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The Franchise Memorandum

Texas Bankruptcy Court Allows Franchisor to Seek Enforcement of Nondisclosure and Nondisparagement Agreements in Bankruptcy
Posted in Bankruptcy

A federal bankruptcy court in Texas held that a former franchisor can seek continued enforcement of its nondisclosure and nondisparagement agreements with a debtor and former franchisee, even following the franchisee’s bankruptcy. In re Lager, 2022 WL 3330421 (Bankr. N.D. Tex. Aug. 11, 2022). James Lager operated a Pirtek USA franchise from 2012 to 2020, when Pirtek terminated the franchise agreement. Following termination, Lager threatened to publish an exposé of Pirtek’s allegedly discriminatory practices. The parties entered into a settlement agreement, whereby Lager agreed to nondisclosure and nondisparagement agreements. Lager subsequently breached these agreements and, on the eve of arbitration, declared bankruptcy and rejected the agreements. Pirtek sued, seeking to enforce its restrictive covenants. Lager argued that, because he had rejected and rescinded the agreements in bankruptcy, he was no longer bound by them.

The court disagreed with Lager. In light of the recent Supreme Court ruling in Mission Prod. Holdings v. Tempnology LLC (In Re Tempnology, LLC), 139 S. Ct. 1652 (2019), the court held that Pirtek’s rights survived in these circumstances because rejection in bankruptcy “does not terminate the contract[,] [r]ather the counterparty retains the rights it has received under the agreement.” Importantly, because the restrictive covenants did not require affirmative action on the part of Lager, the restrictive covenants survived rejection of the contract in bankruptcy.

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The Franchise Memorandum is a collection of postings on summaries of recent legal developments of interest to franchisors brought to you by Lathrop GPM LLP. 

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