Fresh Out of Bankruptcy, Bennigan's Sues Franchisees

Shut down Bennigan’s in Lone Tree, Colorado. Photo/Janet Sparks

PLANO, Tex. (Blue MauMau) – After Bennigan’s Franchising Company, LP, (BFC) made the announcement that it had reached an agreement with the U.S. Bankruptcy Court on October 31, 2008, it stated that it would continue partnering with its franchisees to grow the Bennigan’s brand. But since that time, the franchisor has filed a federal lawsuit against its franchise operators, triggered by a letter it received from attorney Peter R. Silverman of Shumaker, Loop & Kendrick on November 3, advising that Bennigan’s had breached its franchise agreement. Serving as a notice of default, the letter outlines five allegations of the material breaches and methods to cure within 30 days, including paying franchisees for damages. Silverman stated that they identified “these defaults without prejudice to the right to notice other defaults that the scheduled franchisees may later or otherwise become aware of. Further, some franchisee may later have individualized claims.”

The well-publicized bankruptcy filed last July resulted in the bankruptcy court approving the acquisition of Bennigan’s Franchising Company LP by affiliates of Atalaya Capital, including the company’s equity, trademarks and other assets.  Bennigan’s Grill & Tavern and Steak & Ale brands were also included, according to the company’s announcement. At the time the Chapter 7 insolvency was in the process, the franchise owners felt Bennigan’s Franchising was committed and in firm control of the trademarks and the rights to their royalties. Larry Briski, head of the Bennigan’s Franchise Owners Association, made the statement that they were not concerned at that time. “I’m assured that the franchise agreements and trademarks have strong legal protection. We have employed a franchise attorney early on to work for the interests of our owners,” Briski said in an interview with Blue MauMau last August.

Now that same law firm is representing that Bennigan’s has breached its obligations. Silverman starts with the first allegation that BFC is responsible for administering a Marketing Fund and a Production Fund, under provisions of its UFOC  (now referred to as Franchise Disclosure Documents), and that all franchisor-owned and operated units are required to contribute to the Production Fund on the same basis as the franchisees. The fund generates marketing for franchise owners in running their restaurants. They claim that corporate units were in default on their pre-bankruptcy contributions, and that BFC chose to ignore it so as to benefit the Metromedia Restaurant Group (MRG), another entity of the company, as opposed to benefitting Bennigan’s franchisees, the beneficiaries of the fund.

Another allegation of material breach pertains to Bennigan’s gift card agreement with franchisees, and the gift card manual. Franchise owners contend the program is no longer operating and has severely damaged customer goodwill, causing confusion and economic loss to franchisees. The third asserts that Bennigan’s is also required to provide a list of approved suppliers for goods and services necessary to operate the restaurants. In his letter, Silverman claims that Bennigan’s supply system has faltered and that franchisees have not been able to obtain all necessary items from approved suppliers. Franchisees also allege that the company is no longer operating the Micros system, the POS, which it had committed to.

But as a last allegation, Silverman states that the company has allowed the franchise system to collapse, causing enormous harm to all franchisees. Because Bennigan’s represented that it had distinctive concepts and the control of the marks to represent to the public the system’s high standards of quality he states, “. . . it appears that MRG [Metromedia Restaurant Group] exercised operating control over BFC to benefit MRG at BFC’s expense. In allowing the system to collapse . . . BFC has materially breached the Agreement.” Because many of the franchisees are in states with common law or a relationship statute that require a franchisor to exercise good faith in carrying out discretionary responsibilities under the agreement, Silverman asserts that BFC’s breach is compounded by the breach of the covenant of good faith.

Bennigan's Fires Back

Attorneys for Bennigan’s shot back with a reply dated November 19, 2008. “Our review of the letter and its obvious deficiencies indicates that the letter was not sent in a good faith effort to resolve any alleged breaches  . . .”  John H. Spillman of Smith, Gambrell & Russell wrote that they believe the letter was purposefully drafted to prevent Bennigan’s from even understanding the alleged breaches much less curing them. Because there are so many problems with the letter, Spillman said he would provide an overview of some of the most glaring issues.

His first states that Article 19 of the Agreement addresses a franchisee’s termination rights, but that it only permits termination by a franchisee if Bennigan’s violates any material provision, term or condition of the franchise agreement, or fails to pay any material uncontested obligations due and owing to the franchisee. As a condition to that, Spillman said the franchisee is required to provide written notice to Bennigan’s setting forth the alleged breach in detail. He scolds, “Your letter is woefully deficient in all respects.”  He also feels that Silverman’s allegations of breach are vague at best and there is no detail whatsoever regarding specific damages to individual franchisees. He again states that his letter is not a serious attempt to give notice of specific harm suffered by individual franchisees, but instead “is simply the newest tactic employed in connection with the royalty strike in which your clients have been engaged collectively since the bankruptcy of Bennigan’s former parent company in July . . .” adding that many of Silverman’s clients were delinquent in their payments since before that time. 

In order to move the discussions forward, Spillman gives Bennigan’s response to each of the franchise owners’ allegations. He explains that his response is to help Silverman’s clients understand there is no factual basis to their allegations. Concerning the last claim that Bennigan’s allowed the system to collapse, he states, “. . . Bennigan’s acted decisively to save the system from possible collapse by declining to join the bankruptcy filing of its former parent and former affiliates, borrowing substantial funds to keep the system in operation and acting diligently to address any adverse effects the affiliate bankruptcies may have had on the Bennigan’s system.”

In closing, Spillman asserts that Bennigan’s is aware of specific instances in which certain franchisees and individuals associated with those franchisees have contacted third parties with whom Bennigan’s has ongoing contractual relationships, to induce those third parties to breach their contractual obligations with Bennigan’s. “Bennigan’s reserves all rights against any corporate or individual parties who interfered with, or may in the future interfere with, any of Bennigan’s contractual or business relationships with third parties.”

Following the filing of its original complaint dated December 2, 2008, Bennigan’s Franchising filed its amended complaint in federal court in the Northern District of Texas against the franchise owners on January 26. The lawsuit contends that the franchisees’ notice of default is defective and that Bennigan’s failed to cite a single provision of any of the franchise agreement that was allegedly breached.

According to the  complaint, the franchise agreement, with some exceptions, provides that if a franchisee gives the company written notice of an alleged breach or violation of any laws that give rise to a claim showing they have a right to terminate, then Bennigan’s has the absolute right to immediately commence legal action against the franchisee without giving any notice or without regard to any waiting period that may be contained in the franchise agreement.  Further, it states that if Bennigan’s commences legal action, then the franchisee defendants “will have the right to terminate [the Franchise Agreement] . . . unless and until a Court of competent jurisdiction has ruled on the merits that [Bennigan’s] has breached [the Franchise Agreement] in the manner alleged by [Defendant].”

It adds that the defendant franchisees do not have the right to terminate the respective franchise agreements unless Bennigan’s fails to begin the action necessary to correct the breach or violation within the thirty days after the final judgment has been entered against Bennigan’s and all times for appeals have expired.

The franchisees’ motions to strike and to dismiss the amended complaint were denied last month. Next, there will be a hearing on Bennigan’s motion for a temporary restraining order regarding the shut down of several units. Attorneys on both sides did not wish to make comment on the litigation at this time.

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