Discharge of claims in bankruptcy – Covenants not to compete

By: Andrew G. Lizotte

One of the principal benefits for an individual filing for bankruptcy is the so-called fresh start, that is, a discharge of liabilities that arose prior to the bankruptcy.  A recent decision of the Massachusetts Bankruptcy Court addressed the right to a discharge in relation to covenants not to compete with a former employer or franchisor.

Prior to the bankruptcy, Mr. Hurvitz entered into a franchise agreement with Blue Grace Franchise LLC, a transportation logistics and technology company.   The agreement effectively prohibited Mr. Hurvitz from competing with, or soliciting customers from, Blue Grace for approximately two years after the termination of the agreement.   Blue Grace terminated the agreement because of payment defaults.  Mr. Hurvitz went to work for a competing company.  Blue Grace brought suit in state court and obtained a temporary restraining order prohibiting Mr. Hurvitz from continuing to violate the noncompete/nonsolicitation provisions of the franchise agreement.  Mr. Hurvitz then filed for bankruptcy, presumably in an effort to get out from underneath the restrictions in the franchise agreement.

The dispute came down to whether Blue Grace had a “claim” against Hurvitz, as only claims may be discharged in bankruptcy.  A claim includes a right to payment and a right to an equitable remedy (such as an injunction or restraining order) if the creditor also has a right to payment of money damages.  Strictly equitable (non-monetary) remedies are not “claims” and may not be discharged.   The Court concluded that, because the contract did not provide for a right to payment for breach of the noncompete/nonsolicitation provisions, and because the parties agreed in the contract that such a breach would cause immediate and irreparable harm that could not be remedied by money damages, the rights of Blue Grace did not constitute a claim.  Mr. Hurvitz could not be released from these obligations under the franchise agreement.  The Court ultimately sent the dispute back to state court, where Blue Grace could seek further enforcement and Hurvitz could try to challenge the reasonableness of the noncompete/nonsolicitation provisions.  Prior Massachusetts bankruptcy decisions have been inconsistent on this topic, and the decision provides further guidance to debtors and creditors in bankruptcy as to the potential treatment of such provisions in a bankruptcy case.

The case is In re Carl S. Hurvitz, Case No. 16-11844-MSH.