Revised July 13, 1999
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
____________________
No. 98-20918
Summary Calendar
____________________
In the Matter of: JEFFREY A GOFORTH,
Debtor,
-------------------------
ERNEST JAY HALL,
Appellee,
v.
JEFFREY A GOFORTH,
Appellant.
--------------------------
_________________________________________________________________
Appeal from the United States District Court
for the Southern District of Texas
_________________________________________________________________
July 9, 1999
Before KING, Chief Judge, and WEINER and DENNIS, Circuit Judges.
PER CURIAM:
Appellant Jeffrey A. Goforth appeals the final judgment of
the district court, which affirmed the bankruptcy court’s order
granting appellee Ernest Jay Hall’s summary judgment motion and
denying Goforth’s summary judgment motion on the ground that 11
1
U.S.C. § 502(b)(7) does not limit Hall’s claim against Goforth.
We affirm.
I. FACTUAL AND PROCEDURAL HISTORY
In April 1993, appellee Ernest Jay Hall, the majority
shareholder of a company known as Teleometrics, contracted to
sell his shares to appellant Jeffrey A. Goforth. The Integrated
Agreement provided that Goforth was to become the majority
shareholder of Teleometrics by purchasing fifty-eight shares of
Teleometrics stock, while Teleometrics redeemed its remaining
outstanding shares from Hall through the issuance of promissory
notes to Hall. Goforth fully performed his only individual
obligation under the Integrated Agreement, to purchase the fifty-
eight shares, in April 1993. The signatories to the Integrated
Agreement included Hall, David Dollahite, as president of
Teleometrics, and Goforth, in his individual capacity as
purchaser.
In connection with the Integrated Agreement, the parties
executed an employment agreement (Employment Agreement) to retain
Hall as an employee of Teleometrics. The signatories to the
Employment Agreement were Hall, in his individual capacity, and
Teleometrics. Goforth executed the Employment Agreement on
behalf of Teleometrics in his new capacity as president of the
company. He did not sign the Employment Agreement in his
individual capacity.
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Approximately five months after the sale, numerous problems
between Hall and Goforth culminated in Hall’s termination. Hall
sued Goforth and Teleometrics for wrongful termination, and the
case was referred to arbitration. On August 29, 1994, the
arbitrator issued an award in the amount of $1,127,237 against
Goforth and Teleometrics jointly and severally. The arbitrator
did not issue findings and did not apportion the damages between
those deriving from the Integrated Agreement and those deriving
from the Employment Agreement.
On January 23, 1995, a Texas state court entered a judgment
based on the arbitration award (the judgment). Like the
arbitrator’s award, the judgment did not apportion the damages
between the two agreements. On December 28, 1995, the Texas
Court of Appeals affirmed the judgment on the ground that
Teleometrics had not timely moved to vacate the arbitrator’s
award.
On February 8, 1995, both Teleometrics and Goforth filed for
Chapter 11 bankruptcy protection in the Bankruptcy Court for the
Western District of Washington. Hall filed identical claims for
the full amount of the judgment in both cases. Both debtors
objected to Hall’s claims, requesting that the claims be limited
under 11 U.S.C. § 502(b)(7). On May 22, 1995, Hall initiated
adversary proceedings to determine the applicability of 11 U.S.C.
§§ 502(b)(4) and 502(b)(7) to his claims.
During pretrial conferences in the Teleometrics adversary
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proceeding, the issue arose whether the judgment was based on the
Integrated Agreement, the Employment Agreement, or some
combination of the two. The parties agreed that approximately
$300,000 of the judgment derived from the Integrated Agreement
and was a secured claim,1 and that the remaining $827,000 derived
from the Employment Agreement and was an unsecured claim. The
Bankruptcy Court for the Western District of Washington
subsequently transferred the cases to the Bankruptcy Court for
the Southern District of Texas (the bankruptcy court).
Thereafter, the bankruptcy court held that § 502(b)(7)
limited Hall’s $827,000 unsecured claim against Teleometrics to
$192,000 because Hall was an employee of Teleometrics and his
claim arose out of the breach of an employment contract. Hall is
seeking to recover from Goforth the balance of the unsecured
claim.
