Silk Plants, Etc. Franchise Systems, Inc. v. Register (In re Register)

In 1986, Perry and Martha Register (debtors) entered a franchise agreement with Silk Plants, Etc. Franchise Systems, Inc. (Silk Plants). The franchise agreement granted the Registers a franchise to operate a Silk Plants, Etc. store. The agreement also contained a noncompete covenant prohibiting the Registers from engaging in any business that offered or sold similar products to those sold at Silk Plants, Etc. within 10 miles of the Registers’ Silk Plants, Etc. store for a two-year period. The noncompete covenant was enforceable only if Silk Plants performed as promised under the franchise agreement. In March 1988, the Registers filed for Chapter 13 bankruptcy. The Registers subsequently rejected their Silk Plants, Etc. franchise agreement as an executory contract (i.e., a contract under which both parties still held unperformed obligations). Following the rejection, the Registers began operating a business similar to their former Silk Plants, Etc. franchise. Silk Plants brought an adversary proceeding against the Registers in the bankruptcy case, asserting that the Registers’ operation of their business violated the noncompete covenant in the franchise agreement. Silk Plants sought to enjoin the Registers from operating the business. In support of its position, Silk Plants claimed that the noncompete covenant was severable from the franchise agreement and was not executory, meaning that the Registers could not reject the covenant. Silk Plants further asserted that because a breach of a noncompete covenant gives rise to a claim for equitable relief rather than monetary damages, the injured party does not have a claim as defined by the Bankruptcy Code, and the bankruptcy should not affect the party’s right to relief.