Our clients expect settlement agreements to be enforceable. Such agreements often contain activity restrictions, like noncompete agreements and confidentiality provisions. U.S. Bankruptcy Court Judge Michelle Jerson of the Northern District of Texas had the opportunity to consider the consequences of a flagrant breach of a settlement agreement in the case of Pirtek USA v. James Bradley Lager, (Bankr. N.D. Texas, 2023). Jerson carefully marshalled the facts in this very interesting opinion addressing important issues of contract law, franchise law and dischargeability in bankruptcy.

The defendants, James Bradley Lager (the debtor) and his company JBL Hose Service LLC d/b/a Texas Hose Pro (JBL), had signed two successive and confidential settlement agreements with its franchisor, Pirtek USA, LLC (Pirtek) in order to resolve nonrenewal by Pirtek of two franchise agreements. In the first settlement, debtor and JBL agreed to pay unpaid amounts to the franchisor, observe the noncompete provisions and maintain confidentiality. Within months of entering into the first settlement agreement, counsel to the debtor and JBL demanded $9 million from Pirtek and rescission of the first settlement agreement. The parties renegotiated the first settlement agreement.

Under the second settlement agreement, Pirtek agreed to pay JBL $300,000 and the defendants agreed to very robust nondisclosure and nondisparagement provisions. After signing the second settlement agreement, the defendants went on a campaign to publicly malign Pirtek. Among the public disparagements that violated the second settlement agreement, the defendants posted allegations of Pirtek’s racism on social media, sent a copy of the second settlement agreement to the franchise gripe site, Unhappyfranchisee.com, and offered the publisher of the gripe site a book deal. Not satisfied by mere disclosure of confidential information, and publishing of information falsely alleging racism, defendants retained the publisher of the gripe site for active public relations against Pirtek, and notified various regulators of franchise laws of alleged bad acts by Pirtek.

During this period of disparagement, Pirtek had filed an arbitration against defendants seeking damages for these contract violations and requested an injunction against public disparagement. The arbitrator issued a temporary restraining order against the defendants, which the defendants flagrantly violated. Right before the first hearing in the arbitration, the defendants filed voluntary petitions in bankruptcy and the cases were jointly administered, staying the arbitration. Pirtek filed an adversary proceeding for breach of the settlement agreement, enforcement of its executory provisions, liquidated damages, counsel fees and nondischargeability. The defendants counterclaimed alleging violations of the Texas Unfair and Deceptive Trade Practices Act and a variety of other business torts. Pirtek moved for summary judgment on all claims and counterclaims which was substantially granted.

The debtor opposed the nondischargeability claim, asserting that the breach of contract did not rise to the level necessary to warrant nondischargeability under 11 U.S.C. Section 523(a)(6) and that Pirtek failed to specify the precise harm it suffered other than breach of contract. The court noted that the exception to discharge under Section 523(a)(6), when successfully litigated, is “almost universally in the context of a tort claim,” but that the court stated the U.S. Court of Appeals for the Fifth Circuit has held that “a knowing breach of a clear contractual obligation that is certain to cause injury may prevent discharge under Section 523(a)(6), regardless of the existence of separate tortious conduct.” See Williams v. IBEW Local 520 (In re Williams), 337 F.3d 504, 509 (5th Cir. 2003). As stated in the opinion, “… the focus of the court is ‘not the specific injury which occurred,’ but rather ‘the intent to cause an injury or to intentionally act in a manner which the debtor knows should cause injury … ’the test for willful and malicious injury under Section 523(a)(6) … is condensed into a single inquiry of whether there exists ‘either an objective substantial certainty of harm or a subjective motive to cause harm’ on the part of the debtor.’” (citing Berry v. Vollbracht (In re Vollbracht), 276 F. App’x 360, 361 (5th Cir. 2007) (quoting Williams, 337 F.3d at 509 (5th Cir. 2003)). The court rejected the debtor’s argument that the plaintiff had failed to fulfill its burden by failing to specify the “precise harm” it suffered. The court next considered the knowledge and intent of the defendants at the time of the breaches.

The court found that the debtor knew or should have known that accusing a business of racially discriminatory practices would materially harm its reputation and that the debtor acted with the requisite mens rea. The extreme nature of the debtor’s statements demonstrated that the debtor intended to harm Pirtek’s reputation by breaching the second settlement as the summary judgment record is replete with evidence of numerous instances of the debtor directly posting to his own personal social media account disparaging content and defamatory comments about Pirtek and its executives, and their purportedly racist and abusive business practices. The court concluded there was no doubt that nondischargeability was required. The opinion provides guidance regarding the elements necessary to prove nondischargeability based on a contract breach.

Damages are difficult to assess for the breach of a confidentiality agreement. The court enforced the liquidated damage provision contained in the second settlement agreement, which was the consideration paid under the second settlement agreement and counsel fees and costs incurred by Pirtek. The court also enforced all of the remaining restrictive covenants.

The court and Pirtek did all they could against a disingenuous party. Pirtek may not have received the indubitable equivalent of its original bargain, but the court concluded that it was entitled to its liquidated damages, which is the remedy that it negotiated for itself. All in all, the parties did receive rough justice, and we received a very instructive opinion.

Reprinted with permission from the August 17, 2023, issue of The Legal Intelligencer© 2023 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.