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Bankruptcy Court Modifies Automatic Stay to Allow Litigation Against Former Franchisee to Proceed in Another Forum
Posted in Bankruptcy

A federal bankruptcy court in Alabama granted limited relief from the automatic stay to a franchisor that wanted to pursue injunctive relief pursuant to the franchise agreement. In re Mainous, 2019 WL 6245752 (Bankr. S.D. Ala. Nov. 21, 2019). U.S. Lawns, Inc., the franchisor of businesses offering commercial landscape services, and the Mainouses were parties to a franchise agreement that included noncompete provisions. The relationship between the parties deteriorated and the Mainouses assigned their rights and interests in the franchise to a third party. The Mainouses then filed for bankruptcy. During the pendency of their bankruptcy, the Mainouses filed a complaint in Alabama state court seeking a declaratory judgment against U.S. Lawns related to the enforceability of the franchise agreement and the validity of the noncompetes. U.S. Lawns then moved for relief from the automatic stay in the bankruptcy court seeking permission to pursue injunctive relief against the Mainouses.

Absent certain exceptions, the filing of a bankruptcy petition enjoins litigation against a debtor in another forum unless a bankruptcy court finds “cause” exists to grant relief from the automatic stay. In making such a determination, the bankruptcy court analyzed ten factors, balancing the hardship to the creditor against the potential prejudice to the debtors, the debtors’ estate, and other creditors. The bankruptcy court found that, while most of the relevant factors weighed in favor of the Mainouses, limited relief from the automatic stay was appropriate. The Alabama court observed that denying relief from the automatic stay in this case would negatively impact U.S. Lawns, as it would be deprived of fully defending the pending state court action. Additionally, the bankruptcy court considered its limited jurisdiction and concluded that it lacked jurisdiction over the nonfiling third-party assignee. Therefore, the bankruptcy court held that, in the interest of fairness and judicial economy, cause existed to grant U.S. Lawns limited relief from the automatic stay to pursue its claims for injunctive relief in the state court.

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The Franchise Memorandum is a collection of postings on summaries of recent legal developments of interest to franchisors brought to you by Lathrop GPM LLP. 

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