Opinion
Case No. 95-10589-AM, Adversary Proceeding No. 95-1050, Case No. 95-10659-AM, Adversary Proceeding No. 95-1057
March 15, 1995
MEMORANDUM OPINION
These adversary proceedings came on to be heard in open court on March 7, 1995, on the motion of the debtors, the operators of three Popeye's Famous Fried Chicken restaurants, for a preliminary injunction to prevent the franchisor, America's Favorite Chicken Company (sometimes referred to in this opinion as AFC), from treating the franchise agreements as terminated, and, in particular, from directing vendors of proprietary supplies not to make deliveries to the debtors' restaurants. The franchisor has filed counterclaims and has similarly moved for a preliminary injunction to restrain the debtors from use of the Popeye's service mark and to enforce the post-termination provisions of the franchise agreement. A hearing was first held on the debtor's motion for preliminary injunction on February 23, 1995. At that hearing, the Court concluded that, even though the defendant had received notice and was represented at the hearing by counsel, the period of notice was so short — 1 day — that the hearing should instead be treated as one for a temporary restraining order under Fed.R.Civ.P. 65(b). Based on the evidence presented at the hearing, the Court entered a temporary restraining order prohibiting the franchisor from treating the franchise agreement as terminated or interfering with deliveries of supplies to the restaurant and scheduling a further hearing for March 7, 1995 on the motion for preliminary injunction. At the conclusion of the evidence at the hearing on March 7, 1995, the Court made findings of fact and conclusions of law orally on the record, denied the debtor's motion for a preliminary injunction and its oral motion for a stay of the Court's ruling, and took AFC's motion for preliminary injunction under advisement. With respect to the debtor's motion for preliminary injunction, this memorandum opinion supplements the findings of fact and conclusions of law orally stated on the record. With respect to AFC's cross-motion for preliminary injunction, this memorandum opinion shall constitute the Court's findings of fact and conclusions of law as required by F.R.Bankr.P. 7052 and Fed.R.Civ.P. 52(a).
Findings of Fact
Pop Up 1, Inc filed a voluntary chapter 11 petition in this Court on February 14, 1995 and continues in possession of its estate as debtor in possession. It operates a Popeye's Famous Fried Chicken restaurant at 12184 Glade Drive, Reston, Virginia under a written franchise agreement originally entered into on August 30, 1982, between Popeyes Famous Fried Chicken, Inc. as the franchisor and Alonzo and Sylvia P. Mundy as the franchisees. The franchisee's rights were assigned to the debtor in September 1982. At some point not disclosed by the record, Al Copeland Enterprises, Inc. became the successor in interest to Popeye's Famous Fried Chicken, Inc. In turn, AFC is the successor by merger to Al Copeland Enterprises, Inc. The president of Pop Up 1, Inc. is Sylvia P. Mundy, Ph.D. (sometimes referred to in this memorandum opinion as Dr. Mundy).
MBW3 Enterprises, Inc. is an affiliate of Pop Up 1, Inc. It filed a voluntary chapter 11 petition in this Court on February 17, 1995 and likewise remains in possession of its estate as debtor in possession. It is the franchisee (jointly with Alonzo and Sylvia Mundy) of two Popeye's Famous Fried Chicken restaurants, one located at 10801 Lee Highway, Fairfax, Virginia, and the other at Willston Centre II, Arlington Boulevard, Falls Church, Virginia, under written franchise agreements dated May 12, 1986 and December 31, 1986, respectively. These stores have actually been operated by two affiliated corporations known as 2 Pop Up, Inc. and 3 Pop Up, Inc., respectively, also debtors in possession before this Court, with MBW3 acting as a management company for all three of the restaurants. Dr. Mundy is also the president of MBW3. A fourth Popeye's, located at Tyson's Corner, Virginia, was operated by an affiliated corporation called Typop, Inc., also managed by Dr. Mundy. The Typop store closed in approximately August 1994.
These two entities also filed a complaint for injunctive relief against AFC. Their motions for a preliminary injunction were denied at the hearing on February 23, 1995, because they lacked standing, not being parties to the franchise agreements.
