The Bankruptcy Code invalidates so-called ipso facto clauses in contracts purporting to terminate a debtor’s interest in property, such as a franchise agreement, solely on the basis of a bankruptcy filing or insolvency. [ 10] However, the filing of a bankruptcy petition does not expand the franchisee’s rights in the franchise agreement. [ 11]
How does bankruptcy affect a franchise agreement?
The Bankruptcy Code invalidates so-called ipso facto clauses in contracts purporting to terminate a debtor’s interest in property, such as a franchise agreement, solely on the basis of a bankruptcy filing or insolvency. [ 10] However, the filing of a bankruptcy petition does not expand the franchisee’s rights in the franchise agreement. [ 11]
What happens to an expired A&A franchise agreement in bankruptcy?
A franchise agreement that has expired by its own terms or that is properly terminated under state or federal law before a bankruptcy is filed is not protected, because it is not considered in force. Since the franchise agreement is no longer in existence, it will not be considered property of the estate when the bankruptcy case is filed. [ 13]
Can a franchisee-debtor terminate a franchise agreement?
A franchisor is prohibited from initiating or continuing any act to terminate a franchisee-debtor’s franchise agreement or take any other action that could diminish the franchisee-debtor’s rights without first obtaining relief from the automatic stay from the bankruptcy court, pursuant to Section 362 of the Bankruptcy Code.
What are executory contracts in a franchise bankruptcy case?
Examples of executory contracts routinely at issue in franchise bankruptcy cases include franchise agreements, certain service contracts, equipment leases and real property leases and subleases. [ 27]
When is a franchisee's termination deemed to be complete?
What is a business bankruptcy?
How to assume an executory contract?
How long do you have to file for bankruptcy?
What chapter does a business file under?
Can a franchisee file for Chapter 13?
Who are the creditors?
See 4 more
About this website
Can you file bankruptcy on a franchise?
Franchise agreements may be covered by an automatic stay At that point, you may owe fees, fines or penalties if filing for protection from creditors caused you to violate your franchise agreement. Bankruptcy may allow you to eliminate or reduce your debt without losing assets such as a franchise.
What happens when a franchisee files bankruptcy?
Upon the filing of a bankruptcy case, a franchise agreement becomes property of the debtor/franchisee's bankruptcy estate. This means the franchisee's rights in the franchise agreement are protected by the Automatic Stay, an injunction imposed by Section 362(a) of the Bankruptcy Code.
Is a franchise agreement an executory contract in bankruptcy?
The Bankruptcy Code has special rules on how a debtor can treat this type of agreement where it was entered into prior to the filing of the bankruptcy and remains in effect as of the time the case was filed. A franchise agreement which is in effect at the time a bankruptcy case is filed is an executory contract.
How can a franchise agreement be terminated?
A franchisee may legally terminate an agreement if the franchisor doesn't provide the agreed-upon training, protect the promised territory, goes bankrupt, commits an act of fraud, or misrepresents the profits of the franchise. This contract can be terminated for any of the above reasons by either party.
Can a franchise owner be fired?
While franchisees are not technically employees of a franchise brand, they can be “fired” by franchisors, who reserve the right to terminate their contract “for cause.” This involves ending the relationship based upon a default under the franchise agreement.
What happens to the franchisee if the franchisor goes into liquidation?
When a franchisee company can no longer pay its debts and enters insolvency, the franchise agreement is generally terminated as a matter of course. Many franchisors include this automatic termination clause in their contract to limit the damage to their own financial situation.
What is the difference between executory and executed contract?
(a) An executed contract is one in which all the parties thereto have performed all the obligations which they have originally assumed. (b) An executory contract is one in which something remains to be done by one or more parties.
What constitutes an executory contract?
A contract under which unperformed obligations remain on both sides, or where both parties have continuing obligations to perform. For example, most leases or contracts for the sale of goods where the goods have not been delivered by the seller and the buyer has not paid, are executory contracts.
What is an executory contract?
An executory contract is an ongoing agreement between two parties who are responsible for completing certain obligations over a set period of time. They are written agreements that ensure each party is clear about their own and the other's responsibilities.
What are the causes of termination of a franchise?
What Can Cause the Early Termination of the Franchise Agreement?The franchisee has been convicted of a crime.Bankruptcy due to which the business cannot continue.The franchisee lost the license required to do a specific type of business. ... The Franchisee failed to pay the amount as agreed in the agreement.More items...•
Can a franchisor terminate a franchise agreement?
