In re Ward

• Decision Date: 16 April 1996
• Docket Number: Bankruptcy No. 95-45186. Adversary No. 96-4037.
• Citation: 194 BR 703
• Parties: In re Michael E. and Angela L. WARD, Debtors. The MAIDS INTERNATIONAL, INC., Plaintiff, v. Michael E. and Angela L. WARD, Defendants.
• Court: U.S. Bankruptcy Court — District of Massachusetts

194 B.R. 703 (1996)

In re Michael E. and Angela L. WARD, Debtors The MAIDS INTERNATIONAL, INC., Plaintiff, v. Michael E. and Angela L. WARD, Defendants.

Bankruptcy No. 95-45186. Adversary No. 96-4037.

United States Bankruptcy Court, D. Massachusetts.

April 16, 1996.

COPYRIGHT MATERIAL OMITTED

Peter Knox, Shirley, MA, for Maids International Inc.

Andrew G. Lizotte, Hanify & King, Boston, MA, for Michael E. Ward, Angela L. Ward.

OPINION

JAMES F. QUEENAN, Jr., Bankruptcy Judge.

Seeking to enforce a noncompetition clause in its franchise agreement, The Maids International, Inc. ("Maids") has brought this complaint to enjoin Michael E. Ward and Angela L. Ward (the "Debtors") from owning or operating a maintenance and cleaning service within a fifty mile radius of the franchised territory. Maids contends neither the Debtors' bankruptcy filing nor rejection of their covenant not to compete affects its right to an injunction against the Debtors' competition. I am thus faced with the question of whether Maids' right to injunctive relief is a "claim" within the meaning of the Bankruptcy Code and hence subject to being discharged. At the hearing on Maids' motion for a temporary restraining order, I ruled its right to an injunction is a claim. I therefore dismissed the complaint and ordered Maids to file a proof of claim, reserving jurisdiction to issue the present opinion. Set forth here are my findings of fact and conclusions of law in support of the order of dismissal.

I. FACTS

The facts are not in dispute. Maids has developed a system for establishing and operating a household maintenance and cleaning service. Having a principal office in Omaha, Nebraska, Maids franchises its rights in the system to numerous parties throughout the United States.

On April 10, 1989, Maids signed a franchise agreement with a corporation owned and operated by the Debtors named Award Services, Inc. ("Award"). In addition to signing on behalf of Award, the Debtors signed the agreement personally as guarantors of Award's performance thereunder. The agreement also includes the Debtors within the meaning of the term "Franchise", thereby making them jointly responsible with Award. Under the agreement, Maids gave Award the exclusive right to use its system and the name "Maids" in Concord, Massachusetts and in several nearby towns. In return, Award paid Maids $15,900 and obligated itself (and the Debtors) to pay Maids a royalty based on a percentage of its gross sales at rates which range from 4.5% to 7%, depending upon the amount of weekly gross sales. The agreement was for an initial term of five years.

The following provisions of the franchise agreement are of relevance to the present proceeding:

XV. COVENANTS

. . . . .

C. FRANCHISEE further covenants that for a period of two (2) years after the termination or nonrenewal of the franchise, regardless of the cause of termination, it shall not, either directly or indirectly, for itself, or on behalf of or in conjunction with any other person, persons, partnership or corporation, own, maintain, engage in, or participate in the operation of a maintenance and cleaning service system within a radius of fifty (50) miles of the area designated hereunder or any then existing The Maids Unit Franchise.

. . . . .

E. FRANCHISEE acknowledges that a violation of any covenant in this Paragraph will cause irreparable damage to FRANCHISOR, the exact amount of which may not be subject to reasonable or accurate ascertainment, and therefore, FRANCHISEE does hereby consent that in the event of such violation, FRANCHISOR shall as a matter of right be entitled to injunctive relief to restrain FRANCHISEE, or anyone acting for or on behalf (sic), from violating said covenants, or any of them. Such remedies, however, shall be cumulative and in addition to any other remedies to which FRANCHISOR may then be entitled. FRANCHISEE represents and acknowledges that in the event of the termination of this Agreement for whatever cause, its experience and capabilities are such that it can obtain employment in business engaged in other lines or of a different nature than that of the operation of a maintenance and cleaning service franchise and that the enforcement of a remedy by way of injunction will not prevent it from earning a livelihood. In the event FRANCHISOR brings suit to enforce any provision hereof, FRANCHISOR shall be entitled to receive, in addition to any relief or remedy granted, the cost of bringing such suit, including reasonable attorney\'s fees. The covenants set forth in this Paragraph XV shall survive the termination or expiration of this Agreement.

