Anytime Fitness v. Thornhill Brothers
- Case Type:
- Business
- Case Status:
- Reversed and Remanded
- Citation:
- 22-30757 Fifth Circuit (5th Circuit, Oct 27,2023) Published
- Tag(s):
-
- Ruling:
- Whether 11 U.S.C. § 365(f), or any other portion of Title 11, authorizes a bankruptcy court’s approval of a debtor’s
partial assignment of an executory contract? It does not.
- Procedural context:
- After the District Court affirmed the bankruptcy court's approval of the settlement, Anytime appealed before the fifth circuit. The Court of Appeals has jurisdiction to hear Anytime’s continuing appeal under 28 U.S.C. § 158(d). It review not the district court opinion but the bankruptcy court’s judgment and applied clear error review to the bankruptcy court’s factual conclusions and de novo review to the bankruptcy court’s legal conclusions. The Court of Appeals agrees with Anytime that that the settlement violated 11 U.S.C. § 365’s provisions governing the treatment of executory contracts in bankruptcy.
The debtor must first assume such contract or lease in accordance with the provisions of section.365(f)(2)(A). And, even when enabled by a prior assumption, a debtor’s power of assignment is not unqualified. The non-bankrupt party to the contract, the erstwhile contractual counterparty of the debtor-assignor, must be given “adequate assurance” of the assignee’s “future performance.” But, when it comes to assuming an executory contract, the courts have been clear that it’s all or nothing- "An executory contract must be assumed or rejected in its entirety.” And, when a trustee relies on §365(f) to assign an executory contract in bankruptcy, it must assign the contract in whole, not in part.
The Court of Appeals explained that the job of discerning what, if anything can be assigned under § 365(f) decidedly belongs to the bankruptcy judge, the district court, and by extension, the Court of Appeals. The bankruptcy court applied § 365(f) to authorize something the Code forbids—the partial assignment of an executory contract.
- Facts:
- In February 2020, William Flynn filed a personal injury suit against the franchise owner, Thornhill Brothers Fitness,
LLC (“Thornhill”), and named an additional defendant, franchisor Anytime Fitness, LLC (“Anytime”). Anytime Fitness got the complaint dismissed, and the case continued against the franchisee. Just before the trial, Thornhill Brothers filed for bankruptcy and immediately entered into an agreement with the plaintiff. The Bankruptcy Court approved the settlement without notice and a hearing. In the approved settlement Thornhill agreed to sign a document dubbed the “Confession of Judgment,” to be entered in the Louisiana court where the Flynns’ personal injury lawsuit was pending.
In this “confession,” Thornhill admitted to $7 million in total liability to the Flynns. Then Thornhill agreed to assign all rights it had “against Anytime Fitness LLC” to the Flynns, including any rights arising from “the indemnity agreement contained in the Franchise Agreement” between Thornhill and its franchise parent, Anytime. Thornhill otherwise retained the franchise agreement. It granted the plaintiff a new claim against the franchisor, Anytime Fitness, and a new suit against Anytime Fitness was filed.
Anytime then protested in the bankruptcy court, arguing that the approval of the Stipulation, designed to facilitate “recover[y] against Anytime,” violated Anytime’s notice and hearing rights. See Fed. R. Bankr. P. 9019(a). the Bankruptcy court entered a new order ratifying the Stipulation approved. the District Court affirmed the order.
- Judge(s):
- Per Curiam- Richman, Chief Judge, and Southwick and Oldham.
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