The Franchise Memorandum

The Sixth Circuit recently affirmed a summary judgment ruling by an Ohio federal district court in favor of plaintiff Wendy’s International, Inc. on all claims brought against it by a franchisee. Wendy’s International, Inc. v. Saverin, 2009 WL 2018163 (6^th Cir. July 9, 2009). The franchisee operated 42 stores in Missouri and Illinois. In 2006, the franchisee began defaulting on its financial obligations, leading Wendy’s to terminate three of its franchise agreements. The parties subsequently reinstated the franchises through a reinstatement agreement that required the defendant to cure certain financial defaults. The defendant, however, continued to experience financial difficulties, which led the parties to enter into a forbearance agreement to facilitate the winding down of their relationship. But the defendant defaulted on a payment to Wendy’s shortly after the forbearance agreement was signed. Despite notice and the opportunity to cure, the defendant failed to cure its financial defaults.  A state court ultimately appointed a receiver for the franchises. Accordingly, Wendy’s terminated the franchise agreements. 

Wendy’s filed a complaint for breach of contract in federal court, claiming that the defendant was individually liable under his personal guaranty for obligations incurred under the franchise, reinstatement, and forbearance agreements. The defendant denied liability and brought counterclaims based on Wendy’s alleged breach of the forbearance agreement and of the implied covenant of good faith and fair dealing contained in the forbearance agreement. The defendant’s theory was that Wendy’s breached a good faith obligation to oppose the appointment of the receiver, which then triggered Wendy’s right to terminate the franchise agreements. The district court granted Wendy’s motion for summary judgment and dismissed the defendant’s counterclaims.

In affirming the lower court’s summary judgment ruling, the Sixth Circuit found that, pursuant to the forbearance agreement, Wendy’s properly terminated the defendant’s franchise agreements based on the financial defaults. The court rejected the defendant’s counterclaim that Wendy’s violated the implied covenant of good faith by taking action that allegedly hastened the appointment of a receiver over the franchises. First, the court held that where a contract contains an integration clause, as did the forbearance agreement, extrinsic evidence could not be used to prove an additional promise—in this case, an alleged promise to oppose a receivership—that was not included in the express terms of the agreement.  Second, the court held that under Ohio law, the implied covenant is only implicated by acts or omissions that could not have been contemplated at the time of drafting and therefore were not explicitly addressed by the contract. The court found that the possible appointment of a receiver was “of the utmost concern” when the forbearance agreement was drafted, so the implied covenant did not apply.

Finally, the Sixth Circuit also affirmed summary judgment in favor of Wendy’s on its claims under the personal guaranty. The court found that all of the financial obligations under the forbearance agreement were within the scope of the guaranty. It rejected the defendant’s claim that he was entitled to a setoff based on the profits Wendy’s would earn by refranchising his restaurants or opening company-owned  restaurants in his market. The court found this to be based on the speculative assumptions that Wendy would reopen each restaurant and that it would earn more in profits from company-owned locations than it would have earned from the defendant’s restaurants if they had continued operating.