Rapid Temps, Inc. v. Lamon

1The Court has subject matter and personal jurisdiction
pursuant to 28 U.S.C. §§ 1334 and 157(b); this is a core
proceeding pursuant to 28 U.S.C. § 157(b)(2)(I); and these are
findings of fact and conclusions of law as required by Rule 7052
F.R.B.P. 	This chapter 7 case was filed prior to the effective
date of most of the provisions of the Bankruptcy Abuse Prevention
and Consumer Protection Act of 2005 (“BAPCPA”), Pub. L. No. 109-
08, 119 Stat. 23, and therefore the changes enacted by that
legislation are not applicable to this case.
UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF NEW MEXICO
In re:
LINDA GAIL LAMON,
Debtor. 	No. 7-05-16328 SA
RAPID TEMPS, INC.,
Plaintiff,
v. 	Adv. No. 05-1247 S
LINDA GAIL LAMON,
Defendant.
MEMORANDUM OPINION ON PLAINTIFF’S
PARTIAL MOTION FOR SUMMARY JUDGMENT
RE: DISCHARGEABILITY OF INJUNCTIVE RELIEF
This matter is before the Court on Plaintiff’s Partial
Motion for Summary Judgment Re: Dischargeability of Injunctive
Relief (doc 15)(“Motion”) and Memorandum in Support thereof (doc
16), Defendant’s Response (doc 17) and Memorandum in Support
thereof (doc 18), and Plaintiff’s Reply (doc 21). 1 	Plaintiff’s
complaint also seeks a determination of the dischargeability of
money damages it was awarded by a state court. 	That part of the
case is not dealt with by the Motion or by this Memorandum
Opinion.
FACTS
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The facts are not in dispute. 	They consist of the admitted
allegations of the complaint, the admitted undisputed facts
contained in Plaintiff’s motion and facts found in the main
bankruptcy file, of which the Court takes judicial notice.
1. 	Debtor Linda Lamon filed a Chapter 7 bankruptcy on August 5,
2005.
2. 	Debtor was employed by Rapid Temps and entered into an
employment agreement (“Agreement”) in September, 1999, that
contained a covenant-not-to-compete. 	The Agreement states, in
part:
6. 	Non Competition
During the term of this Agreement, Employee shall
not undertake any work as an employee or consultant,
directly or indirectly, for any person, firm or
corporation other than Rapid Temps, within the staffing
industry. 	Employee agrees to refer to Rapid Temps all
opportunities within the present or contemplated
business activities of Rapid Temps that may come to the
attention of Employee, but Rapid Temps shall have the
right to reject such opportunity within its sole
discretion.
After termination of this Agreement, whether with
or without cause and whether initiated by Employee or
Rapid Temps, Employee agrees that for a period of three
(3) years hereafter, Employee will not participate
directly or indirectly, personally or as an agent,
associate, employee, partner or manager, or otherwise,
of another, in the ownership, management, operation, or
control of any business similar to the business
currently operated or planned by Rapid Temps if such
business provides services within those states in which
Rapid Temps has been actively engaged in operating its
business as evidenced by the existence of Clients and
Medical Professionals in such states.
Employee acknowledges that Rapid Temps has a
legitimate business interest in preventing Employee
from competing with Rapid Temps and that breach of the
provisions of this paragraph may damage the goodwill of
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Rapid Temps and give rise to irreparable injury to
Rapid Temps. 	Employee therefore agrees that damages
would be an inadequate remedy for the injury caused to
Rapid Temps, and Rapid Temps is therefore entitled to
injunctive relief to prohibit Employee from competition
with Rapid Temps in violation of the provisions of this
paragraph.
...
8. 	Injunctive Relief and Damages
In the event Employee violates the terms of any
part of this Agreement, and Rapid Temps applies to a
court of competent jurisdiction for an injunction
restraining Employee from further violation, as
provided in Paragraphs 5 through 7 above, such remedy
shall not be deemed to be exclusive, and Rapid Temps
shall be entitled to pursue any other remedies
available at law or equity in addition to injunctive
relief.
