Maids International, Inc. v. Ward (In Re Ward)
194 B.R. 703, 28 Bankr. Ct. Dec. (CRR) 1197, 1996 Bankr. LEXIS 387 (1996)
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Rule of Law:
A right to an equitable remedy for breach of performance, such as an injunction to enforce a covenant not to compete, constitutes a dischargeable "claim" under the Bankruptcy Code if the breach also gives rise to an alternative right to payment, such as monetary damages for future lost profits.
Facts:
- On April 10, 1989, Michael and Angela Ward, through their corporation, entered into a five-year franchise agreement with The Maids International, Inc. ('Maids') to operate a cleaning service.
- The Wards personally guaranteed the agreement.
- The agreement contained a covenant prohibiting the Wards from owning or operating a competing maintenance and cleaning service within a 50-mile radius for two years following the termination of the franchise.
- The franchise agreement expired on April 9, 1994.
- After the agreement expired, the Wards began operating a competing cleaning service named 'Mops' within the proscribed territory.
Procedural Posture:
- Maids initiated an arbitration proceeding against the Wards with the American Arbitration Association.
- On March 31, 1995, the arbitrator awarded Maids damages and issued a cease and desist order against the Wards.
- Maids then filed suit in the District Court of Douglas County, Nebraska, which entered a default judgment for monetary damages against the Wards on July 20, 1995.
- Subsequently, Maids filed suit on the judgment in the District Court of Concord, Massachusetts, which authorized attachments on the Wards' assets.
- On November 13, 1995, the Wards filed a petition for Chapter 7 bankruptcy in the U.S. Bankruptcy Court.
- On January 25, 1996, Maids filed an adversary complaint in the bankruptcy court seeking an injunction to enforce the non-compete covenant.
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Issue:
Does a franchisor's right to an injunction to enforce a covenant not to compete constitute a "claim" under § 101(5)(B) of the Bankruptcy Code, and is therefore dischargeable, when the breach of the covenant also gives the franchisor a right to seek monetary damages?
Opinions:
Majority - Queenan, J.
Yes, the right to an injunction to enforce the covenant not to compete constitutes a dischargeable 'claim' under the Bankruptcy Code. The statutory definition of a 'claim' includes a right to an equitable remedy for a breach of performance if that breach also gives rise to a 'right to payment.' Here, the Debtors' breach of the non-compete covenant gives Maids two alternative remedies under state law: an injunction to stop future competition, or a suit for monetary damages to compensate for future lost profits. The existence of this alternative right to damages is a 'right to payment' that brings the equitable remedy within the Code's definition of a 'claim.' Therefore, the obligation is subject to discharge in the Debtors' bankruptcy. This interpretation promotes the fundamental bankruptcy policies of providing debtors with a fresh start and ensuring equal treatment among creditors.
Analysis:
This decision significantly impacts the enforceability of non-compete agreements in bankruptcy by classifying the right to an injunction as a dischargeable 'claim' whenever a monetary remedy is also available. It prioritizes the debtor's 'fresh start' policy over a creditor's right to specific performance, potentially weakening the value of such covenants for franchisors and employers. The court's reasoning, which focuses solely on whether an alternative right to payment exists, creates a clear standard that conflicts with the more complex tests used in other jurisdictions, contributing to a circuit split on this critical issue.
