The Franchise Memorandum

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 cured or assured of being promptly cured before the specific executory contract can be assumed and/or assigned under 11 U.S.C. § 365. The debtor in this case operated 77 separate KFC restaurants as a KFC franchisee. After the debtor defaulted under the KFC franchise agreements, KFC terminated all 77 franchise agreements. Through negotiations, the debtor and KFC entered into a set of Workout Agreements for each of the 77 restaurants designed to replace the terminated KFC franchise agreements with new ones, which would provide the debtor with a short window to sell its KFC restaurants.

At issue in the Bankruptcy Court was whether the debtor could assume the new franchise agreements without also having to assume the obligations under the other Workout Agreements associated with each restaurant. The bankruptcy court held that each set of Workout Agreements did not constitute one indivisible executory contract. The district court disagreed and found that all four Workout Agreements were part of one indivisible executory contract for each restaurant. Accordingly, the debtor was required to comply with the terms of all four agreements before it could assume and assign any of the 77 KFC franchises it currently operated.