Ms. Lamon was hired by Rapid Temps as a medical staffing
recruiter.
3. 	The Agreement/covenant-not-to-compete does not provide for
liquidated damages.
4. 	The Agreement/covenant-not-to-compete does provide for
injunctive relief.
5. 	Debtor was terminated by Rapid Temps on June 18, 2004.
6. 	Rapid Temps brought suit against Debtor in September 2004 in
the Fifth Judicial District Court for the state of New Mexico.
Trial commenced in June 2005. 	After a five day bench trial, on
July 29, 2005, the judge sent a transmittal letter to the parties
that accompanied Findings of Fact and Conclusions of Law
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2The letter and FFCL appear at docket 19 in the main
bankruptcy case.
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(“FFCL”) 2. 	The trial court concluded that Rapid Temps was
entitled to compensatory damages in the amount of $18,137.08 and
exemplary damages in the amount of $36,274.16. 	The letter
requested that Rapid Temps’ attorney prepare a judgment and
injunction consistent with the FFCL. 	On August 1, 2005, the
state court filed the FFCL.
7. 	Some relevant conclusions of law found by the state court
include:
48. 	Defendant Lamon and Defendant SysProg, Inc. have
misappropriated, as that term is used in the New
Mexico Uniform Trade Secrets Act, NMSA 1978, § 57-
3A-2, the trade secrets of Rapid Temps by using
and disclosing those trade secrets obtained from
Rapid Temps by improper means, that is, (a)
acquiring such information with knowledge that the
information was confidential information of Rapid
Temps, and (b) in willful breach of the duty set
forth in her employment agreement regarding using
and disclosing Rapid Temps confidential
information.
49. 	This actual misappropriation should be
enjoined pursuant to the New Mexico Uniform
Trade Secrets Act, NMSA 1978, § 57-3A-2, by
prohibiting Linda Lamon from using or
disclosing all confidential information taken
from Rapid Temps. 	Counsel for Plaintiff
shall prepare an appropriate draft injunction
and judgment for submission to the court
after disclosing to counsel for Linda Lamon.
50. 	Plaintiff is entitled to damages against
Defendants Lamon and SysProg for the lost
profit from the sales by Linda Lamon to UHS
Radiation Oncology in the amount of
$14,217.58, and the sales by Linda Lamon to
Ireland Cancer Center in the amount of
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$3,919.50, pursuant to the New Mexico Uniform
Trade Secrets Act, NMSA 1978, §57-3A-2.
51. 	The misappropriation of Linda Lamon was
willful and malicious and the Court awards
twice the amount of actual damages,
$18,137.08, pursuant to the New Mexico
Uniform Trade Secrets Act, NMSA 1978, §57-3A-
2.
52. 	Plaintiff Rapid Temps is entitled to injunctive
relief pursuant to the New Mexico Trade Secrets
Act, N.M.S.A. 1978, § 57-3A-3 to prevent and
remedy past and threatened misappropriation of its
proprietary information by Defendant Lamon and an
Order from the Court requiring the return of any
misappropriated proprietary information from
Defendant Lamon or any party that has wrongfully
received such information from her. 	Plaintiff
Rapid Temps is entitled to injunctive relief as
there is no adequate remedy at law to protect its
legitimate interests. 	The injunction shall
prevent Defendant Lamon from violating the
covenant-not-to-compete, soliciting Rapid Temps’
customers, using or disclosing Rapid Temps’
confidential information, and unfairly competing.
