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In re Ortiz

UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA


January 21, 2009

IN RE: VICTOR M. ORTIZ, DEBTOR.
TOP RANK, INC., A NEVADA CORPORATION, APPELLANT,
v.
VICTOR M. ORTIZ, AN INDIVIDUAL, APPELLEE.

The opinion of the court was delivered by: Margaret M. Morrow United States District Judge

BANKRUPTCY NO. BK 08-10004 RR

ADVERSARY NO. AP 08-01037 RR

ORDER REVERSING DECISION OF THE BANKRUPTCY COURT

Top Rank, Inc. appeals an order of the bankruptcy court granting Victor M. Ortiz's motion for summary judgment on its claims for declaratory and injunctive relief. The order was entered on August 18, 2008, and Top Rank timely appealed.

I. FACTUAL AND PROCEDURAL BACKGROUND

Ortiz is a professional boxer; Top Rank is a boxing promoter.*fn1 In 2005, Ortiz and Top Rank entered into a five-year promotional agreement,*fn2 pursuant to which Ortiz agreed to fight annually in a minimum number of bouts promoted by Top Rank and Top Rank agreed to pay Ortiz a guaranteed minimum purse per bout.*fn3 The agreement contained an exclusivity provision, requiring that Ortiz fight only in televised bouts promoted by Top Rank.*fn4 The contract prohibited Ortiz from fighting in bouts for another promoter for ninety days before or after a televised appearance promoted by Top Rank.*fn5

On January 2, 2008, Ortiz filed a voluntary Chapter 7 bankruptcy petition. On April 21, 2008, he filed an adversary action against Top Rank, seeking declaratory relief, a permanent injunction, and attorneys' fees and costs.*fn6 Ortiz argued that the promotional agreement was rejected by operation of law on March 3, 2008, because the bankruptcy trustee did not assume his obligations under the contract within sixty days after the bankruptcy action was filed, and Top Rank took no action to prevent its rejection within that period.*fn7 See 11 U.S.C. § 365(d)(1) ("In a case under chapter 7 of this title, if the trustee does not assume or reject an executory contract or unexpired lease of residential real property or of personal property of the debtor within 60 days after the order for relief, or within such additional time as the court, for cause, within such 60-day period, fixes, then such contract or lease is deemed rejected").

Ortiz asserted that Top Rank had interfered with his efforts to enter an agreement with Golden Boy Productions, another boxing promoter, by advising Golden Boy that the promotional agreement was still valid.*fn8 Ortiz sought a declaration that he was no longer required to perform his obligations under the promotional agreement and an injunction prohibiting Top Rank from interfering with future negotiations between Ortiz and third parties.*fn9 On August 18, 2008, the bankruptcy court entered judgment in Ortiz's favor on the declaratory and injunctive relief claims.*fn10 It concluded that the trustee's rejection of the promotional agreement terminated all of Ortiz's obligations under the agreement; and that Top Rank's rights under the agreement were limited to seeking monetary damages against the bankruptcy estate.*fn11 The court also found that even if the trustee's rejection of the contract did not terminate Ortiz's obligations, the exclusivity provision was unenforceable under Nevada law as an unreasonable non-competition agreement.*fn12

Top Rank appealed the ruling on August 26, 2008.*fn13 It contends (1) that the bankruptcy court erred as a matter of law in finding that the trustee's rejection of the promotional agreement extinguished all of Top Rank's non-monetary rights under the contract;*fn14 (2) that the court committed reversible error by addressing the reasonableness of the exclusivity provision under Nevada law because Ortiz did not raise the issue in his motion for summary judgment and it did not have an opportunity to conduct discovery or present evidence on the issue;*fn15 and (3) that, even if it was appropriate for the bankruptcy court to address the reasonableness of the exclusivity provision, it erred in finding that the clause was unreasonable as a matter of law.*fn16

II. DISCUSSION

A. Standard of Review

The district court has jurisdiction to hear appeals from final judgments, orders or decrees of the bankruptcy court. 28 U.S.C. § 158(a). When reviewing a decision of the bankruptcy court, a district court functions as an appellate court and applies the standards of review generally applied in federal courts of appeal. In re Webb, 954 F.2d 1102, 1103-04 (5th Cir. 1992). The district court must accept the bankruptcy court's findings of fact unless they are clearly erroneous. A finding is clearly erroneous "'when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed.'" In re Banks, 263 F.3d 862, 869 (9th Cir. 2001) (quoting Anderson v. Bessemer City, 470 U.S. 564, 573 (1985)). The district court reviews the bankruptcy court's conclusions of law de novo. In re Cohen, 300 F.3d 1097, 1101 (9th Cir. 2002); In re Anastas, 94 F.3d 1280, 1283 (9th Cir. 1996).

B. Whether Rejection of the Promotional Agreement Terminated Ortiz's Obligations Under the Agreement

1. Standards Governing Rejection of Executory Contracts in Bankruptcy

The parties' dispute concerns the effect of the rejection of an executory personal contract in bankruptcy; this issue is addressed in 11 U.S.C. § 365. Section 365(a) provides that "the trustee, subject to the court's approval, may assume or reject any executory contract or unexpired lease of the debtor." Section 365(d)(1) provides that "[i]n a case under chapter 7 of this title, if the trustee does not assume or reject an executory contract or unexpired lease of residential real property or of personal property of the debtor within 60 days after the order for relief, or within such additional time as the court, for cause, within such 60-day period, fixes, then such contract or lease is deemed rejected." The parties agree that the promotional agreement was an "executory contract" as that term is defined in bankruptcy law, and do not dispute that it was "deemed rejected" by the trustee's failure to assume it.