. . . . .

XVIII. RESOLUTION OF DISPUTE

Except as to a breach for non-payment of any fee for royalty or advertising as set forth heretofore, any controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be settled by arbitration conducted in Omaha, Nebraska in accordance with the commercial Arbitration Rules of the American Arbitration Association and judgement upon any award rendered by the Arbitrator may be entered in any court having jurisdiction thereof.

. . . . .

XXVIII. LIABILITY FOR BREACH

In the event of any default on the part of either party hereto, in addition to any other remedies of the aggrieved party, the party in default shall pay to the aggrieved party all amounts due and all damages, costs and expenses, including reasonable attorneys fees, incurred by the aggrieved party as a result of any such default.

. . . . .

XXXII. APPLICABLE LAW

This Agreement was accepted in the State of Nebraska and shall be interpreted and construed under the laws thereof, which laws shall prevail in the event of any conflict of laws, except to the extent governed by the United States Trademark Act of 1946 (Lanham Act, 15 U.S.C. Sections 1051 et seq.).

. . . . .

XXXIII. EQUITABLE RELIEF

Nothing herein contained shall bar the right of either party to obtain injunction relief against threatened conduct that will cause loss or damages under the usual equity rules, including the applicable rules for obtaining preliminary injunctions, provided an appropriate bond against damages be provided.

. . . . .

XXXIV. FRANCHISEE

The term "FRANCHISEE" shall include all persons who succeed to the interest of the original FRANCHISEE by transfer or operation of law and shall be deemed to include not only the individual or entity defined as "FRANCHISEE" in the introductory paragraph of this Agreement, but shall also include all partners of the entity that executes this Agreement in the event said entity is a partnership and all shareholders, officers and directors of the entity that executes this Agreement in the event said entity is a corporation. By their signatures hereto, all partners, shareholders, officers and directors of the entity that signs this Agreement as FRANCHISEE acknowledge and accept the duties and obligations imposed upon each of them individually by the terms of this Agreement. The singular usage incudes the plural and the masculine and neuter usages include the other and the feminine.

The franchisee agreement expired on April 9, 1994, the end of its five year term. Thereafter, the Debtors commenced operation of a cleaning service within the franchised territory. They operate the business under the name "Mops" and do not hold themselves out as operating a franchise of Maids.

Maids responded to this competition with a series of legal actions. It first commenced an arbitration proceeding in Omaha with the American Arbitration Association. This was uncontested by the Debtors. On March 31, 1995, the arbitrator awarded Maids damages (including interest) of $29,232. He also ordered the Debtors to cease and desist the ownership or operation of a maintenance and cleaning service until April 9, 1996, within a radius of fifty miles from the franchised area or within a radius of fifty miles from any Maids franchise existing on April 9, 1994. Maids then brought suit in the District Court of Douglas County, Nebraska. On July 20, 1995, that court entered a default judgment against the Debtors in the sum of $61,056. Apparently this was in part a confirmation of the arbitration award. At no time has any court entered an injunction against the Debtors competing, in confirmation of the arbitration award or otherwise. Maids next brought its attack closer to home. On November 1, 1995, it filed suit on the judgment in the District Court of Concord, Massachusetts. That court authorized attachments of the Debtors' residence and bank accounts.

Shortly thereafter, on November 13, 1995, the Debtors filed a petition with this court requesting entry of an order for relief under chapter 7 of the Bankruptcy Code. Undeterred, Maids on January 25, 1996 filed its complaint commencing the present adversary proceeding. In its complaint Maids requested an injunction against the Debtors owning or operating a maintenance and cleaning establishment within a fifty mile radius of the franchised territory. At the same time, Maids filed a motion for a temporary restraining order and asked for an emergency hearing. At the hearing on February 5, 1996, I denied the motion, dismissed the complaint and ordered Maids to file a proof of claim. Maids thereafter filed a proof of claim within the permissible filing period.

II. VALIDITY OF DEBTORS' COVENANT NOT TO COMPETE

The franchise agreement states it shall be "interpreted and construed" under the law of Nebraska, which the agreement says is where Maids accepted it.¹ Contracting parties may stipulate as to the jurisdiction whose law shall govern their contract, particularly when one of them has a place of business in the named jurisdiction or the contract was executed there.² In any event, for our purposes the laws of Nebraska, Massachusetts, and elsewhere are essentially the same as to the validity and enforceability of the Debtors' covenant not to compete.

Covenants not to compete are often made by sellers of...