December 19, 2024
Citation:
In re Pinnacle Foods of California LLC, 2024 WL 5190414 (Bankr. E.D. Cal. Dec. 19, 2024)
Executive Summary:
In this unpublished decision, Judge René Lastreto II of the United States Bankruptcy Court for the Eastern District of California denied Pinnacle Foods of California LLC’s motion to reconsider the prior order that denied its motion to assume six franchise agreements with Popeyes Louisiana Kitchen, Inc. (“Popeyes”). The court reaffirmed its application of the “hypothetical test” under 11 U.S.C. § 365(c)(1), which bars assumption of contracts when applicable law excuses the non-debtor party from accepting performance from a hypothetical third party. The court held that the Lanham Act and the California Franchise Relations Act (CFRA) allowed Popeyes to withhold consent to assumption, rejecting Pinnacle’s arguments for reconsideration.
Relevant Background:
Pinnacle Foods, a franchisee of Popeyes, operates six restaurants in California. The company faced financial difficulties and filed for Chapter 11 bankruptcy in April 2024, electing to proceed under Subchapter V. Pinnacle sought to assume its franchise agreements with Popeyes, arguing that it could cure any monetary defaults and provide adequate assurance of future performance.
The court previously denied Pinnacle’s motion to assume the agreements, finding that 11 U.S.C. § 365(c)(1), as interpreted by the Ninth Circuit in Catapult Entertainment, Inc. v. Perlman, 165 F.3d 747 (9th Cir. 1999), barred assumption without Popeyes’ consent. The court relied on the Lanham Act, which protects the personal and non-assignable nature of trademark licenses, and the CFRA, which permits franchisors to withhold consent under certain conditions.
Following this ruling, Pinnacle filed a motion for reconsideration, arguing that the court had committed a legal error. Pinnacle claimed that the CFRA preempted the Lanham Act and urged the court to reconsider the reasonableness of Popeyes’ refusal to consent to assumption. Popeyes opposed the motion, arguing that it merely rehashed previously rejected arguments and failed to demonstrate any clear error or exceptional circumstances required for reconsideration under Federal Rules of Civil Procedure 59(e) and 60(b).
Decision:
The court denied Pinnacle’s motion for reconsideration, reaffirming its earlier findings and rejecting Pinnacle’s arguments for several reasons:
- The court held that the hypothetical test under § 365(c)(1) remained binding in the Ninth Circuit, barring assumption of the franchise agreements without Popeyes’ consent. The court reiterated that under the hypothetical test, a debtor may not assume a contract if applicable law excuses the non-debtor party from accepting performance from a hypothetical third party. It emphasized that the identity of the contracting party is material in franchise relationships, and applicable law—here, the Lanham Act and CFRA—excuses Popeyes from accepting performance from a hypothetical third party.
- The court reaffirmed that the Lanham Act (15 U.S.C. §§ 1051, 1060) protects a trademark owner’s rights to control the use of its trademarks and maintain the goodwill associated with them. The court cited In re N.C.P. Marketing Group, Inc., 337 B.R. 230 (D. Nev. 2005), to emphasize that trademark rights are personal and non-assignable without the owner’s consent. It rejected Pinnacle’s argument that the Lanham Act and CFRA were in conflict, noting that both laws could coexist and independently justified Popeyes’ refusal to consent.
- The court found that the CFRA (Cal. Bus. & Prof. Code § 20028) does not override the Lanham Act but provides additional grounds for Popeyes to withhold consent. Under the CFRA, franchisors may refuse consent to assignment if the proposed transferee fails to meet their standards or does not comply with conditions specified in the franchise agreement. The court held that this statutory framework supported Popeyes’ position, as applicable law permitted it to withhold consent even under the CFRA.
- Pinnacle argued that the court should reconsider its decision to examine the reasonableness of Popeyes’ refusal to consent, relying on CFRA provisions. The court rejected this argument as irrelevant, finding that the CFRA permits franchisors to withhold consent based on applicable standards, and no inquiry into reasonableness was required in this case.
- The court concluded that Pinnacle’s motion failed to meet the high threshold for reconsideration under Rules 59(e) and 60(b). It found no clear error, newly discovered evidence, or change in controlling law that would warrant altering the prior decision.
Looking Forward:
This decision underscores the challenges faced by franchisees in bankruptcy when seeking to assume franchise agreements without franchisor consent. Franchisors can rely on the Lanham Act and CFRA to protect their interests, ensuring control over trademark use and operational standards.
Therefore, franchisors should review and strengthen their franchise agreements to explicitly address consent and transfer conditions, safeguarding their rights in jurisdictions that follow the hypothetical test. Additionally, this case shows the importance of documenting defaults and maintaining compliance with applicable laws to avoid complications in similar disputes.