Franchise Dealer and Distributor

Sonnenschein's Corporate Reorganization & Bankruptcy Practice Group, together with the firm's Antitrust, Marketing Practices & Franchise/Distribution, Litigation, Intellectual Property & Technology, Corporate and other practice groups, works on a variety of matters across the nation in connection with terminations, financial distress, or bankruptcies affecting franchises, dealers and distributors. 
Troubled franchisee or dealer situations present a complex mix of business and legal challenges.  A franchisor or manufacturer will have multiple interests, which may at times appear in conflict.  Examples include:

• Keeping the "point" from going dark, to ensure an uninterrupted flow of goods and services to customers
• Collecting money owed
• Terminating a franchise or dealer relationship
• Transitioning a location or territory
• Minimizing litigation risk
• Avoiding disruption of goods and services to customers
• Maintaining relationships with other franchisees and dealers
• Sending a consistent message about business policies and practices
• Extracting licenses, permits, listings and registrations from the terminated or distressed dealer

Because each troubled situation is unique, our lawyers take a team approach to identifying practical solutions to pressing issues.  There is no "one size fits all" answer.  Solutions may include:

• Consensual negotiated agreements
• State law remedies, such as replevin, attachment, foreclosure, and receiverships
• Retaining professional fiduciaries as interim management, either out of court or with court supervision
• Selling operating assets

Areas in which Sonnenschein has significant expertise include:

• Franchise/dealership terminations and related litigation
• Seeking relief from the automatic stay to complete terminations or enforce other rights
• Estate use of intellectual property rights during bankruptcy
• Handling attempts to assume franchise agreements and related cure cost disputes
• Handling attempts to assign franchise relationships to third parties or to effectuate a change of control of the franchise or franchisor in the face of restrictive state laws
• Out-of-court workouts/composition of creditors
• Chapter 11 reorganizations
• Purchases or sales of distressed assets, both in bankruptcy and outside bankruptcy, including filing Hart Scott Rodino notifications
• Enforcement of non-competition and non-solicitation agreements, and covenants to protect trade secrets
• Review of existing forms with a focus on future enforceability in the event of a potential bankruptcy
• Secured financing and foreclosures

Representative Engagements

The following is a summary of certain of the matters in which we have been actively involved for the party or parties noted in the descriptive text and that are of a public nature.  There are also representations in non-public matters that are not discussed by name herein. 

Managing Franchisee Distress or Bankruptcy

ICH and Sybra, Inc. (S.D.N.Y.):  
We represented these related Chapter 11 debtors who were the second largest Arby's franchisees with approximately 240 restaurants.  The cases resulted in a successful sale of assets to the franchisor under Section 363 of the Bankruptcy Code.  All trade creditors in the operating company case were paid in full with interest.

Bobby and Tracy Underdown (M.D. Pa.):  
We represented McDonald's Corporation in litigation in bankruptcy court and district court in connection with the termination of the franchises of these co-owners.  Attempts to challenge or undo the pre-petition termination of the franchises were unsuccessful. 

Muffler Store Franchisor:
Sonnenschein handles matters related to bankruptcy and distressed franchisees of a muffler store chain.

Learning Center Franchisor: 
We represented a franchisor of learning centers in connection with the termination of a troubled franchisee and the seamless transition to a new franchisee.  The transition was accomplished out of court through a general assignment for the benefit of creditors, which allowed the troubled franchisee to use the services of a professional fiduciary to wind up its operations.  The assignment also allowed a new franchisee to acquire the operating assets, while insulating itself from the liabilities of the prior operator, all without interruption in service to customers.

Multi-Tiered Franchise Cases

Opal Concepts (Fantastic Sams) (C.D. Cal.): 
We represented the regional owners (franchisees/subfranchisors) of this hair salon chain in the bankruptcy case of the master franchisor of Fantastic Sams.  This case presented unique issues involving multi-tiered franchises.  One issue was the assumption or rejection of regional franchise agreements.  The multi-tiered nature of the franchise required careful attention to the relationship of the regional owners with the master franchisor and its lenders, on the one hand, and also the regional owners' relationship with the subfranchisees and their lenders, on the other hand.  The case resulted in a sale of the master franchisor to a new owner maintaining the multi-tier franchise system intact.

