A bankruptcy court has found that Applebee’s failed to properly terminate its franchise agreements prior to the franchisee petitioning for bankruptcy. Therefore, the franchise agreements remained in effect and were property of the franchisee’s bankruptcy estate.
On September 20, 2017, Applebee’s sent a letter to the franchisee, who operated 160 restaurants, granting 90 days to cure its failure to pay royalties. The letter said the franchise agreements would automatically terminate on the 91st day if the franchisee did not cure the default. Additional letters from Applebee’s extended the cure period to April 27, 2018, but did not mention termination. Before the cure period ended, Applebee’s sent a final letter to the franchisee agreeing generally to delay exercising its contractual rights under the franchise agreements.
Applebee’s claimed the franchise agreements terminated April 27, 2018, the end of the final cure period and were not subject to or protected by the bankruptcy court’s automatic stay. The franchisee claimed Applebee’s failed to provide clear unambiguous notice of intent to terminate the franchise agreements prior to the franchisee filing for bankruptcy.
The court found Applebee’s argument unpersuasive. It said that the multiple letters extending the cure periods was not clear and unambiguous notice of Applebee’s intent to terminate. The September 20, 2017 letter was the only letter to mention termination. The subsequent letters only extended the time the franchisee could cure the default. The court concluded that Applebee’s could have terminated the franchise agreements by providing the franchisee a clear and explicit notice of termination, but Applebee’s failed to do so.
Franchisors intent on terminating a franchise agreement must make sure the notices of default and termination contain all required language to terminate the franchise agreement at the end of any cure period.
