Applebee’s second largest franchisee wins crucial franchise termination dispute

The latest in an ongoing dispute between RMH Franchise Holdings, the second-largest Applebee’s franchisee, and Applebee’s parent company, Dine Brands Global Inc.

The Dispute

In June 2017, RMH Franchise Holdings, Inc., Applebee’s second largest franchisee, stopped making royalty payments to Applebee’s. Then, in January 2018, RMH stopped making payments for advertising that were due under the franchise agreements. RMH allegedly stopped making the payments for a number of reasons – management’s poor decisions, an unsuccessful push by Applebee’s to appeal to millennials, a failed move to wood-fire grills, an unpopular new ad campaign – each of which resulted in RMH’s inability to operate profitably.

On May 8, 2018, RMH and certain of its affiliates collectively filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the District of Delaware. The bankruptcy filing resulted from a dispute between RMH and Applebee’s as to whether or not Applebee’s terminated certain RMH’s franchise agreements prior to its bankruptcy filing.

At the time of the bankruptcy filing, RMH operated approximately 159 Applebee’s restaurants in 15 states.  Each of the restaurants is subject to a franchise agreement between Applebee’s, as franchisor, and RMH, as franchisee. The franchise agreements authorize RMH to use Applebee’s trademarks, menu, and restaurant décor. In exchange, RMH is legally obligated to pay Applebee’s a monthly royalty fee and a certain percentage of gross sales to an advertising fund used to support local and national advertising of Applebee’s restaurants.  Upon termination of the franchise agreements, RMH is obligated to stop operating the restaurants as Applebee’s restaurants and Applebee’s has the right to take possession of the closed restaurants.

Also on May 8, 2018, Applebee’s sued RMH in a U.S. District Court in Kansas, seeking, among other things, to recover royalties and to turn over operations of RMH’s restaurants in Arizona and Texas to Applebee’s parent company, Dine Brands Global.  Applebee’s asserted, subject to certain forbearance agreements and termination letter notices sent to RMH, that the franchise agreements terminated and that Applebee’s had the present right to force RMH to assign its leases to Applebee’s and to sell its inventory, fixtures and equipment to Applebee’s.

RMH had filed for bankruptcy protection in the early hours of May 8, prior to the filing of the lawsuit by Applebee’s.

Bankruptcy Court Decision

Applebee’s commenced an adversary proceeding in RMH’s bankruptcy case seeking, among other things, a declaratory judgment that the franchise agreements terminated prior to the bankruptcy filing.  RMH filed an answer denying that the franchise agreements terminated prior to its bankruptcy filing and asserted a counterclaim against Applebee’s for breach of contract.

On Sept. 25, 2018, Judge Brendan Shannon issued a ruling holding that the franchise agreements were not terminated by Applebee’s prior to RMH’s bankruptcy filing. Judge Shannon ruled that:

• Cure notices and extensions sent by Applebee’s to RMH did not permit retroactive termination of the franchise agreements.
• Cure extensions did not clearly and unambiguously provide for automatic termination of the franchise agreements upon expiration of the cure period.
• Applebee’s agreed to forbear from exercising all of its rights and remedies until May 8, 2018.
• RMH filed its bankruptcy case prior to Applebee’s attempted termination of the franchise agreements and thus, the franchise agreements are part of RMH’s bankruptcy estate.

As a result of the bankruptcy court’s decision, Acon Investments, the private equity owner of RMH, is prepared to invest $10 million to reorganize RMH under a Plan of Reorganization, which will be subject to Bankruptcy Court approval.