The Franchise Memorandum

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 agreement or sublease to KVS. In November 2008, KVS filed for bankruptcy. This reported decision arose from Bradshaw’s petition to the court for an automatic stay protecting his Subway subleases as “property of the estate” under Chapter 11 of the Bankruptcy Code. 

The court rejected Bradshaw’s petition, stating, among other things, that Bradshaw is “neither the Debtor, a third party defendant, nor a co-defendant . . . [and] has a contractual relationship with Subway,” and that Bradshaw, not KVS, had failed to pay rent to the franchisor for four consecutive months. Therefore, Doctor’s Associates rightfully terminated the subleases. The only remedy, the court stated, is for Bradshaw “to file an individual bankruptcy petition under the appropriate chapter should he determine that it is in his interest to . . . gain the benefit of the automatic stay.”