JOHN CINICOLA; BONNIE K. CASE; PHILIP F. RABINOWITZ; MICHAEL FARRELL; MICHELE R. MATHEWS-MLAKAR; MARSHA FINO; ELLIOT SMITH; HUBERT SHICK t/d/b/a NORTH ALLEGHENY INTERNAL MEDICINE v. WILLIAM J. SCHARFFENBERGER, CHAPTER 11 TRUSTEE, et al.; ALLEGHENY GENERAL HOSPITAL; WESTERN PENNSYLVANIA HEALTHCARE SYSTEM, INC.
No. 00-3318
UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT
April 25, 2001
Precedential or Non-Precedential:
2001 Decisions
4-25-2001
Cinicola v. Scharffenberger
Docket 00-3318
Opinions of the United States Court of Appeals for the Third Circuit
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Recommended Citation
“Cinicola v. Scharffenberger” (2001). 2001 Decisions. Paper 90
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Filed April 25, 2001
UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT
No. 00-3318
JOHN CINICOLA; BONNIE K. CASE; PHILIP F. RABINOWITZ; MICHAEL FARRELL; MICHELE R. MATHEWS-MLAKAR; MARSHA FINO; ELLIOT SMITH; HUBERT SHICK t/d/b/a NORTH ALLEGHENY INTERNAL MEDICINE, Appellants
v.
WILLIAM J.
On Appeal from the United States District Court for the Western District of Pennsylvania D.C. Civil Action No. 99-cv-01327 (Honorable Gary L. Lancaster)
Argued September 13, 2000
Before: SLOVITER, SCIRICA and ALITO, Circuit Judges
(Filed: April 25, 2001)
Klett, Rooney, Lieber & Schorling
Two Logan Square, 12th Floor
18th and Arch Streets
Philadelphia, Pennsylvania 19103
EDWIN L. KLETT, ESQUIRE
Klett, Rooney, Lieber & Schorling
One Oxford Centre, 40th Floor
Pittsburgh, Pennsylvania 15219
Attorneys for Appellants
DAVID I. SWAN, ESQUIRE (ARGUED)
MARK E. FREEDLANDER, ESQUIRE
McGuireWoods
Frick Building, 7th Floor
437 Grant Street
Pittsburgh, Pennsylvania 15219-6002
Attorneys for Appellee, William J. Scharffenberger, Chapter 11 Trustee, et al.
JOHN P. EDGAR, ESQUIRE (ARGUED)
GARY P. NELSON, ESQUIRE
Sherrard, German & Kelly
FreeMarkets Center, 35th Floor
210 Sixth Avenue
Pittsburgh, Pennsylvania 15222-2602
Attorneys for Appellees, Allegheny General Hospital; Western Pennsylvania Healthcare System, Inc.
2
OPINION OF THE COURT
SCIRICA, Circuit Judge.
In this bankruptcy appeal, the issue is whether plaintiffs should have obtained a stay under
This appeal arises from the District Court‘s affirmance of the Bankruptcy Court‘s order approving the assumption of eight physician employment contracts by the Chapter 11 Trustee of a bankrupt health care system and their assignment to another hospital.1 Contending their employment contracts were not assignable, the physicians appealed.
I.
FACTUAL AND PROCEDURAL HISTORY
The Allegheny Health, Education and Research Foundation (“AHERF“), the parent corporation, managed a multi-entity healthcare network in Pittsburgh and Philadelphia. After a decade of acquisitions, the health system grew to more than fifty not-for-profit corporations that operated health care, educational and research institutions. The enterprises included Allegheny University Medical Practices,
Plaintiffs-appellants, Dr. John Cinicola and seven primary care physicians, operate the North Allegheny Internal Medicine medical practice in several locations around Pittsburgh.2 Between 1995 and 1997, the physicians signed contracts with Allegheny Integrated Health Group (now Allegheny University Medical Practices), and The Medical College of Pennsylvania-Hahnemann University (now Allegheny University of the Health Sciences)--both AHERF affiliates.