Rapid Temps has suffered actual harm as a result
of Defendant Lamon’s post-employment placement of
medical professionals she had placed while at
Rapid Temps at medical facilities where she had
placed professionals while at Rapid Temps, which
results in irreparable injury to Rapid Temps
protectable by an injunction. 	The Court has
balanced the factors and equities in granting
injunctive relief to Plaintiff. 	Prohibiting
Defendant Lamon from working in the medical
staffing industry for a period of three years will
not result in an undue hardship on Defendant as
she has many years of business experience and
skills unrelated to medical staffing, Defendant
Lamon never engaged in medical staffing prior to
her employment with Rapid Temps, and she has sales
skills which are desirable and useful in other
industries. 	The Court exercises its discretion in
granting the injunction.
8. 	Debtor filed her Chapter 7 bankruptcy before any judgment or
injunction was filed for record.
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9. 	Debtor went to work for Medical Staffing Network (“MSN”), a
direct competitor of Rapid Temps, as a branch manager in
Albuquerque, New Mexico sometime between September 2004 and June
2005.
10. 	Debtor signed a covenant-not-to-compete with MSN.
11. 	Debtor did not share with MSN that she had a covenant-not-
to-compete with Rapid Temps when she was offered the job with
MSN.
12. 	Debtor was fired from MSN but continues to this day to work
in the temporary medical placement field.
13. 	Ten days after Debtor filed her bankruptcy proceeding, Rapid
Temps filed a motion for relief from automatic stay to enter the
judgment and injunction called for by the state court judge, and
to commence enforcement of the injunction. 	Debtor opposed the
relief.
14. 	On March 15, 2006, the Bankruptcy Court entered a Memorandum
Opinion on the Motion for Relief from Automatic Stay
Case 7-05-16328, doc 25). 	The automatic stay was modified to
allow Rapid Temps to return to the Fifth Judicial District Court
to obtain entry of a judgment and take all actions in connection
with entry of the judgment, such as legal action in connection
with supporting or modifying any finding of fact or conclusion of
law, or pursuing any appeal. 	Rapid Temps was further ordered to
take no action to enforce either the monetary or injunctive
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relief pending further order of the Court in this adversary
proceeding.
15. 	Rapid Temps filed its Motion for Partial Summary Judgment,
seeking only a determination that the injunctive relief ordered
by the state court is not a “claim” subject to discharge by the
Bankruptcy Code.
16. 	Debtor opposes this relief, arguing that the injunctive
relief is a claim subject to discharge or a rejected executory
contract under which she has no further obligations.
CONCLUSIONS OF LAW
I. 	The Agreement/Covenant not to compete was not an executory
contract.
The Debtor argues that the arrangement between Rapid Temps
and her is an executory contract. 	Although the Bankruptcy Code
does not define the term, one of the Tenth Circuit's definitions
of an executory contract is a contract in which neither party has
completely performed, and the obligations of each party remain
“complex”. 	Workman v. Harrison, 282 F.2d 693, 699 (10th Cir.
1960). 	Other definitions used by the Tenth Circuit include a
contract that has not as yet been fully completed or performed
and in which future obligations remain, or in which material
performance remains due on both sides. 	United States v. Myers
(In re Myers), 362 F.3d 667, 672-73 (10th Cir. 2004). (Citations
omitted.) 	In Shaw v. Dawson (In re Shaw), 48 B.R. 857, 859 (D.
N.M. 1985), the court used Professor Vern Countryman's now
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classic definition of an executory contract as a contract under
which the obligations of both the debtor and the other party to
the contract are so far unperformed that the failure of either to
complete performance would constitute a material breach excusing
the performance of the other. Countryman, Executory Contracts in
Bankruptcy, Part 1, 57 Minn. L.Rev. 439, 460 (1978). 	The
legislative history of the Code recites simply that “[t]hough
there is no precise definition of what contracts are executory,
it generally includes contracts on which performance remains due
to some extent on both sides.” 	H.R. Rep. 95-595, at 347,
reprinted in 1978 U.S.C.C.A.N. 5963, 6303; S. Rep. 95-989, at 58,
reprinted in 1978 U.S.C.C.A.N. 5787, 5845.