Each of the three franchise agreements is essentially identical and in broad terms grants the franchisee the right to use the Popeye's service mark and "system" in exchange for the payment of royalties and advertising fund contributions calculated as a percentage of gross sales. Under the agreement the payments are due weekly, although as a matter of company policy the franchisor considers the payments timely if made within 19 days of the end of the week. Each agreement contains the following provision:
XIII. TERMINATION
A. Except as provided in Paragraph XIII.B. and C. of this Franchise Agreement, Franchisee shall have thirty (30) days after receipt from Franchisor of a written Notice to Cure within which to remedy any default hereunder. If any such default is not cured within that time, or such longer period as applicable law may require, Franchisor may, at its option, terminate this Franchise Agreement, and all rights granted hereunder effective immediately upon receipt by Franchisee of a written Notice of Termination. Franchisee shall be in default hereunder for any failure substantially to comply with any of the requirements imposed by this Franchise Agreement * * * including, without limitation, any of the following events:
1. If franchisee fails or refuses promptly to pay any monies owing to Franchisor * * *
In addition, the franchise agreements each contain, in Section XIII.B, the following language:
Franchisee shall be deemed to be in default and Franchisor shall terminate this Franchise Agreement and all rights granted hereunder effective immediately without notice or opportunity to cure (except as otherwise required by law), if Franchisee shall become insolvent or * * * if a final judgment remains unsatisfied or of record for thirty (30) days or longer (unless supersedes [sic] bond is filed) * * *
Finally, the agreements contain in Section XVII the following language with respect to waiver:
No failure of Franchisor to exercise any power reserved to it in this Franchise Agreement, or to insist upon compliance by Franchisee with any obligation or condition of this Franchise Agreement, and no custom or practice of the parties at variance with the terms hereof, shall constitute a waiver of Franchisor's right to demand exact compliance with the terms of this Franchise Agreement. Waiver by Franchisor of any particular default by Franchisee shall not affect or impair Franchisor's right in respect to any subsequent default of the same or of a different nature nor shall any delay, forbearance or omission of Franchisor to exercise any power or rights arising out of any breach of [sic] default by Franchisee of any of the terms, provisions, or covenants of this Agreement, affect or impair Franchisor's rights, nor shall such constitute a waiver by Franchisor of any rights hereunder or right to declare any subsequent breach or default. Subsequent acceptance by Franchisor of any payments due to it shall not be deemed to be a waiver by Franchisor of any preceding breach by Franchisee of any terms, covenants, or conditions of this Franchise Agreement.
As a result of the failure of the debtor and MBW3 to make royalty and advertising fund payments required by the franchise agreements, the franchisor (then Al Copeland Enterprises, Inc.) mailed a notice to the franchisees on May 18, 1992, demanding that they cure the defaults by paying the arrearages within 30 days. With respect to the store operated by the debtor, the arrearage came to $108,318.91. With respect to the two stores operated by MBW3, the arrearage totaled $253,024.23. Dr. Mundy admitted that she had received the notices to cure. While Dr. Mundy denied that the arrearages were as high as the franchisor claimed, it is undisputed that no portion of the arrearage has been paid.
When the arrearages were not cured, the franchisor (at that point still Al Copeland Enterprises, Inc.) brought suit against the franchisees in the United States District Court for the Eastern District of Louisiana. Dr. Mundy and the debtors appeared in the suit by Louisiana counsel but at some point terminated their relationship with him. At the time the suit was brought, Al Copeland Enterprises, Inc. was a chapter 11 debtor and at some time subsequent obtained confirmation of a plan of reorganization, the terms of which are not before the court.
