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In re Sears

United States Court of Appeals, Eighth Circuit

July 18, 2017

In re: Korley B. Sears, Debtor.
Rhett R. Sears; Rhett R. Sears Revocable Trust; Ronald H. Sears; Ron H. Sears Trust; Dane Sears, Appellees, Korley B. Sears, Appellant, U.S. Trustee, U.S. Trustee.

          Submitted: November 15, 2016

         Appeal from United States District Court for the District of Nebraska - Lincoln

          Before COLLOTON, BEAM, and GRUENDER, Circuit Judges.


         Korley Sears, a Chapter 11 debtor-in-possession, appeals a decision of the district court[1] affirming the bankruptcy court's[2] grant of summary judgment for several creditors. The judgment allowed proofs of claim totaling over $5.2 million. We conclude that there is no merit to Korley's several objections, so we affirm.


         In 2007, a group of relatives and related entities owned a significant portion of the shares of a company called AFY, Inc. We refer to these parties-Rhett Sears, the Rhett R. Sears Revocable Trust, Ronald Sears, the Ron H. Sears Trust, and Dane Sears-collectively as "the Searses." Pursuant to a stock sale agreement, the Searses sold their shares of AFY to the company and Korley Sears. In return, Korley signed promissory notes payable to the Searses, which were to be paid in annual installments.

         Ronald and Dane Sears were employees of AFY. The sale agreement included a provision requiring them to continue as AFY employees and to maintain loyalty toward AFY and its management. AFY made the first annual installment payments to the Searses pursuant to the sale agreement and promissory notes, but Korley and AFY failed to make further required payments.

         In 2009, AFY's primary lender, Farm Credit Services, withdrew financing. In 2010, AFY and Korley each filed for bankruptcy under Chapter 11 of the Bankruptcy Code. The Searses filed proofs of claim-that is, "a written statement setting forth a creditor's claim, " Fed.R.Bankr.P. 3001(a)-in Korley's bankruptcy. They asserted claims for over $5.2 million based on the debt owed under the sale agreement and promissory notes. Korley, as debtor-in-possession, objected on numerous grounds, including that the sale agreement was never a valid contract. He also asserted that even if the agreement was valid, his liability was discharged when the Searses allegedly breached their duty of loyalty and their duty of good faith and fair dealing.

         Following a hearing on Korley's objections, the Searses moved for summary judgment to allow their claims. Fed.R.Bankr.P. 7056; Fed.R.Civ.P. 56(a). The bankruptcy court granted the motion. The court first concluded that Korley's objections were barred by the doctrine of claim preclusion because they could have been litigated in AFY's earlier bankruptcy proceeding. Alternatively, the court rejected the objections on the merits. The district court affirmed the rulings of the bankruptcy court. As a second court of review, we review the bankruptcy court's grant of summary judgment de novo, applying the same standards as the district court. Contemporary Indus. Corp. v. Frost, 564 F.3d 981, 984 (8th Cir. 2009). Summary judgment is appropriate if there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law. Fed.R.Bankr.P. 7056; Fed.R.Civ.P. 56(a).


         Korley disputes both rationales offered by the bankruptcy court. Because we agree with the bankruptcy court that Korley's objections to the proofs of claim lack merit, we will affirm on that basis.

         Title 11 U.S.C. § 501 provides for the filing of claims in bankruptcy, and § 502 governs the process for determining whether claims are allowed. A "claim" typically is a "right to payment" from the debtor, and it includes rights that are disputed or contingent. 11 U.S.C. § 101(5)(A). A claim that is filed under § 501 is deemed "allowed" against the debtor unless a party in interest objects and the claim implicates an exception listed in 11 U.S.C. § 502(b). See 11 U.S.C. § 502(a); Travelers Cas. & Sur. Co. of Am. v. Pac. Gas & Elec. Co., 549 U.S. 443, 449 (2007). If a proof of claim follows certain requirements under Federal Rule of Bankruptcy Procedure 3001, then it is prima facie evidence of the claim's validity. Fed.R.Bankr.P. 3001(f).

         Korley first argues that the Searses do not have claims under the sale agreement, if it is viewed as a single contract together with the promissory notes, because it is an executory contract that has not been rejected. See 11 U.S.C. § 365. An executory contract under the Bankruptcy Code is a contract where the obligations of both parties "are so far unperformed that the failure of either to complete performance would constitute a material breach excusing performance of the other." In re Interstate Bakeries Corp., 751 F.3d 955, 962 (8th Cir. 2014) (en banc) (quotation omitted). Korley contends that the sale agreement is an executory contract because Ronald, Dane, and Rhett Sears have ongoing duties of loyalty and good faith and fair dealing to AFY ...

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