The recent In re Pinnacle Foods of California, LLC case exposes a significant challenge for franchisees seeking Chapter 11 reorganization in the Ninth Circuit. At issue is the circuit split on the assumption of executory contracts, where Pinnacle Foods attempted to assume its franchise agreements with Popeyes. Under the Ninth Circuit’s stringent “hypothetical test,” the court ruled that Pinnacle could not assume these contracts without Popeyes’ consent, as this test permits the franchisor to veto assumption based on hypothetical scenarios rather than actual intent. This decision underlines the strategic impact of venue selection for franchisees facing bankruptcy, with circuits like the Fifth and First offering a more favorable “actual test” approach.
This case underscores a larger tension in bankruptcy law: balancing the reorganization needs of franchisee debtors with the trademark protections of franchisors. Franchisees struggling to assume contracts critical to their operations may find the “hypothetical test” a considerable barrier in Ninth Circuit courts, as it effectively grants franchisors substantial control over contract assumptions. As this issue surfaces more frequently, courts and practitioners will need to address whether the rigid application of the hypothetical test unduly hinders debtor rehabilitation.
