When franchisees choose to financially reorganize under the Bankruptcy Code, they may be the right size to choose to reorganize under subchapter V of Chapter 11. Subchapter V proceedings are simpler, more streamlined and less expensive than a traditional Chapter 11 and is ideal to allow the self-employed to revitalize their small business. Where the franchisor and the franchisee cannot reconcile, subchapter V may provide the franchisee with breathing room and leverage to be revitalized. In an unpublished decision, a court noted that the debtor and the franchisor may at the commencement of the case may be at each other’s throats, but during the case may negotiate a different outcome. See In re Pinnacle Foods of California, Case No. 24-11015 (Bankr. E.D. Cal. Aug. 15, 2024).

In In re Pinnacle (and its companion cases involving its affiliates), the bankruptcy court had the opportunity to decide the franchisor’s motion titled “Motion to Remove the Debtor from Possession and Expand the Powers of the Subchapter V Trustee or, in the Alternative, to Revoke the Debtor’s Subchapter V Designation and Appoint a Chapter 11 Trustee.” The purpose of the motion was to eliminate the debtors’ right to reorganize because of the conduct of the debtor and because reorganization was futile under applicable law. The parties had a litigation history, which poisoned the opportunity for a consensual plan of reorganization without new ownership and management.