, Employee has been provided with Proprietary Information of Burnett and will in the future be permitted access to additional Proprietary Information. Employee agrees to treat all Proprietary Information provided to Employee as confidential and proprietary to Burnett; to exercise due diligence in the protection of the Proprietary Information; and not to disclose any of the Proprietary Information to any Person, unless such Person is a director, officer, or supervisory employee of Burnett or authorized in writing to do so. Employee shall use the Proprietary Information only pursuant to this Agreement and to properly effectuate Employee's Duties and Obligations to Burnett hereunder and not to effectuate transactions for Employee's personal benefit or for the benefit of any Person other than Burnett without Burnett's prior written consent. All Proprietary Information, together with all notes, copies or abstracts taken or made by Employee thereof, shall be, constitute and remain the sole property of Burnett and shall be returned to Burnett promptly upon the earlier of (i) the written request of Burnett, or (ii) the date the Term and Burnett's employment of Employee ends. In no event shall any copies of written materials constituting Proprietary Information be made without the prior written consent of Burnett.

 

8.3 Remedies. It is specifically understood and agreed that (a) if any part of the non-competition provisions contained in this Agreement is held to be unenforceable, the same shall not affect the remaining provisions of this Agreement or the enforceability thereof, and if such unenforceability relates to the duration or scope of the non-competition provisions of this Agreement, the court making such determination shall have the power to reduce the duration and/or scope of such provisions to make the same reasonable and enforceable; (b) in the event Employee commits a breach (or threatens to commit a breach) of any of the non-competition provisions or Proprietary Information provisions of this Agreement, Burnett shall have the right to have the non-competition provisions or Proprietary Information provisions of this Agreement, as the case may be, specifically enforced by any court having jurisdiction in the premises (in addition to and not in lieu of any other rights and remedies available to Burnett herein, at law or in equity); (c) the remedy at law for any breach of the non-competition or Proprietary Information provisions of this Agreement may be inadequate, and Burnett shall be entitled to seek and obtain injunctive relief, in addition to any other remedy it might otherwise have, and (d) Employee shall be responsible to Burnett for reasonable costs and reasonable attorneys fees incurred by Burnett in enforcing the non-competition provisions and Proprietary Information provisions of this Agreement, and in seeking its remedies.

 

. . . .

 

9.0 Miscellaneous

 

9.1 Non-Assignable. This Agreement is personal to Employee and shall not be assigned, transferred, hypothecated or pledged by Employee.

 

 

. . . .

 

9.3 Governing Law. This Agreement shall be construed and enforced in accordance with, and governed by the laws of, the Commonwealth of Kentucky.

 

The Bill of Sale dated May 20, 1993, by which the debtor in possession conveyed to Insurance Associates of Kentucky, Inc. the Purchased Assets of the debtor, identified those assets as including "all other contracts, files, documents and records which are in existence as of the date of this Bill of Sale as described and specifically referenced in the Purchase Agreement and in Exhibit 6 attached hereto and made a part hereof." Listed on Exhibit 6 to the Bill of Sale are the Sales Representative Employment Agreements with the three defendants.

According to their testimony each of the defendants signed the agreement in the belief that their employment would be terminated if they did not do so. Deposition of Hampton, Jan. 24, 1995, pg. 24; Deposition of Stingle, Jan. 25, 1995, pg. 9; Deposition of Hamilton, Jan. 24, 1995, pgs. 46-47. However, Bruce Burnett, the president of the debtor, denied that he ever implied that the defendants' employment would be terminated if they did not sign the agreements. Deposition of Bruce Burnett, Feb. 20, 1995, pg. 63. Burnett was unable to identify any special training or benefits the defendants received after executing the agreements. Deposition of Bruce Burnett, Feb. 20, 1995, pgs. 108-109.

The debtor was experiencing financial difficulties in September of 1992 when the defendants signed the agreements in question. Deposition of Burnett, Feb. 20, 1995, pgs. 36-37, 71, 90.

According to the testimony of Bruce Burnett, the president and principal owner of the debtor, a number of employees left the insurance agency in 1989 or 1990. At that point he decided that any new employees hired would be required to sign a non-compete agreement, and that current employees likewise would be required to sign such an agreement. Deposition of Burnett, Feb. 20, 1995, pg. 56. However, it was not until 1992 that the attorneys for the debtor completed drafting and revising the form Sales Representative Agreement. Deposition of Burnett, Feb. 20, 1995, pgs. 40, 55. Burnett was involved in discussions to sell the insurance agency during the period of time the defendants were being asked to sign the Sales Representative Employment Agreements. Deposition of Burnett, Feb. 20, 1995, pgs. 31-35. The purchaser might not have retained some of the employees. Id.