After AHERF incurred significant losses, many of its affiliates and hospitals in Philadelphia and Pittsburgh filed for bankruptcy on July 21, 1998.3 Some months after his confirmation, William Scharffenberger, AHERF‘s Chapter 11 trustee, together with some non-debtor AHERF affiliates, filed an emergency application with the Bankruptcy Court to approve a settlement agreement. For our purposes, the germane provisions of the settlement agreement involved the sale of assets and the assignment of executory contracts, for over $25,000,000, to the Western Pennsylvania Healthcare Alliance. To assume control of several of AHERF‘s not-for-profit institutions that did not file for bankruptcy, in particular Allegheny General Hospital, the settlement agreement substituted the Western Pennsylvania Healthcare Alliance for AHERF as the institutions’ sole voting member.4 The settlement agreement also provided for the assignment of the physicians’ employment contracts from Allegheny University Medical Practices and Allegheny
In response, the physicians filed omnibus objections with the Bankruptcy Court alleging the proposed assumption and assignment of their contracts to the Western Pennsylvania Healthcare Alliance--without their consent--violated their employment agreements prohibiting assignment to a non-affiliate of AHERF.5 Moreover,
contesting Western Pennsylvania Healthcare Alliance‘s financial viability, the physicians asserted adequate assurance of Western Pennsylvania Healthcare Alliance‘s future performance of their contracts had not been provided as required by
At a non-evidentiary hearing on July 29, 1999 to consider the physicians’ objections, the Bankruptcy Court allowed the trustee to orally amend the settlement agreement to permit the physicians’ contracts to be assigned to Allegheny General Hospital, at the time an AHERF affiliate.6 This substitution was critical because the contracts explicitly prohibited assignment to an entity, like the Western Pennsylvania Healthcare Alliance, not affiliated with AHERF. After the hearing, the Bankruptcy Court authorized the assumption of the physicians’ contracts and their assignment to Allegheny General Hospital (“the Second Order“). Later that same day, the trustee assigned the contracts to Allegheny General Hospital. The Western Pennsylvania Healthcare Alliance then closed on the settlement agreement on August 3, 1999, substituting the Western Pennsylvania Healthcare Alliance for AHERF as the sole and controlling member of Allegheny General Hospital.
Without seeking a stay, the physicians appealed the Bankruptcy Court‘s Second Order to the District Court on August 5, 1999. As noted, the trustee and the Western Pennsylvania Healthcare Alliance closed on the settlement agreement two days earlier. Before the District Court ruled on their appeal, however, the physicians
Because the sale cannot be reversed, the physicians seek vacation of the Bankruptcy Court‘s order approving the assumption and assignment of their employment contracts. Appellees contend the physicians’ claims are constitutionally moot because the sale has been consummated and statutorily moot under
As noted, the physicians unilaterally terminated their contracts with Allegheny General Hospital, now a Western Pennsylvania Healthcare Alliance affiliate. It became clear at oral argument that the physicians seek to invalidate the assignment of their employment contracts to avoid the noncompetition clauses in their contracts that Allegheny General Hospital would now assert.7 The noncompetition clauses prohibit the physicians from working anywhere “within a five (5) mile radius of any medical practice location at which [they] provided primary care services” for AHERF or its affiliates. The covenants arguably bar the physicians from joining Allegheny General Hospital‘s main competitor in Pittsburgh and terminate on October 28, 2001, “two (2) years after the last date” of their employment. Id. When the noncompetition clauses expire, the physicians concede their appeal becomes constitutionally moot.
II.
CONSTITUTIONAL MOOTNESS
Because the physicians unilaterally terminated their employment, the Western Pennsylvania Healthcare Alliance and the trustee contend the physicians’ appeal is constitutionally moot. In the absence of current employment contracts, appellees assert there remains neither a claim to adjudicate nor relief to grant.
Under
To avoid mootness, a claim must (1) present a real legal controversy, (2) genuinely affect an individual, and (3) have
For constitutional mootness to apply, the physicians must have raised no claim on which relief could be granted. We believe relief may be available here. If assignment of their contracts is vacated, the physicians may have a claim for rejection damages.8 Furthermore, the covenants not to compete in the physicians’ contracts may survive their resignations. See In re Klein, 218 B.R. 787 (Bankr. W.D. Pa. 1998) (holding covenant not to compete in rejected franchise agreement remained effective insofar as it was enforceable under applicable law); In re Steaks To Go, Inc., 226 B.R. 35 (Bankr. E.D. Mo. 1998) (holding covenants not to compete in rejected franchise agreements remained enforceable). Moreover, Allegheny General Hospital belies its own mootness argument by unequivocally stating its intention to enforce the noncompetition clauses. See supra note 7. Because potential contractual obligations and damages claims remain, we hold the physicians’ claims are not constitutionally moot.
