A Franchisee Considering Bankruptcy
By Christine M . Kieta , Esq . The Law Office of Christine M . Kieta PC Chicago , Illinois
The Consumer “ Investing ” In A Franchise
Perhaps the easiest business to build that fulfills the “ American Dream ” is buying into a franchise . Some group of elite business people thought of an idea or product to sell to the world through the most advanced business model of their generation . This business model , known as the franchise , allows the franchisor to minimize its costs while still providing much needed expansion . Those costs are usually shifted onto the franchisee who gets to do business in the name of the franchisor . In exchange , the franchisee generally does not need any superior business talent or entrepreneurial skill . They need the initial financial investment to pay a franchisee fee if any , funds to open up a store , and people to staff that store . The franchisee then follows the franchisor ’ s business model . In a dull way the franchisee gets to be his own boss .
Frankly , a lot of consumers invest in franchises . They take on almost all the financial risk of a business expanding into a new territory . Endless are the stories of the money lost and the debt that haunts them from unexpired commercial leases , purchased inventory that they can ’ t sell , or withheld commissions under an indecipherable mathematical equation . A failed franchise is a financial nightmare . And the bargaining power behind the agreements is often uneven .
This American Dream of being you own boss when in a franchise relationship is severely altered by the franchise agreements and the laws that affect these relationships . Moreover , if the franchisee ’ s financial prospects change such that he has to contemplate bankruptcy ( whether or not it is triggered by the franchise ) he can lose his franchise and may not know that . Indeed , the bankruptcy attorney may not know this either . On the other hand , if contemplating bankruptcy is triggered by the franchise relationship a great analysis instead of bankruptcy is whether or not there is a cause of action available to the franchisee which would sooth the debt .
The Franchise Agreements And The Automatic Stay
Franchise agreements are normally complex and can be a compilation of several contracts . The franchisee may have entered one agreement with the actual franchisor itself . He may have entered other companion agreements with separate entities as a condition to getting the agreement with the franchisor . The agreements often have at least a choice of law clause or it ’ s bigger sister the forum selection clause making any litigation favorable to the franchisor . The franchisee may not even have direct contact with the franchisor and may have to go through a middleman for everything from inventory to getting paid for the product or service it sells .
These business relationships sound messy . But they are not . The obvious benefit is to establish a circuitous labyrinth preventing liability up the chain to the franchisor . If the franchisor or its middleman cancels any of the franchise agreements or refuses to renew then that can have devastating consequences to the franchisee financially .
A very obvious solution to cancellation or non-renewal is to file for bankruptcy to get the protection of the automatic stay . See 11 U . S . C . § 362 . But given the peculiar nature of franchise agreements other provisions of the Bankruptcy Code are triggered . “ It has become generally accepted that franchise agreements that have not terminated as of commencement of a case are executory contracts under the Bankruptcy Code .” In Re Steaks To Go , Inc ., 226 B . R . 35 , 37 ( E . D . Mo , 1998 ) ( internal citation omitted ). Under § 365 ( c ) the trustee cannot assume or assign an executory contract or unexpired lease whether or not the contract or lease restricts that if ( a ) applicable law excuses a party to the contract ( other than the debtor ) from accepting performance from or rendering performance to an entity other than the debtor , and ( b ) such party does not consent to the assumption or assignment .
36 CONSUMER BANKRUPTCY JOURNAL Fall 2016 National Association of Consumer Bankruptcy Attorneys