A FRANCHISEE CONSIDERING BANKRUPTCY
If the Chapter 11 or Chapter 13 plan
relies on the income from the franchise
or if the debtor simply needs that
income a bankruptcy notwithstanding,
then the question is what happens
if filing for bankruptcy does not
really stave off cancellation or nonrenewal? The bankruptcy attorney
may have walked the debtor into a
worse financial situation long-term
than just trying to renegotiate some
of the debts outside of bankruptcy.
Causes of Action Based on
Common Law or State Franchise
Laws
The Plaintiff alleged ‘that Texdis
was content to see the JMV Store
fail, and then attempt to repurchase
the it at a significantly depressed
price. That is the sort of “unfair”
business practice the WFIPA seeks
to prevent.”’ Jm Vidal Inc., v. Texdis
U.S., Inc., 764 F. Supp. 2d 599, 614
(S.D.N.Y. 2011). Stated differently, the
franchisor torpedoed the franchisee.
State’s often have consumer fraud
laws and common law fraud causes
of action that protect consumers
from unfair or fraudulent business
practices. They may also have specific
franchise laws that make certain
conduct by the franchisor unlawful.
Washington, which is referenced
in Jm Vidal, has the Washington
Franchise Investment Protection Act
(“WFIPA”). See RCW 19.100.010 et
seq. The WFIPA makes it declares
lawful to engage in certain deceptive
or unfair methods of competition. See
RCW 19.100.190. More importantly,
it permits an aggrieved franchisee
to sue for the costs of the litigation,
attorney’s fees, and treble damages.
See RCW 19.100.190(1) and (3). If
the franchisee is seeking bankruptcy
because of the franchisor the potential
for treble damages alone is lucrative
enough to consider suing the franchisor
instead of filing for bankruptcy.
By contrast Illinois is much
more limited in its protections
to franchisees.
The Franchise
Disclosure Act permits private civil
actions and the recovery of attorney’s
fees.
See 815 ILCS 705/26.
But there are other causes of action
as well. ‘“Bad faith” is a term of art in
contract law; it refers to one party’s
manipulation of contractual terms in
order to take commercial advantage
of another party. (citation omitted).
If a party is found to have acted in
bad faith, then the other party is
relieved of the effects of contractual
breaches caused by that bad faith.’
Zeidler v. A & W Restaurants, Inc.,
301 F. 3d 572, 574-75 (7th Cir.
2002). This principle is so well
established that the 7th Circuit
refused summary judgment to a
franchisor sued by a franchisee for
wrongful termination of the contract
because the franchisor forced the
franchisee into the very default
it used as a basis to cancel the
contract. See Interim Health Care
of N. Ill. Inc. v. Interim Health Care
Inc., 255 F. 3d 876 (7th Cir. 1992).
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The long term consequences to
bankruptcy or litigation present
unique circumstances depending
on the reason the franchisee is
considering bankruptcy.
If the
franchisee
elects
bankruptcy
he may lose his franchise. On
the other hand, if franchisee is
considering bankruptcy because
of the franchisor’s conduct, then
it may be better for the attorney
to determine if the potential
causes of action (off set by any
potential
affirmative
defenses
or counterclaims) offer recovery
in the franchisee’s favor that
prevents the need for bankruptcy.
National Association of Consumer Bankruptcy Attorneys
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