Rapid Temps terminated Debtor on June 18, 2004. 	This
terminated the contract. 	After that time Rapid Temps no longer
had any obligations remaining. 	See In re Hughes, 166 B.R. 103,
105 (Bankr. S.D. Ohio 1994)(If a contract has been terminated
prepetition, there is no contract for the trustee to reject.)
(Citing 2 Collier on Bankruptcy § 365.02 (15 th ed. 1993)); Oseen
v. Walker (In re Oseen), 133 B.R. 527, 529-30 (Bankr. D. Idaho
1991)(With no outstanding performance due on defendant’s part,
the contract was not executory and could not be rejected.);
Cooper v. Carstens Health Indus. (In re Cooper), 47 B.R. 842, 844
(Bankr. W.D. Mo. 1985)(“An employment contract contemplates pay
for work. 	Here that relationship has been terminated and debtor
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has no obligation to work for Carstens and Carstens has no
obligation to pay. ... The Court finds here that the agreement is
not executory, Carstens having no performance obligation, and
therefore the non-competition requirement may not be rejected.”)
Only the Debtor has an obligation, which is to comply with the
non-compete agreement. 	This duty, standing alone, does not make
the contract executory. 	See Fellerman and Cohen Realty Corp. v.
Clinical Plus Inc. (In re Hirschhorn), 156 B.R. 379, 388-89
(Bankr. E.D. N.Y. 1993)(Courts hold that a lease is not an
executory contract when only remaining obligation of the debtor
is a covenant not to compete)(Collecting cases); Oseen, 133 B.R.
at 529 (Plaintiff’s only remaining duty was to not to compete
with Defendant, so the contract was not executory.)
In sum, Rapid Temps has no remaining obligations to Debtor.
The Agreement/Covenant is not an executory contract and therefore
it may not be rejected.
II. 	Even if the Agreement/Covenant were executory, rejection
alone does not discharge Debtor’s obligations thereunder.
Assuming the Agreement/Covenant were an executory contract,
it is clear that it was not assumed within 60 days of the order
for relief and was deemed rejected pursuant to 11 U.S.C. §
365(d)(1). 	Rejection gives rise to prepetition breach. 	11
U.S.C. § 365(g).
“Because rejection constitutes only a breach, not a
termination, an obligation in a rejected contract continues to
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bind the debtor unless the obligation is discharged.” 	Abboud,
Dow & Wyzew, a Pennsylvania Partnership v. The Ground Round, Inc.
(In re The Ground Round, Inc.), 335 B.R. 253, 262 (1 st Cir. BAP
2005). 	(Emphasis in original.) 	See also In re Alongi, 272 B.R.
148, 153 (Bankr. D. Md. 2001)(“Rejection of an executory
contract, because it constitutes a breach, does not terminate the
contract. 	Accordingly, the rights and obligations of the parties
remain intact after a rejection.”); In re Annabel, 263 B.R. 19,
25-26 (Bankr. N.D. N.Y. 2001):
Rejection of the executory contract pursuant to Code §
365(d), however, is not tantamount to the termination
of all of the rights of the parties under the contract.
To the contrary, a debtor's rejection of an executory
contract constitutes a breach of the subject contract,
which breach, absent an earlier assumption, is
statutorily deemed to have occurred immediately prior
to the filing of the debtor's bankruptcy petition. 	See
Code § 365(g). 	“Thus, the effect of a rejection is
that a breach is deemed to exist which in the ordinary
case will give rise to a claim for damages... [and] ...
does not...affect the parties' substantive rights under
the contract...such as the amount owing or a measure of
damages for breach.” 	3 Collier On Bankruptcy, 15th
ed., ¶ 365.09[1], at 365-73 (2000) (footnotes omitted).
