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The Franchise Memorandum

The Franchise Memorandum

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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 ...

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A federal bankruptcy court in Illinois has held that a franchisor’s rights under a franchise agreement’s covenant not to compete was a “claim” within the meaning of the Bankruptcy Code and would thus not be enforced via injunctive relief. In re Roberts, 2019 WL 5079247 (Bankr. N.D. Ill. Oct. 10, 2019). Aire Serv, the franchisor of an HVAC-repair system, and JSR Heating and Cooling were parties to a franchise agreement. After the relationship deteriorated, Aire Serv terminated the franchise agreement and JSR declared bankruptcy. Aire Serv commenced an adversary proceeding ...

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Ruling on cross motions for summary judgment, the U.S. Bankruptcy Court for the District of Delaware found that a franchisor had failed to provide clear and unambiguous notice of its intention to terminate in notices it gave to the franchisee, so that no termination occurred prior to the filing of the franchisee’s bankruptcy petition. In re RMH Franchise Holdings, Inc., 2018 WL 4637456 (Bankr. D. Del. Sept. 25, 2018). RMH Franchise Holdings and its affiliates are the second-largest franchisee of Applebee’s Neighborhood Bar & Grill restaurants, operating 160 restaurants in ...

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In In re A&F Enterprises, Inc. v. IHOP Franchising LLC, 2014 U.S. App. LEXIS 2408 (7th Cir. Feb. 7, 2014), the Seventh Circuit reversed the district court and the bankruptcy court and stayed the enforcement of the bankruptcy court orders that were on appeal. The dispute in the bankruptcy case involved when a debtor-franchisee must assume or reject a real property lease for a leased franchise location. Under bankruptcy law, a debtor must assume or reject a commercial real property lease within 120 days after the bankruptcy case is filed or the lease is deemed rejected. In contrast, a ...

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In Carroll v. Farooqi, 2013 U.S. Dist. LEXIS 22329 (N.D. Tex. Feb. 19, 2013), the United States District Court for the Northern District of Texas affirmed a U.S. Bankruptcy Court’s holding that an individual had standing to pursue an action against a franchisor under the Texas Deceptive Trade Practices Act (DTPA). The case involved an unsuccessful sale of a Salad Bowl franchise. The CEO of the fast causal franchise company (who was also its president, chairman, and CFO) contacted a potential buyer of a franchise. The buyer signed a thirty-day option contract and paid $25,000 to the ...

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In In re Wagstaff Minnesota, Inc., 2012 U.S. Dist. LEXIS 372 (D. Minn. Jan. 3, 2012), the United States District Court for the District of Minnesota reversed a United States Bankruptcy Court decision by holding that a comprehensive set of Workout Agreements involving four separate contracts (Reinstatement Agreement, Addendum to Reinstatement Agreement, Letter Agreement, and KFC Franchise Agreement, collectively “Workout Agreements”) should be interpreted as forming one executory contract. Under the Bankruptcy Code, all defaults under an executory contract must be ...

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In In re Wagstaff Minnesota, Inc., 2011 U.S. Dist. LEXIS 124889 (D. Minn. Oct. 26, 2011), the United States District Court in Minnesota denied an appellee’s request to authorize an appeal of a Bankruptcy Court’s decision directly to the Eighth Circuit Court of Appeals. The normal appeal process for decisions from a bankruptcy court is to appeal first to either a bankruptcy appellate panel for the particular circuit or to the U.S. District Court for the particular district, then to the applicable circuit court of appeals, and then to the U.S. Supreme Court. Under certain ...

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In In re Quattrin, 2011 Bankr. LEXIS 1941 (Bankr. N.D. Cal. May 26, 2011), the debtor was a franchisee in the Total Car Franchising Corporation (“Total Car”) system at the time he filed for bankruptcy. During the bankruptcy case, the franchise agreement was terminated. The debtor subsequently received his bankruptcy discharge, which gave rise to the discharge injunction against the collection of discharged debts. Total Car thereafter sought to enforce its post-termination remedies under the franchise agreement, including enforcement of the two year non-competition ...

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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 ...

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In Doctor’s Associates, Inc. v. Jesal Desai, 2010 Bankr. LEXIS 86454 (D.N.J. August 23, 2010), the franchisor (“DAI”) sought to remove pending litigation from the bankruptcy court to federal district court. The procedural history of the case includes litigation in arbitration, state court, federal district court, and bankruptcy court. DAI’s motion to withdraw the reference was brought after it was unsuccessful in asking the bankruptcy court to remand the pending litigation back to the district court. A motion to withdraw the reference is very similar to a motion to ...

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In In re Tornado Pizza, LLC, 2010 Bankr. LEXIS 1108 (Bankr. D. Kan. Apr. 9, 2010), and companion case In re Team KC, Inc., 2010 Bankr. LEXIS 1107 (Bankr. D. Kan., Apr. 9, 2010), a Kansas federal bankruptcy court granted franchisor Domino’s Pizza Franchising, LLC relief from the automatic stay to enforce the post-termination obligations of the former franchisee in bankruptcy. The bankruptcy court ruled that the franchise agreements, which were validly terminated pre-bankruptcy, were not executory contracts that could be assumed and assigned in the bankruptcy case. The ...

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In In re All American Properties, Inc., 2010 Bankr. LEXIS 687 (Bankr. M.D. Pa. Mar. 10, 2010), a franchisor sought to annul the automatic stay following a former franchisee’s bankruptcy filing. Franchisor Petro Franchise Systems had sued its franchisee for trademark infringement.  Petro obtained an injunction prohibiting the franchisee from using Petro’s trademarks and brands.  The franchisee ignored the injunction order and continued to operate the infringing business. 

After a hearing on an order to show cause for the franchisee’s non-compliance with its orders, the ...

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A bankruptcy court in North Carolina has refused to apply the automatic stay in bankruptcy to agreements that were never formally transferred to the would-be franchisee corporation. In re KVS Foodsystems, LLC, 2009 WL 1241272 (Bankr. E.D.N.C. April 29, 2009). Subway’s parent company, Doctor’s Associates, had entered into a franchise relationship and sublease agreement for two Subway stores with an individual named Vitus Bradshaw. Bradshaw then formed KVS Foodsystems, LLC (KVS), to operate his two stores, but he never transferred the rights or obligations of the franchise ...

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About this Publication

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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