November 19, 2025|Franchise Frontlines
November 19, 2025 | United States Bankruptcy Court for the Southern District of Ohio | Unpublished Opinion
Executive Summary
In a Chapter 11 case involving a Hampton Inn hotel franchise, the United States Bankruptcy Court for the Southern District of Ohio granted the debtor-franchisee’s motion to assume its franchise agreement with Hilton Franchise Holding LLC under 11 U.S.C. § 365 and denied Hilton’s motion for relief from the automatic stay. The franchisor argued that the debtor’s failure to complete a property improvement plan (“PIP”) by contractual deadlines constituted an incurable nonmonetary default that barred assumption and justified termination. The court disagreed, holding that although the missed PIP deadlines were technically incurable historical defaults, they were neither material nor the source of substantial economic harm to Hilton. The court further found that the debtor provided adequate assurance of prompt cure of monetary and nonmonetary defaults and adequate assurance of future performance. The decision provides important guidance on how bankruptcy courts may analyze franchise PIP defaults in the assumption context.
Relevant Background
The debtor, Hilliard Hotels, LLC, operated a Hampton Inn under a franchise agreement with Hilton Franchise Holding LLC. As part of the original franchise agreement, the debtor agreed to complete a property improvement plan requiring specified renovations within a set timeframe. The initial completion deadline was July 2020, later extended by Hilton. The debtor failed to complete the PIP by both the original and extended deadlines.
Despite those defaults, Hilton continued to work with the debtor for several years and did not issue a termination notice before the debtor filed for Chapter 11 relief in September 2023. After the bankruptcy filing, Hilton sought relief from the automatic stay under 11 U.S.C. § 362(d) to terminate the franchise agreement, arguing that the PIP default was incurable and that assumption was prohibited under 11 U.S.C. § 365(b). The debtor, in turn, moved to assume the franchise agreement and proposed to cure prepetition monetary defaults and complete the PIP within fourteen to twenty-four months.
The dispute required the court to determine whether the franchise agreement could be assumed notwithstanding the missed PIP deadlines.
Decision
The court began by recognizing that a nonterminated franchise agreement constitutes property of the estate under 11 U.S.C. § 541 and is subject to the automatic stay under § 362. If the debtor could not assume the franchise agreement under § 365, then “cause” would exist to lift the stay and permit termination.
Applying the business judgment test under § 365(a), the court first concluded that the debtor exercised sound business judgment in seeking to assume the agreement. Testimony established that completion of the PIP would likely increase occupancy rates and average daily room rates, resulting in projected revenue growth. The court found no evidence that the debtor’s decision to assume was clearly erroneous or speculative.
The more difficult issue concerned the nonmonetary PIP default. Hilton argued that the failure to meet contractual completion deadlines was a historical fact incapable of cure and therefore barred assumption. The court acknowledged that the deadlines had passed and could not be retroactively satisfied. It nevertheless declined to adopt a per se rule that all incurable defaults prohibit assumption.
Instead, the court followed authority holding that a technically incurable default bars assumption only if it is material or has caused substantial economic harm. In assessing materiality, the court examined whether the PIP completion deadlines went to the essence of the parties’ bargain. The court found they did not. At the time of contracting, Hilton knew the improvements would take years to complete. Hilton had extended deadlines, continued accepting franchise fees, and never issued a termination notice before bankruptcy. The debtor had invested more than $1.5 million toward renovations and maintained high customer satisfaction ratings. On this record, the court concluded that the PIP default was not material and did not cause substantial economic harm to Hilton.
Turning to the cure requirements of § 365(b)(1), the court found that the debtor provided adequate assurance of prompt cure of monetary defaults by proposing payment within seven to thirty days of plan confirmation. With respect to the PIP default, the proposed fourteen-to-twenty-four-month completion timeline was deemed reasonable in light of construction logistics, design approval processes, and the remaining term of the franchise agreement.
Finally, the court held that the debtor provided adequate assurance of future performance under § 365(b)(1)(C). The debtor was current on postpetition franchise fees, had significant liquid funds, projected additional investor contributions, and demonstrated a credible plan to complete the PIP. The court emphasized that “adequate assurance” does not require an absolute guarantee, only a strong likelihood of performance.
Accordingly, the court denied Hilton’s motion for relief from stay and granted the debtor’s motion to assume the franchise agreement.
Looking Forward
This decision offers meaningful guidance for franchisors and franchisees navigating Chapter 11 cases involving brand standards and PIP compliance.
First, the opinion reflects a pragmatic approach to nonmonetary defaults. Missed PIP deadlines, while technically incurable, may not automatically bar assumption if the default is not material to the essence of the franchise relationship and has not caused substantial economic harm. Courts may consider course of dealing, continued acceptance of fees, and the absence of prepetition termination efforts in evaluating materiality.
Second, the ruling underscores the importance of the record. The debtor presented detailed evidence of renovation expenditures, projected revenue increases, liquidity, and investor support. Franchisors opposing assumption should be prepared to demonstrate concrete brand harm or economic injury resulting from noncompliance.
Third, the decision reinforces that “adequate assurance of future performance” does not require certainty. A reasonably demonstrable capability to perform, supported by financial evidence and operational history, may suffice.
For franchisors, the case illustrates the need for consistency in enforcing brand standards prepetition. Continued extensions, ongoing cooperation, and acceptance of franchise fees may later be cited as evidence that a PIP default was not material. For franchisees, the opinion confirms that bankruptcy courts may preserve franchise relationships where a viable path to cure and improved performance exists.
As franchise systems increasingly confront restructurings in the hospitality sector, this decision highlights the interplay between franchise agreements and the debtor’s assumption powers under § 365—an area that remains highly fact-dependent and strategically significant.
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 LLP 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.