In this regard then, the Court must query whether the
Debtor's statutory breach of the covenant not to
compete gave rise to a claim discharged under the
Debtor's Order of Discharge. 	See Creator's Way
Associated Labels, Inc. v. Mitchell (In re Mitchell),
249 B.R. 55, 58 (Bankr. S.D. N.Y. 2000).
(Footnote omitted.); Creator's Way Associated Labels, Inc. v.
Mitchell (In re Mitchell), 249 B.R. 55, 58 (Bankr. S.D. N.Y.
2000)(“Although there is some contrary authority, it now appears
to be well-settled that rejection does not terminate an executory
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contract or necessarily avoid the rights of the non-debtor party
under the contract.”)(Citations omitted.); Kwik-Kopy Corp. v.
Klein (In re Klein), 218 B.R. 787, 790-91 (Bankr. W.D. Pa.
1998)(Covenant remains effective despite rejection.); In re
Printronics, 189 B.R. 995, 1000 (Bankr. N.D. Fla. 1995)(Contract
liabilities remain intact after rejection; issue is whether a
covenant not to compete is a dischargeable claim.)
Therefore, even if the Court could find that the
Agreement/Covenant were an executory contract that was rejected
by operation of law, that does not mean that Debtor’s obligations
under the contract were terminated. 	The issue is whether
Debtor’s obligation under the Agreement/Covenant are a
dischargeable claim.
III. Debtor’s Obligations under the Agreement/Covenant are not a
dischargeable claim.
“In New Mexico, injunctions are granted to prevent
irreparable injury for which there is no adequate and complete
remedy at law.” 	Hines Corp. v. City of Albuquerque, 95 N.M. 311,
313, 621 P.2d 1116, 1118 (1981).
{6} In determining whether to grant injunctive relief,
a trial court must consider a number of factors and
“balance the equities and hardships.” 	Key v. Chrysler
Motors Corp., 119 N.M. 267, 274, 889 P.2d 875, 882
(Ct.App. 1995) reversed on other grounds,
1996-NMSC-038, 121 N.M. 764, 918 P.2d 350. Some of
these factors include: (1) the character of the
interest to be protected; (2) the relative adequacy to
the plaintiff of an injunction, when compared to other
remedies; (3) the interests of third parties; (4) the
practicability of granting and enforcing the order; and
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(5) the relative hardship likely to result to the
defendant if granted and to the plaintiff if denied.
Wilcox v. Timberon Protective Ass'n, 111 N.M. 478,
485-86, 806 P.2d 1068, 1075-76 (Ct.App. 1990).
{7} “ ‘Injunctions are harsh and drastic remedies
[that] should issue only in extreme cases of pressing
necessity and only where there is no adequate ...
remedy at law.’” 	Hill v. Community of Damien of
Molokai, 1996-NMSC-008, ¶ 51, 121 N.M. 353, 911 P.2d
861 (quoting Padilla v. Lawrence, 101 N.M. 556, 562,
685 P.2d 964, 970 (Ct.App. 1984) (alteration in
original)). 	The granting of an injunction is an
equitable remedy, and whether to grant equitable relief
lies within the sound discretion of the trial court.
Moody v. Stribling, 1999-NMCA-094, ¶ 30, 127 N.M. 630,
985 P.2d 1210. 	The trial court's discretion will not
be disturbed unless there is an abuse of discretion.
Id. 	“An abuse of discretion occurs when a ruling is
clearly contrary to the logical conclusions demanded by
the facts and circumstances of the case.” 	Sims v.
Sims, 1996-NMSC-078, ¶ 65, 122 N.M. 618, 930 P.2d 153.
Insure New Mexico, LLC v. McGonigle, 128 N.M. 611, 614, 995 P.2d
1053, 1056 (Ct. App. 2000). 	See also Winrock Enter., Inc. v.
House of Fabrics of New Mexico, Inc., 91 N.M. 661, 664, 579 P.2d
787, 790 (1978)(Injuctive relief is appropriate when there is
imminent harm of a continuous nature because redress would
require a multiplicity of suits, rendering the injury irreparable
at law.)
