In re Udell

Barry Udell (debtor) worked for Standard Carpetland USA, Inc. (Carpetland) in Fort Wayne, Indiana. Udell’s employment contract included a noncompete covenant prohibiting Udell from competing with Carpetland for three years after leaving Carpetland. The covenant provided that if Udell actually breached or threatened to breach the noncompete agreement, Carpetland would be entitled to injunctive relief, reasonable attorney fees incurred by Carpetland in obtaining the injunction, and stipulated damages of $25,000. Udell left Carpetland and purchased a local carpet store shortly thereafter. Udell subsequently sued Carpetland in Indiana state court to recover compensation allegedly owed to him under his employment contract, and Carpetland counterclaimed for damages and an injunction for Udell’s alleged breach of the noncompete covenant. The trial court granted Carpetland a preliminary injunction under Indiana law, which provided that equitable relief was appropriate only if an award of damages was inadequate. Several days later, Udell filed a Chapter 13 bankruptcy petition. Carpetland sought emergency relief from the Bankruptcy Code’s automatic stay to enforce the preliminary injunction. Carpetland asserted that relief from the stay was appropriate because Carpetland’s right to an injunction was not a “claim” for purposes of the Bankruptcy Code and could not be discharged in the bankruptcy. The bankruptcy court agreed and granted Carpetland relief from the stay to enforce the injunction. The bankruptcy court noted that under 11 U.S.C. § 101(5)(B), a “claim” includes a right to an equitable remedy for breach of performance if the breach “gives rise to a right to payment.” The court reasoned that Udell’s breach of the noncompete covenant giving rise to the injunction did not give rise to a right to payment, because the state court had necessarily held that Carpetland’s right to an injunction could not be satisfied by an award of damages. The district court reversed, and Carpetland appealed.