A federal court recently determined that a franchisee’s affirmative defenses were barred by the doctrine of res judicata. In KFC Corp. v. Kazi, 2014 U.S. Dist. LEXIS 138278 (W.D. Ky. Sept. 30, 2014), KFC sought to recover past-due money from Kazi, the guarantor and sole shareholder of four franchisees that operated 142 terminated KFC units. Kazi asserted affirmative defenses attacking the franchisees’ liability to KFC. The franchisor argued Kazi’s defenses were barred because they were, or should have been, litigated during prior bankruptcy proceedings involving the franchisees.
For the doctrine of res judicata to apply, there must have been (1) a final decision on the merits; (2) a subsequent action between the same parties; (3) an issue in the subsequent action that was litigated or should have been litigated in the prior action; and (4) a similar core of operative facts or transactions. The court held, first, that the order of a sale in the bankruptcy proceedings constituted a final decision on the merits. Second, the case at bar involved the same parties from the prior bankruptcy proceedings—KFC as a creditor of the franchisees and Kazi as the sole shareholder of the franchisees and guarantor of their debts. Regarding the third prong, the court found that Kazi had unsuccessfully raised, or should have raised, the affirmative defenses attacking KFC’s pre-bankruptcy conduct in the bankruptcy proceedings because “those claims would have a direct effect on the assets in the bankruptcy proceeding.” Finally, the court had no doubt that the defenses arose from the same transactions giving rise to Kazi’s liability under the guaranties.