Franchisee 101: Corralled Franchise Claims

Lewitt Hackman [co-author: Caitlyn Dillon]

A federal court has granted, in part, restaurant franchisor Golden Corral’s motion to dismiss a complaint brought by a former franchisee. The court found a general release of claims, executed as part of an assignment of a franchise agreement, was enforceable under New Jersey law.

William Scism and Karen Scism entered into a franchise agreement with Golden Corral in 2007. In 2011, they formed a limited liability company. They assigned the franchise agreement to the new entity, with Golden Corral’s consent. The written assignment contained a release of liability. The release barred claims against Golden Corral arising out of the franchise agreement or assignment agreement that occurred on or before the date of the assignment agreement.

The Scisms later closed the franchised restaurant and were unable to repay their loans. A creditor sued the franchisee. The franchisee filed a third-party complaint against Golden Corral. Golden Corral moved to dismiss, arguing that the claims against it were barred by the franchisee’s general release. The franchisee argued that their claims were not barred by the general release because the New Jersey Franchise Practices Act (“FPA”) forbids a franchisor from requiring a franchisee to agree to a general release that would relieve the franchisor from liability under FPA at the time of entering into a franchise agreement.

The court held the FPA did not apply. When the parties signed the assignment, the franchisee had already signed a franchise arrangement with Golden Corral. Had Golden Corral required the franchisee to sign a release when they signed the franchise agreement, the FPA would have applied. Here the release was signed later. The court dismissed the franchisee’s claims as barred by the general release.

Franchisees should review any general release requested by their franchisor carefully with counsel. A release of claims that franchisors often insist on as a condition of consenting to an assignment or transfer by the franchisee, if valid, can defeat a franchisee’s later claim or prevent a franchisee from suing to enforce a claim.

Scism & GC of Vineland, LLC v. Golden Corral Corporation, No. 18-12879 ES (D.N.J. Dec. 4, 2019)

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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