While the suit in the United States District Court was pending, the chief executive officer of the franchisor (by now AFC) mailed a letter on November 13, 1992 to Dr. Mundy, referring generally to the litigation between the company and its franchisees and offering a 90-day standstill. Specifically, the letter stated:
* * * I would like nothing more than a "cease-fire" and the opportunity to amicably resolve our differences in a professional, business-like manner. To accomplish these objectives, I propose to you as a good-faith gesture made in the spirit of compromise and reserving to each party all rights, the following:
2. If claims are in suit, the Company will agree to a 90 day moratorium in the prosecution of the action or, if necessary, agree to file joint motions to continue all matters for 90 days subject to court approval.
3. No franchises will be terminated or access to the supply or product or promotional material be denied during such 90 day period;
4. Franchisees, in consideration for the above, agree to recommence payment, in a timely manner, as of November 15, 1992 of all contractually agreed-to sums including, but not limited to, royalty fees, advertising fund.
In essence, if you pay current obligations during the next 90 days we will consider you "in good standing" for such period regardless of your previous debts, and during these next 90 days we will attempt to resolve all of your prior disputes and put to rest any lingering litigation.
The 90 day moratorium period will commence on November 24, 1992. * * * Let's work together on a new beginning by putting past differences behind us.
Dr. Mundy's unrebutted testimony is that no one from AFC contacted her during the 90-day standstill period to discuss the delinquent payments owed by the three franchises, but that sometime in March 1993 she contacted a Mr. Kam Nasser and a Ms. Vicky Stapelton at AFC to discuss workout terms. Dr. Mundy contends that during the 90-day standstill period and thereafter, the three franchises remained current in their royalty and advertising fund payments to AFC.
On May 13, 1993, the United States District Court for the Eastern District of Louisiana entered summary judgment in favor of AFC against the franchisees in the amount, with respect to the Reston store, of $123,519.21 and with respect to the Fairfax and Falls Church stores, a total of $286,809.50. No portion of the judgment has been paid. Although Dr. Mundy testified that she had no knowledge of the summary judgment motion and did not learn until December 1994 that the judgment had been entered, her Virginia bankruptcy counsel — who is the same attorney representing Pop Up 1, Inc. and MBW Enterprises, Inc. in the present cases — wrote AFC's counsel on April 22, 1993 stating, "I also note that the litigation in Louisiana U.S. District Court is set for hearing on April 28, 1993 for argument of summary judgment against the corporate franchisees," and requesting that the hearing be continued. In a Disclosure Statement dated July 8, 1993, in her own chapter 11 case, and signed by her, the statement is made:
Judgments were also entered in the aggregate amount of $296,949.56 with respect to the Typop store, a store in Saginaw, Michigan, and a promissory note.
Dr. Mundy had filed a chapter 11 case in this court on June 28, 1991.
When she acquired the Popeyes franchise, the Debtor agreed to pay certain royalties and advertising fees. There are arrearages owed to the franchisor, but the Debtor disputed the amount of Copeland's claim. After litigation, the amount due was determined to be approximately $488,000.00.
Additionally, in a letter to AFC dated August 12, 1993, discussing AFC's demand for a general release of all claims as a condition of any workout, Dr. Mundy asks, "Will the recent judgment be withdrawn concurrent to signing the new settlement agreement?" As a result, I am constrained to find that Dr. Mundy had at least constructive knowledge through her attorney in 1993 that a summary judgment motion had been filed and actual knowledge that judgment had in fact been entered.
On May 17, 1993, Dr. Mundy's chapter 11 case was dismissed on motion of a creditor. On June 24, 1993, AFC mailed a notice of termination to Pop Up 1, Inc., MBW3 Enterprises, Inc., and Alonzo and Sylvia P. Mundy terminating the franchise agreements. Upon learning of the notice, Dr. Mundy immediately telephoned Mr. Ernie Renaud at AFC to protest the termination inasmuch as she was, she asserted, current in her payments. AFC agreed to a meeting to discuss the matter.
