Opinion
Case No. 01-61119-A, Chapter 11
April 1, 2002
MEMORANDUM OPINION AND ORDER
This matter is before the Court on Mr. Stiller's request for the Court to order the debtor to assume an executory lease contract and a related covenant not to compete. The lease is for a bowling center in Norwalk, Connecticut and the Covenant Not to Compete (the "Covenant") is between Henric Segers, Richard Stiller and the debtor, as successor lessee of the premises. The Court has jurisdiction over the issues presented pursuant to 28 U.S.C. § 157(b)(2) and 28 U.S.C. § 1334(b).
BACKGROUND
On July 2, 2001, the debtors filed a voluntary Chapter 11 petition with the Court. The debtor includes AMF Bowling Worldwide, Inc. ("WINC") and its several subsidiaries. AMF Bowling, Inc., the parent of AMF Group Holdings Inc. which owns all of the outstanding common stock of WINC, filed a Chapter 11 petition in this Court on July 30, 2001. At the time of filing its petition, WINC owed approximately $527,000,000 in principal under two series of senior subordinated notes which are publicly traded, and WINC also owed approximately $614,100,000 in principal under a prepetition credit facility provided by a syndicate of banks and other senior secured lenders.
The debtor and its foreign subsidiaries own and operate 517 bowling centers in the United States and in foreign countries, and collectively employ approximately 17,020 full and part-time personnel. The debtor owns and operates bowling centers worldwide, and manufactures billiard and bowling equipment and products, including consumer products and new bowling center packages, that consist of the equipment necessary to outfit a new bowling center.
The foreign subsidiaries of the debtor are not debtors in this proceeding.
An active Unsecured Creditors Committee was appointed on July 17, 2001, and on August 31, 2001, the debtor filed its initial Chapter 11 plan and disclosure statement. On November 7, 2001, the debtor filed its Second Amended Joint Plan of Reorganization, which was further amended and debtor's Second Amended Second Modified Joint Plan of Reorganization was confirmed as a consensual plan on February 1, 2002.
FINDINGS OF FACT
The parties have stipulated as to the operative facts. Richard Stiller ("Stiller") and Henric Segers ("Segers") are the owners of all of the capital stock of Rip Van Winkle Enterprises, Inc., a Connecticut corporation that owned and operated a bowling center on Connecticut Avenue in Norwalk as a tenant of Statecourt Enterprises, Inc. The lease from Statecourt to Rip Van Winkle is dated November 6, 1962 (the "Lease") and has an original term of fifteen years, with the right to renew for up to fifty years through the exercise of ten five-year options. On October 2, 1989, Rip Van Winkle gave a Collateral Assignment of the Lease and a certain sublease between Rip Van Winkle, as sublessor, and Fairfield County Savings Bank, as sublessee, to Stiller to secure the obligations owed him by AMF under the Covenant. The Collateral Assignment provides, in pertinent part, for AMF's guaranty of the obligations of Rip Van Winkle to Stiller under the Collateral Assignment. Approximately a month later, Rip Van Winkle assigned the Lease to AMF, by means of an Absolute Assignment, which makes no reference to the Collateral Assignment. When Rip Van Winkle and AMF entered into the Collateral Assignment on October 2, 1989, Stiller and AMF entered into the Covenant providing for the payment of approximately $736,000 to Stiller over a fifteen year period, during which Stiller was prevented from owning or operating a bowling center within a radius of 50 miles of Norwalk. None of the parties recorded any of the closing documents, until AMF had Rip Van Winkle execute a Confirmatory Assignment of Lease on April 3, 1996 for the purpose of acknowledging the Absolute Assignment and putting to record a document memorializing the lease rights of AMF in the Norwalk bowling center. Again, the Confirmatory Assignment makes no reference to the Covenant or the Collateral Assignment.
Although both Stiller and Segers were parties to the Covenant, only Stiller is a party in this action. Therefore, we only address Stiller's relationship with the debtor. Reportedly, Segers now serves as an employee of AMF. See Post-Trial Memorandum of Stiller, p. 17.
AMF paid the requisite sums to Stiller under the Covenant until the filing of its Chapter 11 petition on July 2, 2001. No post-petition payments have been made to Stiller and the balance due Stiller under the Covenant is currently approximately $303,600. Stiller maintains that AMF would not have bought the assets of Rip Van Winkle without Stiller entering into the Covenant, and Stiller alleges the consideration he was to receive under the Covenant is in exchange for the sale of the goodwill of Rip Van Winkle to AMF.
