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If a franchisor or an agent of a franchisor goes to the bank without your permission and makes an offer to obtain free title to your tangible assets at a FMV that the franchisor gets to determine, and the bank takes the small offer that doesn't satisfy the balance you owe on the loan, is this tortuous interference with contract even if you are in default of your loan ---or is this a common business practice of franchisors when franchisees are failing and may have to go into bankruptcy, etc...
Tortious Interference
Submitted by Paul Steinberg on Thu, 2007/03/01 - 19:46.
Definition of Tortius Interference
Depends on state law, the Restatement(2d) of Torts says:
One who intentionally and improperly interferes with another's prospective contractual relation (except a contract to marry) is subject to liability to the other for the pecuniary harm resulting from loss of the benefits of the relation, whether the interference consists ofEarliest citation is to 1621, when someone threatened "to mayhem and vex with suits" customers patronizing a particular merchant. So vexatious plaintiffs have been with us for at least a few centuries.(a) inducing or otherwise causing a third person not to enter into or continue the prospective relation (b) preventing the other from acquiring or continuing the prospective relation.
Loan Default
Submitted by Paul Steinberg on Thu, 2007/03/29 - 14:43.
Normally, when you buy equipment to start your franchise, you will have that financed by the bank; they may also finance the "build-out" of the physical plant in which your franchise will operate.
You will normally be required to pledge the equipment as collateral, in addition to signing a personal guaranty. If you don't pay the bank, what happens next is determined by state law and by the language of your loan documents.
It sounds like you are describing a situation in which the borrower defaulted, the bank took title to the equipment, and sold it to the f'zor; and the bank is pursuing the guarantor for the deficiency between what the bank is owed and what it sold the equipment for.
I wouldn't say it is common practice, but you must remember that much of the equipment has maximum value to someone who wants to use the equipment in a branch of that franchise system. Some of the equipment may have logos/"trade dress"/etc and therefore cannot be used by anyone other than an authorized f'zee.
That is why it is logical that when a franchisee goes out of business, the equipment will be sold to an incoming f'zee. In the case you describe, the f'zor may have bought the equipment at pennies on the dollar with the intent of re-selling it at full price to a new incoming f'zee.
On those facts, it would not be tortious interference.
Loan Default and Tortuous Interference with Contract
Submitted by Guest on Thu, 2007/03/29 - 16:39.
Thank you, Paul. But is it legal for third parties, who are encouraged by the Zor, to approach your Landlord without your knowledge to negotiate a lower rent? Is it lawful for the Zor to negotiate with the Landlord behind your back to make sure that the Landlord terminates the lease so that a third party can take over, even when the Landlord has assured the Zee that the lease will not be in default if the Zee continues to pay the rent to acquire the time to sell the tangible assets. Is it legal for a third party who doesn't even yet have a franchise to approach the Zee's bank and make a small offer for the tangible assets of the franchisee and do the banks generally azccept these offers for the tangible assets from third parties who don't yet have franchise rights when they approach the bank, and don't really want these rights until they know how cheaply they can get title to the assets.
While some Zors may indicate that they will assume the lease and purchase your tangible assets and the lease improvements upon termination, or assign the right to a third party, in the terms of the franchise agreements, in actual practice they have policies wherein they encourage third parties to approach the ZEE who is failing and terminating and it is the third party who directly negotiates to sub-lease or assume the lease and who negotiates and purchases the tangible assets, not to include the lease improvements, in either a default situation or a transfer. This third party benefits more, of course, from a sale transfer, in which they acquire the franchise rights at less cost than the purchase of a new franchise. .
This, of course, permits the third party, in either instance, to get the business for almost nothing because of the pressure on the original Zee, who has failed, to get out from under the personal guarantees on the lease and the franchise, itself.
These policies, of course, allow the churning franchisors to provide an appearance of a viable franchise with no outlay of capital and no "due diligence" concerns. These same franchisors have the priority security interests in the assets upon default under the franchise agreement and the Landlords who sign the co-terminus default arrangements are often screwed by the franchisors, as well.
These same churners often use the threat of "liquidated damages" clause in the franchise agreement as an incentive to failing Zees to cooperate in the takeover and the turnover of the business. It is obvious that they contemplate in the franchise agreements the takeover of the business with no outlay of capital by the Zor.
If this isn't tortuous interference under the law to control the assets of the franchisee, this is certainly "bad faith" practice because of the discrepancy between the disclosure in the contracts and the actual bad practices of the Zors that are not disclosed in the franchise agreements.
From the standpoint of failing Zees, this practice becomes very personal and feels like assault with intent to steal by the Zor and for the Zor by opportunistic third parties who may or may not have made a good deal!
