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Non-Compete Covenants and New York Bankruptcy

Sometimes employers ask workers to sign “non-compete” agreements to protect the employer’s interests, usually trade secrets or client information that is crucial to its business. The agreement limits the employee’s ability to work in the same occupational field for another employer (including self-employment) for a certain time period in a certain location in exchange for employment, increased pay, or professional advancement. Because non-compete agreements are contracts, the question arises as to what happens to them in New York bankruptcy.

The short answer is that there is rarely any direct effect if neither party has broken the agreement. The non-compete doesn’t so much create a monetary debt between an employee-debtor and an employer, so there’s nothing to discharge or repay. The employer is offering work or other professional benefits, and the employee is promising to refrain from future activity.

Things get trickier after an employee has breached a non-compete agreement because the damages are either injunctive relief—a court order preventing the employee from working—or monetary damages. In the case of the latter, the damages become an unsecured debt. These can be discharged or worked through in a chapter 13 repayment plan. An injunction, by contrast, might interfere with a debtor’s bankruptcy by forcing him or her to accept a lower-paying job. Lower pay can help debtors stay in chapter 7 because it’s means tested, but it can also seriously hamper a chapter 13 plan. Changing jobs might jeopardize the debtor’s ability to either complete or propose a plan that the court will accept.

When the roles are reversed, however, a different set of problems can emerge. For example, if an employee leaves a company, and then that company dissolves in chapter 7, it’s unlikely that any of the former company’s creditors can enforce the non-compete agreement. Debtors working as sole proprietors might have better luck enforcing non-compete agreements against former employees because the employer’s benefits under the agreement (protection of the employer’s business interests) stick to individual owners. Partnerships and similar entities might be able to find some success asserting their rights under an agreement if they intend to continue their business. Fortunately, many non-compete agreements contemplate these situations, so they tend not to come up in bankruptcy.

If you think a non-compete agreement might cause problems with your bankruptcy or the opposite party’s then you should consult with an experienced New York bankruptcy lawyer.

For answers to more questions about employment agreements in bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced New York bankruptcy attorney Bruce Weiner for a free initial consultation.

Rosenberg, Musso & Weiner, L.L.P
26 Court St # 2211
Brooklyn, NY 11242, USA

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