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LC Franchisor, LLC v. Valley Beef, LLC

United States District Court, E.D. Missouri, Eastern Division

October 3, 2016

LC FRANCHISOR, LLC, and LC CORPORATE, LLC Plaintiffs,
v.
VALLEY BEEF, LLC Defendant.

          MEMORANDUM AND ORDER

          JEAN C. HAMILTON UNITED STATES DISTRICT JUDGE

         This matter is before the Court on Plaintiffs LC Franchisor, LLC's and LC Corporate, LLC's (together, “Lion's Choice”) Motion for Partial Summary Judgment on Liability. (ECF No. 65.) The Motion has been fully briefed and is ready for disposition.

         BACKGROUND

         The following facts are undisputed. Lion's Choice is a St. Louis based quick service restaurant chain that specializes in roast beef sandwiches. The company and brand were originally owned by Red Lion Beef (“RLB”). Valley Beef, LLC (“Valley Beef”) was formed in 2001 as a Lion's Choice franchisee. In December 2011, Valley Beef filed for Chapter 11 bankruptcy. In September 2013, Lion's Choice underwent a change in ownership, and LC Corporate, LLC acquired RLB's assets. On February 12, 2014, shortly after Valley Beef emerged from bankruptcy, Lion's Choice and Valley Beef entered into a modified Franchise Agreement (hereinafter, the “Agreement”) and a Promissory Note and Repayment Agreement (hereinafter, the “Note”). (Plaintiffs' Statement of Uncontroverted Material Facts (“Plf. SUMF”) ¶ 1.) In negotiating the Agreement and the Note, the Parties were represented by counsel. Id. ¶ 2.

         The Agreement requires, in part, that Valley Beef periodically deliver to Lion's Choice financial reports and information, including, but not limited to, consolidated balance sheets and income statements. Id. ¶ 4. The Agreement also provides the following with respect to termination of the Agreement:

This Agreement shall terminate immediately upon written notice from Franchisor to Franchisee in accordance with the notice provisions hereof upon:
13.1.1 the insolvency of Franchisee…
Franchisor shall have the right at its election to terminate this Agreement upon the lesser of the minimum time required by applicable law or ninety (90) days written notice (“Ninety Day Notice”) to Franchisee upon the occurrence of any of the following:…
13.2.4 a default by Franchisee under any of (a) the Promissory Note and Repayment Agreement…
Upon termination of this Agreement for any reason, all of Franchisee's rights and privileges hereunder shall immediately cease, and Franchisee shall immediately cease operating or using, or permitting to be used or operated, anywhere in any manner and whether directly or indirectly: (a) the Proprietary Marks; (b) all advertising and promotional materials and programs, menu boards, signs, supplies, uniforms or other items bearing the Proprietary Marks; (c) the licensed Know-How; (d) the Standards Manual; and (e) [the] Franchisor's exterior building design.

Id. ¶¶ 3, 6, 29. The Promissory Note sets forth the following “Events of Default”: (g) Borrower shall…(vi) become unable, admit in writing its, his or her inability or fail generally to pay its, his or her debts as they become due, (vii) become insolvent or (viii) take any action for the purpose of effecting any of the foregoing…” Id. ¶ 7. As relevant, neither the Agreement nor the Note explicitly define the terms “insolvency” or “insolvent.”

         After the Agreement and the Note were executed, Valley Beef submitted to Lion's Choice monthly income statements for February, March, and April 2014, which collectively showed a deficit of $142, 688. Id. ¶ 12. On July 7, 2014, Valley Beef provided Lion's Choice with a balance sheet dated May 31, 2014, which showed Valley Beefs “total assets” as $766, 803.07 and “total liabilities” as $4, 762, 206.77. Id. ¶ 14. Also during this time period, Valley Beef failed to timely pay invoices from multiple vendors. Id. ¶¶ 55-58. Valley Beef subsequently provided Lion's Choice with a balance sheet dated July 14, 2014, which showed Valley Beefs “total assets” as $645, 301.96 and “total liabilities” as $4, 722, 990.50. Id. ¶ 16. The financial statements and balance sheets Valley Beef provided to Lion's Choice correctly reflected all of the company's assets and liabilities. Id. ¶ 19.

         On August 1, 2014, Lion's Choice sent Valley Beef written notice of termination, which became effective on February 27, 2015. Id. ¶¶ 21, 28. The termination notice states in pertinent part:

The Balance Sheet provided by Valley Beef to the Franchisor as of May 31, 2014 shows that Valley Beef is insolvent. Under Section 13.1 of the Franchise Agreement, Valley Beefs insolvency is grounds for ...

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