Section 365(g) describes the effect of such a rejection: "Except as provided in subsections (h)(2) and (i)(2) of this section, the rejection of an executory contract or unexpired lease of the debtor constitutes a breach of such contract or lease --

(1) if such contract or lease has not been assumed under this section or under a plan confirmed under chapter 9, 11, 12, or 13 of this title, immediately before the date of the filing of the petition; or

(2) if such contract or lease has been assumed under this section or under a plan confirmed under chapter 9, 11, 12, or 13 of this title --

(A) if before such rejection the case has not been converted under section 1112, 1208, or 1307 of this title, at the time of such rejection; or

(B) if before such rejection the case has been converted under section 1112, 1208, or 1307 of this title --

(i) immediately before the date of such conversion, if such contract or lease was assumed before such conversion; or

(ii) at the time of such rejection, if such contract or lease was assumed after such conversion."

The exceptions in sections 365(h) and (i) concern unexpired real property leases and time share agreements. Additionally, section 365(n) provides special rules for the rejection of intellectual property license agreements. Notably, the statute does not specifically address personal services contracts. Thus, section 365(g) governs the rejection of such a contract.

Both parties agree that the promotional agreement was "rejected" as a result of the trustee's failure to assume it. Ortiz argues that rejection of the agreement "terminated" it, and relieved him of any further contractual obligations. The bankruptcy court agreed, concluding that Ortiz had no further obligations under the contract and that Top Rank's remedies were limited to filing a claim for money damages against the estate.*fn17

Top Rank argues that rejection merely constitutes a pre-petition breach of the contract, which does not effect the substantive rights and obligations of the parties.*fn18 Thus, it asserts that in addition to filing a claim against the estate, it may also seek injunctive relief enforcing the agreement's exclusivity provision.

The law regarding rejection of executory contracts in bankruptcy has been the subject of much confusion; one court has described it as "murky and confusing." In re Bergt, 241 B.R. 17, 21 (Bankr. D. Alaska 1999). In the past, courts treated a rejection as a cancellation or termination of the contract.

See Michael T. Andrew, Executory Contracts in Bankruptcy: Understanding 'Rejection,' 59 U. COLO. L. REV. 845 (1988) ("Andrew I") (describing the "common portrayal of the rejection of executory contracts as permitting contract revocation, cancellation, avoidance or the like"). Courts now recognize, however, that rejection does not terminate a contract. See In re Mitchell, 249 B.R. 55, 58 (Bankr. S.D.N.Y. 2000) ("[I]t now appears to be well-settled that rejection does not terminate an executory contract, or necessarily avoid the rights of the non-debtor party under the contract," citing In re Lavigne, 114 F.3d 379, 386-87 (2d Cir. 1997), and In re Drexel Burnham Lambert Group, Inc., 138 B.R. 687, 709 (Bankr. S.D.N.Y.1992) (quoting Michael T. Andrew, Executory Contracts Revisited: A Reply to Professor Westbrook, 62 U.COLO.L.REV. 1, 17 (1991) ("Andrew II")); see also, e.g., In re Onecast Media, Inc., 439 F.3d 558, 563 (9th Cir. 2006) ("[R]ejection of an executory contract in accordance with applicable provisions of the Bankruptcy Act is not the equivalent of rescission," quoting In re Murphy, 694 F.2d 172, 174 (8th Cir.1982)); Matter of Continental Airlines, 981 F.2d 1450, 1459 (5th Cir. 1993) ("Significantly, § 365(g)(1) speaks only in terms of 'breach.' The statute does not invalidate the contract, or treat the contract as if it did not exist. To assert that a contract effectively does not exist as of the date of rejection is inconsistent with deeming the same contract breached"); In re The Ground Round, Inc., 335 B.R. 253, 262 (1st Cir. B.A.P. 2005) ("[T]he Debtor's rejection of the lease of the Property constitutes a breach of the lease as of the petition date. See 11 U.S.C. § 365(g). Accordingly, the rights and obligations of the parties remain intact after a rejection because 'rejection does not change the substantive rights of the parties to the contract, but merely means the bankruptcy estate itself will not become a party to it,'" quoting Andrew I at 848-49); Drexel Burnham Lambert Group, Inc., 138 B.R. at 709 ("Consistent with bankruptcy law's general deference to state-law rights in or to specific property, rejection of a contract does not terminate such rights that arise from rejected contracts. [R]ejection is not itself an avoiding power," quoting Andrew II at 17).

This shift in the treatment of rejection is largely due to courts' adoption of the reasoning set forth in three influential law review articles: Michael T. Andrew, Executory Contracts in Bankruptcy: Understanding 'Rejection,' 59 U. COLO. L. REV. 845 (1988), Jay Lawrence Westbrook, A Functional Analysis of Executory Contracts, 74 MINN. L. REV. 227 (1989), and Michael T. Andrew, Executory Contracts Revisited: A Reply to Professor Westbrook, 62 U. Colo. L. Rev. 1 (1991). See, e.g., Bergt, 241 B.R. at 21 (discussing the articles' influence and observing that they "are so well written and researched that their conclusions have been increasing[ly] adopted by bankruptcy courts (and, more recently by district and appellate courts) to resolve issues involving assumption and rejection of executory contracts. . . . Though the law review articles are secondary legal authority, they are well documented with case law and legislative history, explaining where the courts have gotten off track, and showing the proper analytical path. Most professionals who dabble in bankruptcy and have tried to make sense of § 365 will come away with the feeling of 'that's it!'").

