## Facts

- Perry and Martha Register entered into a franchise agreement with Silk Plants, Etc. Franchise Systems, Inc. on March 8, 1986 to operate a specialty retail store selling artificial plants and related products.
- The agreement included a covenant not to compete that barred the Registers, for two years after termination, from operating a similar business within a 10-mile radius; enforcement was conditioned on the franchisor’s performance under the agreement.
- The Registers filed a Chapter 13 bankruptcy petition on March 15, 1988.
- By agreed order dated May 18, 1988, the Registers rejected the franchise agreement as an executory contract under 11 U.S.C. § 365.
- After rejection, the Registers operated a business similar to their former franchise in the same general area.
- Silk Plants filed an adversary proceeding seeking an injunction to enforce the noncompete.
- Silk Plants argued the noncompete was severable and not executory, or alternatively that injunctive enforcement was not a bankruptcy “claim” subject to plan treatment.

## Issues

1. Whether the covenant not to compete was part of an executory franchise agreement subject to rejection under 11 U.S.C. § 365 or instead severable and independently enforceable.
2. Whether the franchisor’s request to enforce the noncompete by injunction constituted a “claim” under the Bankruptcy Code because the breach gave rise to a right to payment.
3. Whether rejection of the franchise agreement barred post-rejection injunctive enforcement of the noncompete and limited the franchisor to bankruptcy claim treatment.

## Decision

- The court held the franchise agreement, including the noncompete covenant, was an executory contract that the debtors validly rejected under § 365.
- The court treated rejection as a breach that generated a prepetition bankruptcy “claim” for the franchisor’s rights associated with the noncompete.
- The court denied injunctive relief, concluding the franchisor’s rights had to be addressed through the Chapter 13 process rather than enforced outside it.

## Legal Principles

- A covenant not to compete embedded in a franchise relationship may be treated as part of a single executory contract when its enforceability depends on performance obligations under the agreement.
- Rejection of an executory contract under 11 U.S.C. § 365 operates as a breach deemed to occur immediately before the petition date, converting the counterparty’s contract rights into a prepetition claim for bankruptcy purposes.
- Under the Bankruptcy Code’s definition of “claim,” a right to an equitable remedy is a claim if the breach also gives rise to a right to payment; where monetary damages can compensate the harm, injunctive relief is generally subject to bankruptcy claim treatment.
- Creditors may not avoid bankruptcy administration of contractual rights by characterizing economically compensable injuries as purely equitable remedies.

## Conclusion

The bankruptcy court refused to enjoin the debtors from competing after rejection of their franchise agreement, holding that the noncompete was part of an executory contract rejected under § 365 and that the franchisor’s enforcement interest constituted a bankruptcy “claim” because the breach could be remedied by payment.


Silk Plants, Etc. Franchise Sys., Inc. v. Register (In re Register), 95 B.R. 73 (Bankr. M.D. Tenn. 1989)