Montileone v. AAMCO: When the Franchise Exit Package Unravels

September 8, 2025 | United States District Court, Eastern District of Missouri | Unpublished Opinion

Executive Summary
In an unpublished opinion, Magistrate Judge Shirley Padmore Mensah of the Eastern District of Missouri addressed AAMCO Transmissions, LLC’s attempt to join additional parties to a lease dispute arising out of a terminated franchise relationship. Plaintiff Montileone Properties, LLC sued AAMCO for breach of lease and breach of the duty of good faith and fair dealing, alleging AAMCO vacated the leased Brentwood, Missouri property after previously acquiring business assets and terminating franchise rights. AAMCO argued the lease was part of an integrated transaction that also included a franchise termination agreement and asset purchase agreement, and sought to join Montileone Industries, Inc. and its principal, Timothy Montileone, for indemnification and offset rights. The court held that Rule 20 permitted joinder of Montileone Industries and Mr. Montileone, but denied leave to proceed under Rule 14. The ruling allows AAMCO to amend its counterclaims but stops short of approving a third-party complaint.

Relevant Background
Montileone Properties is a real estate entity owned by former AAMCO franchisee Timothy Montileone. After a dispute with AAMCO in 2018, the parties executed three agreements simultaneously: (1) a franchise termination agreement, (2) an asset purchase agreement transferring business assets to AAMCO, and (3) a lease agreement under which AAMCO rented the Brentwood property for ten years at $60,000 annually plus expenses.

In 2024, Montileone Properties alleged that AAMCO abandoned the property, leaving alterations to its layout and failing to provide required access. The complaint asserted both breach of the lease and breach of good faith, emphasizing that the lease revenue formed the “majority of the monetary consideration” exchanged for relinquishing the franchises.

AAMCO counterclaimed, asserting indemnification rights under the asset purchase and termination agreements for expenses incurred defending a pending class action against Montileone Industries. AAMCO also invoked an “offset right” allowing it to reduce lease obligations by amounts owed to it under the other agreements. Seeking to unify the disputes, AAMCO moved to join Mr. Montileone and Montileone Industries.

Decision
Judge Mensah applied Rule 15’s liberal amendment standard because the motion was filed before the scheduling order’s deadline. She emphasized that leave to amend should be “freely give[n] when justice so requires,” Fed. R. Civ. P. 15(a)(2), and may be denied only for undue delay, bad faith, futility, or unfair prejudice. See Foman v. Davis, 371 U.S. 178, 182 (1962); Roberson v. Hayti Police Dep’t, 241 F.3d 992, 995 (8th Cir. 2001).

The court concluded that Rule 14 did not apply because AAMCO’s proposed claims against Montileone Industries and Mr. Montileone were not derivative of Montileone Properties’ lease claims. As the Eighth Circuit has held, Rule 14 “does not allow the defendant to assert a separate and independent claim even though the claim arises out of the same general set of facts as the main claim.” Mattes v. ABC Plastics, Inc., 323 F.3d 695, 698 (8th Cir. 2003).

However, joinder was permissible under Rule 20. Montileone Properties itself had alleged that the lease was “specifically called-for” and “critical to” the asset purchase and franchise termination because the rental stream was the principal consideration for giving up the franchises. Its claim for breach of good faith rested on the “spirit of” the lease as inducement for the broader transaction. In light of those allegations, the court held that AAMCO’s indemnity and offset claims were “reasonably related” to the same set of transactions and that resolving them together would promote efficiency without undue prejudice.

Accordingly, the court permitted AAMCO to amend its counterclaims to add Montileone Industries and Mr. Montileone as defendants, but denied leave to pursue them by third-party complaint.

Looking Forward
This case is a mess. By tying a franchise termination, an asset purchase, and a lease assumption together, the parties created a litigation quagmire. What began as a straightforward rent dispute has now ballooned into a multi-party fight over indemnity, offsets, and the meaning of interdependent agreements.

For franchisors, the lesson is not that exit packages are impossible or disfavored, but that they must be structured with clarity and foresight. At a minimum, franchisors considering a termination-and-takeover should ensure:

1. Contractual and Legal Foundations
   The very first issue is whether the buyout and assumption are being done in strict compliance with the Franchise Agreement, disclosure laws, and any applicable state statutes. If the franchisor skips required notices, mishandles default or termination provisions, or structures the assumption in a way that contradicts the FDD, it can open the door to claims of wrongful termination, fraud, or violation of franchise registration laws. Even if the franchisee is cooperative, the papering of the transaction has to be airtight—otherwise regulators and future franchisees may see it as a precedent for cutting corners.
2. Operational Transition and Brand Protection
   Once the franchisor assumes operations, it steps into the shoes of the franchisee. That means taking over employees, leases, vendor contracts, and customer relationships. Each of these comes with legal and practical risks—joint employment liability, successor liability for unpaid wages, lease obligations that are not assignable, and even inherited vendor disputes. The franchisor also has to consider how directly operating the location affects brand consistency and morale within the system. Other franchisees will be watching to see whether the franchisor is playing by the same rules or giving itself advantages. A poorly handled takeover can damage trust in the system.
3. Exit Strategy and Long-Term Goals
   Finally, franchisors should ask themselves: Why are we taking this unit back, and what is our plan once we do? Sometimes the goal is to stabilize the unit and quickly resell it to a new franchisee. Sometimes it’s about maintaining a strategic location or piloting operational changes. But franchisors can get stuck holding more units than they intended, saddled with ongoing liabilities. If the endgame isn’t clear—and properly resourced—the franchisor risks turning an opportunistic buyback into a costly distraction that diverts focus from system growth.

In short, this decision is a cautionary tale. What seemed like a clean break in 2018 has resurfaced seven years later as a complicated dispute involving multiple agreements and parties. Franchisors should view this not as a warning against buybacks, but as proof that even cooperative exits must be meticulously planned and documented to prevent them from unraveling in court.

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.

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