Default Judgment • Franchises

Maaco Franchising, Inc. v. Gaarder, PICS Case No. 14-0516 (E.D. Pa. March 21, 2014) Ludwig, J. (14 pages).

Maaco alleged pre-termination and ongoing breach of a written franchise agreement. Defendants filed multiple unsuccessful bankruptcy petitions and after the case was removed from civil suspense, failed to answer plaintiff’s complaint. Following entry of default judgment, defendants’ filed a motion to open the default. Denied.

Maaco, headquartered in King of Prussia, franchises auto painting and body work centers which specialize in motor vehicle painting, body repair and other automotive products and services. In 2006, Maaco and Gaarder entered into a franchise agreement to operate a Maaco Auto Painting and Bodyworks Center in Texas. Gaarder then assigned his rights and obligations to defendant MCC Humble Auto Paint, Inc. but agreed to continue to be bound by the provisions of the franchise agreement and to guarantee all of MCC Humble’s obligations under the agreement.

During the term of the franchise agreement, defendants failed to make required payments. On June 17, 2010, Maaco advised defendants that they were in default under the agreement and required to cure the defaults within 15 days. Maaco attempted to work with defendants to cure the defaults, but defendants failed to become and remain current in their submission of weekly gross receipts and payment of royalty and advertising fees. Maaco sent a second notice of default and on March 11, 2011, notice of termination of the franchise agreement. The notice of termination triggered the post termination covenants including the duty to cease using the Maaco center, system and marks and to pay all sums due and return all Maaco materials. Defendants continued to operate their Maaco center and use the Maaco system and marks. On May, 11, 2011, Maaco filed an action to enforce termination of the franchise agreement, to collect all amounts due under the agreement and to enjoin defendants from operating a motor vehicle painting or auto body repair business in violation of the Lanham Act and the agreement’s post-termination covenants.

On June 7, 2011, defendant MCC Humble filed its first corporate bankruptcy under Chapter 11. On May 3, 2012 the bankruptcy was dismissed because no plan had been filed. On Dec. 31, 2011, defendant Gaarder filed his first personal bankruptcy, which was dismissed on Feb. 15, 2012 after he failed to file all required statements and schedule within the required time. Gaarder filed two more personal bankruptcies, which were all dismissed for deficiencies and failure to file the required schedules and plans. Humble filed a second corporate bankruptcy under Chapter 11. On Nov. 9, 2012, the Houston Bankruptcy Court held that no automatic stay existed based on Humble’s second filing. With no stay pending, a conference was scheduled and defendants were given a deadline to respond to plaintiff’s motion for preliminary judgment. When no answer was filed, plaintiff moved for a default judgment on Jan. 28, 2013. On Feb. 20, 2013, defendants moved to open the default.

Defendants argued that plaintiff violated the franchise agreement by failing to provide adequate training which resulted in the failure of the franchise and entitled the defendants to some form of self-help rescission. Plaintiff countered that five years passed between the alleged failure to train and defendants’ cessation of payments under the franchise. Additionally, defendants continued to operate the Maaco franchise for at least one year after they ceased payment. Even if defendants were to prove a breach by plaintiff, their admitted continued operation of the franchise without payment of required fees was not excused and their defense failed.

Defendants’ conduct was culpable because even if they were experiencing financial difficulties, the filling of multiple bankruptcies and failure to prosecute the bankruptcies to conclusion and to provide financial disclosures to the court and creditors suggested that the bankruptcies were filed for a purpose other than obtaining relief from financial difficulties. Additionally, dire financial straits did not excuse the failure to answer the complaint and defendant Gaarder could have filed a pro se answer before the deadline set by the court. Based on the record, it was clear that defendants’ efforts to delay the prosecution of plaintiff’s claims were willful and in bad faith.