85 F.4th 321
5th Cir.2023Background
- In November 2019 William Flynn was injured using an inversion table at a Thornhill Brothers Fitness (Thornhill) Anytime Fitness franchise; Flynn sued Thornhill and Anytime Fitness in Louisiana state court.
- A state trial court dismissed Anytime with prejudice; Flynn’s claim against Thornhill proceeded and a multi-day jury trial was set for March 21, 2022.
- Five days before trial Thornhill filed a Chapter 11 petition; within 48 hours the debtor submitted a settlement (approved by the bankruptcy court under Rule 9019) that (1) caused Thornhill’s insurer to pay $1 million, (2) included a ‘‘confession of judgment’’ admitting $7 million liability, and (3) assigned Thornhill’s rights against Anytime (not the entire franchise agreement) to the Flynns while Thornhill retained the franchise agreement.
- Anytime learned of the settlement only after the bankruptcy court signed it, objected that the partial assignment violated its rights under 11 U.S.C. § 365 and due process, and obtained a hearing; the bankruptcy court reapproved the settlement and the district court affirmed.
- The Fifth Circuit reversed: it held § 365(f) does not authorize partial assignments of executory contracts, rejected the argument that Rule 9019 compliance or § 105 could cure a § 365 violation, and remanded for further proceedings.
Issues
| Issue | Plaintiff's Argument (Anytime) | Defendant's Argument (Thornhill / Bankruptcy Court) | Held |
|---|---|---|---|
| Whether 11 U.S.C. § 365(f) authorizes partial assignment of an executory contract | § 365(f) permits only whole-contract assumption/assignment; partial assignment is unlawful | The debtor assigned only whatever rights it had against Anytime (so no forbidden partial assignment); § 365(f) allows the assignment made | No. § 365(f) requires assignment of the executory contract in whole; partial assignments are not authorized |
| Whether approval under Rule 9019 (Jackson Brewing test) can validate the settlement despite a § 365 violation | The Rule 9019 settlement cannot override statutory limits in § 365; approval violated affected party’s rights | Compliance with Jackson Brewing balancing justifies approval of the compromise | No. Satisfaction of Rule 9019 does not override statutory requirements of § 365 |
| Whether the bankruptcy court could avoid determining whether Thornhill actually had assignable rights (i.e., ‘‘assignment of nothing’’) | Bankruptcy court must determine what rights (if any) were assigned and whether that assignment is lawful | If Thornhill had no rights to assign, the assignment was harmless; interpretation belongs to another forum | The bankruptcy court erred in deferring that determination; it must decide assignability when authorizing assignments under § 365 |
| Whether § 105 or other catch-all provisions authorize a partial assignment contrary to § 365 | § 105 cannot create substantive powers to circumvent specific Code provisions | General equitable powers permit necessary relief | No. § 105 and catch-alls cannot be used to create substantive rights or remedies inconsistent with the Bankruptcy Code |
Key Cases Cited
- Mission Product Holdings, Inc. v. Tempnology, LLC, 139 S. Ct. 1652 (2019) (discusses executory contracts and effect of rejection in bankruptcy)
- Matter of Provider Meds, LLC, 907 F.3d 845 (5th Cir. 2018) (establishes all-or-nothing rule for assuming executory contracts)
- In re Nat'l Gypsum Co., 208 F.3d 498 (5th Cir. 2000) (debtor assumes contract "cum onere"—with its burdens)
- Stewart Title Guar. Co. v. Old Republic Nat'l Title Ins. Co., 83 F.3d 735 (5th Cir. 1996) (debtor may not accept parts of an executory contract and reject others)
- In re Fleming Companies, Inc., 499 F.3d 300 (3d Cir. 2007) (assignment changes who performs, not the obligation assigned)
- In re Jackson Brewing Co., 624 F.2d 599 (5th Cir. 1980) (Rule 9019 balancing test for approval of compromises)
- Radlax Gateway Hotel, LLC v. Amalgamated Bank, 566 U.S. 639 (2012) (limits use of § 105 where specific Code provisions control)
- N. Pipeline Constr. Co. v. Marathon Pipeline Co., 458 U.S. 50 (1982) (constitutional limits on bankruptcy courts' power)