Termination of Closed Franchises or Dealerships: A Potential Trap for the Unwary, but Federal Bankruptcy Law May Provide Significant Leverage to Franchisors and Suppliers

As economic uncertainties continue, with good news from the markets one day followed by bad news the next three or four, dealers and franchisees are increasingly likely to curtail their operations substantially or even close their businesses. Does this mean a franchisor or supplier can immediately terminate the franchise or dealer agreement? In some places, the answer is clearly “yes,” but in a surprising number of others, the answer is “not so fast.” Careful consideration of both the language of the applicable contracts and statutes and adequate factual investigation are crucial. Importantly, however, federal bankruptcy law may actually provide significant leverage to franchisors and suppliers in these situations.

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