Udell, Matter of
| Decision Date | 03 March 1994 |
| Docket Number | No. 93-2002,93-2002 |
| Parties | , Bankr. L. Rep. P 75,752 In the Matter of Barry Stuart UDELL, Debtor-Appellee. Appeal of the STANDARD CARPETLAND USA, INC., Appellant. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Howard B. Sandler, Robert L. Nicholson (argued), Beckman, Lawson, Sandler, Snyder & Federoff, Fort Wayne, IN, for appellant.
Mark A. Warsco (argued), Patricia J. Pikel, Warsco & Brogan, Fort Wayne, IN, for debtor-appellee.
Before FLAUM and EASTERBROOK, Circuit Judges, and SKINNER, District Judge. *
A bankruptcy court granted the creditor-appellant relief from the automatic stay prescribed by the Bankruptcy Code, finding that its right to an injunction to enforce a restrictive covenant was not a "claim" dischargeable in bankruptcy. The district court reversed The Standard Carpetland USA, Inc. ("Carpetland") employed debtor-appellee Barry Stuart Udell ("Udell") in its Fort Wayne, Indiana store. The parties entered an employment contract that included a covenant not to compete. For three years after leaving Carpetland, Udell was not to engage in any business similar to Carpetland within 50 miles of Fort Wayne. The covenant gave Carpetland the right to both an injunction and liquidated damages:
and this appeal followed. We reverse and remand.
In the event of Udell's actual or threatened breach of the provisions of this paragraph 11, Carpetland shall be entitled to an injunction restraining Udell as well as reimbursement for reasonably [sic] attorneys fees incurred in securing said judgment and stipulated damages in the sum of $25,000.00.
Soon after leaving Carpetland, Udell purchased a local carpet store which he claims does not compete in the same market as Carpetland. Udell sued Carpetland in the Superior Court for Allen County, Indiana, seeking damages for breach of the employment contract with respect to allegedly past due commissions and other compensation. Carpetland counterclaimed for damages and an injunction pursuant to the restrictive covenant. The state court granted Carpetland a preliminary injunction in June, 1992. Udell is appealing this order in the Indiana appellate courts.
Several days after the injunction issued, Udell filed a Chapter 13 bankruptcy petition. To enforce its preliminary injunction in the Indiana court, Carpetland filed a motion for emergency relief from the automatic stay prescribed by the Bankruptcy Code. Carpetland argued that its right to an injunction was not a "claim" under Sec. 101(5)(B) of the Bankruptcy Code, 11 U.S.C. Sec. 101 et seq., and therefore could not be discharged in Udell's bankruptcy. In relevant part, Sec. 101(5)(B) defines "claim" as a "right to an equitable remedy for breach of performance if such breach gives rise to a right to payment."
The bankruptcy court granted Carpetland relief for the purpose of enforcing the injunction entered in the state court. 149 B.R. 898 (Bkrtcy.N.D.Ind.1992). The court ruled that Carpetland's right to injunctive relief was not a claim dischargeable in bankruptcy. Under Indiana law, an injunction may issue only if the remedy of damages is inadequate. The state court had ruled in this case that an injunction is the proper remedy for Udell's breach, and under the strictures of Indiana law, this ruling necessarily encompasses a decision that the right to the injunction could not be satisfied by the payment of liquidated damages. Accordingly the breach that gives rise to the injunction does not "give rise to a right to payment" under Sec. 101(5)(B). The bankruptcy court further ruled that relief from the automatic stay was warranted because "the potential harm to Carpetland by continuing the stay outweighs the potential harm to [Udell] which may flow from terminating it." Id. at 907.
The district court reversed the grant of relief. 149 B.R. 908 (N.D.Ind.1993). It held that Carpetland's right to an injunction is a Sec. 101(5)(B) "claim" dischargeable in bankruptcy because it also enables Carpetland to seek liquidated damages. Carpetland's restrictive covenant provides for an injunction and liquidated damages in the event of "threatened" as well as actual breaches. In the opinion of the district judge, a "threatened" breach is a future breach. Because a future breach gives rise here to liquidated damages, "the usual reason for granting ... injunctions, which is, that money damages for ... future violations are inadequate because of the inability to prove the extent of damages resulting from future breach of the restrictive employment covenants, does not apply." Id. at 912. The district court acknowledged that Indiana law requires a showing of "irreparable harm incapable of reduction to monetary relief" before an injunction may issue. The court concluded, however, that "it is solely because the specific language employed by these parties contemplates liquidated damages for future In reversing the bankruptcy court's grant of relief from the stay, the district court found it unnecessary to reach Udell's argument that, even if Carpetland's right to an injunction were not a Sec. 101(5)(B) claim, the bankruptcy court abused its discretion by giving insufficient consideration to Udell's inability to get a "fresh start," or to the unequal treatment of other creditors which will result from the lifting of the stay.
breach that the right to payment arises in this case." Id. at 912 n. 7.