Under a typical franchise agreement, the franchisor's and franchisee's relationship can end in one of two ways: (i) the franchise agreement can expire at the end of an initial or renewal term, or (ii) one party (most likely the franchisor) can terminate the agreement before it expires.
Can you terminate a franchise agreement early?
Terminating a franchise agreement A franchisor or franchisee can try to end an agreement early, or before the term expires.
What happens if you break a franchise agreement?
A franchisee that closes without terminating the franchise agreement is at risk of being liable to the franchisor for “lost future profits,” or the money the franchisor would have earned if the franchisee had stayed open for the life of the franchise agreement.
What happens after a franchise agreement is terminated?
No matter the type of franchise, once the franchise agreement is terminated and the franchisee walks away, the franchisee will be subject to post-termination non-competition covenants which will preclude the franchisee from then establishing a competing business.
What happens when the franchise agreement expires or terminate early?
When your franchise agreement expires, it is incumbent on a franchisee to immediately cease all franchise operations. This means: De-identification: The franchisee must stop using the franchisor's trade name and trademarks. This involves removing any signage from your place of business.
How long do franchise agreements last?
between five and 20 yearsThe typical length of a franchise agreement is between five and 20 years. A common reason for this general length of time is often the size of the franchisee's initial investment, though market conditions and the type of franchise can also be factors.
The Bankruptcy Handbook for Franchisors and Franchisees
Financial troubles and bankruptcy are a reality in some franchisor/franchisee relationships, and a percentage of struggling franchisees will declare bankruptcy each year.
Can a Bankrupt Franchisee Assign Its Franchise Without the Franchisor's ...
When a franchisee files for bankruptcy, a franchisor naturally has concerns over how the process will affect the parties' relationship. Of particular concern is the possibility that the franchisor will be forced into a relationship with an unacceptable successor as a result of a bankruptcy judge's decision to authorize assumption and assignment of the franchise agreement over the franchisor's ...
A Franchisee’s Guide to Franchisor Bankruptcy - Einbinder & Dunn LLP
Fall 2011 Franchise Law Journal 55 T his article explores franchisor bankruptcy proceedings from a fran-chisee’s perspective. After sum-marizing the two main types of bankruptcy proceedings, it
When a Franchisor Files for Bankruptcy - Franchisee Resource Center
This article provides a brief history of some well-known franchisor bankruptcies of recent years -- including Denny's, Bennigan's, Steak & Ale, Original Roadhouse Grill, Cork & Olive, The Ground Round, Church's Chicken, Popeyes, and 7-Eleven -- with a look at the outcomes of these bankruptcies for both the franchisors and their franchisees.
Is There a Silver Lining to Franchisee Bankruptcy?
In any scenario, being proactive is key, said Haupt, who noted some franchisors “will act like they’re surprised” when a franchisee files for bankruptcy because they don’t have proper mechanisms in place for reporting warning signs up the chain.
Franchise Agreement Becomes Property of Bankruptcy Estate
Upon the filing of a bankruptcy case, a franchise agreement becomes property of the debtor/franchisee’s bankruptcy estate. This means the franchisee’s rights in the franchise agreement are protected by the Automatic Stay, an injunction imposed by Section 362 (a) of the Bankruptcy Code.
Pre-Bankruptcy Termination
To avoid a franchise agreement from becoming tied up in a bankruptcy proceeding, a franchisor’s best option is to unambiguously terminate the agreement prior to the bankruptcy filing. The importance of unambiguous termination language has been made clear by several bankruptcy courts.
Franchisor Can Object to Assignment of Franchise Agreements
If a franchise agreement is not terminated pre-bankruptcy, a franchisee’s right to assume and assign the agreement is very broad. Notwithstanding, franchisors can block such assignments under certain circumstances.
Adequate Assurance of Performance
Even where a franchise agreement has not been terminated pre-bankruptcy and is not subject to the anti-assignment provisions of section 365 (c) (1), a franchisor may still object to assumption and/or assignment of its franchise agreement, where the franchisee/debtor has not provided “adequate assurance” of future performance.
What happens if a franchisor files for bankruptcy?