III.
STATUTORY BACKGROUND
As noted, the trustee assumed the physician contracts and then assigned them to Allegheny General Hospital. The physicians appeal the assignment. Before addressing the legal issues raised by the assignment, we briefly review the relevant sections of the Bankruptcy Code.
A.
11 U.S.C. S 365
Section 365 of the Bankruptcy Code authorizes the trustee to assume or reject executory contracts, enabling “the trustee to maximize the value of the debtor‘s estate by assuming executory contracts . . . that benefit the estate and rejecting those that do not.” L.R.S.C. Co. v. Rickel Home Centers (In re Rickel Home Centers, Inc.), 209 F.3d 291, 298 (3d Cir. 2000); see also
Once the trustee assumes an executory contract,
lease.“). Before an executory contract may be assigned, the trustee first must assume the contract and “adequate assurance of future performance” of the contract must be provided.
There are other protections as well. Section 365(c) places constraints on the assignment rights created under
commercial rather than legal standards.‘” Official Comment 3 to
Uniform Commercial Code S 2-609 (1972 Ed.). What constitutes “adequate assurance” is to be determined by factual conditions; the seller must exercise good faith and observe commercial standards; his satisfaction must be based upon reason and must not be arbitrary and capricious.
Richmond Leasing Co. v. Capital Bank, N.A., 762 F.2d 1303, 1309-10 (5th Cir. 1985) (quoting In re Sapolin Paints, Inc., 5 B.R. 412, 420-21 (Bankr. E.D.N.Y. 1980)); see also In re Carlisle Homes, Inc., 103 B.R. 524, 538 (Bankr. D.N.J. 1988) (“The phrase `adequate assurance of future performance,’ adopted from section 2-609(1) of the Uniform Commercial Code, is to be given a practical, pragmatic construction based upon the facts and circumstances of each case. Although no single solution will satisfy every case, the required assurance will fall considerably short of an absolute guarantee of performance.“) (citations omitted).
rendering performance to an entity other than the debtor or the debtor in possession, whether or not such contract or lease prohibits or restricts assignment of rights or delegation of duties.
12
B.
11 U.S.C. S 363
For sales in bankruptcy,
To promote certainty and finality in bankruptcy sales,
13
The reversal or modification on appeal of an authorization . . . of a sale or lease of property does not affect the validity of a sale or lease under such authorization to an entity that purchased or leased such property in good faith, whether or not such entity knew of the pendency of the appeal, unless such authorization and such sale or lease were stayed pending appeal.
The provision‘s blunt finality is harsh but its certainty attracts investors and helps effectuate debtor rehabilitation. See 3 Collier on Bankruptcy P 363.11. Nevertheless, we have rejected a per se rule “mooting appeals absent a stay of the sale . . . at issue.” Krebs, 141 F.3d at 498 (holding failure to obtain stay of order approving sale of executory contracts by debtor rendered appeal moot because any remedy would affect sale). Instead, we require the satisfaction of two conditions before an appeal becomes moot under
IV.
STATUTORY MOOTNESS
The trustee and the Western Pennsylvania Healthcare Alliance contend the physicians’ appeal is statutorily moot because the assignment of the physicians’ contracts triggered the protection of
First we must examine whether
A.