The articles argue that the effect of rejection is best understood by looking at the assume-or-reject decision from the perspective of the trustee of the bankruptcy estate. A bankruptcy trustee, faced with an executory contract, has the option of assuming or rejecting (i.e., not assuming) the contract. 11 U.S.C. § 365(a). Normally, the estate automatically succeeds to the debtor's assets. Because an executory contract is both a potential asset and a potential liability of the debtor, however, it is treated differently. As the Ninth Circuit has explained:

"The trustee's power to reject those executory contracts which he finds burdensome to the bankrupt's estate is an extension of his power to renounce title to and abandon burdensome property which is already a part of the estate. Because executory contracts and leases involve future liabilities as well as rights, however, an affirmative act of assumption by the trustee is required to bring the property into the estate in order to ensure that the estate is not charged with the liabilities except upon due deliberation.

Thus, executory contracts and leases -- unlike all other assets -- do not vest in the trustee as of the date of the filing of the bankruptcy petition. They vest only upon the trustee's timely and affirmative act of assumption." In re Lovitt, 757 F.2d 1035, 1041 (9th Cir. 1985).

See also Bergt, 241 B.R. at 22 ("The assumption of an executory contract has the effect of making the debtors' obligations an administrative expense of the estate. 'Rejection' is merely the trustee's business judgment that the estate should not assume the burden of an executory contract as an administrative expense. Thus, the nondebtor party has an unsecured claim for such nonperformance instead of an administrative expense claim. It is often not advisable for a trustee or debtor-in-possession to assume and obligate itself to pay the obligation in regular U.S. dollars as opposed to rejecting and turning the claim into an unsecured claim payable in what are usually attenuated 'bankruptcy dollars' (i.e., paying 10ó on the $1.00 is probably above average in most chapter 7 cases)," citing Andrew I at 884-89 and Westbrook at 232, 252-53 (footnotes omitted)); In re Chestnut Ridge Plaza Associates, L.P.,156 B.R. 477, 482-83 (Bankr. W.D. Pa. 1993) ("Simply put, 'rejection' is the decision by the estate not to assume a lease because it is not a favorable investment. Rejection does not alter the substantive rights of the parties to the lease. It is merely the decision of the bankruptcy estate not to become a party to the lease thereby avoiding any unfavorable consequences of a bad bargain made prepetition by the debtor," citing Andrew I at 888). The power of the trustee to assume or reject an executory contract originally "ha[d] a clear and fairly modest purpose: to insure that creditors of the debtor who are parties to pending contracts and leases do not become administrative creditors of the estate merely by virtue of the estate's succession to the debtor's property."*fn19 Andrew I at 865.

As section 365 makes clear, the rejection of an executory contract constitutes a breach of the contract.*fn20 "A rejection of an unexpired lease removes the lease from the bankruptcy estate, and 'constitutes a breach of such contract or lease' that is effective immediately before the petition for bankruptcy." Onecast Media, 439 F.3d at 563 (citing 11 U.S.C. § 365(g)). "[R]ejection of an executory contract serves two purposes. It relieves the debtor of burdensome future obligations while he is trying to recover financially and it constitutes a breach of a contract which permits the other party to file a creditor's claim." Id. (quoting In re Rega Props., Ltd., 894 F.2d 1136, 1140 (9th Cir.1990) (in turn quoting In re Norquist, 43 B.R. 224, 225 (Bankr. E.D. Wash.1984) (internal quotation marks omitted)).

As can be seen, one purpose of the rule that rejection constitutes a breach "is to ensure that the non-debtor party to the contract will have rights equivalent to those of other parties who are otherwise similarly situated." Andrew I at 878. Although rejection also serves to relieve a debtor from certain financial obligations, the breach created by rejection under the Bankruptcy Code does not terminate rights and obligations under the contract. Rather, the debtor is relieved because monetary claims for breach are treated as claims against the estate rather than the debtor: "[r]ejection's effect is to give rise to a remedy in the non-debtor party for breach of the rejected contract, typically a right to money damages assertable as a general unsecured claim in the bankruptcy case. Rejection has absolutely no effect upon the contract's continued existence; the contract is not cancelled, repudiated, rescinded, or in any other fashion terminated." Drexel Burnham Lambert Group, 138 B.R. at 708 (quoting Andrew II at 16-17). While courts have explained the rule as providing protection for the debtor, therefore, it is clear that rejection in itself does not eliminate the non-debtor's rights under the contract.

