In re Jz L.L.C.

Page 412

371 B.R. 412

In re JZ L.L.C., Debtor Diamond Z Trailer, Inc., Appellant, v. JZ L.L.C., Appellee.

BAP No. ID-07-1011-KMoR.

Bankruptcy No. 01-03545-TLM.

United States Bankruptcy Appellate Panel of the Ninth Circuit.

Submitted Without Oral Argument on May 23, 2007.

Filed June 18, 2007.

COPYRIGHT MATERIAL OMITTED

Michael Christian, Marcus, Christian & Hardee, LLP, Boise, ID, for Diamond Z Trailer, Inc.

Randal J. French, Bauer & French, Boise, ID, for JZ, L.L.C.

Before: KLEIN, MONTALI, and RIBLET,^* Bankruptcy Judges.

OPINION

KLEIN, Bankruptcy Judge.

We confront the puzzle of the status of an executory contract that was neither assumed nor rejected during a chapter 11 case in which there was a confirmed plan that did not involve transfers of property of the estate or creation of new entities. We conclude that the "ride through" doctrine developed under the former Bankruptcy Act retains vitality in chapter 11 cases when the debtor continues operating and does not change form.

After a chapter 11 case was closed, the reorganized debtor sued in state court to enforce a license that it had granted prepetition regarding the use of its manufacturing technology. The state court declined to act without a bankruptcy court ruling that the license, which had been neither assumed nor rejected during the chapter 11 case, remained in effect. The bankruptcy court ruled that the license contract survives under the "ride through" doctrine, that the debtor has standing to enforce the contract because all property of the estate vested in the debtor on confirmation, and that the reorganized debtor should not be judicially estopped. We AFFIRM.

FACTS

In 1998, JZ L.L.C., dba Zehr Manufacturing ("JZ"), executed a Licensing Agreement with Diamond Z Trailer, Inc. ("Diamond Z"), which the parties agree is an executory contract.

JZ licensed Diamond Z to manufacture, promote, and sell the "Zehr HG 7000" horizontal grinder on an exclusive basis for five years, with two nonexclusive five-year extensions.

The Licensing Agreement also contained a noncompetition clause prohibiting JZ from manufacturing and distributing the Zehr HG 7000 and preventing Diamond Z from developing, manufacturing, distributing, or selling rotogrinders and horizontal grinders except the Zehr HG 7000.

Diamond Z negotiated with JZ to acquire JZ's technology and inventory before, during, and after JZ's chapter 11 case that commenced in November 2001 and closed in April 2003.

JZ's bankruptcy schedules, disclosure statement, and plan of reorganization did not disclose the license, either as an asset or as an executory contract. Nor did JZ reveal that it had, and was continuing to have, negotiations with Diamond Z regarding the sale of its various rights and assets.

Diamond Z had actual knowledge of JZ's chapter 11 case despite not being scheduled or listed as a party to an executory contract. It did nothing to inform the court or the creditors of the situation. Nor did Diamond Z ask the court under 11 U.S.C. § 365(d)(2) to order JZ to determine within a specified time whether to assume or reject the Licensing Agreement.

JZ's chapter 11 plan did not contain a provision assuming or rejecting all executory contracts not previously dealt with. The plan was a simple reorganization in which JZ retained the property of the estate and did not change legal form. No property was transferred. There was no merger or consolidation.

The order confirming JZ's chapter 11 plan, which provided for 100 percent payment to creditors to be financed through future operations, was entered on January 16, 2003. The case was closed on April 14, 2003.

After the fifth anniversary of the Licensing Agreement in 2003, the license became nonexclusive.

No agreement having been reached despite years of effort, JZ sued Diamond Z in Idaho state court on October 4, 2004 (JZ L.L.C. v. Diamond Z Trailer, Inc., No. CV-2004-10005), seeking a declaratory judgment that the Licensing Agreement was still in effect, an injunction, and damages arising from Diamond Z's manufacture of grinders in breach of the Licensing Agreement.

Diamond Z admitted it began producing its own horizontal grinder in June 2003 but asserted JZ lacks standing and should be judicially estopped from enforcing the Licensing Agreement because JZ omitted it from the schedules.

The state court deferred trial until after the bankruptcy court ruled on the bankruptcy issues raised by Diamond Z.

On September 20, 2006, the bankruptcy court reopened the JZ chapter 11 case and entertained JZ's Motion for Order Confirming Ride Through of Executory Contract — Licensing Agreement as a contested matter. Diamond Z contended that both the Licensing Agreement and the subsequent cause of action regarding that agreement remain property of JZ's bankruptcy estate as to which JZ lacks standing because they were not disclosed in JZ's bankruptcy schedules, disclosure statement, or plan of reorganization. Diamond Z also argued that JZ was judicially estopped from bringing the state court action.