To recapitulate, although the Bankruptcy Court authorized the assignment of the physicians’ contracts to Allegheny General Hospital under the Second Order (issued July 29, 1999), the Western Pennsylvania Healthcare Alliance gained control of several AHERF affiliates, including Allegheny General Hospital, under the authority of the First Order (issued July 23, 1999). Entered under
The Bankruptcy Code provides debtors with broad authority to assume and assign executory contracts, which we have defined as “a contract under which the obligation
15
of both the bankrupt and the other party to the contract are so far unperformed that the failure of either to complete performance would constitute a material breach excusing the performance of the other.” In re Columbia Gas Sys. Inc., 50 F.3d 233, 238 (3d Cir. 1995) (quoting Sharon Steel Corp. v. Nat‘l Fuel Gas Distrib. Corp., 872 F.2d 36, 39 (3d Cir. 1989)).14 Neither party disputes the executory nature of the physicians’ employment contracts. Moreover
In addition,
We first explored the relationship between
16
another automobile dealer, refused to pay the bankruptcy estate. The bankruptcy court then ordered him to close on the sale, and, in an effort to avoid this obligation, Krebs appealed the debtor‘s initial assumption of the agreements underThere is a nexus between
Even though assignments of executory contracts are governed by
§ 365 and not by the more general§ 363 sales provision, assignments are in fact just a type of sale. Instead of purchasing or leasing property, transactions governed by§ 363 , an assignee purchases a lease. A good faith assignee, therefore stands in the same shoes as a good faith purchaser and as an innocent third party depends on the finality of bankruptcy orders to the same extent as good faith purchasers.15
15. As Judge Sloviter has pointed out, “[T]he same policy concerns are equally applicable to lease assignments and to sales or leases or property. Assignment of a lease is, after all, simply the purchase of a right to lease property.” Slocum, 922 F.2d at 1096 (Sloviter, J., dissenting).
Comco Assocs., SPA 77k L.P. v. Faraldi Food Indus. Ltd., 170 B.R. 765, 769 n.9 (E.D.N.Y. 1994).
Under Krebs, 141 F.3d at 498-99 (executory contracts), and Rickel, 209 F.3d at 301-02 (lease contracts), a party need only obtain a stay pending appeal when the debtor receives authorization to assign and sell executory contracts or leases under both
Other courts have not explicitly extended
The synonymous definitions of assignment and sale add further weight for considering the terms together. An assignment is by definition:
[The] act of transferring to another all or part of one‘s property interest, or rights. A transfer or making over to another of the whole of any property, real or persona, in possession or in action, or of any estate or right therein. It includes transfers of all kinds of property, including negotiable instruments. The transfer by a party of all of its rights to some kind of property, usually intangible property such as rights in a lease, mortgage, agreement of sale or a partnership. Tangible property is more often transferred by possession and by instruments conveying title such as a deed or a bill of sale.
Black‘s Law Dictionary 119 (6th ed. 1990) (citation omitted). A sale by definition is a “revenue transaction where goods or services are delivered to a customer in return for cash or a contractual obligation to pay. Term comprehends transfer of property from one party to another for valuable recompense.” Id. at 1337.
The trustee contends that “the transaction consummated pursuant to the Global Settlement Agreement, including the assumption and assignment of the Contracts by the trustee to AGH [(Allegheny General Hospital)]” involves both
As noted, we have rejected a per se rule which would moot every appeal not accompanied by a stay under
Whichever interpretation best serves
In West, we held
[I]f non-bankruptcy law provides that the government would have to consent to an assignment of the West Contract to a third party, i.e., to someone “other than the debtor or the debtor in possession,” then West, as the debtor in possession, cannot assume that contract. This provision limiting assumption of contracts is applicable to any contract subject to a legal prohibition against assignment.
