Should violation of a noncompete agreement lead to a debt that cannot be discharged

Judge Williamson recently denied summary judgment ruling that damages from an intentional violation of a noncompete agreement could still be discharged in a chapter 7 bankruptcy. In Edwards Moving & Rigging, Inc. v. Jenkins (In re Jenkins), 2022 Bankr. LEXIS 1047, Case No 8:21-bk-04085; adv. 8:21-ap-00316-MGW (Bankr. M.D. Fla. 14 April 2022) the district court had found that the debtor (Jenkins) had both violated his noncompete agreement with Edwards Moving & Rigging, Inc., but that Jenkins also may have attempted to conceal his violation by erasing his Edwards-issued smartphone. The district court held Jenkins in contempt for violating a preliminary injunction. Edwards sought to find the debt nondischargeable under 11 U.S.C. 523(a)(6) asserting that the preclusive effect of the district court order mandated that the debt be excepted from discharge.

Judge Williamson found mitigating factors in the background of the case. Jenkins left his job with Edwards for personal reasons, told the company he was leaving and who he was going to work for, and did not attempt to steal any of Edwards customers or employees or take any documents or information. This raised an issue of material fact as to whether there was an intent to injure Edwards, or whether he intentionally committed an act that was substantially certain to injure Edwards, thus precluding summary judgment.

Jenkins had to be trained for his position at Edwards, which training normally takes 2-3 years. Jenkins worked for Edwards for 2 and ½ years, but the travel required for the job was hard on Jenkins and his family. Jenkins advised Edwards of this issue, and in April 2019 Jenkins gave Edwards his two weeks notice, advising them he was going to go work for a competitor.

In a lawsuit against Jenkins the district court ultimately found that Jenkins had breached his noncompete agreement, and found Edwards was harmed by such breach as to the time and ‘know-how’ it had invested into Jenkins, and by the void caused by his departure. The district court found that the harm caused Edwards was incalculable. The Court issued an injunction preventing Jenkins from working for the new employer until May 21, 2022. It awarded fees to Edwards, and subsequently found a breach of the injunction, resulting in a judgment against Jenkins for $3892,968.12. This was followed by a chapter 7 bankruptcy by Jenkins.

Edwards relies on In re O’Connor, 2010 WL 390726 (Bankr. W.D. La, 10 Oct 2010) where a debtor violated a noncompete clause by starting a competing business and soliciting the former employer’s customers. In that case as well a non-bankruptcy court found a violation of the agreement, issued an injunction, found that the injunction had been violated, and actually sentenced the debtor to 12 months imprisonment. The debtor transferred his interest in the business to his brother as a front, and continued to operate the business. The critical facts in determining that the debt was nondischargeable in O’Connor was that he set up a competing business and solicited the prior employer’s customers; and that the violation continued after the injunction and concealed a continuing violation by transferring the business to his brother.

The factors distinguishing this case from O’Connor is that Jenkins left due to the strain the travel was causing to his family. Also Jenkins did not retain any tools , documents, or data. He did not solicit any of Edward’s customers. While the resetting of the smartphone could be viewed as an attempt to conceal the breach, Jenkins was up front with Edwards as to his plans to work for a competitor.

These factors raise the issue of even given a breach of the noncompete agreement, but whether Jenkins ‘committed an intentional act the purpose of which was to cause injury or which was substantially certain to cause injury’ to Edward. The district court’s findings are entitled to preclusive effect, but do not establish that the violation of the noncompete agreement establishes a willful and malicious injury under §523(a)(6) as a matter of law. Summary judgment was denied.

Michael Barnett has be board certified in consumer bankruptcy law by the American Board of Certification since 1993, and is AV rated by Martindale Hubbell*. AV Preeminent®: The highest peer rating standard. This is given to attorneys who are ranked at the highest level of professional excellence for their legal expertise, communication skills, and ethical standards by their peers.

Michael Barnett
813 870-3100
https://hillsboroughbankruptcy.com

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