In re May, Bankruptcy No. 2-91-00714

• Decision Date: 03 February 1992
• Docket Number: Bankruptcy No. 2-91-00714,Adv. No. 2-91-0362.
• Citation: 141 BR 940
• Parties: In re John P. MAY, Joan L. May, Debtors. John P. MAY, Plaintiff, v. CHARLES BOOHER & ASSOCIATES, INC., Defendant.
• Court: U.S. Bankruptcy Court — Southern District of Ohio

141 B.R. 940 (1992)

In re John P. MAY, Joan L. May, Debtors.

John P. MAY, Plaintiff, v. CHARLES BOOHER & ASSOCIATES, INC., Defendant.

Bankruptcy No. 2-91-00714, Adv. No. 2-91-0362.

United States Bankruptcy Court, S.D. Ohio, E.D.

February 3, 1992.

Denis J. Murphy, Alan F. Berliner, Carlile Patchen & Murphy, Columbus, Ohio, for defendant.

Richard O. Wuerth, Gregory D. Rankin, Lane, Alton & Horst, Columbus, Ohio, for plaintiff.

William B. Logan, Jr., Luper Wolinetz Sheriff & Neidenthal, Columbus, Ohio, Chapter 7 Trustee.

Charles M. Caldwell, Office of the U.S. Trustee, Columbus, Ohio.

OPINION AND ORDER ON MOTIONS FOR SUMMARY JUDGMENT AND MOTION TO DISMISS

BARBARA J. SELLERS, Bankruptcy Judge.

I. Procedural History

Before the Court are various motions filed in this adversary proceeding by the plaintiff, John P. May ("May") and the defendant, Charles Booher & Associates, Inc. ("Booher"). Both parties seek a declaratory judgment regarding the nature and dischargeability of certain obligations contained in an employment contract between May and Booher. Specifically, May seeks a declaration from this Court that certain covenants not to compete contained in an employment contract are discharged in his Chapter 7 bankruptcy. This issue is presented to the Court through cross motions for summary judgment and Booher's motion to dismiss this adversary.

The Court has jurisdiction in this adversary proceeding under 28 U.S.C. § 1334(b) and the General Order of Reference entered in this district. This is a core proceeding under 28 U.S.C. § 157(b)(2)(I) which this bankruptcy judge may hear and determine.

II. Facts

The parties do not dispute the salient facts. May began working for Booher as an insurance agent in July 1980. During the course of his employment May had several written agreements with Booher. While May disputes whether he breached those agreements, he does not dispute that the agreements contained covenants obligating May upon the termination of his employment not to compete with Booher. These covenants generally provided that for two years after May's employment with Booher, he would not "solicit, sell to, divert, serve, accept or receive insurance agency brokerage or consulting business or employee benefit business from any customer or active prospect of CBA Charles Booher & Associates".

May left Booher's employ in November 1990. On January 30, 1991, May and his wife filed a joint petition for relief under Chapter 7 of the Bankruptcy Code. The Court issued a discharge in that joint case on June 17, 1991.

On September 23, 1991, May commenced this adversary proceeding seeking a permanent injunction against Booher from further violations of the discharge injunction provided by 11 U.S.C. § 524(a)(2). May contends that a lawsuit filed by Booher on September 9, 1991 in the Common Pleas Court of Franklin County violates the provisions of his bankruptcy discharge. May voluntarily dismissed the first, fourth and fifth claims of the complaint.¹

III. Issue Presented for Determination And Procedural Posture of Case

The parties agree that the sole legal issue before the Court is whether obligations not to compete imposed by May's employment agreements with Booher are "debts" which were discharged in May's Chapter 7 case.

Each party seeks summary judgment on this narrow legal issue pursuant to Fed. R.Civ.P. 56, made applicable to these proceedings by Fed.R.Bankr.P. 7056. May and Booher agree to the material facts necessary for the Court to determine, as a matter of law, whether the obligations not to compete imposed upon May under various employment agreements with Booher were included in the scope of the discharge issued to May under 11 U.S.C. § 727(b). If such obligations were covered by the discharge, Booher's commencement of a suit against May in state court would be a violation of the discharge injunction.

Accordingly, the Court will address only the discrete legal issues raised by the parties. No legal determination will be made regarding the enforceability of such "non-competition covenants" under Ohio law or whether May, as a matter of fact, breached any part of his employment agreements with Booher. Those issues are more appropriately addressed in the state courts.

