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WILMINGTON, Delaware – As the Quiznos sandwich chain awaits a court order that will declare that it has emerged from bankruptcy reorganization, one franchisee’s desperate plea is now on court record, along with the 400-plus other Chapter 11 document filings.
The store owner begs the judge in his letter dated May 20, “Please include for consideration the financial harm caused to present and past franchisees. Please have closed door/series of conference calls to owners before you release [Quiznos] . . . and its affiliates from bankruptcy.”
The shop owner further explains that because of Quiznos’ actions over the past seven years, including its bankruptcy, his business is in immediate danger of financial failure. The sinking of his business would affect his family, employees, vendors, and banks.
He writes, “They [Quiznos officials] are now demanding we sign an agreement to avoid immediately being defaulted out of our [last store.]” Having been in the system since 2000 and at one time owning three Quiznos stores, the franchisee declares that signing the new agreement is a trap designed to strip him of his rights, and to ensure he remains silent. Unless he agrees to all the company’s terms, he said he will lose his remaining restaurant.
One Quiznos franchisee told Blue MauMau that the troubled store owner is probably being required to sign a new 15-year franchise agreement even though the company is not out of bankruptcy reorganization. Asking not to be identified, the store owner said there is no telling what demands Quiznos is now putting on franchise owners whose franchises are about to expire. He thinks those franchisees are probably being required to sign releases as well, so that the franchisor cannot be held accountable for any wrongdoing. The source said he didn’t know if companies can require new franchise agreements to be executed while going through the reorganization process.
Blue MauMau was told last week by a spokesperson from the bankruptcy court hotline that Quiznos was still going through the process of emerging from Chapter 11 reorganization. Although Quiznos announced publicly last week that it had emerged, there was no such documentation that declared the franchisor had exited from bankruptcy proceedings. Last Wednesday, the bankruptcy court through its website only stated, “The plan was substantially consummated.”
The franchisee writing to the bankruptcy judge states, “We have been working hard to recover financially from the many, many harmful decisions, policies and actions by the leadership of Quiznos.” The desperate franchisee tells that many Quiznos decisions made in May of 2011 cost him and his wife their home. “At that time we had to comply one hundred percent or we would have to close,” he explains, insisting that everyone who does comply with Quiznos mandates fails. The franchise owner states that cash flow for franchised stores is not a priority for the company. “We are just considered collateral damage. They [Quiznos] have spent their years always blaming the [store] owners and insulating themselves from any accountability,” he said.
The store owner also expresses that no franchisee wanted Quiznos to fail, nor did they want a hostile relationship with their franchisor, which would not be logical. “At the same time we did not want to be forced into bankruptcy ourselves and to endure financial hardship after destroying families’ futures and reputations in their communities,” he said asking, “Do we not have the right to not follow the franchisor into the ditch of financial ruin?”
The broken franchisee tells the judge that store owners are the ones who have put up the money to build the restaurants. And they are the ones who have spent countless dollars, emptying their bank accounts, and working endlessly with no days off to keep their doors open. He adds, “. . . Quiznos turned a deaf ear [to franchisee problems] and applied more pressure and intimidation [to allow the franchisor] to do what it wanted with no real and honest regard what those consequences would be [for franchisees].”
The shop owner told the judge his store sales are well above the national average, but the only way he could do it was by not complying 100 percent with Quiznos’ rules. “Their [Quiznos] store model does not work and they have not fixed it.” The franchisee felt his business, including his employees, vendors and banks, needed to be kept safe in dealing with his franchisor’s destructive actions. He added that the company’s legal department had done a great job making franchise owners accountable for everything, while not holding Quiznos accountable for anything.
The despondent store owner pleads with Judge Peter J. Walsh asking, “. . . please do not communicate that I have taken this time to communicate with you because we actually are afraid of them [Quiznos]. It is a very vindictive group for anyone who would stand their ground . . . we would be punished.”
But in his closing note he adds, “I just got word they [Quiznos] plan on terminating us. I hope you can and will put a stop (even if it is a temporary injunction) that would help us all.” He explains to the judge, “We spent almost $600,000 building these stores and at least $200,000 more trying to keep the doors open. Thank you.”
Australian Jason Gehrke, author of Why franchisors fail: Lessons from the Titanic, explains franchisees’ dilemma in trying to survive a franchisor’s bankruptcy: “Like a sinking ship, a franchisor failure often creates a suction that drags surviving franchisees down with it, leaving only a small amount of wreckage on the surface to identify that the system ever existed (such as a vacant store, a painted-over sign, or a Google search that references an outdated website).” The author explained that like the Titanic, the promoted unsinkable passenger liner that actually sank with its lights on and engines running, franchisors can also sink in a similar fashion. Gehrke explains that “the notion that a system is proven simply because it exists ignores the possibility that it may have been on life support from the outset or is sailing directly into the path of an iceberg.”
Jenny Buchan, professor at University of New South Wales, Australia explains in her book, Franchisees as Consumers, that franchising is not set up under American law to protect franchisees when a franchisor goes under. She says, “An alarming number of franchisors fail, leaving franchisees struggling for appropriate recognition in the [franchisor] insolvency process. Providing a way for franchisees to protect their significant investments from the consequences of franchisor failure is a serious and unmet issue for policy makers with material economic impacts (externalities) on franchisees.”
Professor Buchan explains that almost without exception, franchise contracts make no reference to franchisees’ rights on franchisor failure. She says, “The franchise agreement, in its current form, is unable to address franchisor failure satisfactorily nor will it evolve, unaided, to provide an adequate solution.” Buchan asks, “Can franchisees protect themselves against the consequences of a rogue franchisor's exploitative, negligent, fraudulent or criminal behaviour by simply negotiating contracts better? The short answer is no.”
The law scholar asserts that the legal construct around franchise agreements must be changed to match the needs of the modern business format franchise arrangement. Under one-sided agreements in favor of what the franchisor wants, franchise owners are consumers and are best protected under consumer laws.
Professor Buchan also explains that corporate governance needs to be changed under the law so that the board of directors of a franchisor has a fiduciary responsibility to franchise owners. She insists that the 20th century business-format franchise model and its considerably stronger control over the small business unit has managed to escape such requirements. Buchan proclaims that bankruptcy laws for franchisors must be changed to give franchise owners a stake compared to their voicelessness and helplessness now.