2. Whether Rights to Equitable Relief Survive Rejection

To determine whether a claim for non-monetary relief under an executory contract can be asserted post-bankruptcy against the debtor, a court must look elsewhere than section 365. The "breach" created by rejection is deemed to have occurred immediately prior to the filing of the bankruptcy petition. Onecast Media, 439 F.3d at 563 (citing 11 U.S.C. § 365(g)). For this reason, to the extent that breach of an executory contract gives rise to a claim for money damages, that claim can be asserted only against the bankruptcy estate, not against the debtor. See id. (rejection-as-breach "permits the other party to file a creditor's claim"). Whether the non-debtor party has a right to an equitable remedy that survives bankruptcy turns on whether such right constitutes a "claim" that is dischargeable in bankruptcy. See Mitchell, 249 B.R. at 58-59 ("The plaintiff concedes that any pre-petition breach giving rise to a money damage claim in favor of Mitchell would vest in the estate under § 541(a). Accord Delightful Music Ltd. v. Taylor (In re Taylor), 913 F.2d 102, 106 (3d Cir. 1990). Similarly, any pre-petition breach by Mitchell giving rise to a monetary claim for damages would be discharged. Thus, the appropriate inquiry is not whether the contract is estate property, but whether the debtor's statutory breach of his exclusive performance obligation gives rise to a 'claim' that will be discharged under 11 U.S.C. § 727(b)"); In re Brown, No. Civ.A. 97-5425, 1997 WL 786994, *4 (E.D. Pa. Nov. 26, 1997) (" We must decide whether Death Row has a right to an equitable remedy against Brown which survives bankruptcy. A discharge in bankruptcy releases a debtor's liability for his or her 'debts.' See 11 U.S.C. § 524(a). A 'debt' is defined as a liability on a 'claim.' See 11 U.S.C. § 101(12). . . . Under the Bankruptcy Code a right to an equitable remedy may be a claim only if the remedy 'gives rise to a right to payment.' [11 U.S.C. § 101(5)]; In re Continental Airlines, No. 96-7038, 1997 WL 541985 at *9 (3d Cir. Mar.13, 1997) [ ]. Thus, not all rights to equitable relief against a debtor are subject to discharge in a bankruptcy proceeding").

Bankruptcy law provides for the discharge of a bankrupt's "debts," defined as "liabilit[ies] on [ ] claim[s]." 11 U.S.C. § 101(12); see also Brown, 1997 WL 786994 at *4. The Bankruptcy Act defines a "claim" in relevant part as a "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)(B); see also Brown, 1997 WL 786994 at *4. Thus, "[a]n equitable remedy, such as an injunction, will 'give rise to a right to payment,' and therefore be discharged, if payment of a monetary remedy is an alternative to the equitable remedy." Mitchell, 249 B.R. at 59 (citing In re Ben Franklin Hotel Assocs., 186 F.3d 301, 305 (3d Cir. 1999); In re Continental Airlines, 125 F.3d 120, 133 (3d Cir. 1997); In re Udell, 18 F.3d 403, 408 (7th Cir. 1994); and In re Chateaugay Corp., 944 F.2d 997, 1008 (2d Cir. 1991)). The inquiry for the court, therefore, is "whether monetary payment is a viable alternative for [the non-debtor's] proposed equitable remedy." Ben Franklin Hotel Assocs., 186 F.3d at 305; see also Brown, 1997 WL 786994 at *4 (in determining whether a right to equitable relief is a claim, the court does not apply a "specific formula," bur rather considers whether "damages [are] an adequate substitute" for the equitable remedy).

Brown illustrates the application of this rule to a non-competition clause in a personal services contract. There, executory contracts between Brown, a musician, and his record label, Death Row, were rejected by Brown, acting as debtor-in-possession in a Chapter 11 bankruptcy proceeding. Brown, 1997 WL 786994 at *1-2. Brown sought a declaration that Death Row could no longer enforce the contracts against him. Id. at *1. The bankruptcy court denied declaratory relief and Brown appealed. Id. On appeal, Death Row argued that "its right to equitable relief to prohibit Brown from breaching the non-compete clauses of the various contracts [was] not dischargeable because that right [did] not qualify as a 'claim' under the Bankruptcy Code." Id. at *3. The district court noted that determining whether Death Row's right to prohibit breach of the non-competition clauses constituted a "claim" required consideration of "the remedial purpose, practicality and feasibility of issuing an injunction to enforce the covenants not to compete in the agreements before us . . . .[as] dictated by state law." Id. at * 4. Applying California law, which governed the contract, the court concluded that the non-competition provisions in the agreements were not enforceable in equity. Id. at *6. Accordingly, it held that Death Row's claims under the contracts were dischargeable.

3. The Bankruptcy Court's Decision Regarding the Effect of Rejection

In its brief, Top Rank describes the effect of rejection under section 365 in terms that are consistent with the court's discussion above. It argues that rejection merely constitutes a pre-petition breach that does not terminate the contract or eliminate rights under it.*fn21 Ortiz does not disagree with this interpretation of section 365 as a general matter. Rather, he argues that a different rule applies to personal services contracts, namely, that rejection terminates the agreement.*fn22 The bankruptcy court agreed with Ortiz, holding:

"As a result of the rejection of the promotional rights agreement, [Ortiz] has no remaining obligations under that agreement. Top Rank is limited to filing a claim for monetary damages against the estate, and [Ortiz] is free to enter a promotional rights agreement with any party without restrictions as to rights to televise or broadcast his professional bouts."*fn23

The court relied on four cases in reaching this conclusion. Three of these do large number directly state that rejection effects a "termination" or "cancellation" of a contract; they focus on whether rejection is permissible, not on its effect. Given their detailed analysis as to whether rejection was permissible, however, the cases appear to presume that rejection terminates personal services contracts. In any event, to the extent they implicitly hold that rejection terminates or cancels a contract, the court finds the cases unpersuasive, and elects instead to follow the large number of cases and well-reasoned academic commentary concluding that rejection is merely a pre-petition breach and does not terminate a contract. The court's view in this regard is reinforced by the fact that section 365(g) makes no exception for personal service contracts.

