Rent-A-Wreck Crash Into Bankruptcy Dismissed for Lack of Good-Faith Filing
The U.S. Bankruptcy Code provides distressed companies an array of tools to reorganize their business affairs and restructure their debt.
March 06, 2018 at 02:42 PM
10 minute read
The U.S. Bankruptcy Code provides distressed companies an array of tools to reorganize their business affairs and restructure their debt. These powers include, among other things, the imposition of the automatic stay, centralizing most disputes in the bankruptcy court, the ability to sell assets free and clear of interests, the ability to reject burdensome contracts, and the authority to obtain a discharge if the debtor complies with the code's requirements. However, not everyone is entitled to file a bankruptcy case and obtain access to such relief. To utilize the process, a debtor must file the case in good faith. The term “good faith” is not defined in the code. Courts have interpreted good faith to mean the case must have a valid reorganization purpose. This issue was addressed in a recent decision issued on Feb. 13, by U.S. Bankruptcy Judge Laurie Selber Silverstein of the District of Delaware in In re Rent-A-Wreck of America, Case No. 17-11592. In a detailed 36-page opinion that thoroughly reviewed the record and case decisions regarding the good-faith requirement, the court held the debtors were not in financial distress at the time of the filing and filed the cases as part of a continuing two-party dispute with a franchisee, and directed dismissal of the cases for lack of good faith.
The Dispute
The opinion details a decade-long dispute between the debtors in the cases, Rent-A-Wreck of America Inc. (RAWA) and its wholly owned subsidiary, Bundy American (Bundy, and together with RAWA, the debtors), and David Schwartz, the founder and prior owner of Bundy Rent-A-Wreck. Schwartz first started using that name in 1973 in connection with his car sales business in Los Angeles. There was no formal franchise agreement between RAWA and Schwartz. RAWA thereafter went public. At the time of the opinion, there were 76 Rent-A-Wreck franchises in 28 states, plus operations in St. Maarten and Scandinavia. In addition, Bundy had between four and six nondebtor subsidiaries that operated rental franchises and related businesses.
RAWA was acquired by J.J.F. Management Services Inc. in 2006 when JJFMS purchased all outstanding RAWA stock and took RAWA private. At the time of issuance of the opinion, RAWA was part of a group of private companies owned by JJFMS. JJFMS's primary principal, John J. Fitzgerald Jr., was an owner, the president, CEO, and chairman of the JJFMS board of directors, and director and chairman of RAWA's board of directors.
After the sale closed, RAWA wrote Schwartz demanding that he either provide evidence of a franchise agreement or that he stop holding himself out as a RAWA franchisee. In June 2007, Schwartz sued RAWA, Bundy, and JJFMS in the U.S. District Court for the District of Maryland, seeking a declaratory judgment that Schwartz had a royalty-free Rent-A-Wreck franchise pursuant to a 1985 agreement or, alternatively, that he had an implied-in-fact contract based on a course of conduct between 1977 and 2007. RAWA and Bundy counterclaimed, seeking a declaration that any franchise agreement could be terminated or was an unlawful restraint on trade. After two jury trials, motions for judgment notwithstanding the verdict, and two decisions issued by the U.S. Court of Appeals for the Fourth Circuit on appeal, it was adjudicated that Schwartz did indeed hold an implied-in-fact royalty and fee-free franchise agreement to run a Rent-A-Wreck used car rental business in West Los Angeles for his lifetime. The precise terms of the contract were left for further negotiation or litigation. RAWA was later held in contempt by the Maryland court for intentionally diverting prospective customers from Schwartz's business when RAWA's call center told prospective customers that there was no franchise in Los Angeles. The court's opinion states that the Maryland court observed in one of its opinions that Fitzgerald proclaimed at the outset of the litigation the he would make Schwartz “sweat at virtually every stage of the proceedings.”