CONCLUSIONS OF LAW:

Kentucky adheres to the general rule that a contract for personal services is not assignable. Henry v. Hughes, 24 Ky. 453, 1 J.J. Marsh 453 (1829); Davenport v. Gentry's Admr., 48 Ky. 427, 9 B. Mon. 427 (1849); F. Haag & Bro. v. Reichert, 134 S.W. 191 (Ky. 1911). Consequently, had the defendants remained in the employment of the debtor, the debtor in possession could not have assumed and assigned these Sales Representative Employment Agreements without the consent of the defendants. 11 U.S.C. 365(c)(1).

Only the defendant Stingle was still on the payroll of the debtor when the employment agreements were transferred to Insurance Associates of Kentucky, Inc. pursuant to this court's order and the Bill of Sale dated May 20, 1993. However, under the terms of numbered paragraph 6 of the Sales Representative Employment Agreements, the employment of Stingle terminated on May 20, 1993, because as a result of the sale of the Purchased Assets of the debtor, the business of the debtor was essentially liquidated and discontinued on that date. Paragraph 6.0(c), Sales Representative Employment Agreement.

Clearly, once the employment of the defendants by the debtor terminated, either by reason of their prior resignation or as a result of the liquidation and discontinuance of business of the debtor, the Sales Representative Employment Agreements ceased to be executory. It is not alleged nor does it appear from the record that the debtor is required to perform any future obligations under these agreements. In re Jolly, 754 F.2d 349 (6th Cir. 1978).

The question presented is whether either of the plaintiffs, Van Meter Insurance, Lexington, Inc. or the debtor in possession, has a cause of action for injunctive relief or damages against the defendants for their alleged willful violation of the non-competition covenants of the agreements.

As to the plaintiff Van Meter Insurance, Lexington, Inc., the agreements in question not being executory, and, in any event, even if they were executory, not being assignable without the consent of the defendants, the only right Van Meter arguably acquired as a result of the purchase of these contracts was a cause of action against the defendants for their alleged willful violation of the non-competition covenant.

The cause of action of the plaintiffs sounds in tort. Assuming, without deciding, that this particular tort action against the defendants for violation of the non-competition covenant of the Sales Representative Employment Agreements may be assignable by the debtor in possession, the Bill of Sale does not purport to convey to the purchaser the estate's interest in existing causes of action for violation of the contracts. Gibbons v. Tenneco, Inc., 710 F.Supp. 643, 652-53 (E.D. Ky. 1988). It would appear that any causes of action for such violations of the non-competition covenant as occurred prior to May 20, 1993 and any continuing activity in relation thereto, remain in the estate to be prosecuted at the discretion of the debtor in possession. This is confirmed by the fact the debtor in possession is a joint plaintiff in this action. Thus, the court is not persuaded that the plaintiff, Van Meter Insurance, Lexington, Inc., has standing to assert a cause of action herein.

The court cannot discern from the pleadings what violations of the non-competition agreements, if any, may have occurred after May 20, 1993.

In any event, such causes of action as Van Meter Insurance, Lexington, Inc. may have, based on these agreements, can rise no higher than the debtor's and the estate's rights under the agreements.

There is dictum indicating Kentucky courts might enforce the negative covenant in these agreements at the instance of an employer under appropriate circumstances. Cain v. Gardner, Ky. 185 S.W. 122 (1916).

The non-competition covenant bars the defendants for a period of 2 years after the date of the termination of their employment, from selling, soliciting, offering for sale or brokering, insurance products to customers who acquired insurance products from the debtor during the one-year period immediately preceding such termination date. However, Paragraph 8.3 of the standard form Sales Representative Employment Agreement empowers the court "to reduce the duration and scope" of the non-competition provisions to make them reasonable and enforceable.

The agreements recite that the consideration for the defendants' signing the agreements was their desire to be trained and/or employed as sales representatives for Burnett and to "be exposed to Burnett's special technical methods, special sales techniques, confidential and proprietary information and Trade Secrets used by Burnett in its Business."

All of the defendants had been sales representatives of the debtor, Burnett & Associates, Inc., for some time, Stingle for seven years, and Hampton and Hamilton for two years, when they were persuaded to sign the agreements. Presumably, they were already familiar with the training methods and proprietary information of the debtor.