The bankruptcy court relied primarily on Matter of Taylor, 913 F.2d 102 (3d Cir. 1990). Taylor concerned the decision of musician James Taylor, acting as debtor-in-possession in a Chapter 11 bankruptcy proceeding, to reject a music publishing agreement into which he had entered with Delightful Music. Matter of Taylor, 913 F.2d at 103. The contract obligated Taylor, as lead songwriter for the group Kool and the Gang, to compose and perform sufficient material for eight albums, either as a member of the group or as a solo performer. Id. at 104-05. Shortly before filing a bankruptcy petition, Taylor left the group to pursue a solo career; at the time, Kool and the Gang had produced only one album under the contract. Id. at 105. Taylor sought and received approval from the bankruptcy court and the district court to reject the publishing agreement. Delightful argued that the agreement could not be rejected because it was not properly part of the bankruptcy estate. The court disagreed, stating: "It is simply a non sequitur to suggest that a trustee may not reject an executory contract because it is not property of the estate. It is the trustee's decision (whether to assume or reject) that determines whether the benefits of an executory contract will or will not become property of the estate." Id. at 107.

The court framed the question before it as "whether executory contracts for the personal services of the debtor may be rejected under § 365 of the Bankruptcy Code." Id. at 104. As a result, it did not squarely address the effect of rejection; it focused primarily on whether the trustee or debtor in possession had the power to reject the contract. Taylor did hold, however, that Delightful "ha[d] a claim against the debtor's estate for whatever damages the rejection/breach ha[d] occasioned. This claim, like the claims of other creditors, will have to be dealt with in the reorganization plan." Id. at 107. The court did not articulate its rationale for concluding that Delightful's remedies were limited to filing a claim against the estate; it is thus conceivable that the court believed Delightful's remedies were limited because the rejection had "terminated" the contract.

Alternatively, the court may have implicitly found that any equitable rights Delightful had "[gave] rise to a right to payment," 11 U.S.C. § 101(5), and thus were enforceable only as a claim against the estate. Such a rationale would have been consistent with the governing statutes. If Taylor held that Delightful was limited to a claim against the estate because rejection eliminated Taylor's obligations under the contract, however, it was contrary to the weight of authority.

In concluding that Ortiz had no further obligations under his contract with Top Rank, the bankruptcy court also relied on In re Cirillo, 121 B.R. 5 (Bankr. D.N.J. 1990). Cirillo is a brief opinion that, like Taylor, focused on whether a contract had been rejected; the opinion addressed the effect of rejection indirectly, if at all. The court stated simply: "As a result [of rejection], the remedies available to Tice and Levine are limited to those provided in 11 U.S.C. § 365, and to filing a proof of claim with this court. Tice and Levine are thereby enjoined from proceeding with their state court action." Cirillo, 121 B.R. at 7. Because it does not directly address the effect of rejection, Cirillo is unpersuasive for the same reasons as Taylor, on which it exclusively relies.

Additionally, the bankruptcy court cited All Blacks B.V. v. Gruntruck, 199 B.R. 970 (W.D. Wash. 1996), which like Taylor and Cirillo, addressed the power of the trustee to reject a contract rather than the effect of rejection. Citing Taylor, the All Blacks court rejected the idea that "[subsection] 365(c) bars the trustee from either assuming or rejecting the contracts, [with the result that] the contracts [were] . . . not part of the bankruptcy estate and [were] still enforceable." All Blacks, 199 B.R. at 973-74. More importantly, the court did not treat the appellant's right to seek injunctive relief to enforce a rejected personal services contract as an issue determined by the rejection. Rather, it turned to 11 U.S.C. § 101, and considered whether the appellant's right to enforce the musical group Gruntruck's obligations under the personal services contract constituted a "claim" under section 101(12). Id. at 975. The court concluded that Gruntruck's obligations constituted a claim, because damages were an appropriate remedy for breach of the obligations, and "'there[ was] no meaningful distinction between financial obligations and obligations to perform.'" Id. (quoting the bankruptcy court's opinion). If rejection itself had extinguished all Gruntruck's obligations to perform under the rejected executory contract, there would have been no need to determine whether equitable relief to enforce those was obligations was a "claim." This aspect of the court's discussion, therefore, demonstrates that rejection does not automatically terminate the debtor's obligations under the contract or prohibit the non-debtor from seeking equitable relief.

The final case cited by the bankruptcy court -- Cloyd v. GRP Records, 238 B.R. 328 (Bankr. E.D. Mich. 1999) -- does appear to suggest that rejection itself, rather than limitation of the non-debtor's remedies to a claim against the estate, relieves the debtor of the obligation to perform. The Cloyd court rejected the non-debtor's argument that "the debtor may only receive relief by obtaining a discharge pursuant to 11 U.S.C. § 727 rather than [through] rejection of the agreement." Id. at 334. Thus, although Cloyd did not plainly hold that "rejection equals termination," it intimated that rejection relieved the debtor of his contractual obligations. The Cloyd court appeared to believe that this "limitation [on] the trustee's ability to enforce personal service contracts was incorporated under § 365 as a means of protecting debtors against involuntary servitude." As noted, however, the primary purpose for allowing a trustee to reject a contract is to protect the estate from burdensome obligations. While rejection may often have the effect of relieving burdens on the debtor, this is not the primary function of the doctrine. Moreover, it is not necessary to conclude that rejection terminates a debtor's obligations under a contract to protect against involuntary servitude. Executory contracts can be enforced through specific performance only if such relief is available under state law. State law regarding specific performance reflects the same concerns regarding involuntary servitude that Cloyd cited as support for its interpretation of the rejection doctrine. Cloyd's reasoning is therefore unpersuasive, and the court declines to follow it.

