In re Vylene Enterprises, Inc.
| Citation | 105 BR 42 |
| Decision Date | 15 February 1989 |
| Docket Number | Adv. No. LA 85-4983 SB.,Bank No. LA 84-14659 SB |
| Parties | In re VYLENE ENTERPRISES, INC., Debtor. VYLENE ENTERPRISES, INC., Plaintiff, v. NAUGLES, INC., et al., Defendants. and related cross-action. |
| Court | United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — Central District of California |
Howard Mark Becker of Antin, Magasinn, Stern, Litz & Grebow, Los Angeles, Cal., and Phillip K. Fife of Fife, Smith & Ablon, Universal City, Cal., for debtor.
William Rintala of Rintala, Smoot, Jaenicke & Brunswick and Michael A. Morris of Stutman, Treister & Glatt, Los Angeles, for Naugles, Inc.
Davis von Wittenburg, Los Angeles, Cal., U.S. Trustee.
Naugles', Inc. ("Naugles") has brought this action to prohibit the debtor Vylene Enterprises, Inc. ("Vylene") from infringing Naugles' federally registered trademarks and from otherwise unfairly competing with it. The grounds for the adversary proceeding are that Vylene's ten-year franchise agreement with Naugles has expired according to its terms, and has not been renewed. Vylene opposes the action on the merits, and counterclaims for a renewal of the franchise and for damages.
The Court has previously granted relief from stay to Naugles to permit it to terminate Vylene's franchise and lease, for failure to pay franchise fees and rent ordered by the Court. Vylene's damage claim remains to be determined by the Court.
The issue now before the Court is whether Naugles is entitled to terminate the franchise because no renewal has been negotiated. The Court holds that Naugles had a duty to negotiate in good faith for the renewal of the franchise agreement, and that Naugles has breached this duty by failing to engage in any such negotiations and by opening a competing store that prevented it from bargaining in good faith.
Vylene filed the underlying first amended complaint on April 15, 1986 pursuant to authorization of the Court. Vylene asserts nineteen claims for relief, all arising out of the non-renewal of the franchise agreement. Naugles has filed a counterclaim for trademark violations, unfair competition, misappropriation of trade secrets and for possession of the real property under the sublease from Naugles.
Vylene paid $25,000 to Naugles for a ten-year franchise beginning on December 30, 1975 for a Mexican-type fast food restaurant in Long Beach, California. The franchise included a sublease of the property from Naugles. Vylene claims that its restaurant was the most successful Naugles franchise, and one of the most successful Naugles restaurants.
Naugles began business in 1971, and in 1975 it owned 12 restaurants, including the Long Beach restaurant franchised to Vylene. Naugles subsequently expanded to 219 company-owned restaurants by late 1985. The Vylene franchise was the sole Naugles franchise until October, 1983, when Naugles franchised five more units. As of late 1985 all of the Naugles restaurants were company-operated, apart from these six franchises and one unit under an area franchise. Naugles has subsequently bought out all but one of its other franchises.
Relations between Vylene and Naugles were apparently good until 1984, when Vylene fell behind in payments due under the franchise agreement. In February, in June and again in July, 1984 Naugles gave Vylene notices of termination of the franchise agreement. In response to the last of these notices, Vylene filed this Chapter 11 bankruptcy case on July 17, 1984. At that time Vylene was four months behind in it payments under the franchise agreement. On August 24, 1984 Naugles gave notice that it intended not to renew the franchise upon its expiration on December 30, 1985.
Through various proceedings before this Court, Vylene paid its delinquent franchise fees in the amount of $38,121 and was permitted to assume the franchise agreement through its expiration date of December 31, 1975. The issue of the renewal of the franchise was reserved for later determination.
On October 30, 1985 Vylene gave timely notice of its intent to exercise its renewal or extension rights. On November 14, 1985 Debra Green, the owner and president of Vylene, met with Michael Mooslin, the president of Naugles, to discuss the terms and conditions of a renewal agreement. On November 20, 1985 Naugles responded with an offer, and demanded a renewal fee of $104,522 and other terms that Vylene found unacceptable. (Mr. Mooslin had repeatedly promised Ms. Green theretofore that Naugles would not ask for a renewal fee larger than $40,000). The franchise renewal fee was based on the fee that Naugles was charging in 1983 for new franchises, which was the last time that it had offered any franchises for sale. Although in 1983 Naugles was offering to finance a portion of the franchise fee, it declined to offer any financing arrangements to Vylene, "due to its uncreditworthy history."