The bankruptcy court ruled that: (1) JZ has standing; (2) despite the lack of disclosure, the Licensing Agreement "rode through" JZ's chapter 11 case and remained binding as between the original parties; (3) that the cause of action was not property of the estate because it accrued at Diamond Z's breach in June 2003 after the chapter 11 case was closed; and (4) that, while judicial estoppel appeared to be inappropriate under the facts, the ultimate determination belonged to the state court. An order granting JZ's motion was entered on January 12, 2007.

This timely appeal ensued.

JURISDICTION

The bankruptcy court had jurisdiction via 28 U.S.C. § 1334. We have jurisdiction under 28 U.S.C. § 158(a)(1).

ISSUES

(1) Whether JZ has standing to enforce an unscheduled executory contract.

(2) "Whether the undisclosed Licensing Agreement "rode through" JZ's bankruptcy.

(3) Whether the state court cause of action remains property of the bankruptcy estate.

(4) Whether JZ should be judicially estopped from prosecuting the state court cause of action.

STANDARDS OF REVIEW

We review findings of fact for clear error and issues of law de novo. Litton Loan Serv'g, LP v. Garvida (In re Garvida), 347 B.R. 697, 703 (9th Cir. BAP 2006). Decisions whether to invoke judicial estoppel are reviewed for abuse of discretion. Hamilton v. State Farm Fire & Cas. Co., 270 F.3d 778, 782 (9th Cir. 2001).

DISCUSSION

After dealing with the foundational problem of the obligation to prepare complete schedules, we explain why the chapter 11 debtor has post-bankruptcy standing that a chapter 7 debtor lacks and why the "ride through" doctrine applies here, whereupon the other issues resolve themselves.¹

Context requires that we acknowledge the existence of a brooding presence looming over this appeal. Although there is no merit, for reasons we shall explain, to JZ's view that executory contracts need not be scheduled, there is also no question that Diamond Z, having negotiated with JZ during and after the chapter 11 case with full knowledge of the case and without informing the court or other creditors, is in poor position to display the "clean hands" necessary to invoke equity in order to exploit JZ's omission. The confirmed full payment plan, moreover, also makes it difficult to identify a victim who is complaining. Diamond Z does not speak for the creditors. Its protest that funds that should be directed to creditors are being used to sue Diamond Z is too incongruous to be persuasive, coming from one who could have revealed the Licensing Agreement to the court and the creditors on whose behalf it now tries to protest. We think Diamond Z doth protest too much.

I

The parties debate whether an executory contract is property of the estate as if that question is relevant to the preparation of schedules and to whether the Licensing Agreement was required to be scheduled. It is not relevant to either.

JZ was required to file schedules of assets and liabilities, a schedule of executory contracts and unexpired leases, and a statement of financial affairs, "prepared as prescribed by the appropriate Official Forms." Fed. R. Bankr.P. 1007(a).

Official Form 6, Schedule A ("Real Property"), requires the debtor to list "all real property in which the debtor has any legal, equitable, or future interest." All means all.

Official Form 6, Schedule B ("Personal Property"), requires the debtor to list "all personal property of the debtor of whatever kind." All means all.

Each of those schedules instructs that executory contracts and unexpired leases be listed on Official Form 6, Schedule G ("Executory Contracts and Unexpired Leases"), which requires listing of "all executory contracts and all unexpired leases of real or personal property" to include timeshare interests. All still means all.

It is settled that the debtor has a duty to prepare these bankruptcy schedules and statements "carefully, completely, and accurately" and bears the risk of nondisclosure. Cusano v. Klein, 264 F.3d 936, 946-49 (9th Civ.2001), quoting In re Mohring 142 B.R. 389, 394 (Bankr.E.D.Cal. 1992), aff'd mem., 153 B.R. 601 (9th Cir. BAP 1993), aff'd mem., 24 F.3d 247 (9th Cir.1994); Hay v. First Interstate Bank of Kalispell, N.A., 978 F.2d 555, 557 (9th Cir.1992) (chapter 11 debtor, but not creditors, estopped from prosecuting omitted cause of action).

Every contract to which the debtor is party is encompassed by the scheduling obligation. A contract is either in the asset/liability category or in the executory contract category. For example, a contract that obliges a counterparty to pay the debtor $10,000 per month for 10 years but as to which the debtor has no remaining duties is an asset and is not executory. To be sure, there may be perplexing questions of characterization when it comes to characterizing a contract as asset, liability, or executory. Answering such questions may require careful study of the...