The franchisor of Applebee’s Grill & Bar has sued its second-largest franchisee to prevent the bankrupt operator’s 160-plus restaurants from being liquidated to satisfy creditors.
Dine Brands Global alleges in the action that it was in the process of assuming control of the stores when RMH Franchise filed for Chapter 11 protection. The filing asks the U.S. Bankruptcy Court of Delaware to permit the reassignment of the stores’ leases and the sale of the equipment and furniture to Dine Brands instead of treating the restaurants as assets of RMH.
Under the terms of the Applebee’s franchise contract, Dine Brands asserts, it is entitled to assume the leases of franchised stores and purchase their interiors if the operator violates the agreement. RMH had stopped paying royalties as far back as June 2017, and was withholding advertising fund contributions for the majority of its units by January 2018, the suit alleges.
Dine Brands, franchisor of about 2,000 U.S. Applebee's restaurants in total, says it alerted RMH last September that it was in default on its franchise commitments and had 90 days to “cure” the situation. When the December deadline rolled around, Dine extended the cure period at least five more times.
During that time, Dine Brands alleges, RMH closed 15 restaurants without the franchisor’s OK, a requirement under the franchise contract. The brand parent says the closings will cost it $10.2 million in lost royalties and ad-fund contributions.
RMH was alerted that its franchise agreement would be formally revoked on April 27. By that time, the franchisee was in arrears on royalties and ad contributions by about $12.2 million, the documents show.
However, Dine Brands said at the time that it would take no further action until May 8, according to Friday’s filing. The delay was necessary to plan for the takeover of RMH’s units, Dine Brands says.
On May 7, RMH officials were reminded of Dine Brands’ intention of assuming management of the stores, the suit asserts.
On May 8, RMH filed for bankruptcy protection.
"After numerous atttempts to resolve the situation, we had no choice but to take action," Applebee's President John Cywinski said in a statement provided to Restaurant Business. "Applebee's hopes to keep as many RMH restaurants open as possible as it continues to drive the current business momentum for the brand."
"When a franchisee fails to meet its legal and financial obligations, we are forced to take action to protect the brand for the benefit of the restaurants and fellow franchisees who are paying their share," Cywinski said. "For nearly a year, while RMH did not pay its obligations of over $12 million in royalties and advertising fees, RMH self-admittedly stockpiled over $18 million in cash."
RMH did not respond by press time for a request for input.
"Its unfortunate that this particular franchisee has an issue, but at the same time, I'm very happy that Applebee's is experiencing some of the best sales and traffic in a decade," Greg Flynn, CEO of the only Applebee's franchise larger than RHM, Flynn Restaurant Group, said in a statement provided to Restaurant Business through Dine Brands. "A strong driver of our success has been our incredible collaboration and partnership among franchisees and Applebee's leadership. I believe the future is very bright for Applebee's."