NOT FOR REPRINT
© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
You Might Like
View AllFifth Circuit Sides With Fourth Circuit and Rules That Discharge Exceptions Apply to Corporate Subchapter V Debtors
7 minute readTom Sabatino, an 8-Time Legal Chief, Off to New Adventures After Year-Long Run at Rite Aid
2 minute readTrending Stories
- 1'I'm Staying Everything': Texas Bankruptcy Judge Halts Talc Trials Against J&J
- 2What We Know About the Kentucky Judge Killed in His Chambers
- 3Ex-Prosecutor and Judge Fatally Shot During Attempted Arrest on Federal Corruption Charges
- 4Judge Blasts Authors' Lawyers in Key AI Suit, Says Case Doomed Without Upgraded Team
- 5Federal Judge Won't Stop Title IX Investigation Into Former GMU Law Professor
Who Got The Work
Greenberg Traurig shareholders Christina M. Carroll and A. Michael Pratt have entered appearances for the Secretary of the Pennsylvania Department of Banking and Securities, Wendy Spicher in a pending civil rights lawsuit. The case, filed Aug. 13 in Texas Northern District Court by Troutman Pepper Hamilton Sanders; Ashcroft Sutton Reyes; and Locke Lord on behalf of TMX Finance Corporate Services, seeks to challenge the secretary’s ongoing attempt to regulate commercial lending activity outside the Commonwealth of Pennsylvania. The suit furthers contends that the secretary issued an investigative subpoena to TMX for potential violations of the Pennsylvania Loan Interest and Protection Law and the Consumer Discount Company Act despite TMX's business activities not being governed by such. The case, assigned to U.S. District Judge David C. Godbey, is 3:24-cv-02054, TMX Finance Corporate Services Inc v. Spicher.
Who Got The Work
Joseph J. Mueller and Rachel Bier of Wilmer Cutler Pickering Hale and Dorr have entered appearances for Omachron Alpha, Omachron Intellectual Property and SharkNinja Operating in a pending patent infringement lawsuit. The action, filed Sept. 16 in Massachusetts District Court by Kirkland & Ellis, asserts three patents in connection with SharkNinja's sale of the 'Vertex' and 'Stratos' cordless vacuum cleaners. The case, assigned to U.S. District Judge Allison D. Burroughs, is 1:24-cv-12373, Dyson, Inc. et al v. SharkNinja, Inc. et al.
Who Got The Work
Shloime Fellig of Latham & Watkins has entered an appearance for Ardelyx the company's CEO and CFO in a pending securities class action related to Xphozah, a drug which treats kidney disease and end-stage renal disease. The complaint, filed Aug. 16 in Massachusetts District Court by Pomerantz LLP, contends that the defendants failed to disclose that the company would not be seeking the drug’s acceptance into the Transitional Drug Add-on Payment Adjustment, a bundled payment system regulated by the Medicare Improvements for Patients and Providers Act. The case, assigned to U.S. District Judge Leo T. Sorokin, is 1:24-cv-12119, Yarborough v. Ardelyx, Inc. et al.
Who Got The Work
Alexander P. Ott, Megan Corrigan and Karen Gover of McDermott Will & Emery have entered appearances for Analog Devices, a Massachusetts-based manufacturer of semiconductor processing equipment, in a pending patent infringement lawsuit. The suit, which asserts two patents, was filed July 9 in Massachusetts District Court by Arrowood LLP and the Devlin Law Firm on behalf of Ocean Semiconductors. The case, assigned to U.S. District Judge Patti B. Saris, is 1:24-cv-11759, Ocean Semiconductors LLC v. Analog Devices Inc.
Who Got The Work
Forrest M. 'Teo' Seger of Clark Hill has entered an appearance for Equifax Information Services in a pending lawsuit for claims under the Fair Debt Collection Practices Act. The case was filed Aug. 13 in Texas Western District Court by Halvorsen Klote on behalf of Quinton Humphrey. The case, assigned to U.S. District Judge Fred Biery, is 5:24-cv-00892, Humphrey v. LVNV Funding, LLC et al.
Featured Firms
Law Offices of Gary Martin Hays & Associates, P.C.
(470) 294-1674
Law Offices of Mark E. Salomone
(857) 444-6468
Smith & Hassler
(713) 739-1250