Once triggered by a debtor’s bankruptcy petition, the automatic stay suspends a parties’ right to commence or continue an action against property of the debtor’s estate. In general, a party can seek relief from the automatic stay for a variety of reasons, including for cause, lack of adequate protection or that the debtor has no equity in the property and the property is not necessary for reorganization. In a case of first impression, a district court in Pennsylvania has found that an injunction enforcing a non-compete provision in a franchise agreement was not a “claim” against the bankruptcy estate, under 11 U.S.C.S. § 101(12), since the injunction was a form of equitable relief for which an award of damages was not a viable alternative, and, thus, the injunction was not subject to the automatic stay.
In In Re Stone Resources, Inc., __ B.R. __, 2011 U.S. Dist. LEXIS 4017925 (E.D. Pa. Bankr. September 11, 2011) (unpublished) the debtor entered into a franchise agreement in 2000 which allowed it to use the franchiser’s trademarks and proprietary processes in its stone restoration and maintenance business. The agreement contained a covenant that prohibited the debtor from competing with the franchiser or its affiliates for two years after the agreement ended, and the franchiser sued the debtor in federal district court in May 2010, seeking an order enforcing that covenant. The U.S. District Court for the Eastern District of Pennsylvania issued a preliminary injunction in December 2010, which required the debtor to cease its business operations and turn over assets to the franchiser.
The franchisee declared Chapter 11 bankruptcy in February 2011, and the franchiser asked the bankruptcy court to dismiss the debtor’s bankruptcy case pursuant to 11 U.S.C.S. § 1112(b) or, in the alternative, to grant the franchiser relief from the automatic stay under 11 U.S.C.S. § 362(d) (1) so it could enforce the preliminary injunction. The bankruptcy court denied the franchiser’s motion holding that there was no evidence that the debtor declared bankruptcy in bad faith, and lifting the stay so the franchiser could enforce the district court’s injunction would have made it impossible for the debtor to reorganize its business and pay its creditors.
The franchisor then appealed to the District Court. The District Court held that the bankruptcy court abused its discretion in denying franchisor’s motion for stay relief in order to enforce preliminary injunction ordering a debtor to, inter alia, cease and desist in the operation of a business in accordance with the terms of a covenant not to compete. The District Court found that where the only remedy available for a cause of action is an equitable remedy that claim is not dischargeable in bankruptcy and not subject to the automatic stay.