IV. Conclusions of Law

A. The Legal Nature of the Obligation

Except as otherwise provided in the Bankruptcy Code, a discharge granted under 11 U.S.C. § 727(a) discharges a debtor "from all debts that arose before the date of the order for relief under this chapter." 11 U.S.C. § 727(b). A "debt" is "liability on a claim." 11 U.S.C. § 101(12). A "claim" is defined as:

(A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; 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;

11 U.S.C. § 101(5).

Thus, if any breach by May of the obligations imposed by the various employment agreements with Booher gave rise to a "claim" in Booher's favor and that claim arose before the order of relief in the bankruptcy case, those "debts" would be discharged under 11 U.S.C. § 727.

The analysis begins with the construction of the term "claim." The Supreme Court of the United States has addressed the issue of whether obligations under injunctions are "liabilities on claims" subject to the discharge of 11 U.S.C. § 727. Ohio v. Kovacs, 469 U.S. 274, 105 S.Ct. 705, 83 L.Ed.2d 649 (1985).

In Kovacs, the debtor failed to comply with a state court injunction to remove certain industrial waste products from his property. The state court appointed a receiver to take possession of the debtor's property. Clean up of the debtor's property had not been completed, however, before the debtor filed a voluntary petition under Chapter 11 of the Bankruptcy Code. The case was later converted to one under Chapter 7.

The Supreme Court held that the debtor's obligation under the injunction to clean his property was a "debt" (liability on a "claim") within the meaning of 11 U.S.C. § 727(b) and, thus, was discharged. Kovacs, 105 S.Ct. at 709. The Court reasoned that a "claim," as defined in 11 U.S.C. § 101(5),² includes an equitable remedy which has been reduced to a judgment, such as an injunction. 105 S.Ct. at 708. The Court then examined whether this equitable injunctive remedy "gives rise to a right to payment" within the meaning of 11 U.S.C. § 101(5). If so, then the obligations imposed by the injunction are "debts" which are discharged.

The Supreme Court agreed with the lower courts and held that the debtor could not comply with the injunction to remove industrial waste from his property without the expenditure of money. Kovacs, 105 S.Ct. at 710. This required expenditure of money distinguished the injunction against the debtor from a purely equitable remedy. Thus, where the debtor must expend money to comply with an injunction, the obligation arising under the injunction is a "debt" which is discharged under 11 U.S.C. § 727(b) unless a specific provision of 11 U.S.C. § 523(a) excepts that obligation from discharge for some other reason.

As further explained by another court, "although the terms of the injunction would not require the payment of money, to the extent that the injunction were to be effective, it would. Thus, when we look at the substance of what the plaintiff seeks, rather than the form of the relief sought, we see that the plaintiff is really seeking payment." United States v. Whizco, Inc., 841 F.2d 147, 150 (6th Cir.1988).

Thus, simply finding an affirmative duty to perform an act does not give rise to a nondischargeable obligation. Rather, the analysis should focus on the substance of the affirmative duty. If an expenditure of money is required to perform the obligation, then the affirmative duty gives rise to a "claim" and, thus, the underlying liability may be subject to the discharge issued pursuant to 11 U.S.C. § 727(b). If no other provision of the Bankruptcy Code excepts this "debt" from the operation of the discharge, it will be within the scope of the discharge.

On the other hand, if no expenditure of money is required to comply with the affirmative duty under the injunction, then there may not be a "debt" in the bankruptcy context. If there is no "debt," discharge of that underlying obligation will not occur. Several courts have reached this conclusion by applying the rationale of the Kovacs decision to employment contracts which contain "no compete" clauses. See, In re Cox, 53 B.R. 829 (Bankr. M.D.Fla.1985); In re Peltz, 55 B.R. 336 (Bankr.M.D.Fla.1985) and Carstens Health Industries v. Cooper (In re Cooper), 47 B.R. 842 (Bankr.W.D.Mo.1985).

The Cox decision was based upon facts which are similar to the facts presently before this Court. A previous employer of the debtor sought relief from the discharge injunction of 11 U.S.C. § 524 to proceed with a state court action against the debtor for alleged breaches of the debtor's employment contract. Cox held that if the state court determined that the debtor had breached the "no compete" covenants, it must also further determine whether the employer's resulting injury could be adequately compensated by monetary damages. Cox, 53 B.R. at 832. If monetary damages were found to be adequate, "then this monetary award would be a claim within the meaning of § 101(4)(B) § 101(5)(B) which would be discharged under § 727(b)." Cox, 53 B.R. at 832. If, however, the state court determined that the employer was entitled to an injunction, "then this relief would not be a `claim'". Cox, 53 B.R. at 832.

Thus, the court in Cox granted the employer limited relief from the discharge injunction to pursue an injunction against the debtor. The court relied...