Noncompetition Agreements Not Subject to §362 Automatic Stay Where Provisions Are Found Not To Be "Claims" Under The Code

By: James Duckham

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

           In In re Hurvitz,[1] the Bankruptcy Court for the District of Massachusetts granted Blue Grace Franchise (“Blue”) relief from an automatic stay because Blue’s right to enforce the noncompetition and nonsolicitation provisions in its franchise agreement were not claims under section 101(5) of the United States Bankruptcy Code (the “Code”).[2]  In February 2015, Blue and Carl Hurvitz entered into a franchise agreement that gave Hurvitz a nonexclusive and limited license to use Blue’s services and technology.[3]  This agreement contained restrictive covenants that prohibited Hurvitz from competing or soliciting business away from Blue for two years after the agreement was terminated.[4]  In January 2016, Blue terminated the agreement and Hurvitz began to work for Freight Management Company (Freight), a direct competitor of Blue.[5]  In April 2016 Blue filed suit in Massachusetts Superior Court, and in May 2016 Blue was granted a temporary restraining order that enjoined Hurvitz from continued employment at Freight and from soliciting or contacting Blue’s former, current, or perspective clients.[6]  On May 16, 2016, Hurvitz filed a petition for relief under chapter 7 of the Code, which pursuant to section 362 of the Code, resulted in an automatic stay of the restraining order.[7]  Blue then made a motion to the bankruptcy court requesting relief from the automatic stay.[8]  Ultimately, the bankruptcy court granted relief from the automatic stay finding that the franchise agreement’s provisions were not considered claims under the Code.[9]

            Section 101(5)(B) of the code defines a claim as a “right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured.”[10]  Hurvitz argued that Blue’s restraining order was an attempt to enforce a claim and thus should be stayed.[11]  Conversely, Blue argued that the provisions are enforceable and the right to enforce them should survive a bankruptcy discharge.[12]  The court interpreted section 101(5)(B) to mean that equitable relief can only constitute a claim if the equitable relief is an alternative to a right to payment or if compliance with the equitable order will lead to a money payment.[13]  Further, the court stated that the majority of bankruptcy courts have held that equitable relief for breach of a noncompetition agreement do not constitute a claim under the Code.[14]  To determine if injunctive relief is an adequate remedy, bankruptcy courts look at both the terms of the agreement and applicable state law. [15]  The court determined from the franchise agreement that Blue and Hurvitz “effectively stipulated to the entry of injunctive relief and the inadequacy of money damages in the event of a breach of the post-termination covenants, including the noncompetition and nonsoliciation provisions….”[16] Moreover, Massachusetts state law favors injunctive relief (and not damages) in respect of noncompetition agreements.[17]  Because neither the agreement nor state law provides a right to payment as an alternative to post termination covenants, the court held that the restrictive covenants did not constitute claims.[18]

           Under the Code, a court shall grant relief from a stay for cause.[19]  To determine if there is cause, bankruptcy courts weigh three factors: (1) whether any great prejudice will result to either party because of the continuation of a civil suit, (2) whether the hardship to the non-bankrupt party considerably outweighs the hardship of the debtor, and (3) whether the creditor has the possibility if prevailing on the merits of his or her case.[20]  Weighing the factors, the court determined that there would be no prejudice to the bankruptcy estate if enforcement of the restrictive covenants were allowed and Blue would suffer substantial harm if enforcement was not allowed.[21]  Therefore, the court ruled that Blue should be granted relief from the stay.[22]

           Section 101(5)(B) of the Code was specifically enacted with the purpose of “excluding rights to an equitable remedy for a breach of performance with respect to which such a breach does not give rise to a right to payment.”[23]  Following In re Hurvitz, whether or not parties to a noncompetition agreement are subject to an automatic stay depends on if the agreement provides a right to payment as an alternative to the equitable relief.[24]  If the agreement provides for monetary relief as an alternative, a court following Hurvitz might be inclined to rule that the provision is a claim under Section 101(5)(B) of the Code.  However, states differ in what constitutes a right to payment; therefore, courts may reach different results regarding similar agreements.

[1] No. 16-11844-MSH, 2016 Bankr. LEXIS 2657, (Bankr. D. Mass. July 20, 2016).

[2] See Id. at *2.

[3] See Id.

[4] See Id.

[5] See Id. at *4.

[6] See Id.

[7] See Id. at *4–5.

[8] See Id. at *1.

[9] See Id. at *1–2.

[10] 11 U.S.C. § 101(5)(B) (1978)

[11] See Id. at *5.

[12] See Id.

[13] See Id. at *5–6.

[14] See Id. at *6.

[15] See Id.

[16] See Id. at *7–9 (noting that Section 14.9(a) of the agreement stated that liquidated damages were exclusively for lost profits due to early termination, and are not meant to be a substitute for the post termination covenants).

[17] See Id. at *10.

[18] See Id.

[19] See 11 U.S.C. § 362(d)(1)(1978). 

[20] See In re Hurvitz, 2016 Bankr. LEXIS 2657, at *11 (citing In re Haines, 309 B.R. 688, 674 (Bankr. D. Mass. 2004)).

[21] See In re Hurvitz, 2016 Bankr. LEXIS 2657, at *11–12.

[22] See Id. at *12.

[23] Collier on Bankruptcy ¶ 101.05 (Alan N. Resnick & Henry J. Sommer eds., 16th ed.).

[24] See In re Hurvitz, 2016 Bankr. Lexis 2657, at *5–6