- Case Type:
- Case Status:
- 19-8007 (6th Circuit, Jan 28,2020) Not Published
- Motion to Dismiss Chapter 11 Case denied where Creditor/Franchisor did not validly terminate franchise agreement pre-petition, affording Debtor opportunity to assume Franchise Agreement and reorganize.
- Procedural context:
- Debtor filed Chapter 11 in the Northern District of Ohio. Creditor filed a Motion to Dismiss or in the alternative for Relief From Stay alleging that Debtor lacked any reasonable prospect of reorganization. Bankruptcy Court (Judge Alan Koschik) denied the Motion and Creditor appealed. The Sixth Circuit BAP affirmed the Bankruptcy Court's ruling denying Creditor's Motion.
- The outcome hinged on whether Creditor/Franchisor validly terminated the Franchise Agreement with Debtor based on an alleged threat to public health. Debtor operated a restaurant under a Franchise Agreement with Creditor. In 2018, Creditor sent written notice to all franchisees (including Debtor) to stop serving Romaine lettuce in light of an E.Coli outbreak. Debtor obtained Romaine from another, unapproved supplier who was not within the containment zone for growing, and continued to serve Romaine. Creditor sent two additional demand letters to Debtor advising that service of Romaine was a serious violation of the Franchise Agreement as it placed public health at risk When Debtor continued to serve Romaine, Creditor sent a Notice of Termination of the Franchise. Debtor then filed for relief under Chapter 11. Creditor asserted that Debtor had no possibility of reorganization because the Franchise Agreement had been terminated. The Bankruptcy Court agreed that Debtor's continued service of Romaine procured from unauthorized sources violated the Franchise Agreement but did not trigger Creditor's right to terminate without notice and opportunity to cure because by the time Creditor purported to terminate the Franchise, the public health crisis had passed, Accordingly the Franchise Agreement was in effect and subject to assumption under Section 365, providing Debtor with a meaningful opportunity to reorganize.
- Buchanan, Harrison & Opperman
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