Friday 15 August 2008

Franchisee bankruptcy in the US

Owners of trade marks and other IP rights relating to business format franchise operations in the United States may find "Franchise Agreements in Bankruptcy: Fiasco or Fortuity" interesting. It was published on the website of law firm Baker, Donelson, Bearman, Caldwell & Berkowitz, PC earlier this month. This article focuses on the effects of bankruptcy on the franchisee and on the consequences of the IP-owning franchisor either allowing the franchise to remain in place or letting it go. It examines the concept of the "whole agreement" and gives as an example the position of a franchise contract where the same parties have also entered into a separate software licence:
"The determination of what constitutes a single executory contract or several separate ones will be governed by applicable state law, though the bankruptcy court will decide the issue. For example, where a franchisee enters into a franchise agreement and in conjunction therewith also enters into a software license agreement at the same time, those two documents, even though signed separately, will likely be deemed a single executory contract such that the debtor must assume both or reject both".
In terms of claims on the assets of the franchisee, the article states:
"If a franchise agreement is not expressly assumed, it is deemed rejected, and the franchisor has a general unsecured claim against the estate for damages. The Bankruptcy Code provides that the rejection constitutes a breach of the contract which is deemed to have occurred immediately before the filing of the petition. By rejecting the agreement, the trustee or debtor forgoes the benefits of performance by the other party but avoids the burden of performance by the estate. While the charges which accrued after the case was filed are in this context part of the prepetition claim, to the extent that the contract benefited the estate after the case was filed, a claim can also be made for payment of the charges incurred during the case as an administrative expense to be paid in full and on a higher priority than payments to general unsecured creditors".

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