Prior to the meeting, Dr. Mundy filed a second chapter 11 case in this court on July 8, 1993. On July 13, 1993, a meeting was held at AFC's headquarters in Atlanta, Georgia, attended by Dr. Mundy, Frank Belatti, Ernie Renaud, and Michael Anderson. Mr. Belatti was the chief executive officer of AFC. Mr. Renaud was a consultant who, in effect, managed the Popeye's division of AFC. Mr. Anderson was the vice president of franchise administration. At the meeting, Dr. Mundy did not disclose that she had filed a second chapter 11 case. In the course of the meeting, she testified, Mr. Belatti told her that AFC had "inherited" approximately 200 cases in litigation when it succeeded to the interests of Al Copeland Enterprises. She further testified that Mr. Renaud told her that termination letters were sent to all franchisees who were not current, and that the termination letter to her was "done on the assumption we were not current," and that Mr. Renaud told her he had investigated and "determined that I was current." In any event, the termination letter was neither canceled nor withdrawn, but the matter was "turned over" to Mr. Anderson to attempt to reach an agreement. The next day, Mr. Anderson sent Dr. Mundy a letter stating, "As we agreed, AFC will temporarily halt actions regarding termination proceedings until Friday, July 23, 1993. This provides us the time to investigate all of the issues you raised during our meeting." Mr. Anderson requested that she supply him with certain specific information.
AFC soon thereafter learned of Dr. Mundy's chapter 11 filing and continued to negotiate with her in the context of the chapter 11 case an effort to reach a settlement. In her chapter 11 case, AFC consistently maintained — and Dr. Mundy just as consistently disputed — that the franchise agreements had already been validly terminated. After extensive negotiation the parties reached a tentative agreement resolving their differences under which new franchise agreements would be signed for the three stores operated by the debtors and for the Typop store, and a promissory note given for the sums due under the old franchise agreements. After some additional delay — a portion of which was taken up by unsuccessful efforts to get AFC approval of a new location for the Typop store, which had lost its lease — Dr. Mundy eventually signed the agreement, but her counsel, in transmitting the agreement to AFC's counsel on August 19, 1994, advised AFC that the debtor was unable to comply with the agreement as written because of the intervening closing of the Typop store, and that the agreement would have to be renegotiated. AFC, not surprisingly, did not sign the agreement. In September, 1994, Chief Judge Bostetter of this Court ordered Dr. Mundy's chapter 11 case dismissed based on inability to effectuate a plan of reorganization. For reasons that are not clear, the order was not signed and entered on the docket until February 6, 1995.
A significant point of contention, in addition to fixing the disputed amount of one arrearage and arriving at payment terms, involved the right to develop additional franchises. At one point, one of the entities controlled by Dr. Mundy had the exclusive right to develop new stores in a defined portion of the Northern Virginia area. That right apparently lapsed, and the territory, or at least a significant portion of it, was instead sold to an entity called Jan-Jer Enterprises in mid-1993.
On February 13, 1995, AFC mailed notices to Pop Up 1, Inc., MBW3 Enterprises, Inc. and Alonzo and Sylvia Mundy referencing the notice of termination dated June 24, 1993, demanding that they cease operation of the Popeye's restaurant, and reciting the continuing failure to pay royalties and advertising fees. That amount of the arrearages is stated to be $675,132.43. The letter also asserted that, to the extent franchise rights had not previously been fully terminated, they were being terminated, without notice or opportunity to cure, as provided for in the franchise agreement, because of Dr. Mundy's insolvency and because of the failure to pay the judgment entered by the United States District Court for the Eastern District of Louisiana.
This includes sums related to the Typop store.
The next day, February 14, 1995, AFC notified certain suppliers of proprietary and trade-marked supplies of the termination and directed them to cease delivering such products to the stores operated by the debtors.
On February 23, 1995 this Court held an expedited hearing on the debtors' motion for a preliminary injunction to restrain AFC from treating the franchise agreements as terminated and from interfering with the delivery of supplies to the stores. Because AFC had only one day notice of the hearing, the Court treated the hearing as one for a temporary restraining order and granted a temporary restraining order to preserve the business operations and going concern value of the stores pending a full evidentiary hearing on the motion for a preliminary injunction. That hearing, as noted above, was held on March 7, 1995.
