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Zeh v. Orthodontic Centers of America, Inc.

United States District Court, Sixth Circuit

November 8, 2013

J. STEVEN ZEH, D.M.D., P.S.C., et. al, Plaintiffs,
v.
ORTHODONTIC CENTERS OF AMERICA, INC. and ORTHODONTIC CENTERS OF KENTUCKY, INC. Defendants.

MEMORANDUM OPINION AND ORDER

THOMAS B. RUSSELL, Senior District Judge.

This matter is before the Court upon Orthodontic Centers of America, Inc., and Orthodontic Centers of Kentucky, Inc. (collectively "OCI") Motion to Reopen this Case and to Enforce the Settlement Agreement OCI entered into. (Docket No. 171.) Plaintiffs Dr. Steven Zeh and related entities' (hereafter collectively referred to as "Zeh") have responded. (Docket No. 173.) OCI has replied. (Docket No. 176.) This matter is ripe for adjudication. For the following reasons, the Court will GRANT OCI's Motion to Reopen the Case and DENY OCI's request for attorneys' fees.

Plaintiff Zeh has also moved to Reopen this Case and Enforce the Settlement Agreement by: (1) declaring any payment obligation of Zeh under the parties' Settlement Agreement was terminated when OCI filed for bankruptcy in March 2006; and (2) barring any further attempts by Defendant or its successors to enforce the Settlement Agreement against Zeh. (Docket No. 174.) OCI has responded. (Docket No. 176.) Zeh has replied. (Docket No. 178.) This matter is ripe for adjudication. For the following reasons, the Court will DENY Plaintiff Zeh's Motion to Reopen this Case and Enforce the Settlement Agreement by declaring Zeh's payment obligations were terminated when OCI filed for bankruptcy in March 2006 and barring further attempts by Defendant or its successors to enforce the Settlement Agreement against Zeh.

In its July 23, 2004 Order, this Court retained jurisdiction over this matter for purposes of enforcement of the Settlement Agreement and Release, the Security Agreement, and the Amended Management and Business Services Agreement. (Docket No. 157.) OCI asserts that Zeh has breached the Settlement Agreement by failing to make the required monthly installment payments and invokes its right to accelerate all payments due under the Settlement Agreement. OCI requests the Court enter judgment in its favor for the remainder of the amount owed under the Settlement Agreement, plus pre and post judgment interest thereon, and reasonable attorneys' fees incurred in connection with this matter.

OCI states Zeh made the required monthly payment through March of 2006, but then stopped making further payments despite multiple demands from OCI for payment. As required by the Settlement Agreement, OCI has provided Zeh with notice of default. (Docket No. 173-1; 173-3.) Nevertheless, Zeh has failed and refused to make any payment under the Settlement Agreement since March of 2006.

Paragraph 10's Enforceability

Zeh agrees with OCI on all the above assertions, except as to the meaning of the Settlement Agreement and its obligation to OCI under the Settlement Agreement. Zeh points out that in March of 2006 OCI filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the Eastern District of Louisiana (Case No. 06-101179). Paragraph 10 of the Settlement Agreement provides:

10. Termination of Obligations. Plaintiffs' obligation to make payment of the Monthly payments and Defendants' obligation to provide services in accordance with this Agreement, the MBSCA, and the Amended MBSA shall cease in the event either Defendant becomes a debtor in a proceeding under the United States Bankruptcy Code. The parties acknowledge that this agreement was reached as a result of mediation conducted by Hon. Thomas B. Russell, United States District Judge. It is the intention of both parties that this provision terminating Plaintiffs' obligations be enforceable if either or both Defendants become debtors in a bankruptcy proceeding. Because this Settlement Agreement resolves some claims which would have a special status in a bankruptcy proceeding, because of the parties' interest, because all parties were represented by counsel in arms-length negotiations, and because of Judge Russell's approval, this Paragraph is believed to be enforceable. (emphasis added.)

(Docket No. 171-3, Paragraph 10.) Zeh argues that pursuant to that paragraph Zeh's obligation to make payments and OCI's obligation to provide services ended in 2006 when OCI became a "debtor in a proceeding under the United States Bankruptcy Code."[1]

In OCI's response/reply brief, (Docket No. 176), they assert that these bankruptcy termination or "ipso facto" clauses are unenforceable as a matter of law. OCI argues the Bankruptcy Code itself expressly prohibits these types of clauses. Section 541(c)(1) of the Bankruptcy Code states:

(c)(1) Except as provided in paragraph (2) of this subsection, an interest of the debtor in property becomes property of the estate under subsection (a)(1), (a)(2), or (a)(5) of this section notwithstanding any provision in an agreement, transfer instrument, or applicable nonbankruptcy law-
(A) that restricts or conditions transfer of such interest by the debtor; or (B) that is conditioned on the insolvency or financial condition of the debtor, on the commencement of a case under this title, or on the appointment of or taking possession by a trustee in a case under this title or a custodian before such commencement, and that effects or gives an option to effect a forfeiture, modification, or termination of the debtor's interest in property. (emphasis added.)

11 U.S.C. ยง 541. Section 365(e) similarly provides:

(e)(1) Notwithstanding a provision in an executory contract or unexpired lease, or in applicable law, an executory contract or unexpired lease of the debtor may not be terminated or modified, and any right or obligation under such contract or lease may not be terminated or modified, at any time after the commencement of the ...

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