Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—Bankr. E.D. Ken.: Franchisor cannot recover attorney fees from franchisee’s bankruptcy estate, (Jan 28, 2014)

By Linda O’Brien, J.D., LL.M.

A restaurant franchisor was not entitled to recover attorney fees from the franchisee’s bankruptcy estate that were incurred in connection with the transfer of the franchise agreements, the federal bankruptcy court in Covington, Kentucky, has ruled (In re AppleILLINOIS, LLC, January 24, 2014, Wise, T.).

AppleILLINOIS, LLC, an operator of 33 Applebee’s restaurants, filed a Chapter 11 bankruptcy petition and sought to sell its restaurants through an auction process. Pursuant to a procedures order for the assumption or assignment of executory contracts and unexpired leases, AppleILLINOIS filed a notice that identified its executory contracts and unexpired leases, and identified the 33 franchise agreements as executory contracts that might be assumed, assigned, or rejected. The notice also identified proposed cure amounts relating to the 33 franchise agreements for unknown remodeling obligations. In response, franchisor Applebee’s International, Inc. reserved its rights to object to the notice pending the auction’s outcome when the identity of the purchaser and specific contracts to be assumed or assigned would be known. RMH Illinois, LLC was the successful bidder at the auction held in June 2013. RMH agreed to purchase 15 of the restaurants and operate them as Applebee’s.

An asset purchase agreement and sale order between AppleILLINOIS and RMH was approved by the bankruptcy court. The agreement provided for the payment of the proposed cure amounts to the franchisor but did not identify any defaults entitling the franchisor to the payments. To facilitate the sale, AppleILLINOIS and the franchisor agreed to reserve for resolution whether the franchisor would be entitled to recover attorney fees incurred in connection with the assumed franchise agreements. After the sale, the franchisor sought from AppleILLINOIS the proposed cure payments in the amount of the attorney fees it incurred in connection with the transfer of the franchise agreements.

The bankruptcy court found that the franchisor was not entitled to recover attorney fees from AppleILLINOIS’s bankruptcy estate. To receive an award of attorney fees under the assumed franchise agreements between AppleILLINOIS and the franchisor, it was required that (1) there be a legal proceeding; (2) to construe or enforce provisions of the franchise agreements, including provisions requiring payments to franchisor incident to the restaurant operations; and (3) the entity requesting the attorney fees must be the “prevailing party.” Although the bankruptcy case was a legal proceeding, the court found that there was no action to construe or enforce the provisions of the assumed franchise agreements and the franchisor was not the prevailing party within the meaning of the agreements. Further, the franchisor was paid a transfer fee at the close of the sale by RMH to defray costs incurred in connection with the transfer of the franchise agreements.

The case is No. 13-20723.

Attorneys: Ellen Arvin Kennedy (Dinsmore & Shohl) for AppleILLINOIS, L.L.C. Ronald E. Gold (Frost Brown Todd LLC) for Creditor Committee.

Companies: AppleILLNOIS, LLC; Applebee’s International, Inc.

Cases: FranchisingDistribution KentuckyNews