In re Printronics, Inc.
| Decision Date | 08 December 1995 |
| Docket Number | Bankruptcy No. 95-00103. |
| Citation | 189 BR 995 |
| Parties | In re PRINTRONICS, INC., Debtor. |
| Court | U.S. Bankruptcy Court — Northern District of Florida |
J. Michael Davis, Gainesville, FL, for Debtor.
Karen K. Specie, Gainesville, FL, Mark P. Naughton, Philip V. Martino, Rudnick & Wolfe, Chicago, IL, for Kwik Kopy.
Jim Bennett, Asst. U.S. Trustee, Tallahassee, FL.
THIS MATTER came on for hearing on the debtor's Motion for Authorization to Reject Executory Contract in this yet to be confirmed Chapter 11 case. The executory contract which the debtor seeks to reject is a franchise agreement between Kwik Kopy Corporation ("KKC"), franchisor, and the debtor, Printronics, Inc., franchisee. The issue presented by this motion is whether or not the debtor, through rejection of the Franchise Agreement, can avoid the enforcement of a covenant not to compete (the "Covenant") contained in the Franchise Agreement. Pursuant to agreement by the parties and a previous order of this court relating to KKC's motion for relief from stay in order to initiate steps to terminate the Franchise Agreement, all issues relating to the Covenant not to compete and its enforceability are to be dealt with in this proceeding. An evidentiary hearing was held on October 13, 1995, at which time I received evidence from the parties and heard argument with respect to their positions. Based on the evidence presented, and the arguments of counsel, I make the following findings of fact and conclusions of law in accordance with Rule 7052 of the Federal Rules of Bankruptcy Procedure.
On July 19, 1982, William and Helen Lynch, the principals and shareholders of the debtor, Printronics, Inc., executed a KKC Franchise Agreement for a KKC franchise located in Gainesville, Florida. Prior to going into the business of operating a KKC franchise, Mr. Lynch's experience in the printing and copy field consisted mostly of serving in "in-house" graphics departments in municipal government and in private businesses. In those capacities, he was involved in the development of printing techniques and had experience in the development of quick printing operations. These activities ended in 1972 at which time Mr. Lynch began a consulting firm doing marketability studies, and this activity continued until approximately 1982. Mr. Lynch had no experience in the operation of an instant printing business other than that set forth above.
In 1982, Mr. Lynch made the decision to go into the printing business. Prior to entering into the Franchise Agreement with KKC, Mr. Lynch looked at the operations of approximately fifty (50) quick copy and instant printing businesses and interviewed five different franchisors. Based on the results of his investigation and his feeling that KKC had a superior research and development program, Mr. Lynch chose to go with a KKC franchise.
Upon execution of the Franchise Agreement, the Lynches attended a three week orientation program given by KKC at its corporate headquarters in Houston, Texas. During the initial training, the Lynches received training and assistance regarding the management of their business, the accounting systems to be used in the business, the equipment to be purchased for the business, the pricing methodologies to be used, marketing strategies, and the appropriate store layout. The Lynches also received various written material, including materials on marketing and pricing, predesigned business forms, and catalogs for equipment and supplies. Mr. Lynch testified that KKC provided them with "excellent training in quick printing specific business applications" and that "the management training that KKC gave us ... was essential to our survival" during the Lynch's first year in business.
During the first couple of years of their operation, the Lynches experienced problems with both the initial location, which had been selected by KKC, and with a piece of equipment which did not operate properly. After two years, they moved the store to a new site and after three years the equipment problem was finally resolved. Since 1985, they have operated at the same site and with the same equipment as was originally placed in the center.
During the years for which the Lynches have operated, they have not been satisfied with their results as a KKC franchise. Mr. Lynch felt that the KKC trade name conveys a wrong impression to the public that the business is merely a copy center rather than a printing business. Due to the number of low cost competitors in the copy business in the Gainesville area, they could not compete for that particular segment of the business. Mr. Lynch testified that because of his background and experience in the offset printing field, he was able to provide his customers with a higher level of talent and conceptual assistance than what he viewed as the typical KKC operation. However, being restricted to use of just the KKC trade name, he felt that he had difficulty attracting the type of business which he was seeking.
Feeling that the KKC name and logo did not appropriately reflect the nature of the business, in 1984 Mr. Lynch wrote to KKC suggesting that the corporate logo be changed to include the word "Printworks" in the name in order to convey the message that KKC did provide more than merely a copy service. While the responses Mr. Lynch received from KKC were generally positive with respect to his suggestion, apparently no action was taken.
On April 2, 1990, the Lynches assigned their rights under the Franchise Agreement to the debtor in this case, Printronics, Inc., a corporation wholly owned by the Lynches. This was accomplished pursuant to the Consent to Assignment of Franchise to Corporation Agreement and Guarantee and Agreements of Shareholders pursuant to which KKC agreed to the assignment and the Lynches personally guaranteed Printronics' obligations under the Franchise Agreement, and agreed to comply with the terms of the agreement, including the non-compete provisions.
During the period of time that they have operated the KKC, the Lynches have attended both regional and national seminars offered by KKC. They have used the "800" telephone number maintained by KKC for franchise assistance and have received monthly telephone calls from KKC offering support and inquiring about whether Printronics required any assistance with its business. They have received monthly franchise magazines from KKC and the results of surveys of KKC franchises on points of interest. At all times, they have operated with the same equipment, pricing methods, accounting methods, and store layout that they received from KKC.
Over the past three to four years, the Lynches have relied less and less on KKC for service and assistance and have endeavored to become more sophisticated based on Mr. Lynch's knowledge of technology. Mr. Lynch has suggested that KKC get involved with and take a proprietary position in some new technologies, but that suggestion was apparently not accepted. The year of 1994 was disastrous financially with changing national markets and changes in technology and competition. Sales at Printronics failed to increase and the business lost money. On April 17, 1995, Printronics filed a petition for relief under Chapter 11 of the Bankruptcy Code.
On April 18, 1995, the day after the petition was filed, Mr. Lynch sent a letter to all of his customers advising them that the name of his business was being changed from Kwik Kopy to "Great Impressions Printing and Graphics". The business continues to serve the same customers post-petition as it did pre-petition. On August 10, 1995, the debtor filed its motion for authority to reject the Franchise Agreement with KKC. Prior to that motion being filed, KKC filed a motion for relief from the automatic stay to enable it to begin the termination procedure called for in the Franchise Agreement. On August 21, 1995, a hearing was held on KKC's motion for relief from stay at which time KKC was permitted to begin the procedure for termination of the Franchise Agreement, and it was agreed that all issues relating to the validity and enforceability of the agreement would be considered at the hearing on the debtor's motion to reject the agreement. This dispute revolves around the provisions in the Franchise Agreement prohibiting the debtor from competing with KKC following termination of the agreement. The Franchise Agreement provides as follows:
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