The debtor maintains that the lease of the Norwalk bowling center it obtained from Rip Van Winkle is separate and apart from the Covenant, and Stiller asserts that AMF cannot assume the bowling center lease without also assuming the Covenant. At the closing of the transaction among Rip Van Winkle, AMF, Stiller and Segers, the parties executed a Purchase Agreement transferring all of Rip Van Winkle's assets to AMF, a collateral assignment of the lease and sublease for the bowling center from Rip Van Winkle to AMF and the Covenant among AMF, Stiller and Segers. Neither the lease, the Covenant nor the Collateral Assignment to secure to Stiller the obligations AMF owed to Stiller and Segers makes any reference to the other operative documents executed in connection with the lease of the Norwalk bowling center.
CONCLUSIONS OF LAW
The issue before the Court is whether the lease documents and the Covenant must be considered as one legally binding agreement or considered to be a group of independent contracts. If they are a unitary, indivisible agreement, i.e. the Covenant is an integral part of the lease due to the Collateral Assignment, then, AMF must assume both in order to obtain the benefits of the Norwalk bowling center lease, and the payments due Stiller under the Covenant take on the status of mandatory post-petition payments in parity with the rental payments for the center. 11 U.S.C. § 365(d)(3). Stiller argues that AMF cannot assume the Lease and reject the Covenant, which is the expressed intention of AMF.
It is clear to this Court that a non-compete agreement is not an executory contract. After the agreement is signed, the only obligations of the parties remaining are the payment of money on one hand and the requirement of not competing on the other hand. As such, a non-compete agreement is not subject to assumption under 11 U.S.C. § 365(a). See In re Lubrizol Enterprises, Inc., 756 F.2d 1043 (4th Cir. 1985) and In re Andrews, 80 F.3d 906 (4th Cir. 1996).
The determination of contract severability must be made in accordance with state law. The Covenant, the Lease and all of the other operative documents are silent as to what law may apply; however, the Purchase Agreement sets forth that it shall be governed by the laws of Connecticut, but it expired at the closing of the purchase of the assets of Rip Van Winkle by AMF in the Fall of 1989. Nonetheless, we find Connecticut law governs the interpretation of these contracts.
Under Connecticut law, the question of contract interpretation is generally a question of fact because it requires review of the parties' intent. See Levine v. Massey, 654 A.2d 737 (Conn. 1995). Yet, when the contract language is specific, "the determination of what the parties intended by their contractual commitments is a question of law." Id. at 740 (internal quotation omitted). Thus, when only one possible interpretation of the contract can be made, a "court need not look outside the four corners of the contract . . ." to determine its meaning. Hedberg v. Pantepec Int'l, Inc., 645 A.2d 543, 548 (Conn.App.Ct. 1994). Under Connecticut law, this Court cannot "torture words to impart ambiguity where ordinary meaning leaves no room for ambiguity." Levine, 654 A.2d at 741 (internal quotation omitted). We find the language used in the various agreements at issue here is clear.
As to the severability issue surrounding the various agreements between Segers, Stiller, Rip VanWinkle and AMF, we must again look to Connecticut law which provides:
As a general rule, it may be said that a contract is entire, when by its terms, nature, and purpose, it contemplates and intends that each and all of its parts and the consideration shall be common each to the other, and interdependent. On the other hand, it is the general rule that a severable contract is one in its nature and purpose susceptible of division and apportionment. The determinative test is in ascertaining from the language used, read in light of the surrounding circumstances, what was the intention of the parties.
Bridgeport Jai Alai, Inc. v. Autovote Sys., Inc. (In re Bridgeport Jai Alai, Inc.), 215 B.R. 651, 657 (Bankr.D.Conn. 1997) (quoting Hartford-Connecticut Trust Co. v. Cambell, 111 A. 864 (Conn. 1920)). We must determine whether the parts and consideration that make up the contracts are common or independent of each other. See Venture Partners, Ltd. v. Synapse Technologies, Inc., 679 A.2d 372, 377 (Conn.App.Ct. 1996).