The standard form Sales Representative Employment Agreement was prepared and revised by attorneys for the debtor over a period of several months before each of the defendants was persuaded to sign the agreement. During this period, Mr. Burnett was attempting to sell his insurance company.

The defendants' testimony indicates they signed the agreements under duress in the belief their jobs would be terminated if they did not sign.

However, Mr. Burnett, the president of Burnett & Associates, Inc., denied that the defendants' signing the agreement was a condition of their continued employment. Mr. Burnett was unable to identify any special in-house training the defendants had received subsequent to their signing of the agreements.

The testimony of Mr. Burnett undercuts any factual foundation on which to base a finding that there was consideration flowing from the debtor to the defendants for their execution of these agreements.

The failure of consideration and the fact these agreements were induced at a time when the survival of the debtor's business was in doubt convinces the court that enforcement of the non-competition covenant under the circumstances here presented is not warranted by the facts of this case. Balancing the interests of creditors in receiving a maximum dividend under the confirmed plan against the right of the defendants to earn a livelihood leads the court to the conclusion that the complaint herein should be dismissed. It seems unfair that the principals of Associates may be empowered to release themselves and perhaps other former employees of the debtor from the covenant not to compete, while at the same time attempting to bind the defendants to the terms of the covenant. Enforcing the covenant may benefit creditors of the debtor to some extent, but the greater beneficiary likely would be the plaintiff, Van Meter Insurance, Lexington, Inc.

There is case law to the effect that a non-competition covenant executed by an employee becomes unenforceable when the employer is no longer in business. Smith, Bell & Hauck, Inc. v. Cullins, 183 A.2d 528, 532 (Vt. 1962); Broome v. Ginsburg, 231 S.E.2d 1 (Ga. App. 1981). In this instance the debtor's business was not sold as a going concern; the business was liquidated. Van Meter Insurance, Lexington, Inc., as successor to Insurance Associates of Kentucky, Inc., purchased certain assets of the debtor's business and not the business as a whole as a going concern. For example, the furniture, fixtures and equipment of the debtor were not included in the sale. The purchaser guaranteed a minimum price to be paid during the purchase period, but otherwise is not responsible for any of the obligations of the debtor.

The automatic stay which went into effect upon the filing of the chapter 11 petition precludes third parties from any act to obtain possession of property of the estate or to exercise control over property of the estate. 1 U.S.C. 362(a)(3). To the extent the defendants may have solicited customers of the debtor during the period the automatic stay was in effect they may be liable for damages for violating the stay. 11 U.S.C. 362(h). Budget Service Co. v. Better Homes of Virginia, Inc., 804 F.2d 289 (4th Cir. 1986). The protection afforded to the debtor and to creditors of the debtor by the automatic stay seems sufficient to the court in this case.

Accordingly, an order shall be entered sustaining the motion of each of the defendants for summary judgment and dismissing the complaint.

Dated:

By the court -

 

________________________________

JOE LEE, CHIEF JUDGE

 

Copies to:

 

W. Thomas Bunch, Esq.

David F. Broderick, Esq.

Robert C. Stilz, Jr., Esq.

Guy M. Graves, Esq.

R. Bruce Stith, III, Esq.

 

93-5142a.b&a

UNITED STATES BANKRUPTCY COURT

EASTERN DISTRICT OF KENTUCKY

LEXINGTON

 

 

IN RE:

 

BURNETT & ASSOCIATES, INC. CASE NO. 93-50431

 

DEBTOR

 

 

 

VAN METER INSURANCE, LEXINGTON, INC.

AND BURNETT & ASSOCIATES, INC. PLAINTIFF

 

VS. ADVERSARY NO. 93-5142

 

JOHN W. HAMPTON,

GARY STINGLE, AND

VINCENT A. HAMILTON DEFENDANTS

 

 

 

ORDER

 

 

In conformity with the memorandum opinion of the court this day entered, the motion of each of the defendants for summary judgment is sustained, and the complaint in this adversary proceeding is dismissed.

Dated:

By the court -

 

_______________________________

JOE LEE, CHIEF JUDGE

 

Copies to:

 

W. Thomas Bunch, Esq.

David F. Broderick, Esq.

Robert C. Stilz, Jr., Esq.

Guy M. Graves, Esq.

R. Bruce Stith, III, Esq.