April 02, 2026|Franchise Frontlines
April 2, 2026 | United States District Court for the District of Minnesota | Unpublished Opinion
Executive Summary
In an unpublished decision, Magistrate Judge Dulce J. Foster of the United States District Court for the District of Minnesota denied a franchisor’s request to stay a franchising dispute after a franchisee filed for Chapter 13 bankruptcy. The franchisee plaintiffs initiated the lawsuit, and after one plaintiff filed for bankruptcy, the franchisor argued that the action should be automatically stayed under 11 U.S.C. § 362. The franchisor contended that the bankruptcy filing halted the litigation. The franchisees maintained that the automatic stay applies only to actions against a debtor, not actions initiated by the debtor. The court agreed with the franchisees and held that the stay did not apply because the debtor was the plaintiff and no counterclaims had been asserted. The court denied the request and allowed the case to proceed.
Relevant Background
The case arises out of a dispute between franchisees and their franchisor involving claims asserted by the franchisees in federal court. The litigation was already underway when one of the franchisee plaintiffs filed for Chapter 13 bankruptcy protection.
Following that filing, the franchisor submitted a notice suggesting bankruptcy and requested that the court stay the proceedings under the automatic stay provisions of the Bankruptcy Code. The franchisor’s position reflected a common assumption that a bankruptcy filing pauses all litigation involving the debtor.
The issue before the court was limited to whether the automatic stay applied in a circumstance where the debtor is the party that initiated the lawsuit and continues to prosecute its claims.
Decision
The court denied the request for a stay and held that 11 U.S.C. § 362 did not apply under these circumstances. The court explained that the automatic stay applies to proceedings against a debtor, not to claims brought by the debtor. In doing so, the court relied on established authority recognizing that the automatic stay is intended to protect debtors from external claims and collection activity, rather than to suspend litigation they voluntarily initiate.
The court further noted that no counterclaims had been asserted against the debtor. As a result, there were no claims against the debtor that would implicate the protections of § 362. On that basis, the court denied the stay request and directed that the case proceed under the existing schedule.
Looking Forward
This decision provides a useful reminder for franchisors evaluating litigation strategy when a franchisee becomes financially distressed. While bankruptcy can affect enforcement strategy and timing, its impact depends heavily on the posture of the dispute rather than the mere existence of a bankruptcy filing.
Where a franchisee initiates litigation, the franchisor may still be required to actively defend those claims notwithstanding the bankruptcy proceeding. The automatic stay is not a blanket pause on all activity involving a debtor, and assuming otherwise may result in missed strategic opportunities or delayed responses.
The decision also underscores the importance of evaluating the structure of claims in franchise disputes. Whether and when claims are asserted against a debtor may affect how bankruptcy protections apply, particularly in cases involving ongoing operational issues within a franchise system. Careful coordination between litigation strategy and bankruptcy considerations may help franchisors maintain control over timing and positioning.
More broadly, this case illustrates a recurring issue in emerging franchise systems, where financial distress and litigation often arise at the same time. In those situations, understanding the limits of bankruptcy protections may help franchisors avoid overgeneralizing the effect of a filing and instead respond based on the specific procedural posture of the case.
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 Partner 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.
