BG Win Creates Law That NDA Obligations Are Not Discharged In Bankruptcy

In a case of first impression, with no prior on-point decision anywhere in the country, BG persuaded the United States Bankruptcy Court for the Southern District of New York to rule that the obligation to not disclose information, pursuant to the terms of a nondisclosure agreement (“NDA”) entered into before bankruptcy, are not discharged in bankruptcy.

Despite the prevalence of NDAs in a wide range of business and personal transactions, and recent high profile disputes involving their enforcement, before now there was no bankruptcy court decision squarely addressing the question of whether NDA obligations survive bankruptcy.

In this case, the Firm’s client entered into an NDA with the Debtor before bankruptcy. The Debtor contended the NDA could be ignored, and the Debtor could even publish facts and circumstances the disclosure of which was prohibited by the NDA, because, the Debtor argued, the “fresh start” of bankruptcy rendered the NDA obligations unenforceable.

The Bankruptcy Court agreed with BG’s analogy to cases addressing non-compete clauses, and accepted the premise of our argument, namely, that obligations to not disclose are not “claims“ within the meaning of the Bankruptcy Code because they do not require the Debtor to pay money.

The Court’s decision quoted BG’s legal brief for the proposition that the NDA obligations “would not require Debtor to expend any funds, or take any action, or do anything at all whatsoever; it merely permits Creditor to enforce the [NDA], which prohibits Debtor from affirmatively breaching [Debtor’s] undertaking ….” (Decision at p. 14.)

The Court thus agreed the NDA obligations were not “claims,” and because only “claims” are subject to being discharged in bankruptcy, the NDA obligations are not discharged in bankruptcy.

Accordingly, while the Firm’s client is not permitted to seek monetary damages for violation of the NDA, the client is free to obtain injunctive relief to enforce the NDA.   

The Firm’s client was represented in this matter by Steve Gubner and Jerry Bregman. “This is a great result and important decision for adding clarity to the law,” Bregman said.

The decision was issued in In re Uchitel, Bankr. SDNY, Case No. 10-11585 (JLG) (Aug. 4, 2022) [DOC # 70]