One of the tools of the debtor filing bankruptcy is the ability to assume contracts or reject burdensome contracts. When a franchisor files bankruptcy, it may choose to reject the undesirable franchise agreements and cause the franchisee to change its name. This is an extraordinary option for the franchisor because it can shape the franchise system when it undergoes corporate renewal. The franchisor can also use this tool to ready itself for sale within the bankruptcy, for example, by jettisoning geographies it no longer desires to support. A recent case suggests that this tool may no longer be available for debtor-franchisors.
The bankruptcy code provides in most instances that, where a contract is rejected by the debtor, the counterparty can no longer avail itself of the benefits of the contract. When the debtor is the franchisor, that would mean that the franchisee might be required to de-identify the business. Special rules apply in intellectual property contracts that allow the licensee to retain the intellectual property rights but not require the debtor to provide services. The same retention rights work similarly where the rejecting debtor is a landlord because the bankruptcy code allows the tenant retention rights without landlord services. This statutory system of retention rights, however, does not apply to trademark licenses.
