Korley Sears v. Rhett Sears
863 F.3d 973
| 8th Cir. | 2017Background
- In 2007 the Sears family (Rhett, Ronald, Dane and related trusts — "the Searses") sold AFY, Inc. stock to AFY and Korley Sears under a stock sale agreement; Korley executed promissory notes payable to the Searses in annual installments.
- AFY made the first installment but Korley and AFY thereafter defaulted; Farm Credit Services withdrew financing in 2009 and AFY and Korley each filed Chapter 11 petitions in 2010.
- The Searses filed proofs of claim in Korley’s bankruptcy for over $5.2 million based on the sale agreement and notes; Korley objected, claiming the sale agreement was invalid and that the Searses’ post-petition conduct (breach of loyalty/good faith) discharged his obligations.
- The bankruptcy court granted summary judgment allowing the Searses’ claims, finding Korley’s objections precluded or meritless; the district court affirmed; Korley appealed to the Eighth Circuit.
- The Eighth Circuit reviewed the grant of summary judgment de novo and affirmed, holding (inter alia) the sale agreement was not executory, post-petition conduct cannot defeat a filed claim under § 502(b), and any procedural Rule 3001 deficiency did not justify disallowance.
Issues
| Issue | Korley’s Argument | Searses’ Argument | Held |
|---|---|---|---|
| Whether the sale agreement + notes were an executory contract that required rejection before claim enforcement | The contract was executory because Ronald and Dane owed ongoing duties of loyalty and Rhett had related obligations | The Searses substantially performed (delivered stock); remaining loyalty duties are peripheral and not the contract’s essence | Not executory; substantial performance by Sellers means contract not executory |
| Whether post-petition breaches by the Searses (appointing trustee, assisting liquidation) discharged Korley’s prepetition debt | Post-petition inequitable conduct by the Searses breached duties and discharged Korley’s obligations | § 502(b) requires assessment as of petition date; post-petition conduct cannot defeat a filed claim | Rejected; post-petition conduct cannot be used to disallow claims under § 502(b) |
| Whether defenses of impossibility, frustration, or failure of consideration apply because Farm Credit withdrew financing pre-petition | Withdrawal made performance impossible or frustrated contract purpose; thus Korley’s obligations discharged | Lender had contractual/legal right to withdraw; parties did not assume non-occurrence; withdrawal unrelated to Sellers’ performance | Defenses fail; lender’s withdrawal did not make performance impossible or relate to Sellers’ obligations |
| Whether the proofs of claim failed to comply with Rule 3001(c)(2)(A)/Official Form 10 (itemized interest) and thus were not prima facie or should be disallowed | Claims lacked required itemized interest and so were not prima facie and should be rejected | Noncompliance negates prima facie status only; § 502(b) lists allowable disallowance grounds and Rule 3001 noncompliance is not one; claims supported by exhibits | Even if not prima facie, record contained sufficient documentary support and Korley raised no § 502(b) defense; claims allowed |
Key Cases Cited
- Contemporary Indus. Corp. v. Frost, 564 F.3d 981 (8th Cir.) (standard of de novo review on bankruptcy summary-judgment appeals)
- Travelers Cas. & Sur. Co. of Am. v. Pac. Gas & Elec. Co., 549 U.S. 443 (Supreme Court) (claims filed are "allowed" unless disallowed under § 502(b))
- In re Interstate Bakeries Corp., 751 F.3d 955 (8th Cir.) (definition and analysis of executory contracts)
- In re Flanagan, 503 F.3d 171 (2d Cir.) (post-petition conduct cannot disallow a prepetition claim)
- Pepper v. Litton, 308 U.S. 295 (Supreme Court) (pre-Code equitable disallowance of claims; discussed but questioned under modern § 502 scheme)
- Holt v. Howard, 806 F.3d 1129 (8th Cir.) (appellate affirmation may rest on any correct ground supported by the record)