November 12, 2025|Franchise Frontlines
November 12, 2025 | U.S. Bankruptcy Court for the Southern District of Ohio, Eastern Division | Unpublished Memorandum Opinion
Executive Summary
In an unpublished memorandum opinion, Judge Mina Khorrami of the U.S. Bankruptcy Court for the Southern District of Ohio denied a creditor’s motion to strike and exclude recorded Zoom videoconferences between a hotel-franchise operator and the special servicer for its CMBS loan. According to the opinion, the servicer argued that all communications after the loan transferred to special servicing were protected settlement discussions under a pre-negotiation letter (“PNL”) and barred by Federal Rule of Evidence 408 or state two-party consent laws. The Debtors—owners of multiple franchised hotels—asserted that the recordings contained unconditional statements regarding default interest and should remain part of the bankruptcy record.
The Court found that the recordings were admissible for purposes of the pending claims objection, concluding that Rule 408 did not apply to unconditional factual statements, the PNL could not convert every communication into a settlement negotiation, and the Florida Security of Communications Act did not bar use of the recordings. The Court further noted that brand-compliance materials from the franchisor were not settlement communications, emphasizing that lenders routinely rely on franchisor reports in hotel distress scenarios. The decision provides important guidance for franchisors and multi-unit operators navigating lender interactions and evidentiary risks in restructuring environments.
Relevant Background
According to the opinion, the Debtors operate multiple franchised hotels and entered Chapter 11 to restructure obligations associated with a 2015 CMBS loan now held by RSS COMM2015-PC1–OH BL, LLC (“RSS”). After default, the loan was transferred from Wells Fargo, the master servicer, to Rialto Capital Advisors, LLC (“Rialto”), acting as special servicer. The Debtors alleged that once the loan transferred into special servicing, they lost access to the online loan-information portal historically provided by Wells Fargo and were required to obtain information directly from Rialto representatives.
The opinion states that Rialto insisted the Debtors sign a Pre-Negotiation Letter as a precondition to receiving any loan-specific information. The PNL, which was governed by Florida law, purported to classify “any and all communications” between the parties as confidential settlement negotiations. The Debtors alleged they signed the PNL only because they could not otherwise obtain routine loan information such as balances, fees, and servicing status.
In April and May 2020, the Debtors’ principal and a Rialto representative participated in two Zoom videoconferences. The Debtors recorded these calls, and the opinion indicates that one exchange was later quoted in the Debtors’ objection to RSS’s claims. In that exchange, the Rialto representative allegedly stated plainly that default interest would not be charged “regardless of how this call goes” and “regardless of whether you sue us or anything,” attributing the decision to the COVID-19 environment.
RSS moved to strike references to the recordings from the claims objection and sought to bar the recordings under Rule 408, the PNL’s confidentiality clause, and Florida’s two-party consent recording statute. The Debtors opposed the motion, asserting that the statements were unconditional, factual, and essential to resolving the claims-allowance dispute.
The opinion also references that the Debtors provided the servicer with a franchisor brand-compliance report concerning one of the hotels. Rialto acknowledged during testimony that such franchisor inspection materials were not settlement communications but instead routine operational information often exchanged during servicing or special servicing.
Decision
The Court denied the motion to strike in full. Because RSS sought to remove the quoted transcript from the claims objection and exclude the recordings from evidence, the Court treated the request as a motion in limine. The Court explained that, in a bench proceeding, evidentiary exclusions require a heightened showing because the judge can review evidence for limited purposes without prejudicing a jury.
The Court first rejected the argument that Rule 408 barred admission. The Court stated that Rule 408 excludes only statements or conduct reflecting conditional compromise proposals. According to the opinion, the recorded statements were expressly unconditional and were not tied to any request for reciprocal consideration. The Court noted that Rule 408 does not shield unconditional statements of fact simply because parties later discuss potential resolution terms in the same conversation. The Court also recognized exceptions under Rule 408(b), noting that statements made during settlement discussions may be admissible for other purposes such as assessing reliance, estoppel, or the context of a dispute. The Court concluded that excluding the Zoom exchange would improperly deprive the bankruptcy process of material facts relevant to whether certain portions of the creditor’s claim—such as default interest—were allowable.