In sum, the court concludes that the bankruptcy court's decision that rejection of the promotional agreement, by itself, "terminated" the contract and extinguished Top Rank's ability to seek equitable relief for breach of contract was error. While there are many reasons why equitable relief enforcing a personal services contract may be unavailable, section 365 does not invite a court to invoke those reasons as a basis for treating rejection as a termination of the contract. Because section 365 adopts no specialized rule governing personal services contracts, the effect of rejection of a personal services contract is determined by section 365(g). This statute provides that rejection of an executory contract constitutes a breach of the contract and no more. To determine whether any provisions of the contract remain enforceable against the debtor, rather than as claims against the estate, courts must assess whether the right to an equitable remedy is a "claim" dischargeable in bankruptcy. This in turn requires an inquiry as to whether an equitable remedy is available under state law. Section 365 simply does not speak to which obligations may and may not be enforced post-bankruptcy against the debtor. Consequently, the bankruptcy court's conclusion that the trustee's rejection of the contract between Ortiz and Top Rank terminated the contract and extinguished any claim for breach that Top Rank may have was erroneous.*fn24

C. Whether Resolution of the Reasonableness Issue was Proper on Summary Judgment

This does not end the court's inquiry, however. The bankruptcy court also conducted the analysis suggested by In re Brown to determine whether an equitable remedy was available for breach of the promotional agreement. It held that the exclusivity provision in the agreement was unreasonable and therefore unenforceable under Nevada law, and thus that Top Rank was limited to a claim for monetary damages against the estate.*fn25 Top Rank asserts that this alternate holding was erroneous as well. It argues that (1) the court should not have addressed the reasonableness of the exclusivity provision because it was not raised by Ortiz and because "Top Rank was not given notice [of the court's intention to decide the matter] or the ability to respond"; and (2) that the court's conclusion that the exclusivity provision was unreasonable was erroneous.

1. Standard Governing Summary Judgment on Grounds not Raised by the Moving Party

In general, it is improper for a court to grant summary judgment on grounds not raised by the moving party. See John Deere Co. v. American Nat. Bank, Stafford, 809 F.2d 1190, 1191-92 (5th Cir. 1987) (reversing a grant of summary judgment on the grounds that plaintiff had not presented evidence of damages, where defendant's motion raised only a res judicata defense, and explaining that "[s]ince the district court's grant of summary judgment was not based on grounds advanced by [defendant], and no opportunity was given to [plaintiff] to respond, we must reverse"). In limited circumstances, however, a court can grant summary judgment sua sponte on grounds apparent in the record. See Ervco, Inc. v. Texaco Refining and Marketing, Inc., 422 F.Supp.2d 1084, 1086 (D. Ariz. 2006) ("At issue is whether the Court may grant summary judgment based on an [issue sua sponte]that was evident from the record but not explicitly raised in the moving papers. . . . [S]ua sponte entry of summary judgment is proper if 'there is no genuine dispute respecting a material fact essential to the proof of movant's case,'" citing Buckingham v. United States, 998 F.2d 735, 742 (9th Cir. 1993)); Pfenninger v. Exempla, Inc., 116 F.Supp.2d 1184, 1201 n. 3 (D. Colo. 2000) ("[A] district court in appropriate circumstances may grant summary judgment on a ground not formally raised in a summary judgment motion," quoting Howell Petroleum Corp. v. Leben Oil Corp., 976 F.2d 614, 620 (10th Cir. 1992)). The party against whom summary judgment is granted "must be given reasonable notice that the sufficiency of his or her claim [or defense] will be in issue," however. See Verizon Delaware, Inc. v. Covad Communications Co., 377 F.3d 1081, 1092 (9th Cir. 2004) (quoting Buckingham, 998 F.2d 735 at 742); see also Celotex, 477 U.S. at 326 (district courts may "enter summary judgments sua sponte, so long as the losing party was on notice that she had to come forward with all of her evidence"); Judwin Properties, Inc. v. U.S. Fire Ins. Co., 973 F.2d 432, 436 (5th Cir. 1992) ("A district court may grant a motion for summary judgment sua sponte, provided that it gives proper notice to the adverse party").

"Reasonable notice implies adequate time to develop the facts on which the litigant will depend to oppose summary judgment." Buckingham, 998 F.2d 735 at 742 (quoting Portsmouth Square v. Shareholders Protective Comm., 770 F.2d 866, 869 (9th Cir. 1985)). Reasonable notice also requires that a party have "'a full and fair opportunity to draw the [c]court's attention to facts and authority in support of its position.'" McCoy v. Terhune, No. 2:01-cv-1218-RRB, 2008 WL 802499, *2 (E.D. Cal. Mar. 24, 2008) (quoting Greenwood v. Hartford Life Ins. Co., 471 F.Supp.2d 1049, 1053 (C.D. Cal. 2007)). "Any doubt about whether notice is required . . . should be resolved in favor of the party against whom summary judgment is sought and [to whom] notice must be given." Ervco, Inc., 422 F.Supp.2d at 1086 (citing HS Resources, Inc. v. Wingate, 327 F.3d 432, 441 (5th Cir. 2003)); see also McCoy, 2008 WL 802499 at *2 ("The distinction [between the moving and non-moving party] is significant because the moving party often has 'a full and fair opportunity to draw the [c]court's attention to facts and authority in support of its position,'" quoting Greenwood, 471 F.Supp.2d at 1053).