Therefore, we must look within the four corners of all of the operative documents to determine (1) if they are supported by the same consideration; (2) if they cover the same subject matter; (3) if they involve the same parties; and (4) if read together, they all have the same purpose. The intent of the parties must be determined from the contents of the documents. See In re: Integrated Health Services, Inc., No. 00-389 to 00-825, 2000 Bankr. LEXIS 1310 (Bankr.D.Del. July 7, 2000). In that case, one of the debtors was a lessee under three facilities leases executed on June 21, 1995. On the same day, an executive of the parent company of the three lessors executed a Non-Competition Agreement with the debtor, prohibiting the executive, inter alia, from leasing other premises to other health care providers for a period of ten years. As consideration for the non-compete agreement, the debtor was to pay the executive $50,000 per year for the ten years of the prohibition agreement. The issues facing the Delaware court are the same ones we must decide in the case sub judice.
On September 6, 1989, Rip Van Winkle, and its shareholders, Stiller and Segers, and AMF entered into a Purchase Agreement whereby Rip Van Winkle sold certain of its assets to AMF. In the Purchase Agreement's recitals, reference is made to the non-compete: "WHEREAS, to induce AMF to enter into this Agreement, the Rip Van Winkle Stockholders have agreed not to compete with AMF or Rip Van Winkle". AMF bought all of the assets of Rip Van Winkle used in the operation of the Norwalk bowling center as of May 23, 1989. A non-exhaustive list of the assets to be conveyed was recited in the agreement, including the Lease. In addition, Article 3 of the Purchase Agreement defined the covenant not to compete required by AMF:
3. Covenant Not to Compete.
Each Rip Van Winkle Stockholder will covenant in an agreement reasonably acceptable to AMF's counsel, that he will not, directly or indirectly, as owner, partner, shareholder, officer, employee, or in any other capacity, engage or otherwise participate in a business involving bowling centers (except for the operation of Sleepy Hollow Lanes, West Haven, Connecticut) within a radius of fifty (50) miles in any direction from the city limits of Norwalk, Connecticut for a period of fifteen (15) years from and after the execution of this Agreement. AMF agrees to pay the Rip Van Winkle Stockholders, on the terms set forth in Exhibit C attached hereto, the total sum of ONE MILLION FOUR HUNDRED AND FORTY THOUSAND DOLLARS ($1,440,000.00) for their covenant not to compete. Payment shall be secured by a collateral assignment of the Bowling Center Lease and the sublease with Fairfield County Savings Bank.
The Purchase Agreement also provides that the only matters that survive the execution of the agreement are all representations, warranties and agreements made by Rip Van Winkle and its stockholders for a period of three years, as well as all representations and warranties concerning Rip Van Winkle's tax matters.
On October 2, 1989, AMF and Rip Van Winkle entered into a brief Assignment of Agreement purporting to assign all of the lessee's rights and interest under an agreement dated March 3, 1980 between Statecourt Enterprises, Inc. and Rip Van Winkle. No mention is made in that document of the Lease or the Covenant. On the same date, Rip Van Winkle and Stiller and Segers, as secured parties, entered into a Collateral Assignment referring specifically to the Covenant. Stiller and Segers required AMF to secure its obligation to pay them fees under the Covenant by means of a collateral assignment of the Lease and an assignment of AMF's rights under the sublease between Fairfield County Savings Bank and Rip Van Winkle.
The Collateral Assignment indicates that Rip Van Winkle's rights to the Lease and sublease are conveyed to Stiller and Segers as security for the payments due under the Covenant executed for the benefit of themselves and AMF. The Collateral Assignment further provides that should AMF default in its payments to Stiller and Segers under the Covenant, the secured parties shall be entitled to the beneficial enjoyment of the bowling center premises.
The Collateral Assignment was never recorded in the land records of Norwalk, Connecticut. Therefore, Stiller failed to obtain an enforceable lien on the Lease and Sublease to secure the obligations due him from AMF under the Covenant. In fact, AMF did not put to record its legal entitlement to the Lease until it recorded the Confirmatory Assignment and the Assignment of Lease on April 3, 1996. AMF recorded the lease for the sole purpose of putting to record the rights of AMF to the Norwalk bowling center premises as established in the previous assignment of the Lease. The Confirmatory Assignment references the Covenant: ". . . and that AMF has been and shall continue to be bound by and to perform each and every covenant, agreement and condition of the Release of Premises from Lease and Covenant Not to Compete as such agreements are referenced and defined in the Assignment [of Lease]." The Assignment of Lease dated the 9th day of November, 1989, also references the Covenant as being binding on AMF.
