A court has blocked the efforts of Applebee’s parent Dine Brands Global to take control of a bankrupt franchisee’s 160 restaurants, putting the chain at risk of losing nearly 10% of the 1,900-store system.
The decision clears the way for RMH Franchise Holdings, the second-largest franchisee of Applebee’s, to sell or shut the units as a part of its Chapter 11 bankruptcy proceedings. RMH filed for bankruptcy protection on May 8.
Dine Brands argued that RMH’s franchise agreement had already been effectively terminated by then. Under the terms of the agreement, the franchisor has a right to take possession of franchised stores if the contract is voided. The franchisor presented the U.S. Bankruptcy Court for the District of Delaware with letters going back to last September, each stressing that RMH was failing to uphold the terms of the franchise pact.
But only the first communication bluntly mentioned that RMH would be in default if it didn’t provide back royalties and otherwise rectify the situation within a certain deadline. That Sept. 20 letter indicated Dine Brands had the right to assume possession of the franchisees’ stores on Dec. 19 if payments weren’t forthcoming.
But on Dec. 18, Dine Brands sent a letter extending what is legally known as a “cure period.” In effect, it provided RMH with more time to pull itself out of trouble and did not repeat the threat of holding the company in default of the franchisee agreement if it didn’t rally.
The concession was apparently part of a wider effort by the franchisor to help struggling franchisees get back on their feet by easing royalty payment requirements. The break was extended several more times to RMH, in each instance without the threat of the contract being declared void.
When RMH filed for protection from creditors in May, it argued that the restaurants were still its property, since the franchisor hadn’t assumed their operation. It also asserted that its franchise agreement had not officially been terminated. The pact requires that Dine Brands give clear notice of a termination, and RMH said it had not been given any updated warning after the Dec. 19 deadline came and went.
The bankruptcy court agreed yesterday with RMH, leaving the restaurants in question under its control. The stores can now be liquidated, with the proceeds used to allay the company’s obligations to debtors.
Applebee’s reacted with a comment to Restaurant Business: “Our priority is to position Applebee’s for long-term growth as America’s favorite Neighborhood Grill & Bar. We took meaningful steps to address a specific franchisee who was negatively impacting our brand and fellow franchisees. We will continue to take necessary measures to address anything that may negatively impact our brand and business.”