2. Whether Top Rank Had Notice that the Reasonableness of the Exclusivity Provision Was at Issue

Ortiz did not raise the reasonableness of the exclusivity provision in his motion for summary judgment. The motion asserted only that the promotional agreement had been terminated by the trustee's deemed rejection.*fn26 Ortiz's complaint also addressed only this narrow issue.*fn27 Ortiz contends that it was appropriate for the bankruptcy court to address reasonableness because Top Rank raised the issue in its opposition in a footnote.*fn28 In its opposition, Top Rank summarized the facts of the case and cited Brown, 1997 WL 786994, for the proposition that "rejection [is] the equivalent of a pre-petition breach and [does] not extinguish [an] equitable right of exclusivity."*fn29 In a footnote to this discussion, it stated:

"Brown ultimately determined the record label was not permitted to enforce the covenant not to compete because California statutory law does not permit it. Brown, 1997 WL 786994, at *5-6. The Promotional Agreement here is governed by Nevada law. (Ex. 1, ¶ 26.) Unlike California, Nevada courts enforce reasonable non-compete provisions. See, e.g., Hansen v. Edwards, 83 Nev. 189, 191 (Nev. 1967); see also In re Klein, 218 B.R. 787, 790-91 (Bankr. W.D. Pa. 1998) (whether post-rejection non-compete provision is enforceable must be analyzed under state law)."*fn30

In his reply, Ortiz did not reference this footnote, Brown or Nevada law on the enforcement of covenants not to compete.*fn31 Rather, he continued to argue that he was entitled to summary judgment on the narrow ground that rejection terminated his obligations under the promotional agreement. The bankruptcy court did not ask either party to address reasonableness at the hearing, and Top Rank thus had no notice that the court intended to make it the basis of her alternate ruling. As a consequence, Top Rank did not have a "'full and fair opportunity to draw the [c]court's attention to facts and authority in support of its position'" that the provision is reasonable. See McCoy, 2008 WL 802499 at *2 (quoting Greenwood, 471 F.Supp.2d at 1053). Because Top Rank did not have notice that reasonableness might be decided on summary judgment, and because it was not given a full and fair opportunity to proffer evidence and argument supporting its position on the issue, the bankruptcy court erred in granting summary judgment on the grounds that the exclusivity provision was unreasonable under Nevada law.

3. Whether the Record Was Sufficient to Permit Decision of the Reasonableness Question

"Where . . . the decision of a question of law by the Court depends upon an inquiry into the surrounding facts and circumstances, the Court should refuse to grant a motion for a summary judgment until the facts and circumstances have been sufficiently developed to enable the Court to be reasonably certain that it is making a correct determination of the question of law." Davidson v. Stanadyne, Inc., 718 F.2d 1334, 1339 (5th Cir. 1983) (quoting Palmer v. Chamberlin, 191 F.2d 532, 540 (5th Cir. 1951)): see also Eby v. Reb Realty, Inc., 495 F.2d 646, 649 (9th Cir. 1974) ("[E]ven when the question is denominated one of law, it will not always be proper to enter summary judgment. In certain cases summary judgment may be inapposite because the legal issue is so complex, difficult, or insufficiently highlighted that further factual elucidation is essential for its prudently considered resolution"); Clark v. Union Mut. Life Ins. Co., 692 F.2d 1370, 1377 (11th Cir. 1982) ("[I]f the facts have not been sufficiently developed to enable the court to be certain that it is making a correct determination of the law, or the decision of a question of law by the court depends upon an inquiry into the surrounding facts and circumstances, then summary judgment should not be entered"); Smith v. Grumman-Olsen Corp., 913 F.Supp. 1077, 1086 (E.D. Tenn.1995) (citing Palmer, 191 F.2d at 540). This raises the question whether the reasonableness of the exclusivity provision is a question of fact or law, and whether it was proper for the bankruptcy court to address the issue on the basis of the limited factual record before it.

Whether the reasonableness of a covenant not to compete is a question of law or fact is decided under state law. See Rent-A-Center, Inc. v. Canyon Television and Appliance Rental, Inc., 944 F.2d 597, 600 (9th Cir. 1991) ("In this case, both parties agree to de novo review of the restrictive covenant's reasonableness. Generally, the classification of this issue as legal or factual depends upon state law").

The Supreme Court of Nevada has stated the rule on the reasonableness of a covenant not to compete as follows:

"An agreement on the part of an employee not to compete with his employer after termination of the employment is in restraint of trade and will not be enforced in accordance with its terms unless the same are reasonable. Where the public interest is not directly involved, the test usually stated for determining the validity of the [non-competition] covenant as written is whether it imposes upon the employee any greater restraint than is reasonably necessary to protect the business and good will of the employer. A restraint of trade is unreasonable, in the absence of statutory authorization or dominant social or economic justification, if it is greater than is required for the protection of the person for whose benefit the restraint is imposed or imposes undue hardship upon the person restricted. The period of time during which the restraint is to last and the territory that is included are important factors to be considered in determining the reasonableness of the agreement." Camco, Inc. v. Baker, 113 Nev. 512, 518 (1997) (quoting Hansen v. Edwards, 83 Nev. 189, 191-92 (1967)).