On March 21, 1997, Goforth filed a summary judgment motion
in his adversary proceeding, arguing that § 502(b)(7) limits
Hall’s claim against Goforth just as it limited Hall’s claim
against Teleometrics. On April 14, 1997, Hall filed his response
and a cross-motion for summary judgment. On December 2, 1997,
the bankruptcy court issued its opinion, which denied Goforth’s
summary judgment motion and granted Hall’s summary judgment
1
Teleometrics’s confirmed plan provided for the payment of
this secured claim. Hall has since received all payments due him
on this claim.
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motion. The bankruptcy court held that § 502(b)(7) does not
limit Hall’s unsecured claim against Goforth. On September 17,
1998, the district court affirmed and entered final judgment
allowing Hall’s unsecured claim against Goforth. Goforth timely
appeals.
II. STANDARD OF REVIEW
We review the bankruptcy court’s grant of Hall’s motion for
summary judgment as though it had been directly appealed to us.
See Charrier v. Security Nat’l (In re Charrier), 167 F.3d 229,
232 (5th Cir. 1999). Our review of the grant of a summary
judgment motion is de novo. See Southmark Corp. v. Coopers &
Lybrand (In re Southmark Corp.), 163 F.3d 925, 928 (5th Cir.
1999); Lynch Properties, Inc. v. Potomac Ins. Co., 140 F.3d 622,
625 (5th Cir. 1998). Summary judgment is appropriate “if the
pleadings, depositions, answers to interrogatories, and
admissions on file, together with the affidavits, if any, show
that there is no genuine issue as to any material fact and that
the moving party is entitled to a judgment as a matter of law.”
FED. R. CIV. P. 56(c).
III. DISCUSSION
Goforth argues that the bankruptcy court and the district
court erred by holding that § 502(b)(7) does not limit Hall’s
claim against him. Both courts interpreted § 502(b)(7) to apply
only to the claims of an employee of the debtor. Because Hall
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was employed by Teleometrics, not Goforth, the bankruptcy court
and the district court found that § 502(b)(7) does not limit
Hall’s claim against Goforth. Goforth challenges this
conclusion, arguing that the language of the statute does not
limit its application to employees of the debtor and that nothing
in the legislative history compels this conclusion. He contends
that § 502(b)(7) applies to any employee who claims damages from
the termination of an employment agreement regardless of whether
the debtor against whom the claim is brought is the actual
employer and that the critical inquiry is whether the debtor is
directly liable for the claimed damages.
Section 502(b)(7) provides:
(b) [T]he court, after notice and a hearing, shall determine
the amount of . . . [a] claim . . . as of the date of the
filing of the petition, and shall allow such claim in such
amount, except to the extent that--
. . . .
(7) if such claim is the claim of an employee for
damages resulting from the termination of an employment
contract, such claim exceeds--
(A) the compensation provided by such contract,
without acceleration, for one year following the
earlier of--
(i) the date of the filing of the petition;
or
(ii) the date on which the employer directed
the employee to terminate, or such employee
terminated, performance under such contract;
plus
(B) any unpaid compensation due under such
contract, without acceleration, on the earlier of
such dates.
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11 U.S.C. § 502(b)(7).
The plain language of the statute supports Goforth’s
position. The language of the statute does not state that it
applies only where the debtor is the actual employer of the
claimant. Instead, it states that it applies to claims “of an
employee for damages resulting from the termination of an
employment contract.” Id. Goforth contends that the only
conditions specified by § 502(b)(7) are met--Hall is an employee
who claims damages resulting from the termination of an
employment contract. According to Goforth, § 502(b)(7) can be
used by anyone who is directly liable for damages resulting from
the termination of an employment contract. He argues that
§ 502(b)(7) applies in his case because he is liable for
employment contract damages by virtue of the state court
judgment.
Although the bankruptcy court acknowledged that the plain
language of § 502(b)(7) does not clearly preclude its application
to Goforth’s case, the court read into the statute the
requirement that the claimant must be an employee of the debtor.
It reasoned that if Congress had not intended to limit
§ 502(b)(7) to situations where the debtor is also the employer,
it could have used the term “person” instead of “employee.”