Conclusions of Law
This Court has jurisdiction of the complaint and cross-complaint under 28 U.S.C. § 1334 and 157(a). Although both the complaint and cross-complaint allege that these are "core" proceedings within the meaning of 28 U.S.C. § 157(b)(2), the Court concludes that they are not in fact core proceedings but rather proceedings "related to" a case under title 11, United States Code. Vylene Enterprises, Inc. v. Naugles, Inc. (In re: Vylene Enterprises, Inc.), 122 B.R. 747 (C.D.Calif. 1990), appeal dismissed 968 F.2d 887 (9th Cir 1992); Marr Broadcasting Co., Inc. v. Shamrock Broadcasting of Texas, Inc., 79 B.R. 673 (Bankr.S.D.Tex. 1987); West Coast Video Enterprises, Inc. v. Owens (In re: West Coast Video Enterprises, Inc., 145 B.R. 484 (Bankr.E.D.Pa. 1992). Under 28 U.S.C. § 157(c), a bankruptcy judge may hear a proceeding that is not a core proceeding but is otherwise related to a case under title 11 but, unless the parties consent, the bankruptcy judge cannot enter a final judgment but must submit proposed findings of fact and conclusions of law to the United States District Court. In this case, all parties orally consented on the record at the hearing on March 7, 1995, to the entry of a final order or judgment by the bankruptcy judge. Accordingly, this court has authority to enter a final judgment or order, subject, of course, to the right of any party to appeal to the United States District Court under 28 U.S.C. § 158(a).
The determinative issues in these two cases are whether AFC validly terminated the franchise agreements prior to the filing of the chapter 11 petitions, and, if so, whether by its actions it waived its rights under the termination provisions of the franchise agreements.
With respect to the first issue, the court concludes that, under the plain language of the franchise agreements, the franchisor had the right to terminate the agreements. The debtors had failed to pay royalties and advertising fund payments as required by the franchise agreement. The franchisor had mailed notices of default, which were received by the debtors. The debtors did not cure the default within 30 days. The franchisor then mailed notices of termination which were received by the debtors on or shortly after June 24, 1994. The court is unable to conclude, as suggested by the debtors, that the notices of termination were invalid because the entity giving the notice (AFC) was not the same as the entity (Al Copeland Enterprises, Inc.) giving the 30-day notice to cure, where there was evidence that AFC was the successor in interest to Al Copeland Enterprises, Inc. Further, even accepting Dr. Mundy's testimony that the franchises were current with respect to payments due after the 90-day standstill letter, the simple fact is that the 90-day period had expired by several months before the franchisor sent the notice of termination. There was conflicting testimony as to whether negotiations were actively on-going to resolve the arrearage at the time the termination letter was sent, but even assuming that negotiations had not reached a stalemate, there was nothing either in the franchise agreements or the November 13, 1992 standstill letter that prevented the franchisor from enforcing its right to terminate the agreements based on the failure to cure the past-due royalties and advertising fund payments.
The more problematic issue is whether the franchisor, by acquiescing in the debtors' continued operation of the stores for approximately 20 months from the date of the termination notice, waived the right to assert that the franchises had been terminated based on that notice. As noted above, each of the agreements contain broad language that arguably restrict the application of waiver. But even without such language, the facts in this case simply do not demonstrate that AFC ever waived its rights to enforce the termination of the agreements.
The franchise agreements each contain language that they are governed by Louisiana law. Louisiana recognizes waiver as a defense to an action based on contract. Keating v. Miller, 292 So.2d 759 (La.App. 1974) (property owner waived breach of construction contract by permitting contractor to continue after owner became aware contractor had reduced slab area below square footage called for by contract); Estoup Signs v. Frank Lower, Inc., 10 So.2d 642 (LaApp. 1942) (advertiser asserting defense that sign company failed to repaint sign every six months waived such assertion by making no complaint for two years that sign had not been repainted.) According to the court in Estoup,
A waiver occurs, takes place, or exists when one dispenses with the performance of something he is entitled to exact or when one in possession of any right, whether conferred by law or by contract, with full knowledge of the material facts, does or forbears to do something the doing of which or the failure or forbearance to do which is inconsistent with the right or his intention to rely upon it.