This often results in a loss of goodwill in the bankrupt franchisor’s name and trademarks. Additionally, if company-owned units close simultaneously with the franchisor’s bankruptcy filing, the public may mis-takenly believe that all units, whether company-owned or franchised, will shut down. The closure of company-owned units further exacerbates the loss of goodwill, as occurred in the Bennigan’s and The Ground Round bankruptcies.27 In each of those cases, media outlets reported stories about
What happens if a franchise agreement is rejected?
In the event that the franchise agreement is rejected, the fran-chisee’s rights to conduct business using the franchisor’s trade-mark will terminate. This can place a franchisee in an untenable position. A franchisee may remain obligated to perform under its rejected franchise agreement but not have a valid license to use the franchisor’s trademark in connection with its business. This result would completely frustrate the purpose of a fran-chise agreement, i.e., conducting business using a franchisor’s trademark and system of operation. Again, in that instance, to avoid uncertainty about its future, a franchisee should file a motion seeking judicial declaration that its agreement has been terminated upon rejection.
What happens when a Chapter 7 trustee liquidates debt?
As discussed above, a Chapter 7 trustee liquidates the debt-or’s assets to maximize returns.93 Among the assets that could be sold are the franchisor’s trademarks and franchise agreements. When a trustee is able to sell all of the franchi-sor’s assets to a single party, the franchise system will gen-erally be left intact but under new ownership. This could result in a favorable outcome for franchisees depending on the purchaser’s franchise experience, business acumen, and financial capability.
What is an automatic stay in bankruptcy?
Bankruptcy filing triggers an automatic stay.78 The auto-matic stay prevents the initiation or continuation of (1) judi-cial proceedings against the debtor; (2) actions to obtain the debtor’s property; (3) actions “to create, perfect, or enforce any lien against [a debtor’s] property”; and (4) setoff of indebtedness owed to the debtor before commencement of the bankruptcy proceeding.79 In a franchisor bankruptcy, the automatic stay stays actions by franchisees against the franchisor either to com-pel the franchisor to provide goods or services or to recover damages from the franchisor for fraud, breach of contract, or tortious interference with contract.80 The application of the automatic stay in a franchisor bankruptcy is not the sub-ject of well-developed law. Nonetheless, the automatic stay may prevent franchisees from (1) voluntarily leaving the sys-tem, (2) refusing to pay royalties and brand fund contribu-tions, and (3) terminating the franchise agreement.81As noted above, rejection does not resolve the franchisee’s position vis-à-vis the franchise agreement. In the event that a franchise agreement is rejected, to avoid any uncertainty con-cerning the effect of rejection, a franchisee should file a motion seeking relief from the automatic stay to have the bankruptcy court determine if (1) its franchise agreement is terminated, (2) it is required to continue to perform under the agreement, and (3) if it is bound by non-competition provisions.82
How long does a Chapter 11 bankruptcy last?
The Chapter 11 debtor is given a period of 120 days from the date that the bankruptcy petition is filed (or after an entry of order for relief if an involuntary bankruptcy petition) to file a plan of reorganization.118 Only the debtor may file a plan of reorganization during this time period. The debtor also has 180 days from the date that the bankruptcy petition is filed (or after an entry of order for relief if an involun-tary bankruptcy petition) to obtain acceptances from credi-tors for the reorganization plan.119 Upon bankruptcy court approval, the debtor may extend its exclusive period for fil-ing a reorganization plan and obtaining creditor acceptance of the reorganization plan. “If the exclusive period expires before the debtor has filed and obtained acceptance of [its reorganization] plan, other parties . . . may file a [reorganiza-tion] plan.”120 In the event that multiple reorganization plans have been filed, the plans will compete for creditor approval.“[A] chapter 11 [reorganization] plan must [properly] designate classes of claims and interests.”121 “[A] plan will [designate] claim holders as secured creditors, [priority] unsecured creditors . . . , general unsecured creditors, and equity security holders.”122 Similar claims and interests are placed within the same class.123 Accordingly, franchisees are generally grouped together within a class of unsecured creditors because each possesses similar unsecured claims against the franchisor.
What happens after a Chapter 7 bankruptcy?
After a Chapter 7 bankruptcy petition is filed, an automatic stay ( see below) is immediately instituted, and a trustee is assigned to adminis-ter the liquidation of the debtor’s assets.15 The stay effective-ly stops all other debt collection and litigation proceedings. Proceeds from the sale of the debtor’s assets will be used to pay off the debts.16 In a franchisor liquidation, the assets that may be sold include the franchisor’s franchise agreements, intellectual property, and premises leased or subleased to franchisees for the operation of their franchised businesses.
