Mackenzie Dimitri, a partner at Einbinder & Dunn LLP (E&D) secured a major win for her client, a restaurant franchisor, in the U.S. Bankruptcy Court for the Middle District of Florida.
In the action, a group of franchisees operating several restaurants pursuant to 13 franchise agreements, with varying ownership groups and a common management company, all concealed sales figures, providing false sales reports to the franchisor and underpaying royalties and other fees for more than a year. Upon learning of the discrepancies, the franchisor retained E&D to represent them in the dispute. Thereafter, the franchisor terminated the franchise agreements, commenced a lawsuit in state court in Florida to enforce its post-termination rights, and filed a motion for preliminary injunctive relief.
On the morning of the hearing on the motion for preliminary injunctive relief, the franchisee group filed for bankruptcy, in nine related actions. The state case was automatically stayed pursuant to the bankruptcy filing. Thereafter, E&D, lead by Ms. Dimitri, coordinated with bankruptcy counsel in Florida to win a motion in the bankruptcy court to lift the automatic stay of the underlying state action. In ruling on the motion for stay relief, the bankruptcy court critically held that the contracts at issue (both franchise agreements and a number of subleases) had all been “properly terminated.” This ruling would have allowed the franchisor to proceed in the state court case to summary judgment and a hearing on damages, fast-tracking the status of the state court case. The ruling would also have allowed the franchisor to proceed in eviction actions for each of the restaurants.
As a result of the successful motion, the franchisor was able to settle with the franchisor for a multi-million dollar cash payment, a multi-million dollar promissory note, and the turnover of all of the restaurants the franchisor sought to operate as corporate locations. The settlement also included provisions that required the franchisee-group and its principals to comply with strict non-compete provisions in order to address other business opportunities the group had sought to pursue that potentially put the franchisor’s trade secrets at risk. The settlement was finalized and restaurants turned over within two months of the franchisee group filing for bankruptcy.
The result was a resounding win for the franchisor and an excellent example of how experienced litigation counsel can protect your trademarks, trade secrets, and rights.