Debra Green sent letters to Naugles on December 8, 1985 and December 27, 1985 to protest the unfairness of the Naugles offer and to request a more reasonable renewal offer. After several further letters, on January 9, 1986 Naugles offered to reduce the franchise renewal fee to $80,000, and to reduce slightly the rent demanded. Alternatively, it offered to purchase the franchise for $80,000.
In late 1985, at the time that the Vylene franchise came up for renewal, Naugles was still conducting its business in part through franchises. The Court finds that Naugles' failure to agree to renewal terms with Vylene was not affected by any determination to discontinue franchising. The Court further finds that Naugles made a specific decision to renew the Vylene franchise in late 1985, subject only to the negotiation of acceptable terms.
There have been no further negotiations since early January, 1986, and no renewal agreement has been reached. Vylene continued to operate its franchise as a debtor in possession under Chapter 11 of the Bankruptcy Code after the beginning of 1986. Naugles brought a motion for a preliminary injunction to prohibit Vylene from infringing its trademarks, on the theory that the franchise was terminated, which this Court denied in it opinion dated August 13, 1986. Vylene Enterprises v. Naugles (In re Vylene Enterprises), 63 B.R. 900 (Bankr.C.D.Cal.1986). The Court also denied Naugles' motion for relief from stay to bring an action for possession of the franchise premises for non-payment of rent. The Court conditioned its order on Vylene's payment of $2,000 per month in franchise and rental payments. This decision is now on appeal to the Ninth Circuit.
In the meanwhile, the United States Trustee brought a motion for dismissal of this case or its conversion to a case under Chapter 7, based on Vylene's failure to comply with the Chapter 11 reporting requirements. After several hearings in which the Court admonished the debtor that compliance was required, the Court authorized the appointment of a Chapter 11 trustee on June 26, 1987. The trustee shortly thereafter recommended the closure of the business and conversion of the case to one under Chapter 7 of the Bankruptcy Code, which was ordered on October 1, 1987. Vylene ceased making its monthly payments, and the Court subsequently granted Naugles' renewed relief from stay motion to take possession of the franchise.
Thus this Court has previously resolved the issues of possession of the franchise premises and the continued operation of the franchise. Vylene's damage claim for failure to renew the franchise remains to be determined.
The relationship between Vylene and Naugles has been flavored from the outset by bad acts on the part of Naugles. Vylene has claimed damages based on only some of these bad acts.
Shortly after the outset of the Vylene franchise, Naugles' chairman of the board Harold Butler began an affair with Ms. Green, which lasted until the end of 1983. Butler, who was some thirty years older than Ms. Green, remained married throughout this time. Apparently Vylene's relationship with Naugles ran rather smoothly so long as the affair lasted. Vylene's difficulties with Naugles began shortly after the termination of the affair.
A second category of bad acts by Naugles arises from its duty under the Vylene franchise agreement to credit to Vylene's account Vylene's pro rata share of rebates that Naugles received from food suppliers for food sold to Vylene. Naugles refused to credit any rebates to Vylene until August 5, 1985, when Vylene demanded the rebates to which it was entitled. Naugles credited Vylene with only $2,000 at that time. Naugles failed to keep any records from which the rebates owed could be calculated, and offered to provide past rebates only if Vylene would shoulder the cost of auditing Naugles' records to determine the correct amount of the rebates owed. Vylene has chosen not to pursue this issue.
A third set of bad acts arose in 1984, when Mooslin purported to take over the operation of the Vylene franchise without the benefit of any court order. Mooslin simply went to the Vylene store, found that Ms. Green was not on the premises, and took control of the operation of the business. He fired most or all of the employees. While Ms. Green soon learned of this intrusion into Vylene's business and regained control of its operation within a few days, many of the employees failed or refused to return, and it was expensive to replace them. This event was one of the factors that precipitated the filing of this bankruptcy case.
A fifth set of bad acts by Naugles arose in 1982, when Naugles denied Ms. Green's request to permit her to open an additional franchise in Cypress, a town close to Long Beach. When Naugles refused to authorize a new franchise at that location, Ms. Green opened a Mexican fast food restaurant there under her own name. According to Ms. Green's testimony, Naugles also told her that...
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