Almost universally, franchise agreements expressly state
that the filing of a claim in bankruptcy is grounds for immediate termination
of the franchise agreement. But, in reality,
bankruptcy laws, prohibit the franchisor from terminating the franchise
agreement based on the franchisee’s
filing in bankruptcy. This is referred to
as a stay in bankruptcy.
A debtor [franchisee] in bankruptcy is shielded by the automatic stay under Sec. 362 of the Bankruptcy Code [11 U.S.C. 362] from debt-related proceedings brought by creditors [franchisor] based on pre-petition events.
A bankruptcy stay means the franchisor is not permitted to terminate
or default a franchisee because of the
filing of bankruptcy, delinquent royalties, or any other deficiencies that are
pre-date the bankruptcy filing.
So what recourse does a franchisor have against a franchisee in bankruptcy? Two options include moving to dismiss the bankruptcy
and seeking to lift the automatic bankruptcy stay, may be available. Either way, the franchisor must file a petition
with the bankruptcy court. This is not a
matter that can be handled by simply
sending a notice to the franchisee or the
These two options were pursued by GNC in the case of In re:
While GNC was not successful in getting the franchisees’ bankruptcy
dismissed or the automatic stay lifted,[ii]
the court provided a nice outline of what
is required for dismissal of bankruptcy claim and was is required to the lift
the automatic bankruptcy stay.
The bankruptcy may be dismissed if:
- the continuing loss to or diminution of the estate [franchised business] and absence of a reasonable likelihood of rehabilitation;
- inability to effectuate a plan;
- unreasonable delay by the debtor [franchisee] that is prejudicial to creditors [franchisor]; [or]
- failure to propose a plan under section 1121 of this title [the federal bankruptcy law] within any time period fixed by the court.4[iii]
To the lift the automatic bankruptcy stay, the franchisor
- the debor [franchisee] lack of adequate
protection of an interest in property [franchise agreement or franchised
business assets] of such party in interest; or
- the debtor [franchisee] does not have an equity
in such property [franchise agreement or franchised business assets], and such property is not necessary for an
re: Meena, Inc., Debtor. In re: Desa of NY, Inc., Debtor. In re: SDA, Inc.,
Debtor. In re: Choudry Sajid Javaid and Gulmeena Javaid, Debtors. ¶16,304. U.S.
Bankruptcy Court, E.D. New York. Case Nos. 8-18-74693-reg, 8-18-74694-reg,
8-18-74695-reg, 8-18-74804-reg. Dated November 6, 2018.
was not successful in getting the franchisees’ bankruptcy dismissed or the
automatic stay lifted in part due to issues non-conveyance of the franchise
agreement and money security agreement from the individual franchisees to the business
entity franchisee. See are previous blog
In re C-TC 9 th Avenue Partnership , 113 F.3d. 1304, at 1311 (2d Cir. 1997).
Source: franchise blaw