Franchisor of Popular Frutta Bowls Chain Lands In Chapter 11 Bankruptcy
The wave of retail bankruptcy filings has crash landed on the burgeoning fruit bowl industry. Frutta Bowls Franchising, LLC, the franchisor for the popular “Frutta Bowls” chain filed a voluntary petition for Chapter 11 bankruptcy protection in the District of New Jersey on February 15th (Case No.: 19-13230). According to its website, Frutta Bowls is the fastest growing superfoods café with healthy alternatives to traditional fast food, including options such as Açai, Pitaya, and Kale bowls.
Started in New Jersey with two locations in 2016, Frutta Bowls has grown at a rapid pace, and appears to now operate in 14 states, with approximately 50 locations. Frutta Bowl’s fast and furious approach to growth may provide a cautionary tale to both franchisors and franchisees. Although, according to documents filed with the bankruptcy court, Frutta Bowls attributes its troubles to its prior legal counsel’s lack of familiarity with franchise law and due to the recent “global economic downturn.”
Faced with over fifteen demand letters from franchisees, Frutta Bowls was compelled to voluntarily seek bankruptcy relief. The overwhelming majority, if not all, of the creditors listed in Frutta Bowl’s bankruptcy petition appear to be individuals with “disputed” claims for franchisee fees, for never opened locations.
The interplay of bankruptcy and franchise law can be a minefield for the unwary. In bankruptcy cases, debtors may seek to reorganize as a going concern or to liquidate, including through the sale of substantially all of the Debtor’s assets. Protecting and preserving rights under valuable franchise agreements must be addressed with caution. Parties must be able to maneuver around the automatic stay imposed immediately upon a bankruptcy filing before proceeding with existing litigation or otherwise enforcing available remedies.
Issues such as whether or not a franchise agreement can be assumed and potentially assigned and/or whether franchisor trademarks can be used be used by a franchisee, are made more complex given the interaction of federal bankruptcy law with other applicable state and federal laws. Franchisors and franchisees may also have to deal with issues concerning the enforcement of non-compete agreements, following the rejection of a franchise agreement in bankruptcy. Taking action without proper court authorization may leave parties subject to damages and potentially sanctions being imposed by the Bankruptcy Court.
If you are addressing issues in the context of a franchisor or franchisee bankruptcy, it is important to know your rights. Chapter 11 debtors typically seek to re-negotiate agreement terms and/or seek to assign contracts to third parties.