Recently the Wall Street Journal, CBS, USA Today and CNBC all reported that Quiznos intends on filing for Chapter 11 bankruptcy protection in the next several weeks. Quiznos plans to present to the court a pre-packaged restructuring plan that the company has been negotiating with its creditors. Approximately two years ago, majority interest in Quiznos was acquired by Avenue Capital Group, a New York based hedge fund, in an out-of-court debt for equity restructuring deal. That deal, among others, has resulted in what the Wall Street Journal reports is a $570 million debt load. Additionally, Quiznos has faced several franchisee-initiated lawsuits (one in 2009 and another in 2013), which asserted claims that Quiznos overcharged its franchisees for food items and supplies. The 2009 lawsuit was settled for approximately $95 million. With total U.S. franchisee restaurants declining from approximately 5,000 restaurants in 2006 to 1,200 today, it is clear that the embattled franchisor has experienced significant difficulties over the last eight years.
The Wall Street Journal reports that a bankruptcy filing would help Quiznos address troublesome leases, unattractive contracts and outstanding litigation. However, the news sources have not discussed whether the “unattractive contracts” include existing franchise agreements. A Quiznos bankruptcy filing could become problematic for franchisees for a number of reasons. During the pendency of a bankruptcy proceeding, Quiznos would be empowered to require franchisees to continue to perform their obligations but franchisees could not compel Quiznos to perform its obligations.
Under the bankruptcy code, a debtor (Quiznos) has the right to assume or reject an “executory contract,” which courts have defined to include franchise agreements. If Quiznos assumes a franchise agreement, that agreement will continue to be in full force and effect and the franchisee will receive the benefit of its bargain, including the ability to compel Quiznos to perform its obligations. Assumption of a franchise agreement may require Quiznos to cure monetary and non-monetary defaults under the franchise agreement. On the other hand, if Quiznos rejects a franchise agreement, although the franchise agreement is not terminated, the franchisee is no longer permitted to use the Quiznos’ trademark, Quiznos is not required to perform its obligations under the franchise agreement and the franchisee is entitled to damages.
Several options may be available to Quiznos franchisees. Franchisees should speak with experienced attorneys and consider organizing themselves to increase their negotiating power.