Can a franchisee file a claim against a franchisor?
franchisee may assert claims against the franchisor, includ-ing claims for (1) breach of the franchise agreement or a related agreement and (2) state law violations that may give rise to damages and rescission of the franchise agreement. These claims may arise either pre-petition or post-petition. If a franchisee files a claim, then that claim will be disposed of as part of the franchisor’s bankruptcy proceeding.87 A franchisee must file its claim in a timely manner or risk los-ing compensation for its claim.88 A franchisee’s claim against the franchisor arising pre-petition will generally be treated as an unsecured claim, with the lowest priority for payment. Those claims that arise during the bankruptcy proceeding will be treated more favorably as administrative expenses.
How to terminate a franchise agreement?
Once you determine to terminate your franchise agreement, you and your attorney must draft a letter and request termination in writing. The letter should detail your intention to terminate the agreement and close the franchise and be sent to the franchisor.
When do franchises terminate?
Without a material breach of contract or other problem, most franchises terminate at the expiration of the contract, or if the franchisee declines to renew the franchise option if either is specified.
What Is a Franchise?
According to the International Franchise Association ( IFA ), a franchise is defined as when:
What clause should be included in a franchise agreement?
If you agreed to a franchise opportunity, whether as a franchisor or franchisee, your franchise agreement should contain a termination clause spelling out all the requirements of ending the agreement legally.
What is a material breach in franchising?
A material breach occurs when a party does not comply with a provision of the contract which then dismantles the value of the contract or deprives one of the parties of the benefit of it. A franchisor can terminate the agreement if a franchisee: Is convicted of a crime. Loses a necessary license or lease. Fails to pay royalties.
What are the obligations of a franchise agreement?
The franchisee must: Stop using the franchisor’s trade name, trademarks , and service marks. The franchisor may have a clause containing the right to repurchase branded inventory.
What is a franchise business?
If you are the franchisee, meaning the one who is licensing a franchise and operating it, you have the advantage of instant brand recognition and an established market. As a franchisor, the owner of the franchise, you receive payment for the right to use the franchise name and, potentially, royalties on the profits.
When is a franchisee's termination deemed to be complete?
Where a franchisor has given notice of termination and the time for the termination pursuant to the contract has expired before the franchisee files for bankruptcy, the termination is deemed to be complete before the bankruptcy filing and the contract is not property of the estate.
What is a business bankruptcy?
Business bankruptcies are filed to preserve assets, distribute assets equitably and/or facilitate orderly liquidation. When a business files for bankruptcy, it may choose to liquidate under Chapter 7 or it may file for reorganization under Chapter 11, under Title 11, of the United States Bankruptcy Code. Subscribe.
How to assume an executory contract?
To assume an executory contract, a franchisee-debtor must declare its intention by filing a motion with the court. If the executory contract is not in default, the franchisee-debtor is entitled to court approval of the assumption, as long as (i) the contract appears to be in the best interest of the estate, (ii) the debtor is able to perform and (iii) the assumption is supported by reasonable business judgment. [ 29] Assumption and rejection are addressed by Section 365 of the Bankruptcy Code.
How long do you have to file for bankruptcy?
If the franchisee still has a right to cure, the filing of the bankruptcy before the cure deadline protects that right. Applicable law will decide whether the cure period is: 1 the express contractual period, 2 any state law statutory cure period, 3 within 60 days after the filing of bankruptcy or 4 in a Chapter 11 case, up until confirmation of a plan of reorganization.
What chapter does a business file under?
If the entity chooses to continue operation, generally it will file under Chapter 11, but it always has the opportunity to “convert” to the other chapter. In a Chapter 7 case, a trustee is appointed to account for the assets and liabilities of the business.
Can a franchisee file for Chapter 13?
An individual franchisee may also file a “wage-earners plan” under Chapter 13, which gives a debtor with regular income an opportunity to repay debts. Although Chapter 13 rules expedite the procedure, a franchisor should generally treat a Chapter 13 case as if it were filed as a business bankruptcy under Chapter 11.
Who are the creditors?
creditors, which include landlords, suppliers and franchisors with claims ; a Creditors Committee comprised of three to seven creditors who are selected by an arm of the U.S. Department of Justice called the U.S. Trustee Program (the committee retains counsel and often a financial advisor paid for by debtor);
