Maids Int'l v. Ward (In re Ward) - 194 B.R. 703 (Bankr. D. Mass. 1996)

Rule:

If the beneficiary of a covenant not to compete elects to receive damages for loss of future profits, he gets the lost profits. Lost profits are a proper element of damages for any breach of contract so long as at the time of the contract the breaching party had reason to know they would be the probable result of breach.

Facts:

Seeking to enforce a noncompetition clause in its franchise agreement, the creditor, The Maids International, Inc., has brought the present complaint to enjoin the debtors, Michael E. Ward and Angela L. Ward, from owning or operating a maintenance and cleaning service within a fifty-mile radius of the franchised territory. Maids contended that neither the Debtors' bankruptcy filing nor rejection of their covenant not to compete affected its right to an injunction against the Debtors' competition.

Issue:

Was Maids’ right to injunctive relief a “claim” within the meaning of the Bankruptcy Code, and hence, subject to being discharged? 

Answer:

Yes.

Conclusion:

The court held that creditor had a right to either damages for debtors' future competition or an injunction against the competition. The court also stated that creditor's alternative right to damages from debtors' future competition in breach of their covenant not to compete was a right of payment within the meaning of the statutory definition of an equitable claim under 11 U.S.C.S. § 101(5). The court, following the plain meaning of the statute, found that two fundamental policies of the Bankruptcy Code should be followed: the policy favoring a debtor's fresh start and the policy favoring equality among holders of similar rights. Thus, the creditor’s alternative right to damages from the debtors’ future competition in breach of their covenant not to compete is a "right to payment" within the meaning of the statutory definition of an equitable claim. Hence, under the definition, the creditor’s injunctive rights constitute a claim, and its claims could be discharged in bankruptcy.