Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—Bankr. D. N.J.: Subway’s claims against bankrupt former franchisee, operating entities premature, (Jun 15, 2016)

By Michael Menzhuber, J.D., LL.M.

A federal bankruptcy court in Newark, New Jersey, has determined that a Subway franchisor’s request for treble damages and attorneys’ fees and a reverse piercing of the corporate veil, following a confirmation of an arbitration award against a former franchisee, was not warranted because neither the franchisee nor the entities that she created to operate the franchises had any assets (In Re: Patwari, June 10, 2016, Sherwood, J.).

Jesal Patwari entered into four separate franchise agreements with Doctor’s Associates, Inc. (DAI) for the operation of Subway sandwich shops in northern New Jersey. She created Shapat, Inc., Shapat II, LLC, Shapat III, LLC, and Patwari, LLC (Operating Entities) to operate the sandwich shops. When she later fell behind on the rent, DAI brought four landlord-tenant actions against her. Four arbitration awards were entered against the franchisee, granting termination of the franchise agreements, payment of under-reported fees and royalties, and liquidated damages.

Patwari subsequently obtained a preliminary injunction to enjoin enforcement of the award in Chancery Court. That action was consolidated with the four landlord-tenant actions brought against her and the Operating Entities and removed to the federal district court in Newark, New Jersey. The action was then consolidated with a separate complaint filed by DAI.

Shortly thereafter, Patwari filed a Chapter 11 bankruptcy petition on behalf of herself and the Operating Entities. DAI filed a proof of claim (for damages awarded under the arbitration awards, treble damages, and attorneys’ fees), as well an adversary proceeding that was still pending. The Chapter 11 cases were later converted to Chapter 7.

Subsequently, it was determined that none of the Operating Entities contained property available for distribution and that Patwari’s only asset was a pending adversary proceeding against her prior state court and bankruptcy counsel. The preliminary injunction enjoining enforcement of the award was subsequently vacated by the bankruptcy court, after which DAI brought claims for treble damages and attorneys’ fees and a reverse piercing of the corporate veil to hold the Operating Entities liable for DAI’s judgment against Patwari.

The bankruptcy court determined that a decision on the relief sought by DAI was not warranted at the present time. With respect to DAI’s claim for treble damages and attorneys’ fees, neither Patwari’s estate nor the Operating Entities’ estates had any assets to satisfy DAI’s claim. Consequently, it made no difference whether DAI’s claim was as stated in its proof of claims or as stated in its latest submission to the court. Also, DAI had filed timely claims in each of the bankruptcy cases that included its claims for treble damages and attorneys’ fees. In the event that assets were brought into any of the estates: (1) DAI would either receive a distribution on the full amount of its filed claims; or (2) the bankruptcy court would determine the validity and/or amount of its claim if an objection was made.

The bankruptcy court also determined that there was no reason to decide DAI’s claim for reverse piercing of the corporate veil at the present time because DAI had filed timely claims in each of the Operating Entities’ cases which, in the absence of any objections, were deemed allowed and none of the Operating Entities’ estates presently had any assets to satisfy DAI’s claims.

The case is No. 08-26178 (JKS).

Attorneys: Forrest Scott Turkish (Law Office of Forrest Scott Turkish) for Doctor's Associates, Inc. Susheela Verma (Law Offices of Susheela Verma) for Jesal Desai a/k/a Jesal A. Patwari. Gary N. Marks (Norris McLaughlin & Marcus, PA) for Shapat, Inc. and Patwari, LLC.

Companies: Doctor's Associates, Inc.; Shapat, Inc.; Patwari, LLC

Cases: FranchisingDistribution NewJerseyNews