Estoup, supra, at 645. As so articulated, the test of waiver is not inconsistent with the standard previously set forth by Chief Judge Bostetter of this court in Vecco Construction Industries, Inc. v. Century Construction Co. (In re: Vecco Construction Industries, Inc.), 30 B.R. 945 (Bankr.E.D.Va. 1983):
The necessary elements of an election by the non-defaulting party to waive default in delivery under a contract are (1) failure to terminate within reasonable time after the default under circumstances indicating forbearance, and (2) reliance by the contractor on the failure to terminate and continued performance by him under the contract, with the [terminating party's] knowledge and express or implied consent.
If a contract requires a "continuing" performance, a party with a contractual right to terminate will not lose the right if he fails to exercise it immediately. However, maintenance of the right may depend on whether the non-defaulting party "brings home to the promisor the complaints . . .[and] continues the relationship on the assurance of better future performance."
30 B.R. at 951 (internal citations omitted).
With respect to the present cases, the court is unable to conclude that the facts demonstrate a waiver of any rights under the June 24, 1993 termination letter. While there have clearly been long periods of forbearance during which the franchisor and the debtors attempted to resolve both the amount of, and how to pay, the past-due amounts, at no point did the franchisor ever state or imply that the termination had been withdrawn. A consistent theme of AFC's communications with Dr. Mundy was that the agreements had in fact been terminated, and that any negotiated resolution would require either that the old agreements be reinstated on terms or new agreements be entered into. It is true, as the debtors point out, that Dr. Mundy's two chapter 11 filings did not technically prohibit action to enforce the termination of the Pop Up 1, Inc. franchise (since Dr. Mundy was no longer a franchisee for that store but only a guarantor), but the automatic stay obviously did prevent action from being taken to terminate the franchises for the Fairfax and Falls Church stores, since Dr. Mundy remained a co-franchisee of those stores. Since any negotiated resolution was likely to involve all three of the stores (as well as the Typop store), and since the franchisor had an interest in reaching a resolution that would enable it to get paid, it was reasonable for the franchisor to negotiate concerning all four of the stores while the pendency of Dr. Mundy's chapter 11 case prevented action with respect to two of them. While it is true that the franchisor did not at any point seek relief from the automatic stay in Dr. Mundy's case for the purpose of enforcing the termination of the Fairfax and Falls Church franchises, given the fact that active negotiations were continuing at least until August 19, 1994, when Dr. Mundy's attorney advised AFC that the agreement which Dr. Mundy had agreed to and signed was no longer feasible, it would arguably have been counterproductive during that time for AFC to have sought relief from the automatic stay. The court agrees with the franchisor's argument that to adopt a rule that would characterize as "waiver" any willingness by the nondefaulting party to negotiate with the defaulting party concerning a cure of a contractual default would be contrary to sound public policy. Public policy favors encouraging creditors to work with financially-distressed debtors; but creditors will have no incentive to do so if any failure to rigorously enforce contractual rights is viewed as a waiver of those rights. In the present case, the franchisor never misled the debtors as to its position that the franchise agreements had terminated, and the debtors at all time were folly aware of the creditor's position. Nor do these cases involve reliance by the franchisor on a purely technical breach of the franchise agreement that is readily curable, such that a court of equity would intervene to prevent a forfeiture. The monetary defaults are substantial — even Dr. Mundy agreed that at least $388,000 was owed for the three stores — and of long standing.
Although the debtors' pleadings assert that the notice of termination was withdrawn or acknowledged to have been sent in error at the July 13, 1993 meeting in Atlanta, the testimony of Dr. Mundy and Mr. Anderson, taken as a whole, does not support that assertion, although it is clear that AFC did put the termination "on hold" while looking into Dr. Mundy's complaints and attempting to reach an agreement with respect to the arrearages.