According to the bankruptcy court, Goforth’s interpretation would
render the term “employee” superfluous.
Goforth responds that the term “employee” is not superfluous
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under his reading of the statute because the term was added to
clarify that § 502(b)(7) does not apply to derivative claims, but
only to the claims of actual employees. In its original form,
the language of the provision made it applicable to claims “for
damages resulting from the termination of an employment
contract.” 11 U.S.C. § 502(b)(8) (1978);2 see In re Wilson Foods
Corp., 182 B.R. 278, 281 (Bankr. D. Kan. 1995). The 1984
amendments to the Bankruptcy Code added language to the
provision, so that the language of the current version makes it
applicable to claims “of an employee for damages resulting from
the termination of an employment contract.” 11 U.S.C.
§ 502(b)(7) (emphasis added); see In re Wilson Foods, 182 B.R. at
281. According to one court, the l984 amendments added the
language “for clarity ‘and to eliminate the possibility that some
third party, such as a dependent of a former employee or a third-
party contractor might assert a claim hereunder.’” In re Wilson
Foods, 182 B.R. at 281 (quoting Norton Bankruptcy Code Pamphlet
1994-1995 Edition (Revised) § 502(b) Editor’s Comment at 379
(1995)). Thus, the term “employee” is not without meaning under
Goforth’s interpretation of the statute.
The bankruptcy court also relied on Johnson v. Beck (In re
Johnson), 117 B.R. 461 (Bankr. D. Minn. 1990), in support of its
2
By virtue of the 1984 amendments to the Bankruptcy Code,
the numbering of this provision changed from § 502(b)(8) to
§ 502(b)(7). See In re Wilson Foods Corp., 182 B.R. 278, 281
n.20 (Bankr. D. Kan. 1995).
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holding that § 502(b)(7) does not apply in Goforth’s case. In In
re Johnson, the claimant, Beck, was an employee of the debtor
corporation whose claims arose out of the breach of an employment
agreement between Beck and the corporation. See id. at 463. The
individual debtor, Johnson, had executed a consent to and
guaranty of the contract as the corporation’s majority
shareholder. See id. at 464. Beck was terminated and sued in
state court seeking a declaratory judgment and actual and
punitive damages. See id. His theories of recovery included
breach of contract by both Johnson and the corporation, Johnson’s
tortious interference with his contractual relations with the
corporation, Johnson’s breach of fiduciary duty as majority
shareholder to Beck as minority shareholder, and Johnson’s
wrongful dilution of Beck’s shares. See id. Johnson and the
corporation thereafter filed for Chapter 11 protection, and
Johnson initiated an adversary proceeding to determine whether
§ 502(b)(7) limited the allowability of Beck’s claims in his
case. See id.
The court first held that § 502(b)(7) did limit Beck’s claim
against the corporation deriving from the corporation’s breach of
the employment contract, but did not limit Beck’s claims against
the corporation on his other theories of recovery. See id. at
468. The court then held that § 502(b)(7) did not limit any of
Beck’s claims against Johnson. See id. at 469-71. With
reference to Beck’s claim against Johnson deriving from Johnson’s
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alleged tortious interference with Beck’s employment relations,
the court stated that “the whole tenor of § 502(b)(7) is such as
to limit it to claims against debtors which were the employers in
contractual privity with the employee-claimant under the contract
in question.” Id. at 469. Thus, the court reasoned that
§ 502(b)(7) does not apply to claims for interference with an
employment contract by someone who was not a party to the
contract. See id. at 470. The court sought to avoid reading the
application of § 502(b)(7) broadly because the provision “is in
derogation of the general bankruptcy-law principle that creditors
are to share ratably in a debtor’s estate, according to the
priorities established under the Bankruptcy Code.” Id. at 469-
70.
