The Franchise Memorandum

In In re Stone Resources, Inc., 2011 Bankr. LEXIS 1166 (E.D. Pa. Mar. 28, 2011), the franchisor, MarbleLife, moved for relief from the automatic stay against the debtor, its former franchisee, seeking to enforce an earlier preliminary injunction order granted in its favor by the U.S. District Court for the Eastern District of Pennsylvania. The preliminary injunction order prohibited the debtor from continued operation in violation of a covenant not to compete contained in the expired franchise agreement between the parties. MarbleLife’s primary argument to establish “cause” for relief from the automatic stay was based upon the lack of adequate protection of its interest in property. MarbleLife did not present any witnesses at the evidentiary hearing in the bankruptcy court, instead relying on the district court’s preliminary injunction order and legal argument from its counsel.

The bankruptcy court denied MarbleLife’s lift stay motion because it was not persuaded that MarbleLife had established any basis for such relief. The court was critical of MarbleLife’s attempt to establish the lack of adequate protection to its property interest based primarily on the district court’s finding of irreparable harm in its preliminary injunction order. The court questioned whether MarbleLife could even establish that it had a protectable property interest based solely on the finding of irreparable harm. The court held that even if MarbleLife could establish that it had a protectable property interest, there was simply no evidence in the record to demonstrate its diminishing value. The court then applied a balancing test to determine whether continued litigation in a forum outside of the bankruptcy court was justified under the facts. The court reasoned that because the franchise agreement between the parties had expired, MarbleLife’s only other protectable interest was its right to enforce the covenant not to compete. The court held that such an interest alone was not enough to warrant that the automatic stay be lifted to allow the enforcement of the preliminary injunction in the district court.