Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—W.D. Ky.: Personal guarantees for KFC franchises met state law requirements, (Jun 30, 2014)

By Edward L. Puzzo, J.D.

Personal guaranties made by the owner of multiple bankrupt KFC franchises were enforceable under Kentucky law without enumeration of the specific obligations being guaranteed because they referred to the franchise agreements being guaranteed, the federal district court in Louisville, Kentucky has ruled (KFC Corporation v. Kazi, June 26, 2014, Heyburn, J.).

Zubair Kazi was the CEO of four corporate franchises, which together operated 142 KFC restaurants. For each franchise agreement, Kazi signed personal guarantees. Each of Kazi's 142 personal guarantees were identical, except for the specific franchisee named as obligor, the specific restaurant involved, the duration of the agreement, and the date of execution. The guarantees required Kazi, in the event of franchisee default, to pay all losses and costs incurred by KFC under the franchise agreements, upon demand and without further notice of dishonor.

In 2011, all of Kazi's franchises entered bankruptcy. KFC then sought to collect from Kazi—as the personal guarantor—the royalties, advertising fees, equipment lease obligations, and other charges owed it under each restaurant's franchise agreement. Kazi challenged the enforceability of his guarantees, claiming they did not satisfy the formalities required by Kentucky's guaranty statute.

Guaranty statute. The Kentucky guaranty statute states:

"No guaranty of an indebtedness which either is not written on, or does not expressly refer to, the instrument or instruments being guaranteed shall be valid or enforceable unless it is in writing signed by the guarantor and contains provisions specifying the amount of the maximum aggregate liability of the guarantor thereunder, and the date on which the guaranty terminates."

The Kentucky statute does not prescribe a specific type of description necessary to expressly refer to an underlying instrument in order for a guaranty to be enforceable, the court stated. Importantly, a guaranty must refer to the instruments being guaranteed, not the specific obligations being guaranteed.

Franchise agreements referenced. In this case, each respective Kazi guaranty expressly assumed the obligation to pay all of the specified franchisee's indebtedness to KFC arising under the terms of the franchise agreement. Regardless of what present and future indebtedness the guarantees purported to obligate Kazi to under various other agreements, all that mattered for KFC's current claim was that each guaranty expressly referred to each restaurant's franchise agreement, stated the court. The phrase "expressly refer to" in the statute does not require that the obligation be apparent without reference to any other documents. What mattered was that Kazi's guarantees each expressly referred to the franchise agreement for each outlet.

The guarantees signed by Kazi named the specific parties to the guarantees by name and, in the franchisee’s case, by specific geographic address, and identified each restaurant outlet’s specific geographic address, the court observed. Thus the statutory requirements for enforceability under the Kentucky guaranty statute were met, the court ruled.

The case is Civil Action No. 3:12-cv-00564-JGH.

Attorneys: Charles J. Cronan, IV (Stites & Harbison, PLLC) for KFC Corporation, KFC U.S. Properties, Inc. and KFC National Council and Advertising Cooperative, Inc. Christopher E. Schaefer (Stoll Keenon Ogden PLLC) for Zubair M. Kazi.

Companies: KFC Corporation; KFC U.S Properties, Inc.; KFC National Council & Advertising Cooperative, Inc.

Cases: FranchisingDistribution KentuckyNews