NEW ORLEANS – Veteran franchisee Larry Lundy has been no stranger to hardship, tragedy and setbacks in his three-decade career with Pizza Hut Inc. After being diagnosed with chronic myelogenous leukemia, his treatment for the rare cancer threw him into a spiral of bankruptcy restructuring of his 67 stores. Lundy landed on his feet, only then to be hit by Hurricanes Katrina, Rita and Gustav.

Through it all, the franchisee managed to stand firm, rebuilding his business in his native community that he loved, New Orleans.

Then came another blow. This one from his own franchisor, under the management of Yum Brands. When Pizza Hut began showing signs of wanting to take back the corporate-owned stores they originally sold Lundy, the relationship started to deteriorate. Lundy fought back tooth and nail, but finally succumbed when the franchisor took advantage of an opportunity to withdraw its guaranty on Lundy’s loans. Soon Lundy succumbed to their pressure and conceded his remaining 44-store network to Pizza Hut.

That began the legal wrangling between franchisor and franchisee in 2010. In trying to determine what value could be placed on Lundy’s business for the asset purchase agreement, all attempts at negotiations failed. Pizza Hut filed a lawsuit against Lundy on January 2, 2011. Lundy countersued. Now, the two are neck-deep in litigation, in a battle only attorneys can resolve.

So how can a 30-year relationship between franchisor and franchisee end in destruction? 

The answer lies in the eye of the storm. 

Early warnings of turbulence

Although the two parties have been in a tumultuous relationship for the past 12 years, Lundy and Pizza Hut didn’t start out that way. As a highly skilled accountant and MBA recipient, Lundy was vigorously recruited by PepsiCo in the early 1980s to help correct the mounting internal accounting problems that plagued the pizza company in its growth. After serving as its vice president/controller, Lundy was promoted to vice president of development, overseeing the structure of 1,500 new Pizza Hut stores.

That position honored him as one of the highest-ranking African-Americans in any national company at the time.

Pizza Hut CEO Steve Reinemund, then under PepsiCo, recognized Lundy’s keen business acumen and his stellar reputation in his hometown community of New Orleans. Reinemund approached him about becoming a franchisee. Although Lundy was considering retiring at age 42 at that point in his successful career, he stepped up to Reinemund’s challenge.

While building his restaurant network in a severely underperforming New Orleans market in the early 1990s, Lundy vowed he would build in all different areas; urban, suburban and rural. He used his PepsiCo stock options as a down payment to purchase 31 corporate stores, valued at $15 million. The franchisee would later add 26 Pizza Hut shops in Baton Rouge. As a result, Lundy’s franchise ranked among the 100 largest minority owned businesses in the United States.

As things were going well for Lundy, he was diagnosed with leukemia in 1999.

Doctors told him he had only eight weeks to live.

While taking acute treatment at the world-renown MD Anderson Cancer Center in Houston, Lundy was simply too ill to run his business. When his stores were being mismanaged by staff, he called on family members to take over. They immediately started closing down under-performing stores to stop the bleeding of cash but bankruptcy was inevitable. When Lundy returned to work in 2004, his family was just beginning to turn the network around.

Lundy had survived.

Hurricane Katrina hits New Orleans, photo:NASA

After restructuring, the franchisee built his Lundy Enterprise restaurant network, saving jobs for most of the 1,200 employees. That’s when Hurricane Katrina hit in 2005. It was a crippling blow that eventually would leave him with only 44 stores. Lundy’s company fell behind on royalty and other payments. He scrambled to save his network. But with Pizza Hut working against him, he decided it was time to get out.

Pizza Hut seizes franchisee’s stores

The franchisor and franchisee began negotiating a fair asset purchase agreement. Pizza Hut and Lundy spent considerable time trying to reach a deal that would transfer Lundy Enterprise’s assets to Pizza Hut, while leaving the franchisee to deal with the liabilities of his properties.

Pizza Hut said it didn’t want to leave a hole in the Louisiana market so while arbitrating with Lundy over the value of Lundy Enterprises, it aggressively re-entered his markets. So far, the franchisor re-opened 18 restaurants in New Orleans and plans to open four more in Baton Rouge. A spokesperson from Yum Brands, which has owned Pizza Hut since 1997, first under Tricon Global, touted the result of its effort in hiring 500 employees. It says there are more hires to come next year.

After several unsuccessful attempts to come up with a value of Lundy’s network, the parties mediated in July 2010 and signed an agreement to arbitrate the matter in the coming October. If the fair market value of Lundy’s business fell short of the amount of its liabilities, Lundy would be allowed fourteen days to negotiate down, with Pizza Hut’s assistance, the amount of Lundy’s outstanding liens.

The arbitration didn’t occur until mid-December.

When judges set the value at $7.8 million, an amount that was not enough to pay off all liens, claims and other expenses, that triggered the negotiation period for Lundy to reduce his lien obligations. Because of the delays, the negotiation period overlapped with the Christmas holidays. Lundy ran into problems meeting with third-party creditors. When he asked Pizza Hut for assistance and for an extension on his negotiating period, they turned him down. 

Lundy immersed in litigation

On January 2, 2011, Pizza Hut terminated all agreements with Lundy Enterprises and filed a lawsuit against the franchisee on trademark infringement, unfair competition, and breach of contract. They also publicly announced the closure of the franchisee company’s 44 stores then in operation with over 800 employees.

But Lundy fired back with vengeance in a counterclaim against Pizza Hut. The franchisor then filed to dismiss all of Lundy’s claims.

U.S. District Judge David Godbey issued a ruling September 19, 2011 denying Pizza Hut’s motion to dismiss but he also dismissed Lundy’s fraud-based claim, alleging the franchisor intentionally interfered with contract and business relations. The judge said Lundy failed to explain how Pizza Hut’s interference was “improper or malicious.” He did allow the remaining grievances to stand.

While Pizza Hut argued that it was within its rights not to extend the 14-day negotiation period which Lundy requested to help him negotiate down debt with creditors, the judge agreed with Lundy. He said the franchisee had sufficiently made his claim that Pizza Hut acted in bad faith “in failing to make commercially reasonable effort” to assist Lundy.

Attorney Justin Klein of Marks & Klein, representing the franchisees, asserts in an amended filing last month that during Lundy’s harrowing times of battling for his life in defeating leukemia, Pizza Hut sensed his vulnerabilities. It began implementing a calculated scheme against him. He claims the franchisor tried to usurp Lundy’s territory, a market that floundered prior to Lundy’s entrance.

Klein further alleges that while Lundy struggled to keep his stores, the franchisor imposed unfair credit terms, refused Lundy’s restaurants the chance to offer new products available in other markets, and opened independent stores that competed with Lundy’s restaurants. Klein alleges that Pizza Hut used “underhanded tactics to try and drive him out of New Orleans,” all the while capitalizing off the good will of his minority status and business success.

Pizza Hut declined to make comment regarding the ongoing litigation. The company’s outside counsel, Van Beckwith of Baker Botts did not return a phone call.

Pizza Hut has responded in the lawsuit that Lundy’s claims “serve no purpose other than to deliberately paint (Pizza Hut) in as unfavorable of a light as possible both to the court and the public."

The trial is now set for July 16, 2012.

Meanwhile, Larry Lundy fights on. While he has kept his leukemia at bay, Lundy has now been diagnosed with prostate cancer.

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