Rarely do we see a franchise dispute settled, only to generate more litigation. In Pirtek USA, LLC v. James Bradley Lager, et al., 2023 WL 4676067 (Bankr. N.D. Texas, 2023), Bankruptcy Judge Michelle Jerson addressed several important issues regarding contract law, and franchise law, and whether a debtor’s breach of a franchise agreement is non-dischargeable 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 JBL’s exit from two franchise agreements. Under the second settlement agreement, Pirtek agreed to pay JBL $300,000 and defendants agreed to very robust non-disclosure and non-disparagement provisions.  After signing the second settlement agreement, defendants went on a campaign to publicly malign Pirtek. Among the public disparagements which violated the second settlement agreement, 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 a book deal, retained the publisher for public relations, 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 the arbitrator issued a temporary restraining order against defendants, which defendants violated. Right before the hearing in the arbitration, defendants filed voluntary petitions 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 non-dischargeability. 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, except for the counsel fee motion, which needed to be refiled.

The debtor opposed the non-dischargeability claim, asserting that the injury based in breach of contract did not rise to the level necessary to warrant non-dischargeability under 11 U.S.C. § 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 § 523(a)(6), when successfully litigated, is “almost universally in the context of a tort claim,” but that the Court stated 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.” Williams v. IBEW Local 520 (In re Williams), 337 F.3d 504, 509 (5th Cir. 2003) (emphasis added). 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….’[t]he test for willful and malicious injury under § 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.’” Id. (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 debtor’s argument that 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 its executives, and their purportedly racist and abusive business practices.

The Court concluded there was no doubt that non-dischargeability was required. The opinion is instructive, and provides guidance regarding the elements necessary to prove non-dischargeability based on a contract breach.