Elias Brothers Restaurants (E.D. Mich.):
We represented the Japanese master franchisee in the bankruptcy reorganization of this restaurant chain.

Managing Dealer or Distributor Distress or Bankruptcy

Madasa US LLC (E.D. Va.): 
We represented Red Bull North America, Inc. in the bankruptcy case of its former Virginia distributor.  We quickly terminated the distribution agreement, enabling our client to enter into an agreement with a new distributor, ensuring the supply of Red Bull Energy Drink to the Virginia market.  We also convinced the court to convert the former distributor's bankruptcy case to one under Chapter 7, thereby putting a trustee in control of all the assets.

Automobile Dealerships: 
We have extensive experience working with troubled automobile and equipment dealerships, both in bankruptcy and in out-of-court settings.  Many of these cases involve fraud on the part of the dealer.  Sometimes the parties can work quickly to resolve matters out of court.  For example, recently we worked on a dealership failure in which the parties consented to interim management pending a sale of the dealership.  The result was a successful sale to new owners while the dealership remained in continuous operation without the need for a bankruptcy filing.  All amounts due to the manufacturer and lender were paid in full.  Sometimes it is not possible to resolve disputes out of court.  In cases involving extensive and complicated fraud, the parties may not be willing or able to settle out of court.  We are adept at handling such scenarios as well.  For example, Sonnenschein attorneys assisted a major automobile manufacturer and affiliated finance company in a case of dealership failure and bankruptcy filing in which the dealer had perpetrated multiple frauds against both the manufacturer and the lender.  The dealer's fraudulent acts included selling a large number of vehicles "out of trust," selling double-pledged vehicles, falsified financial reporting, and complicated title problems.

Wireless Service Provider: 
Sonnenschein lawyers represented a national provider of wireless telephone services in connection with its disputes with dealers involving prohibited transshipping of product.  In the course of the representation, we learned about the nature and scope of fraudulent activities perpetrated by the dealers and were able to assist the client in modifying its systems and procedures to significantly reduce the risk of such activity in the future.

Protecting Intellectual Property

Footstar, Inc. (S.D.N.Y.): 
We represented investors in this bankruptcy case in which Kmart sought to terminate Footstar's license to operate shoe departments within its stores.  Several issues involved extensive briefing and litigation, including the nature of the relationship with Kmart, and whether Footstar could assume the intellectual property aspects of the agreement and cure alleged past defaults.

Medicine Shoppe Franchisees: 
We represented Medicine Shoppe in various bankruptcy and distressed matters.  Our expertise includes cases in which the principal franchisee attempted to establish a competing business or to use bankruptcy to attempt to void a non-competition clause. 

Minimizing Litigation Risk

Existing Program Reviews: 
We review and revise existing franchise and related agreements to maximize the ability to timely terminate franchisee relationships in the future.  We also have revised existing credit support programs to maximize the ability to recover on loans and other credit support in any future bankruptcy or liquidation of the franchisee.  As part of such review, we have developed model forms and procedures for use in default and termination situations.  We also focus on enforceable remedies that allow a franchisor to successfully foreclose on a troubled franchisee with all assets necessary to operate the store.

Pella Windows: 
Sonnenschein helped design a program to address financially troubled distributors and works with Pella to address such distributors as difficulties arise.

Other Key Engagements

Bass Hotels: 
We handled a state court replevin action for Bass Hotels after their general contractor went insolvent before completing a hotel renovation.  In the replevin action, the hotel sought certain furnishings and decorations, which were necessary to complete and open the renovated section of the hotel and which were in the possession of the insolvent general contractor and an unpaid warehouse. 

Budget Rent A Car of Europe: 
Sonnenschein represented the acquirer of Budget Rent A Car, Inc.'s European franchise system.

Schwinn Bicycles: 
Prior to joining the firm, a Sonnenschein partner worked extensively on behalf of Schwinn with its authorized dealer network during Schwinn's Chapter 11 case.