The right to equitable relief constitutes a claim only if it is an alternative to a right to payment or if compliance with the equitable order will itself require the payment of money.
The Kennedys entered into a franchise agreement to operate a Medicap Pharmacy in Owensboro, Kentucky. Under the franchise agreement, the Kennedys could not "own, operate, consult with, or be employed by or in a drug store or pharmacy located within two miles of the Medicap Pharmacy (R) store licensed hereunder" for a period of two years following expiration or termination of the franchise agreement.
Medicap obtained a money judgment against the Kennedys from an Iowa state court for nonpayment of royalty fees under the franchise agreement. The Kennedys terminated the franchise agreement. The Kennedys concede that they breached the non-compete covenant by working in a pharmacy known as Kennedy Pharmacy at the same location as the Medicap Pharmacy. Medicap brought an action in an Iowa state court to enjoin the operation of the Kennedy Pharmacy in violation of the non-compete covenant. The case was later removed to the United States District Court for the Southern District of Iowa.
The Kennedys filed a Chapter 13 bankruptcy petition, which they converted to Chapter 7. The Kennedys obtained a discharge. Medicap filed this adversary proceeding requesting a determination that the Kennedys could not reject the franchise agreement because it was terminated pre-petition, and that Medicap's right to equitable relief for breach of the covenant not to compete was not dischargeable in bankruptcy. Medicap also requested a permanent injunction enforcing the covenant not to compete.
The bankruptcy court granted summary judgment and terminated the automatic stay to permit Medicap to seek an injunction in the Iowa district court. The Kennedys appealed to the United States District Court for the Western District of Kentucky. The district court affirmed the decision of the bankruptcy court, and this appeal followed.
Did the district court and bankruptcy court err in finding the franchisor's right to an equitable remedy for breach of the covenant not a "claim" dischargeable in bankruptcy?
The Court found that in this case, compliance with an injunction would not require the expenditure of money. The Kennedys would simply be required to cease operating their pharmacy in violation of the franchise agreement. Thus, the court held that the Medicap Pharmacies, Inc.'s right to equitable relief did not equate to being a claim. Nor was the requested injunction an alternative to the right of payment.