The Franchise Memorandum

The United States Court of Appeals for the Eleventh Circuit has affirmed a judgment, following a bench trial, against a franchisee who alleged that his inability to repay a promissory note was caused by the franchisor’s breach of the franchise agreement. DZ Bank AG Deutche Zentral-Genossenschaftsbank v. McCranie, 2018 WL 345045 (11th Cir. Jan. 10, 2018). McCranie, the former Brooke insurance agency franchisee, had originally financed the purchase of his franchise with a promissory note from the franchisor’s affiliate. The franchise agreement itself made the franchisor the “agent of record,” meaning the franchisor collected insurance commissions from McCranie’s sales, 85% of which were paid back to McCranie. McCranie had a right to terminate the franchise agreement upon thirty days’ notice, at which point the contract required the franchisor to make McCranie the “agent of record.” The loan documents included several measures to protect against a default by McCranie, but did not include provisions to protect against the possibility of the franchisor’s default.

The franchisor later pledged the note to the plaintiff, DZ Bank, as collateral on a loan. Years later, the franchisor stopped paying McCranie his percentage of insurance commissions, and eventually went into bankruptcy. McCranie terminated the franchise agreement and demanded to be made “agent of record,” but the franchisor failed to do so. When DZ Bank sought to collect on the loan, McCranie argued that the circumstances forgave his debt. Both the district court and Eleventh Circuit disagreed. The appellate court observed that nothing in the loan documents suggested they were integrated with the franchise agreement, meaning the franchisor’s breach of the franchise agreement had no effect on the promissory note. Next, the court observed that the frustration-of-purpose and impossibility-of-performance defenses were inapplicable, because a breach of the franchise agreement was foreseeable, as demonstrated by the protections the lender had included in case of McCranie’s default. Finally, the court noted a lack of authority supporting the argument that the duty of good faith and fair dealing imposed an obligation on a third-party lender to ensure McCranie could continue doing business with insurers and collecting insurance commissions.