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4 Franchise L.J. 1 (1984-1985)

handle is hein.journals/fchlj4 and id is 1 raw text is: n     w o   I

The Bankruptcy of the Franchisee:
The Franchisor's Initial Strategy

by Joyce G. Mazero'
Dallas, Texas

A  franchisee's endeavors to ex-    ~  '
pand too rapidly, purchase exces-
sive inventory, sell products with-
out making required payments to    -
secured lend-ps (or maneuver pay-
ments to improve cash flow) can
have serious financial impact on
the franchisor. This is especially so
where the franchisor has agreed
with lenders to guarantee, repur-
chase, or otherwise assume the
franchisee's liabilities upon default  Joyce G. Mazero
of the franchisee. Accordingly, the ultimate loss can inure
to the franchisor.
The focus of counsel for a company engaged in franchis-
ing is rooted in the general practice of law as well as the
regulatory and court-generated developments of a fran-
chise practice. Important in this regard is the function
of counsel for the franchisor faced with the bankruptcy of
a franchisee. Most likely, the bankruptcy proceedings of a
franchisee will be initiated under Chapter I 1 of the Bank-
ruptcy Code.' Here, counsel must assist the franchisor to
answer the threshold question posed in the bankruptcy:
whether the franchisor will cooperate in the reorganization
of the franchisee or, alternatively, seek judicial relief to
terminate the franchise and, where applicable, recover col-
The purpose of this article is to discuss the practical eval-
uation that should be made by counsel and the franchisor
before reaching this answer. Recommendations contained
in this article are the product of in-house experience with a
*Joyce G. Mazero is general counsel and secretary of Curtis Mathes
Co., of Dallas, Texas. The cooperative efforts and advice of Bruce Camp-
bell, a partner of Davis, Graham & Stubbs, of Denver, Colorado, is grate-
fully acknowledged.

franchising company. Certainly, these recommendations
are not all-inclusive and the experiences of other in-house
counsel and franchisors may vary.
Franchisor's Threshold Strategy
When the franchisor confronts the threshold question,
several factors need careful evaluation. Both business and
legal considerations are involved in each factor, as summa-
rized below:
A. Status of the Franchise Agreement
1. Supporting Reorganization. The franchise agree-
ment will generally be viewed as an essential element of a
reorganization plan. (e.g., agreement provides license to
(continued on page 17).
Elsewhere in This Issue
The Payment of Withholding Tax on the Initial
Franchise Fee Paid by a Canadian Franchisee
to a U.S. Franchisor .........................................  3
Model Standards for Recognition as a Specialist in
Franchise  Law  ..................................................  5
Franchising Bookshelf .........................................  8
The New York State Franchise Sales Act: Has Its
Extraterritorial Jurisdiction Been Clarified? ............ 9
Franchising Currents .........................................  I I
(Including: Franchisee's Restrictive Covenant Did Not
Imply Exclusivity; Termination without Cause Did Not
Violate U.C.C. Good Faith Obligation; Equity Re-
quired a Terminated Franchisee to Be Compensated for
the Value of the Franchise to Prevent Windfall to Fran-
chisor; Courts Continue to Construe Franchise Market-
ing Laws Liberally for the Benefit of Franchisees; and

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