A main point of contention in the bankruptcy case of RMH Franchise Holdings, Applebee’s second largest franchisee, is whether their franchise agreements were terminated prior to a bankruptcy filing.
Dine Global Brands (DIN), Applebee’s parent, filed a lawsuit against RMH arguing they'd already terminated the franchise agreements for the company’s Arizona and Texas restaurant locations and were entitled to take them over. RMH, on the other hand, said they filed bankruptcy just prior to receiving the franchise termination notice, and that the franchise agreements were assets of the company and its creditors. Any actions involving those agreements, RMH argued, were bound by the court.
U.S. bankruptcy judge for the District of Delaware, Brendan Shannon, ruled today in favor of RMH that Applebee’s did not properly terminate the franchise agreements. He cited RMH’s early morning bankruptcy filing on May 8, whereas Applebee’s, unaware of the filing, sent a forbearance letter later that day agreeing to delay its termination rights until May 20. Furthermore, that same day, unaware of RMH’s filing, Applebee’s sent a letter terminating the Arizona and Texas franchise agreements retroactively to April 27 and filed a lawsuit in U.S. District Court asserting its rights to terminate the franchise agreements and recover over $12 million in back royalties and advertising fees.
The court sided with RMH’s receipt of earlier multiple "cure extensions" with no notice of intent to terminate the franchise agreements. In his opinion, Judge Shannon wrote, "nothing in the record suggests Applebee’s unambiguously notified the Debtors (RMH) prior to the petition date that it intended to terminate the franchise agreements on April 27, 2018."
Judge Shannon explained the Applebee’s franchise agreements were governed by Kansas law (Applebee’s was founded and headquartered for many years in Kansas), which "mandates that termination of a contract be clear and unambiguous and convey an unmistakable purpose to rescind or forfeit the agreement."
The court’s decision today in favor of RMH means the following:
RMH has already closed a total of 19 Applebee’s stores (six were closed last week) since it filed bankruptcy on May 8 with 160 stores. The company may look to close a greater number of Applebee’s stores after an operational and lease review is completed.
In addition to lost royalties and advertising fee income that will be eliminated in bankruptcy, Dine Global and its Applebee’s subsidiaries may be responsible for paying RMH’s legal fees in this dispute. The standard Applebee’s franchise agreements contain customary language that the losing party shall pay the prevailing party "its reasonable attorneys’ fees and expenses."
RMH has filed a reorganization plan with the bankruptcy court. In it, they cite a rising business value because of the elimination of losing stores and an improved business picture due to Applebee’s drink and all-you can eat promotions. RMH's private equity sponsor, ACON Equity Partners, has agreed to put up an additional $10 million in cash if the RMH plan is confirmed. This decision by the court means it is now likely RMH will successfully emerge from bankruptcy, rather than be sold in pieces, something its franchisor, Dine Global Brands, had aggressively sought.