That is, the “hypothetical test” requires courts to decide whether, under applicable law, assignment to a third party would be forbidden. See In re Catapult Entm‘t, Inc., 165 F.3d 747, 749-50 (9th Cir.) (adopting “hypothetical test“), cert. dismissed, 528 U.S. 924 (1999); In re Catron, 158 B.R. 629, 638 (E.D. Va. 1993) (same), aff‘d without opinion, 25 F.3d 1038 (4th Cir. 1994); but see Institut Pasteur v. Cambridge Biotech Corp., 104 F.3d 489, 493-94 (1st Cir.), cert. denied, 521 U.S. 1120 (1997); In re Cajun Elec. Power Coop., Inc., 230 B.R. 693, 705 (Bankr. M.D. La. 1999) (rejecting “hypothetical test“); In re Lil’ Things, Inc., 220 B.R. 583, 587 (Bankr. N.D. Texas 1998) (same); In re GP Express Airlines, Inc., 200 B.R. 222, 232 (Bankr. D. Neb. 1996) (same); In re American Ship Bldg. Co., Inc., 164 B.R. 358, 363 (Bankr. M.D. Fla. 1994) (same); In re Ontario Locomotive & Indus. Ry. Supplies (U.S.) Inc., 126 B.R. 146, 147-48 (Bankr. W.D.N.Y 1991) (same) (order subsequently vacated on other grounds); see generally Daniel J. Bussel & Edward A. Friedler, The Limits on Assuming and Assigning Executory Contracts, 74 Am. Bankr. L.J. 321 (Summer 2000) (critiquing “hypothetical test“). Citing Pennsylvania law, the physicians note that personal service contracts are assignable only if the employee “either expressly or implicitly by his conduct consented to the assignment.” All-Pak, Inc. v. Johnston, 694 A.2d 347, 351 (Pa. Super. Ct. 1997). Because the choice of law clause in each of their contracts specified Pennsylvania law, the physicians claim the protections in
Notwithstanding the common law assignment rule in Pennsylvania, the physicians’ contracts permitted AHERF to assign their contracts to any AHERF subsidiary without their consent. The physicians’ employment agreements generally provided that “[t]his Agreement . . .
Although the settlement agreement was amended to avoid violating AHERF‘s contractual duties to the physicians, the Western Pennsylvania Healthcare Alliance maintains the trustee lawfully assigned the physicians’ contracts to Allegheny General Hospital. The Western Pennsylvania Healthcare Alliance points out that the physicians contractually consented to assignment of their contracts to any AHERF affiliate. The Western Pennsylvania Healthcare Alliance also maintains it obtained the physicians’ contracts when it lawfully acquired control over Allegheny General Hospital. Hence there was no second assignment. In support, the Western Pennsylvania Healthcare Alliance cites Institut Pasteur, 104 F.3d 489, and abrogated on other grounds, Hardemon v. City of Boston, No. 97-2010, 1998 WL 148382, at *1 (1st Cir. April 6, 1998).
In Institut Pasteur, the debtor sought assumption of a patent license agreement and confirmation of a plan to transfer the debtor‘s stock to an entity that directly competed with the patent‘s licensor. The licensor argued the stock transfer represented a de facto assignment in violation of
The court adopted an “actual performance test” necessitating a “case-by-case inquiry into whether the nondebtor . . . was being forced to accept performance under its executory contract from someone other than the debtor party with whom it originally contracted.” Id. at 493 (internal quotations omitted). The Western Pennsylvania Healthcare Alliance argues its control of Allegheny General Hospital did not alter the physicians’ original contractual obligations, because their employment contracts provided for their assignment to Allegheny General Hospital. Moreover, it contends its purchase of AHERF‘s assets, which included the physicians’ contracts, is analogous to the stock transfer in Institut Pasteur. Yet the Western Pennsylvania Healthcare Alliance‘s analysis would seem to rest on the application of an “actual performance test” which would be at odds with the “hypothetical test” adopted by our circuit.
In the District Court, the physicians requested reversal of the assumption and assignment of their employment contracts as well as a declaration of nonassignability. As noted, the District Court affirmed the Bankruptcy Court‘s order without opinion and without addressing mootness. Consequently, the District Court did not examine the effect, if any, vacating or modifying the assumption and assignment order would have on the sale between AHERF and the Western Pennsylvania Healthcare Alliance. For this reason, we will vacate the order of the District Court and remand this matter to allow it to consider whether the requested relief would affect the validity of the transaction between AHERF and the Western Pennsylvania Healthcare Alliance. Whether our jurisprudence permits the assignment of the physicians’ contracts, and, if so, whether the assignment satisfied the requirements of
V. CONCLUSION
For the reasons stated, we will vacate the order of the District Court and remand
A True Copy:
Teste:
Clerk of the United States Court of Appeals for the Third Circuit
Notes
For the doctors working for Allegheny University of the Health Sciences [(AUHS)], AUHS is substituted for MCP-HU in their contracts.This agreement, and your rights and obligations hereunder, may not be assigned by you. This agreement, and MCP-HU‘s [(The Medical College of Pennsylvania-Hahnemann University)] rights and obligations hereunder, may be assigned and delegated, from time to time, by MCP-HU to AHERF, or to any other subsidiary of AHERF . . . .