The Court next analyzed the PNL. The PNL broadly defined all communications between the parties after the loan transferred to special servicing as settlement discussions. The Court found this definition unenforceable as a categorical bar to admissibility. The Court explained that evidentiary limitations cannot be expanded by contract to eliminate judicial gatekeeping obligations or impair the truth-seeking function, particularly where the communications at issue were necessary for the Debtors to understand their loan status. The Court cited analogous bankruptcy decisions declining to enforce broad confidentiality clauses in pre-negotiation agreements. The Court also emphasized that the PNL appeared to be signed under circumstances suggesting limited bargaining power, such that enforcing a blanket exclusion would be inequitable.
The Court likewise rejected RSS’s reliance on the Florida Security of Communications Act. The Court noted the absence of evidence showing that the statements were made in Florida or by a Florida resident. The Court further observed that the FSCA’s exclusionary rule applies only in proceedings before Florida state bodies and does not bind federal courts. The Court found that federal law permits one-party consent recording, and the recordings were lawful under 18 U.S.C. § 2511(2)(d).
The Court also referenced that not all communications provided to RSS were settlement-related, including the franchisor’s brand-compliance report, which the servicer acknowledged was informational rather than part of any negotiation. The Court concluded that such exchanges demonstrated that the PNL did not—and could not—convert ordinary operational communications into protected settlement materials.
The Court therefore held the quoted Zoom statements admissible for purposes of the claims objection and declined to remove them from the bankruptcy docket.
Looking Forward
This decision provides several practical insights for franchisors, hotel operators, and multi-unit brands navigating distressed-asset scenarios. First, the opinion illustrates that broad pre-negotiation agreements cannot automatically insulate all communications from later disclosure. Although PNAs remain common in loan-workout situations, franchise systems may wish to ensure that routine brand-compliance exchanges, operational updates, and inspection reports are not inadvertently characterized as settlement communications that impede the flow of critical information. Under different facts and in other jurisdictions, courts may assess such agreements differently, but this opinion underscores the importance of preserving franchisor–franchisee information pathways even in distressed financing environments.
Second, the opinion reinforces that unconditional factual statements by lenders or servicers may not qualify as settlement communications under Rule 408. For franchisors whose brand compliance interacts with lenders’ servicing decisions, this ruling illustrates that routine operational information—such as inspection outcomes or PIP-related materials—may later be used as evidence in bankruptcy proceedings. Maintaining accurate, consistent, and well-documented inspection processes may help reduce uncertainty when franchisees or lenders later rely on brand-compliance reports during restructuring efforts.
Third, the court’s treatment of secret recordings underscores the need for franchisors and multi-unit operators to appreciate the evidentiary risks associated with virtual communications. Even where parties believe discussions are confidential, the use of one-party-consent recording tools may result in statements becoming part of future litigation. Clear communication protocols, especially during financial negotiations, may help ensure that franchisors avoid unintended implications stemming from recorded calls.
Finally, this decision serves as a reminder that franchise relationships often intersect with lender oversight during financial distress. Brand compliance reports and other franchisor materials may be shared with lenders or special servicers, and courts may treat those materials as ordinary business information rather than privileged communications. Ensuring that franchisor documents are accurate, consistent with brand standards, and capable of withstanding scrutiny may assist franchise systems when operators face restructuring or bankruptcy proceedings.
This article is based solely on the opinion of the Court in this matter. The author has not conducted any independent investigation into the facts. For the avoidance of doubt, each statement related to the law and facts in this article is drawn from the Court’s opinion in this case.
Thomas O’Connell is a Shareholder at Buchalter APC and Chair of the firm’s Franchise Practice Group. For questions about this article or media inquiries, you can contact Tom at toconnell@buchalter.com.
This communication is not intended to create, and does not create, an attorney-client relationship or any other legal relationship. No statement herein constitutes legal advice, nor should it be relied upon or interpreted as such. This communication is for general informational purposes only and is not a substitute for legal counsel. Readers should not act or refrain from acting based on any information provided without seeking appropriate legal advice specific to their situation. For more information, visit www.buchalter.com.