Whether Nevada treats reasonableness as a question of law is not entirely clear, however. In Camco, Inc., the Nevada Supreme Court described the issue as a matter to be decided at trial, suggesting that it was factual in nature. See Camco, Inc., 113 Nev. at 518 ("In determining whether Camco enjoyed a reasonable probability of success on the merits of its case, the court must consider whether the provisions of the non-competition agreements would likely be found reasonable at trial" (emphasis added)); see also Sheehan & Sheehan v. Nelson Malley and Co., 121 Nev. 481, 489 (2005) ("We construe covenants not to compete according to their plain language, and such covenants are enforceable only if they are reasonable under the circumstances" (emphasis added)); see also Rent-A-Center, 944 F.2d at 600 (concluding that reasonableness was a question of fact under Kansas law where "'the test . . . [was] whether the restraint is reasonable under the facts and circumstances of the particular case,'" quoting Eastern Distributing Co. v. Flynn, 222 Kan. 666, 670 (1977)). The Camco court nonetheless appeared to decide reasonableness as a question of law:

"In light of this court's acknowledg[ment] that non-compete covenants are restraints of trade and subject to careful scrutiny when made in an employment context, we hold that the covenant at issue is overly broad as to future territory for possible expansion. Therefore, even though there was consideration to support the Bakers and Grosses' agreements not to compete with SuperPawn, we conclude that Camco did not enjoy a reasonable likelihood of success on the merits of its claim, and thus injunctive relief was properly denied. . . . [W]e . . . conclude that the provisions at issue are unreasonable in territorial scope and therefore unenforceable as against public policy." Camco, Inc., 113 Nev. at 519.

The Nevada Supreme Court has also approved a trial court's resolution of the issue on summary judgment. See Jones v. Deeter, 112 Nev. 291, 293-95 (1996) (addressing the district court's resolution of reasonableness at summary judgment stage and holding that a covenant was "per se unreasonable and therefore, unenforceable"). This supports the view that the issue is a question of law.

Hansen v. Edwards, 83 Nev. 189 (1967), likewise suggests that reasonableness is a question of law. There, the court stated: "It appears that the trial court by granting the injunction decided only that the covenant was valid and reserved the question of reasonableness to the trial on merits. However, a review of the record permits the conclusion that nothing more can be added than is presently known that would affect a determination of that question. The circumstances of this case warrant a confinement of the area of restraint to the boundary limits of the City of Reno and a time interval of one year commencing February 10, 1967, the date of the injunction. . . . We deem the restriction thus modified to be reasonable." Id. at 192-93; but see id. at 193 (Collins, J., dissenting) ("I do not agree that a review of the record of the hearing pertaining to the granting of the injunction now permits us to fix, as a matter of law, the reasonableness of the restraint either as to time or space. . . . We should decide, in my opinion, only that covenants in restraint of trade are not ipso facto void in Nevada under our existing general principles of law. Therefore, the granting of the preliminary injunction pending a determination on the merits was within the lower court's discretion. . . . The reasonableness of the restraint as to time requires a further factual consideration in this case which is not within our province to make initially").

As this review of pertinent decisions indicates, the weight of Nevada authority appears to view reasonableness as a question of law. Nonetheless, Nevada courts have generally not decided the reasonableness of a covenant not to compete solely on the face of the provision at issue. Rather, they have considered other relevant facts in assessing reasonableness. See Camco, Inc., 113 Nev. at 520 (considering the fact that "Camco had no customer contacts or good will established in Bullhead City and had not signed a lease or begun construction of a store in that area" in concluding that the geographic scope of a covenant not to compete was unreasonably broad and unenforceable); Jones, 112 Nev. at 296 (considering the fact that "it appears that developing a customer base for the lighting retrofitting business is difficult" but concluding that a covenant's "five-year duration [was] not reasonably necessary to protect Deeter's business and place[d] too great a hardship on Jones"); Hansen, 83 Nev. at 1 (considering the fact that "[i]n the short time that Hansen opened his office after terminating the employment contract he acquired approximately 180 of Edwards' customers" in assessing the reasonableness of a non-competition clause in dispute between two podiatrists, formerly employer and employee).

It does not appear from the record that the bankruptcy court considered the facts and circumstances surrounding the parties' entry into the agreement, the boxing industry or Ortiz's prominence or place in it in finding the exclusivity provision unreasonable as a matter of law.*fn32 Rather, it examined the terms of the contract and determined that it was "by and large extremely one sided."*fn33

The court did observe that enforcement of the exclusivity provision might harm Ortiz's career.*fn34 The record is devoid of evidence regarding the extent to which the provision is necessary to protect Top Rank's business, however. The court therefore concludes that it was not appropriate for the bankruptcy court to decide the reasonableness of the exclusivity provision based solely on the incomplete record before it. See Eby, 495 F.2d at 649 (summary judgment on a question of law is inappropriate where the legal issue is "so . . . insufficiently highlighted that further factual elucidation is essential for its prudently considered resolution"); see also Davidson, 718 F.2d at 1339; Clark,692 F.2d at 1377; Smith, 913 F.Supp. at 1086; Mitchell, 249 B.R. at 60 (noting that a non-debtor's entitlement to injunctive relief to enforce a non-competition provision was "a decision which . . . [was] difficult to reach in a vacuum").

Both because Top Rank lacked adequate notice of the bankruptcy court's intention to rule on reasonableness and because the record was not sufficiently developed for considered resolution of the issue, the bankruptcy court's decision that the exclusivity provision was unreasonable must be reversed.

III. CONCLUSION

For the reasons stated, the decision of the bankruptcy court is reversed. The case is remanded for further proceedings consistent with this order.


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