Udell asserts that Carpetland has waived its arguments before us because only one of its arguments was raised in its petition for reconsideration in the district court. We are satisfied, however, that at one time or another, the substance of all of Carpetland's present arguments were subsumed in the presentation to the district court.
For bankruptcy purposes, a "debt" is a liability on a "claim." 11 U.S.C. Sec. 101(12). By fashioning a single definition of "claim" for the 1978 Bankruptcy Code, Congress intended to adopt the broadest available definition of that term. Pennsylvania Public Welfare Dep't v. Davenport, 495 U.S. 552, 558, 110 S.Ct. 2126, 2130, 109 L.Ed.2d 588 (1990); Johnson v. Home State Bank, 501 U.S. 78, ----, 111 S.Ct. 2150, 2154-55, 115 L.Ed.2d 66 (1991). Under Sec. 101(5) of the Code, a " 'claim' means"--
(A) right to payment ... or
(B) 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[.]
Carpetland argues that our interpretation of Sec. 101(5)(B) should focus on whether the equitable remedy itself gives rise to an alternative right to payment. Udell, on the other hand, argues that a right to an equitable remedy is a "claim" whenever the breach of performance also gives rise to a right to payment--any right to payment, even one that serves a separate remedial purpose from the equitable remedy. We must decide whether Sec. 101(5)(B) requires any connection between the equitable and the legal remedies beyond the fact that both remedies arise from the same breach of performance.
In Ohio v. Kovacs, 469 U.S. 274, 105 S.Ct. 705, 83 L.Ed.2d 649 (1985), the Supreme Court provided some general guidelines for the interpretation of Sec. 101(5)(B). The State of Ohio had obtained a state court judgment against Kovacs for violations of environmental laws at a hazardous waste disposal site. The judgment included (1) an injunction to stop further pollution of the site, the air and public waters; (2) an injunction to clean up the site ("cleanup order"); and (3) an order to pay Ohio $75,000 for injury to wildlife. When Kovacs failed to comply with the judgment, Ohio obtained the appointment of a receiver who took possession of Kovacs' property and began to clean up the site. Kovacs filed for bankruptcy before the receiver had completed his task. The question presented was whether the cleanup order was a "claim" under Sec. 101(4)(B)--now Sec. 101(5)(B)--of the Bankruptcy Code.
The Court found that Ohio had effectively converted its cleanup order into a demand for money damages. After the appointment of the receiver, the only performance Ohio sought from Kovacs was "a money payment to effectuate the ... clean up." Id. at 282, 105 S.Ct. at 709 (quoting from the Sixth Circuit's opinion below, In re Kovacs, 717 F.2d 984, 987 (1983). Because the cleanup order had given rise to a right to payment, the order was a "claim" dischargeable in bankruptcy. The Court emphasized what it had not decided: whether the injunction against further pollution was also a "claim" under Sec. 101(5)(B). Id. at 284, 105 S.Ct. at 710.
Kovacs is helpful in its analysis of the statute, even though the resolution of that case turned on the fact that Ohio had itself elected to convert its equitable right into a demand for a money judgment, the reverse of our present situation. The Court noted that "the key phrases 'equitable remedy,' 'breach of performance,' and 'right to payment' A sponsor of the Bankruptcy Reform Act stated with respect to the definition of "claim":
are not defined" in Sec. 101(5)(B); it proceeded to examine its legislative history. Id. at 280, 105 S.Ct. at 708. We conclude that the Court deemed these provisions ambiguous and follow the Court's example by examining the legislative history of Sec. 101(5)(B), "sparse as it is." Id. at 280, 105 S.Ct. at 708. Cf. United States v. Ron Pair Enterprises, 489 U.S. 235, 241, 109 S.Ct. 1026, 1030, 103 L.Ed.2d 290 (1989)
Section 101(4)(B) [now Sec. 101(5)(B) ] ... is intended to cause the liquidation or estimation of contingent rights of payment for which there may be an alternative equitable remedy with the result that the equitable remedy will be susceptible to being discharged in bankruptcy. For example, in some States, a judgment for specific...
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