Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—D. N.J.: Franchisee’s claim survived franchisor’s bankruptcy, (Mar 21, 2014)

By Edward L. Puzzo, J.D.

A tax preparation franchisee’s claims against its franchisor over franchise territories in Idaho were not discharged in the franchisor’s bankruptcy, according to the federal district court in Newark, New Jersey (FasTax, Inc. v. Jackson Hewitt, Inc., March 20, 2014, Martini, W.). Further discovery was required to determine whether the claim had been independently released by the franchisee.

FasTax, a franchisee of the Jackson Hewitt income tax preparation business, alleged in 2009 that Jackson Hewitt owed it over $1.1 million for acts related to certain franchise territories in Idaho. Soon thereafter, Jackson Hewitt filed for Chapter 11 bankruptcy, listing FasTax as an unsecured creditor. The bankruptcy plan became effective August 16, 2011 and set aside certain assets for unsecured creditors. That same month, Jackson Hewitt presented revised franchise agreements to FasTax which included releases extinguishing any claims FasTax had with Jackson Hewitt, independent of the bankruptcy proceedings. Certain FasTax owners and guarantors returned the releases with handwritten notes only agreeing to release claims associated with the Oregon territories. Jackson Hewitt removed the handwritten notes and alleged that they obtained FasTax’s consent to do so.

FasTax sought a declaratory judgment that the disputed release was invalid and would not preclude its claims against Jackson Hewitt relating to the Idaho territories. Jackson Hewitt moved to dismiss.

Discharge in bankruptcy. Jackson Hewitt argued that FasTax’s claims regarding the Idaho territories were already discharged in bankruptcy. FasTax countered that because it was a known creditor that did not receive actual notice of the bar date for filing proofs of claim in bankruptcy, the discharge was not applicable to FasTax’s claim. The court ruled for FasTax on this issue.

Jackson Hewitt did not dispute that FasTax was on the list of creditors at the outset of the bankruptcy and had filed claims. Therefore, it was a “known creditor,” the court stated. As such, it was entitled to actual notice of the bar date, even if it was already aware of the bankruptcy. Jackson Hewitt’s failure to provide FasTax with actual notice of the bar date meant that the Chapter 11 bankruptcy discharge did not apply to FasTax’s claims, the court ruled.

Validity of release. Alternatively, Jackson Hewitt argued that the release discharged FasTax’s claims, regardless of the bankruptcy. The court stated that it could not find that FasTax gave unequivocal consent to remove the pages from the release that contained the handwritten modifications to its agreement to release certain claims. The court also could not find that the release was invalid either. In the absence of discovery on this issue, it could not rule. Therefore, the court stated, it also could not grant FasTax’s motion for summary judgment. Consequently, the court denied both Jackson Hewitt’s motion to dismiss and FasTax’s motion for a declaratory judgment that the disputed release was invalid.

The case is No. 13-3078 (WJM).

Attorneys: Eric P. Blaha (Larocca Hornik Rosen Greenberg & Blaha LLP) for FasTax, Inc. James Simon Coons (Ansa Assuncao, LLP) for Jackson Hewitt, Inc. and Sondi & Associates, LLC.

Companies: FasTax, Inc.; Jackson Hewitt, Inc.; Sandi & Associates, LLC

Cases: FranchisingDistribution NewJerseyNews