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In re Eutsler

United States Bankruptcy Appellate Panel of the Ninth Circuit

December 27, 2017

In re: TERELL W. EUTSLER, Debtor.
v.
TERELL W. EUTSLER, Appellee. BRADY F. CARRUTH; WILLIAM LESLIE DOGGETT, Appellants,

          Argued and submitted on September 27, 2017 at Spokane, Washington

         Appeal from the United States Bankruptcy Court for the Eastern District of Washington Honorable Frederick P. Corbit, Bankruptcy Judge, Presiding

          Christopher L. Dodson of Bracewell LLP argued for appellants Brady F. Carruth and William Leslie Doggett;

          Eowen S. Rosentrater argued for appellee Terell W. Eutsler.

          Before: FARIS, SPRAKER, and TAYLOR, Bankruptcy Judges.

          OPINION

          FARIS, Bankruptcy Judge.

         INTRODUCTION

         Appellants Brady F. Carruth and William Leslie Doggett (the "Minority Shareholders") appeal from the bankruptcy court's denial of their motion for relief from the automatic stay and motion for reconsideration in debtor Terell W. Eutsler's ("Debtor") chapter 13[1] bankruptcy case. They seek to enforce an option agreement to purchase certain stock from the Debtor. We AFFIRM.

         FACTUAL BACKGROUND

         The facts are undisputed. In 1995, the Debtor and Stephen Dorr incorporated Softbase Development, Inc., a closely-held Texas corporation. The Debtor is the president of Softbase and a member of its board of directors.

         Initially, the Debtor and Mr. Dorr each owned half of the stock. In 1998, the Minority Shareholders purchased 49 percent of the stock for $155, 000. Thus, the Debtor and Mr. Dorr each owned 25.5 percent, and the Minority Shareholders each owned 24.5 percent.

         When the Minority Shareholders bought their stock, the parties entered into a Stock Restriction/Buy-Sell Agreement (the "Buy-Sell Agreement"). Among other things, the Buy-Sell Agreement provided that, upon the occurrence of certain "terminating events, " one of which was "the filing of any proceedings for bankruptcy . . . by a Shareholder, " that shareholder was required to give written notice to the corporation and the other shareholders. The corporation then had the option, but not the obligation, to purchase the shareholder's stock at a price based on a formula. If the corporation did not timely exercise the option, then the other shareholders had the same option.

         On March 12, 2015, the Debtor filed his chapter 13 petition in the United States Bankruptcy Court for the Eastern District of Washington. He valued his interest in Softbase at $5, 000. He did not schedule the Buy-Sell Agreement as an executory contract in Schedule G.

         The bankruptcy court confirmed the Debtor's amended chapter 13 plan on June 3, 2015. The form plan provides blanks for the debtor to list assumed and rejected contracts, but the Debtor did not complete either space.

         Mr. Dorr received notice of the bankruptcy filing as one of the Debtor's unsecured creditors. The Debtor did not send notice of his bankruptcy filing to Softbase or the Minority Shareholders. Neither Softbase nor the other shareholders (Mr. Dorr and the Minority Shareholders) exercised an option to purchase the Debtor's stock.

         A year and a half later, on December 16, 2016, the Minority Shareholders filed a motion seeking relief from the automatic stay ("Motion for Relief"). They argued that the Debtor's bankruptcy filing was a "terminating event" that triggered the purchase options in the Buy-Sell Agreement. They claimed that they only discovered the Debtor's bankruptcy case on November 18, 2016, when an inspection of Softbase's records revealed the bankruptcy. Because Softbase did not exercise its right to purchase the Debtor's stock, the Minority Shareholders argued that they were entitled to purchase the Debtor's shares.

         The Minority Shareholders contended that cause existed to lift the stay because their rights under the Buy-Sell Agreement were unaffected by the Debtor's bankruptcy. They argued that the Buy-Sell Agreement was an executory contract within the meaning of § 365(a) and, because the Debtor did not accept or reject the Buy-Sell Agreement in his plan, "the Agreement rode-through Debtor's bankruptcy unaffected." They argued that the ipso facto provision (that triggered the option rights upon the Debtor's bankruptcy filing) was enforceable.

         Alternatively, the Minority Shareholders argued that the shares were not property of the Debtor's estate and were not subject to the automatic stay because the confirmed chapter 13 plan did not address the Buy-Sell Agreement.

         The Debtor opposed the motion. He argued that if he lost his Softbase stock, his employment would terminate and he would have no income with which to fund his plan. He also contended that the thirty-day period for the Minority Shareholders to exercise the purchase option had expired because Softbase had notice of his bankruptcy as of April 2015.[2] Finally, he argued that the Buy-Sell Agreement is not an executory contract under § 365 because the Minority Shareholders failed to exercise their purchase option, which is the only feature of the Buy-Sell Agreement that would give rise to a performance obligation and make it an executory contract.

         At the hearing on the Motion for Relief, the chapter 13 trustee sided with the Debtor and expressed concern that granting the requested relief would ...


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