The debtor, in support of its waiver argument, points to AFC's practice, during the entire period subsequent to the termination notice, of continuing to send Dr. Mundy and the debtors routine "Dear Franchisee" notices and correspondence, of continuing to inspect the stores for food quality, cleanliness, and service — and, indeed, even awarding one of the stores a difficult-to-achieve "A" rating — and of having agreed to a proposed transfer (which subsequently fell through when the purchasers declined to personally guarantee the lease with the landlord) of the Reston store. For the reasons ably articulated in Baskin-Robbins, Inc. v. Neiberg (In re: Neiberg), 161 B.R. 606 (Bankr. W.D.Pa. 1993), the court cannot conclude that the sending of routine correspondence or the continued inspection of the stores evidenced a waiver when considered in light of the on-going negotiations between AFC and Dr. Mundy and AFC's consistent position during those negotiations that the original contracts had been terminated. With respect to the sale of the Reston store, AFC's position was not that it would consent to transfer of the terminated franchise, but that if Pop Up 1, Inc. executed a new franchise agreement for the unexpired term of the old agreement, AFC would consent to its transfer.
Since the court concludes that the June 24, 1994 termination notice effectively terminated the debtors' rights under the franchise agreements, the court need not reach the question of whether Dr. Mundy's alleged insolvency or the debtors' failure to pay the May 13, 1993 judgment entered by the United States District Court for the Eastern District of Louisiana within 30 days would constitute non-curable grounds of default under Section XIII.B. of the franchise agreements allowing termination without notice. In any event, insufficient evidence was presented at the hearing on the preliminary injunction to determine whether Dr. Mundy is, as alleged, currently insolvent. Furthermore, to the extent that the provision concerning the payment of court judgments was intended to apply to the franchisor's own judgment for past-due royalty and advertising fund payments — a proposition as to which the court entertains considerable doubt — the debtors' waiver argument is much stronger, since that ground for termination had been known to the franchisor since at least June 13, 1993 and was never hinted at, much less asserted, until February 13, 1995, some 20 months later.
The standard for issuance of a preliminary injunction in this circuit is succinctly set forth in Darr v. Massinga, 838 F.2d 118, 120 (4th Cir. 1988):
There [in Blackwelder Furniture Co. v. Seilig Mfg. Co., 550 F.2d 189 (4th Cir. 1977)] we held that four factors are to be considered: (1) the likelihood of irreparable harm to the plaintiff if the preliminary injunction is denied, (2) the likelihood of harm to the defendant if the requested relief is granted, (3) the likelihood that the plaintiff will succeed on the merits, and (4) the public interest. * * * As Blackwelder set forth, the two most important factors are the likelihood of irreparable harm to the plaintiff if interim relief is not granted and the likelihood of irreparable harm to the defendant if interim relief is granted. The two factors should be weighed against one another, and if the balance is in favor of the plaintiff, it is proper to grant interim injunctive relief if grave or serious questions are presented for ultimate decision.
With respect to the matters before the Court there can be little doubt that refusing to continue the temporary restraining order will harm the debtors, as it seems clear from the testimony that there is a market for Popeye's franchises, and it seems intuitively probable, at least in the short term, that the public is more likely to be attracted to a nationally-known name such as Popeye's than to a generic eatery. There is likewise, however, harm to the franchisor if the injunction were to be granted-there was uncontradicted testimony that knowledge by other franchisees that a franchisee was continuing in business without having made royalty and advertising fund payments acted as a disincentive to timely payment by the other franchisors-but the harm is clearly of a lesser order of magnitude than the harm to the debtors from not granting the injunction. If the issue were solely one of balancing of hardships, the balance would weigh in favor of the debtors. However, based on the extensive evidence presented at the hearing on the preliminary injunction, the court, for the reasons set forth above, cannot conclude that there is any likelihood the debtors will ultimately succeed on the merits. Accordingly, the Court denied the debtors' motions for a preliminary injunction.