The Bankruptcy Court did not issue an order approving this amendment to the settlement agreement. Despite the Bankruptcy Court‘s earlier approval of the settlement agreement, Allegheny General Hospital remained an AHERF affiliate because the Western Pennsylvania Healthcare Alliance had not yet closed on the agreement.No assignment of this Agreement or the rights and obligations hereunder shall be valid without the specific written consent of both parties hereto, except that this Agreement may be assigned by MCP-HU or AIHG [(Allegheny Integrated Health Group)] to any parent, subsidiary or affiliated corporation without prior approval of [the] Physician . . . .
The Court of Appeals for the Fifth Circuit has fleshed out the definition of “adequate assurance” and concluded:
“[A]dequate assurance of future performance” are not words of art; the legislative history of the [Bankruptcy] Code shows that they were intended to be given a practical, pragmatic construction.
The phrase first appears in the legislation proposed by the Commission on Bankruptcy Laws . . . .
The Commission Report explains the language “adequate assurance of future performance” as follows:
The language `is adopted from
Uniform Commercial Code S 2-609(1) .’ What constitutes . . . `adequate assurance of future performance’ must be determined by consideration of the facts of the proposed assumption. Cf. Official Comment 4 toUniform Commercial Code S 2-609 (1972 Edition). It is not intended, however, that any non-debtor party should acquire greater rights in a case under the act than he has outside the act.” Report of the Commission on Bankruptcy Laws of the United States, H.R. Doc. No. 93-137, 93d Cong., 1st Sess. Pt. II 156-57 (1973).Section 2-609 of the Uniform Commercial Code, from which the bankruptcy statute borrows its critical language, provides that “when reasonable grounds for insecurity arise with respect to the performance of either party, the other may in writing demand adequate assurance of future performance . . . .” The Commentaries to the Code note that `adequate’ assurance is to be `defined by
And, the relevant exception to this authority inExcept as provided in subsection (c) of this section, notwithstanding a provision in an executory contract or unexpired lease of the debtor, or in applicable law, that prohibits, restricts, or conditions the assignment of such contract or lease, the trustee may assign such contract or lease . . . .
The trustee may not assume or assign any executory contract or unexpired lease of the debtor, whether or not such contract or lease prohibits or restricts assignment of rights or delegation of duties, if --
(1)(A) applicable law excuses a party, other than the debtor, to such contract or lease from accepting performance from or
The trustee may not assume or assign any executory contract or unexpired lease of the debtor, whether or not such contract or lease prohibits or restricts assignment of rights or delegation of duties, if --
* * *
(1)(B) such party does not consent to such assumption or assignment.
The Bankruptcy Order of July 23, 1999 provides:
Notwithstanding anything in this Settlement Order, the Global Settlement Agreement or any exhibits or schedules thereto, nothing in this Settlement Order or any exhibit hereto shall be deemed to (a) in any way affect, including without limitation, authorizing the assumption, assumption and assignment or rejection of any agreement, including without limitation any executory contract or expired lease between any of AUH-East, AHC, or the Debtors on the one hand, and . . . any of the objecting doctor group represented by Kabal & Geeseman on the other hand . . . . The disposition of any such agreement, including without limitation any executory contracts . . . between any of AUH-East, or the Debtors, on the one hand and any of . . . the objecting doctor group represented by Kabal & Geeseman on the other hand . . . shall be determined by separate order(s) of this Court.
Bankruptcy Order of July 23, 1999 at P 27.
The Krebs court developed this test from an earlier application of mootness protection under
A pre-petition creditor sought to foreclose on the developer‘s assets and opposed the authorization of further credit for the debtor. When the creditor appealed the loan authorizations without obtaining a stay pending appeal, we held, “[I]t is impossible to conclude that section 364(e) in itself requires that an appeal be dismissed if a stay is not obtained.” Id. at 559. With language that mirrors
The reversal or modification on appeal of an authorization under this section to obtain credit or incur debt, or of a grant under this section of a priority lien, does not affect the validity of any debt so incurred, or any priority or lien so granted, to an entity that extended such credit in good faith, whether or not such entity knew of the pendency of the appeal, unless such authorization and the incurring of such debt, or the granting of such priority or lien, were stayed pending appeal.
Because