Because Johnson had personally guaranteed the employment
contract, the court went on to examine whether § 502(b)(7)
limited Beck’s claim arising from Johnson’s alleged breach of his
personal guaranty. The court held that § 502(b)(7) did not apply
“because the terminated employment relationship did not run
between Johnson and Beck, and Johnson hence was not directly
entitled to the protection of the statute.” Id. at 470. In
reaching its conclusion, the court examined the nature of
personal guaranties, and concluded that, as guarantor, Johnson
would be liable for the full amount due under the contract
notwithstanding any limitation on its allowability in the
corporation’s case. See id. at 470-71. The court therefore held
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that § 502(b)(7) does not limit the claim of an employee against
the guarantor of an employment contract. See also In re Danrik,
Ltd., 92 B.R. 964, 972 (Bankr. N.D. Ga. 1988) (holding that
comparable provision, § 502(b)(6), does not literally apply to
limit claims of landlord against guarantor-debtor, and that
equities weigh against limiting claim); Kopolow v. P.M. Holding
Corp. (In re Modern Textile, Inc.), 28 B.R. 181, 188 (Bankr. E.D.
Mo. 1983) (holding that § 502(b)(7), then called § 502(b)(8),
does not limit claim of employee against guarantors of employment
contract). But see In re Farley, Inc., 146 B.R. 739, 745 (Bankr.
N.D. Ill. 1992) (holding that § 502(b)(6) does limit the claim of
landlord against guarantor-debtor); In re Interco Inc., 137 B.R.
1003, 1007 (Bankr. E.D. Mo. 1992) (same); In re Revco D.S., Inc.,
138 B.R. 528, 531 (Bankr. N.D. Ohio 1991) (same); In re Rodman,
60 B.R. 334, 334-35 (Bankr. W.D. Okla. 1986) (same).
Although Goforth did not personally guarantee the Employment
Agreement between Hall and Teleometrics, by virtue of the state
court judgment he has been found jointly and severally liable for
the damages flowing from the breach of that agreement. Thus, he
is similar to a guarantor in that he is responsible for the
damages that are not recoverable from Teleometrics. See In re
Johnson, 117 B.R. at 470 (“‘Generally, the purpose of a guaranty
is to provide payment when for any reason the principal debtor
fails to discharge his obligations.’”) (quoting Victory Highway
Village, Inc. v. Weaver, 634 F.2d 1099, 1102 (8th Cir. 1980)
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(applying Minnesota law)). Thus, In re Johnson provides support
for not limiting Hall’s claim under § 502(b)(7).
After consideration of the arguments and authorities, we
hold that Goforth is not entitled to limit Hall’s claim against
him under § 502(b)(7). A state court judgment affirming an
arbitrator’s finding that Goforth is jointly and severally liable
for amounts due under two agreements, only one of which was an
employment agreement, does not entitle Goforth to take advantage
of the limitation of § 502(b)(7). Goforth was not Hall’s
employer, and is more like a guarantor. Thus, mindful of our
duty to avoid reading broadly provisions such as § 502(b)(7), see
In re Johnson, 117 B.R. at 469-70; see also Vanston Bondholders
Protective Comm. v. Green, 329 U.S. 156, 161 (1946) (“A purpose
of bankruptcy is so to administer an estate as to bring about a
ratable distribution of assets among the bankrupt's creditors.”);
Haber Oil Co. v. Swinehart (In re Haber Oil Co.), 12 F.3d 426,
435 (5th Cir. 1994) (“It has been well and often said that
ratable distribution among all creditors is one of the strongest
policies behind the bankruptcy laws.") (internal quotation marks
omitted), we conclude that § 502(b)(7) does not apply in this
case.
Goforth argues that the conclusion that § 502(b)(7) does not
apply ignores the state court judgment finding Goforth directly
liable to Hall on the Employment Agreement, and thus runs afoul
of the Full Faith and Credit Clause. This argument lacks merit.
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The state court judgment merely affirms the arbitrator’s decision
and made no determination whether Goforth was entitled to the
limitation of § 502(b)(7). The arbitrator’s decision similarly
did not examine the applicability of § 502(b)(7). The only
determination it made was that Goforth is jointly and severally
liable for the amount due under the Integrated Agreement and the
Employment Agreement. We need not challenge this conclusion in
order to decide that Goforth is not entitled to limit his
liability under § 502(b)(7). Thus, our determination does not
call into question the state court judgment.
IV. CONCLUSION
For the foregoing reasons, we AFFIRM the judgment of the
district court.
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