Applying the test set out in In re Integrated Health Services, Inc., supra, we find that the purchase of the Rip Van Winkle assets by AMF is supported by consideration in the amount of $810,000, while the separate and substantial consideration to be paid to Stiller for the Covenant is $950,400. The Lease has a separate rent factor from the Covenant that begins in the original Lease at the rate of $48,000 per year, declining to $43,000 a year, and finally ends up at $38,000 per year under the extension option periods. None of these separate contract payments are dependent upon or related to the other.
The Lease and the Covenant do not contain cross-default provisions. In fact, the Lease could not contain such a provision because the Covenant was not in existence when the Lease was executed in 1962. The Covenant does not specifically mention the Lease; it is "self-contained" in that the consideration recited in the Covenant is being paid to Stiller and Segers because:
Stiller and Segers are the sole stockholders of [Rip Van Winkle], are active and knowledgeable managers of Rip Van Winkle Lanes and have developed a valuable relationship with the customers of Rip Van Winkle Lanes which is strong enough to cause those customers to bowl at another center if Stiller and/or Segers worked at or participated in the ownership of a competing bowling center. As a condition to its execution of the [Purchase] Agreement, AMF has required Seller, Stiller and Segers to enter into this Covenant Not to Compete.
The only potential cross-default provision in any of the operative documents is a poorly written attempt to create such a provision in the Collateral Assignment dated October 2, 1989, and AMF's only role in the agreement is as a guarantor of the obligations of Rip Van Winkle to Stiller and Segers. In essence, the Collateral Assignment states that the Lease and the sublease are to be security for the obligations of Rip Van Winkle to Stiller and Segers, and further provides that any default in any payment under the Lease, the sublease or the Covenant can be cured by Stiller and Segers as the secured parties and must be immediately reimbursed to them by AMF and Rip Van Winkle. These constitute cure provisions and not cross-default provisions.
The Lease and the Covenant involve different subject matter. The Lease relates to the operation of the Norwalk bowling center, and the Covenant covers the prohibition of Stiller and Segers from competing with the Norwalk bowling center operations. The performance under the bowling center purchase and lease documents is not intertwined with the obligations under the Covenant.
The Lease covers the rental of the Norwalk bowling center for a period of up to 65 years if all of the option periods are exercised. The initial lease period is for 15 years, and the lessee was granted up to ten successive 5-year option periods. The Covenant requires that Stiller and Segers not compete with the Norwalk bowling center for a period of 15 years. The two contracts have separate and distinct terms, even though the initial terms coincide. Nowhere in either agreement does one depend entirely on the terms and conditions of the other; each are enforceable in a different manner. The Lease contains usual default provisions, and the remedy to AMF should Stiller and Segers violate the prohibition of competition in the Covenant is to enjoin them from further violations of the agreement and to seek damages at law. Each of the agreements stands on its own.
Finally, the Lease and the Covenant have obvious separate purposes for their existence. The Lease is a rental agreement for the Norwalk bowling center, and the Covenant is to prevent Stiller and Segers from competing with the operations of the center for a finite period of time. The Lease originally is between Abraham Rosen and Rip Van Winkle Enterprises, Inc. Later, Rosen assigned its rights as lessor to Statecourt Enterprises, Inc. and Rip Van Winkle assigned its position as lessee to AMF. Thus, the Lease at this time is between Statecourt Enterprises and AMF. The parties to the Covenant are Rip Van Winkle, Stiller, Segers and AMF, and the agreement exists for the benefit of AMF. While the Covenant recites that Rip Van Winkle is a party, nowhere in the document is there specified a duty, benefit or burden involving Rip Van Winkle; it is a nominal party only. Therefore, no identity of parties exists in the Lease and the Covenant.
The draftsmanship of the controlling documents does not evidence an intent of the parties that they are all to be read as one obligation, and we therefore find them to be severable. The Lease and the Covenant are not inextricably bound to each other.
CONCLUSION
The Court has analyzed the documents relating to AMF's use and enjoyment of the Norwalk bowling center in light of Connecticut law and the holding in In re Integrated Health Services, Inc. and concludes that the debtor may assume the Lease for the Norwalk bowling center, which assumption does not operate to elevate the Covenant to a post-petition priority position. The obligations of AMF under the Covenant are not executory, and as a result, it may not be assumed on its own merits. The Lease and the Covenant are severable contracts and as such, debtor may assume the Lease and is not then obligated by 11 U.S.C. § 365(d) to also assume the Covenant. Therefore, for the foregoing reasons, the Motion of Richard Stiller for Order Compelling Assumption of Executory Contract and Performance of Obligations Thereunder is DENIED.
IT IS SO ORDERED.