With respect to the franchisor's cross-complaint, the court adopts the analysis and reasoning of Baskin-Robbins, Supra. In that case, as in this, the debtors continued after termination of their franchise to operate using the franchisor's name. The court noted that, as a general matter, a plaintiff must demonstrate three tests in order to prevail in a trademark infringement action:
(1) that the marks in question are valid and legally protectable; (2) that the mark is owned by the plaintiff; and (3) that defendant's use of the mark to identify its goods or services is likely to cause confusion in the general public as to the origin of the goods or services.
Id., 161 B.R. at 611. As in Baskin-Robbins, there is no serious dispute in these cases that the Popeye's service marks are valid and legally protectable and are owned by AFC. The third element is likewise sufficiently satisfied simply by the debtors' use of the marks: "A likelihood of confusion is `inevitable' when the identical mark is used concurrently by an unrelated entity. Such cases are `open and shut'. Id. Proof of actual confusion is not required, and all that need be shown is the likelihood of confusion. Id. Accordingly, as in Baskin-Robbins, this Court will issue an injunction requiring the debtor to cease any further use of the Popeye's name, signs and marks or otherwise to suggest to the general public an affiliation of their stores with Popeye's. Although no evidence was presented as to how long it would reasonably take to "de-identify" the stores in question, the Court believes that such a process ought not to require more than seven calendar days. Accordingly, the injunction will require that the process of de-identification be completed within that time frame.
AFC's cross-complaint further seeks affirmative compliance by the debtors with certain post-termination requirements of the franchise agreements, including payments of all sums due under the franchise agreements and enforcement of a restrictive covenant. Ordering the payment of pre-petition arrearages would clearly be inconsistent with the Bankruptcy Code, and the treatment of AFC's pre-petition claims is properly one to be determined at the hearing on confirmation of a plan of reorganization, if one is proposed. Post-petition claims for unpaid royalty and advertising fund payments may constitute administrative expenses, but, if so, the proper procedure is for AFC to file a motion for allowance of administrative expense. As for the restrictive covenant, taken literally it would prevent operation of the stores, even after de-identification, for the sale of fried chicken. As in Baskin-Robbins, supra, where the franchisee requested enforcement of a similar restrictive covenant, this Court concludes that enforcement of the covenant would involve irreparable harm to the debtors, while allowing the debtors to continue to operate the former stores, under some name other than Popeye's, will result in little or no harm to AFC, even if fried chicken is served. As the court observed in Baskin-Robbins,
Section XIV.C. of each he franchise agreement provides, "Franchisee covenants that * * * for a period of one (1) year after expiration or termination of this Franchise Agreement, regardless of the cause of termination, Franchisee * * * shall not * * * own, maintain, engage in, or have a controlling interest in any business which is the same as or similar to the business licensed hereunder and which is located within a radius of five (5) miles of the location granted herein."
Prohibiting debtors from operating a similar business * * * would deprive them of an opportunity to generate income and would seriously jeopardize their prospects for a successful reorganization. The likelihood that debtors' case will have to be converted to a chapter 7 proceeding will increase considerably if the covenant is enforced. A chapter 11 debtor should be given a reasonable opportunity to successfully reorganize.
161 B.R. at 613-614. Additionally, as in Baskin-Robbins, this Court concludes that the public interest weighs against enforcement of the covenant:
This case has only recently been filed. To date, no unsecured creditors' committee has been appointed and, accordingly, the unsecured creditors are not represented. As has been indicated, debtors' prospects of successfully reorganizing will be significantly diminished if the covenant is enforced. A consequence of its enforcement would be that debtors' general unsecured prepetition creditors will all be adversely affected. Any distribution to them would be diminished, perhaps substantially. It is in the public interest to maximize, whenever possible, distribution in a bankruptcy case to general unsecured creditors.
Id. at 614.
Accordingly, the Court declines, as part of the preliminary injunction to be entered in favor of AFC, to require the payment of past due royalty and advertising fund payments or to require compliance with the restrictive covenant.
A separate order will be entered granting a preliminary injunction to prohibit the debtors' use of the Popeye's service marks or otherwise holding themselves out as franchisees of the Popeye's Famous Fried Chicken system.