Andrews v. Riggs National Bank (In re Andrews)

80 F.3d 906, 1996 WL 144406
CourtCourt of Appeals for the Fourth Circuit
DecidedApril 1, 1996
DocketNo. 93-2095
StatusPublished
Cited by21 cases

This text of 80 F.3d 906 (Andrews v. Riggs National Bank (In re Andrews)) is published on Counsel Stack Legal Research, covering Court of Appeals for the Fourth Circuit primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Andrews v. Riggs National Bank (In re Andrews), 80 F.3d 906, 1996 WL 144406 (4th Cir. 1996).

Opinions

OPINION

ELLIS, District Judge:

This appeal requires us to decide whether payments to a bankrupt debtor pursuant to a non-competition agreement constitute “earnings from services performed” under 11 U.S.C. § 541(a)(6). The bankruptcy court found that the non-competition agreement was ancillary to a pre-petition transaction, and thus payments under the agreement did not fall within § 541(a)(6). The district court agreed. Because we concur, we affirm.

[908]*908I.

Appellant John A. Andrews (“Andrews”) worked in the ready-mix concrete business most of his life. In 1974, he and various partners formed a ready-mix concrete company in Herndon, Virginia. The company, which ultimately came to be known as AMAX Corporation (“AMAX”), grew to be quite successful, with annual sales of approximately thirty million dollars. As a part owner of AMAX, Andrews was personally active in the company and consequently developed numerous and substantial customer contacts and relationships in the concrete business. He expanded these contacts in 1980 by forming a real estate development company, which allowed him to participate in joint ventures with builders and developers.

In 1989, Andrews and the other owners of the company negotiated with Tarmac Acquisition, Inc. (“Tarmac”) for the latter to purchase the assets of AMAX and related entities. Both sides to the negotiations retained independent experts to value AMAX’s assets. The final sale price of nine million dollars was based on these expert valuations. Tarmac also purchased AMAX’s customer list, representing the good will of the company, for an additional one million dollars. At the same time, the principal owners of AMAX, including Andrews, entered into separate non-competition agreements with Tarmac. These agreements were an express condition of the asset sale because Tarmac was concerned about the AMAX principals’ substantial customer relationships and contacts in the ready-mix concrete business.

Andrews’s non-competition agreement with Tarmac (“NCA”), dated July 17, 1989, provided that he would not compete with Tarmac in the ready-mix concrete business in Northern Virginia, the District of Columbia, or the adjacent portions of Maryland for a period of four years. In exchange, Andrews was to receive one million dollars. Absent setoff,1 this one million dollars was to be paid in quarterly installments of $62,500, plus ten percent annual interest. Andrews asserts that the payments were structured in this manner to approximate his AMAX salary. Yet, he also concedes that Tarmac arrived at the one million dollar figure based on its estimate of the value of eliminating future competition from Andrews.

Andrews treated his NCA payments as ordinary income for federal tax proposes. This treatment was not to his advantage, as the top tax rate on ordinary income was thirty-one percent, significantly more than the twenty-eight percent rate that would have been applicable had he claimed the payments as capital gain from the sale of assets. See 26 U.S.C. § 2. In addition, by claiming the NCA payments as ordinary income, Andrews became subject to an additional self-employment tax of between ten and fifteen percent. See 26 U.S.C. §§ 1401-1402.

On October 14, 1992, Andrews filed a voluntary petition for relief under Chapter 7, 11 U.S.C. § 701 et seq., in the United States Bankruptcy Court for the Eastern District of Virginia. On December 4, 1992, Andrews instituted this contested proceeding against the estate trustee Richard G. Hall (“trustee”) pursuant to Rule 9014, Fed.R.Bankr.P. The motion initiating the proceeding sought to exclude from Andrews’s bankruptcy estate all post-petition payments due him under the NCA. The total of these payments is $250,-000 plus interest.2 According to Andrews, the payments represented his only source of income while the NCA remained in effect [909]*909because the NCA precluded him from engaging in the ready-mix concrete business. But for the NCA Andrews asserts, he could have profitably re-entered the ready-mix concrete business.

The bankruptcy court denied Andrews’s motion, holding that compliance with a non-competition obligation closely connected with the pre-petition sale of an asset does not constitute “services performed” under 11 U.S.C. § 541(a)(6). The district court affirmed, and this appeal followed.

II.

The question presented is whether the payments due Andrews under the NCA qualify as “earnings from services performed” under 11 U.S.C. § 541(a)(6). If so, they are excluded from Andrews's bankruptcy estate, and he may use and enjoy them free from the claims of his creditors. If not, the payments become part of the estate and hence available to satisfy outstanding creditors’ claims.

Analysis properly begins with the language of the statute itself. See United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 1030, 103 L.Ed.2d 290 (1989). Section 541 of the Bankruptcy Code provides that the bankruptcy estate consists of certain broadly defined categories of property,3 but specifically excludes “earnings from services performed by an individual debtor after the commencement of the case.” 11 U.S.C. § 541(a)(1), (6). The phrase “services performed” is not defined in the statute. We are left, then, to construe the phrase in accordance with its ordinary meaning or, if that meaning be ambiguous, to give it the meaning most consistent with the statute’s purpose. Crandon v. United States, 494 U.S. 152, 158, 110 S.Ct. 997, 1001-02, 108 L.Ed.2d 132 (1990); see also Kolcoszka v. Belford, 417 U.S. 642, 645, 94 S.Ct. 2431, 2433, 41 L.Ed.2d 374 (1974) (stating • that “purposes of the Bankruptcy Act must ultimately govern” in determining scope and limitations of term “property” in 11 U.S.C. 110a(5)).

As the parties’ contentions reflect, the ordinary meaning of the phrase is infected with ambiguity. Thus, Andrews suggests that refraining from competition amounts to “performing services” because it confers a benefit on Tarmac. The trustee responds, more plausibly, that the phrase “services performed” is stretched out of shape if it is taken to include refraining from doing something, i.e., not competing, as contrasted with doing something or taking action. According to the trustee, performing a service implies doing an act, not refraining from doing an act.

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Bluebook (online)
80 F.3d 906, 1996 WL 144406, Counsel Stack Legal Research, https://law.counselstack.com/opinion/andrews-v-riggs-national-bank-in-re-andrews-ca4-1996.