A bankruptcy court in Californiadenied Pinnacle Foods of California, LLC’s motion to assume six separate franchise agreements with franchisor Popeyes Louisiana Kitchen, Inc. In re Pinnacle Foods of California LLC, 2024 WL 4481070 (Bankr. E.D. Cal. Oct. 10, 2024). The court found it was bound by the Ninth Circuit interpretation of the “hypothetical test” pursuant to Section 364(c)(1), which allows Popeyes to effectively block Pinnacle from assuming the franchise agreements if it can show that “applicable law would excuse Popeyes from accepting performance from any hypothetical third party to whom Pinnacle might theoretically assign its rights under the Franchise Agreements post-assumption, regardless of the existence of any actual such third party.”
Two different laws favored Popeye’s argument that it could block assignment to a third party under the test. First, the Lanham Act provided that trademark rights are personal to the assignee and not freely assignable to a third party. Second, the California Franchise Relations Act provided a that, while Popeyes’ was limited in its ability to reject a sale or transfer of a franchise agreement, rejection was possible if the proposed buyer did not qualify under Popeyes’ franchise standards. The court acknowledged that the hypothetical test, which is the majority rule among district courts, “often has devastating effects on the ability of Chapter 11 debtors to reorganize” specifically when a debtor franchisee depends on franchise agreements as part of reorganization. The ruling provides for stronger franchisor rights in bankruptcy districts applying the hypothetical test, even when the outcome may be contrary to the purpose of Bankruptcy Code.
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