In this case, the state court entered injunctive relief,
making specific findings that there was no adequate remedy at
law. 	These findings are binding on this Court and the parties
through the doctrine of collateral estoppel. 	See, e.g., Dent
Wizard Int’l Corp. v. Brown (In re Brown), 237 B.R. 740, 745
(Bankr. C.D. Cal. 1999)(Bankruptcy court was bound by state
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court’s determination that an injunction was the only viable
remedy in the case.) 	The final issue remaining then is whether
the injunctive relief awarded by the state court is a claim
subject to discharge. 	This Court joins the overwhelming majority
of courts that finds that a covenant-not-to-compete is not a
dischargeable claim.
Debtor filed a chapter 7 case, and her discharge is governed
by 11 U.S.C. § 727. 	Section 727(b) discharges a debtor from most
“debts.” 	“Debt” means liability on a claim. 	11 U.S.C. §
101(12). 	A “Claim” is defined, in relevant part, as:
[the] right to an equitable remedy for breach of
performance if such breach gives rise to a right of
payment, whether or not such right to an equitable
remedy is reduced to judgment, fixed, contingent,
matured, unmatured, disputed, undisputed, secured, or
unsecured[.]
11 U.S.C. 101(5)(B). 	Therefore, if the right to an equitable
remedy for breach of performance that gives no rise to a right of
payment is not a “claim.” 	The injunctive relief awarded against
Debtor does not give rise to a right of payment. 	It is therefore
not a claim, and not discharged by this bankruptcy proceeding.
See also Kennedy v. Medicap Pharmacies, Inc. (In re Kennedy), 267
F.3d 493, 497-98 (6 th Cir. 2001)(Covenant not to compete was not
claim and would not be discharged.); In re Udell, 18 F.3d 403,
410 (7 th Cir. 1994)(same); Annabel, 263 B.R. at 28 (same); In re
Reppond, 238 B.R. 442, 443 (Bankr. E.D. Ark. 1999)(same);
Printronics, 189 B.R. at 1002 (same); In re Hughes, 166 B.R. at
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106 (same); May v. Charles Booher & Assoc., Inc. (In re May), 141
B.R. 940, 945 (Bankr. S.D. Ohio 1992)(same); Oseen, 133 B.R. at
531 (same); Thomas v. Herzog (In re Thomas), 133 B.R. 92, 95
(Bankr. N.D. Ohio 1991); In re Peltz, 55 B.R. 336, 338 (Bankr.
M.D. Fla. 1985); In re Cox, 53 B.R. 829, 832 (Bankr. M.D. Fla.
1985). 	But see Maids Int’l Inc. v. Ward (In re Ward), 194 B.R.
703, 712 (Bankr. D. Mass. 1996)(Court found that plaintiff had
the right to obtain either money damages or an injunction against
competition. 	Therefore, the equitable remedy gave rise to a
right of payment.); In re Kilpatrick, 160 B.R. 560, 565 (Bankr.
E.D. Mich. 1993)(Michigan law allows money damages for breach of
a noncompete agreement).
CONCLUSION
The Court finds that Plaintiff’s Motion for Partial Summary
Judgment is well taken and should be granted. 	The injunctive
relief awarded by the state court in this case does not
constitute a “claim” dischargeable by Debtor’s discharge. 	The
Court will enter Partial Judgment awarding the relief requested.
Honorable James S. Starzynski
United States Bankruptcy Judge
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copies to:
Jennie D Behles
Attorney for Debtor
PO Box 7070
Albuquerque, NM 87194-7070
Roger E Yarbro
Attorney for Rapid Temps
PO Box 480
Cloudcroft, NM 88317-0480
Michael J. Caplan
Trustee
827 E Santa Fe Ave
Grants, NM 87020-2458
Office of the United States Trustee
PO Box 608
Albuquerque, NM 87103-0608
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