Filing Chapter 11 for a Franchised Business

If you own a franchised business or if you are a franchisor in the Tampa Bay area and you are considering Chapter 11 bankruptcy, it is critical to understand that your bankruptcy case will be a bit different from a business bankruptcy for a company that is not a franchise. Most significantly, your bankruptcy case will need to pay close attention to the franchise agreement and how you are supported by the franchisor.  If you are a franchisor, your bankruptcy case can have an effect on franchisees’ businesses. The following information helps to explain how business bankruptcies under Chapter 11 can impact franchised businesses differently than other businesses in Florida.

When the Franchisee Wants to File for Bankruptcy

 If the franchisor (i.e., the overall franchise business) is not struggling with debt but one of the franchisees is considering bankruptcy, then that franchisee will need to learn more about the process for a Chapter 11 bankruptcy under the U.S. Bankruptcy Code.  Bankruptcy laws are federal and, in most business cases, pretty standardized throughout the states.  For business filings, there are no exemptions so state law does not usually apply; however there are exceptional circumstances when a bankruptcy judge will defer to state law on issues.

Generally speaking, a franchisee can file for Chapter 11 bankruptcy like other businesses that are struggling to repay debt, and a franchisee can create a reorganization plan through which debt will be repaid over a period of years, with the ability to “cram down” over-secured equipment liens. With a Chapter 11 bankruptcy, the franchisee can continue to operate the business while going through the reorganization bankruptcy. However, franchisees should be aware that the franchise agreement could lead to complications. Many franchise agreements have termination clauses for the franchisor if the franchisee files for Chapter 7 or Chapter 11 bankruptcy. However, once the franchisee files for bankruptcy, the automatic stay can prevent the franchisor from moving forward with an expedited termination of the franchise agreement.

The franchisee will also have to ask the court to allow it to assume the franchise agreement, which means continuing to fulfill the terms of the franchise agreement despite the bankruptcy case. In order to assume the agreement, the franchisee will need to be able to show that it has the capacity to fulfill the agreement despite the bankruptcy.

Effects of a Franchisor’s Chapter 11 Bankruptcy 

If the franchisor files for Chapter 11 bankruptcy, it will be particularly important for franchisees to know whether or not the franchisor plans to continue performing its obligations under the franchise agreement. If the franchise agreement is rejected, franchisees may still be able to remain in business, but the businesses will lose much of the overarching support that comes from the franchise.

Chapter 11 is Often Less Devastating Than Chapter 7 for Franchised Businesses 

Finally, if you are still considering bankruptcy and have not yet made a decision about whether to file for Chapter 7—a liquidation bankruptcy—or Chapter 11, you should keep in mind that Chapter 11 tends to be less overwhelming than Chapter 7 for franchised businesses. Since Chapter 7 requires a business to close its doors and liquidate its assets, Chapter 7 bankruptcy can create significant problems for Chapter 7 franchisees who have obligations under an active franchise agreement. Further, if the franchisor files for Chapter 7 bankruptcy, the franchisee may be unable to continue using the franchisor’s trademark in their business practice if the franchise agreement is rejected. You should discuss your options with an experienced bankruptcy lawyer in the Tampa Bay area.

Contact a Tampa Bay Chapter 11 Bankruptcy Lawyer

Both Chapter 11 and Chapter 7 bankruptcies are complicated for franchised businesses, and it is essential to work with experienced Tampa Chapter 11 bankruptcy lawyer no matter what chapter of bankruptcy is under consideration. Chapter 11 ultimately may allow franchisees and the franchisor alike to remain in business while reorganizing debt. Contact Samantha L. Dammer to learn more about how we can assist your business with a Chapter 11 bankruptcy.