The Franchise Memorandum

The United States District Court in New York City last week rejected a franchisee’s attempt to avoid judgment against it for damages and interest, as the court held that counterclaims the franchisee belatedly sought to assert were not timely and could not support an offset in any event. Gallagher’s NYC Steakhouse Franchising, Inc. v. NY Steakhouse of Tampa, Inc., 2011 U.S. Dist. LEXIS 139175 (S.D.N.Y. Dec. 5, 2011). This unusual case saw the franchisee-defendant not deny breach of the franchise agreement’s royalty obligations, not contest the amount it owed in past-due royalties, and not challenge the obligation to pay interest on the debt. Instead, the franchisee pinned its opposition to summary judgment for the franchisor on the argument that the amount of the judgment could not be ascertained because the franchisor itself had breached the franchise agreement as well (or at least the covenant of good faith and fair dealing implied in that agreement) and that the alleged damages against the franchisor should be offset against any to be awarded.

The court rejected the franchisee’s defenses, on several grounds. First, under New York law, an unliquidated, disputed liability on a counterclaim cannot serve as an offset against a liquidated claim that is due and payable, the court ruled, as the two claims were not dependent on each other. Even if the franchisor had breached the franchise agreement, that would not excuse the franchisee’s failure to pay royalties. In addition, the counterclaim had not been asserted in a timely fashion anyway, there was no good cause for the delay, and considering the counterclaim now would prejudice the plaintiff. Judgment was awarded in the full amount claimed by the franchisor.