Auto-Lab Franchising, LLC (“Auto Lab”) franchises Auto Lab Complete Car Care Centers.^[5] In 2020, Empower Central Michigan, Inc. (“Debtor”) purchased a Michigan Auto Lab location.^[6] The parties of this transaction entered into a franchise agreement (“Franchise Agreement”) which contained a non-compete provision (“Non-compete”).^[7] They also entered into a separate confidentiality agreement.^[8]  The Franchise Agreement identified Auto-Lab as the franchisor and the Debtor as the franchisee and included a liquidated damages provision in the event of a material breach by the franchise owner.^[9] Additionally, it included a Non-compete to protect the Franchise’s trademarks. Finally, the Confidentiality Agreement contained similar obligations as the Non-compete and was an incentive for Auto-Lab to transfer confidential information to the Debtor.^[10]  On August 4, 2023, the Debtor filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code.^[11] The Debtor proposed a plan that provided for the rejection of the Franchise Agreement and the Confidentiality Agreement. ^[12] Acknowledging an existing material breach, the Debtor moved to reject the agreements prior to confirmation of the plan, arguing that the franchise fee—its largest expense—no longer justified the Franchise Agreement.^[13] In response to the Debtor’s motion, Auto Lab argued that although the Franchise Agreement may be an executory contract, the Non-compete within the agreement was not executory and could not be rejected. The Debtor also argued that (1) Auto Lab had fully performed under the confidentiality agreement, so no material obligation remained due; and (2) the Confidentiality Agreement was not executory under section 365 of the Bankruptcy Code.^[14]

According to the Court, a contract is executory if “performance remains due to some extent on both sides.” ^[15]The Court found that the Franchise Agreement was executory because performance was still due from both parties of the agreement.  However, the Court considered the Confidentiality Agreement separate from the Franchise Agreement because it intended to give protection to confidential intellectual property throughout the franchises rather than alternative means of monetary relief.  The Court found that this separate agreement was non-executory because Auto Lab completed performance of all its material obligations.^[16] As a result, the Confidentiality Agreement could not be rejected.^[17]

Next, the Court considered whether there was a remedy available to the creditor if the Debtor was able to reject, and thus breach, the Franchise Agreement, particularly, the Non-compete within the Franchise Agreement.^[18] To do so, the court determined whether the agreements intended to give rise to monetary claims, equitable relief, or both.^[19] A “claim” according to Bankruptcy Code section 101(5)(B) is the “right to an equitable remedy for breach of performance if such breach gives rise to a right to payment.”^[20] Therefore, if there is a monetary alternative to an equitable remedy, it is not a “claim” as contemplated by the Bankruptcy Code, and is not dischargeable in bankruptcy.^[21] Because the Non-compete did not give rise to monetary damages, it remained enforceable post-rejection of the Franchise Agreement as a whole.^[22] Additionally, even if the Confidentiality Agreement was executory, in the event of a breach, Auto Lab would be entitled to an injunction prohibiting further breaches.^[23] The Court found that the protections of the Confidentiality Agreement and Non-compete provision amounted to equitable relief, not an alternative to a right of payment, and could not be reduced to a monetary claim under 11 U.S.C. § 101(5)(B); thus, they remained enforceable.^[24]

Under chapter 11 of the Bankruptcy Code, a debtor may be permitted to reject an executory agreement, which generally refers to a contract where performance is still due from both parties. However, even if the agreement is executory and subject to rejection, certain provisions of the agreement remain enforceable if the creditor has a claim for equitable relief that cannot be satisfied through monetary compensation.^[25]