If the franchise, parent, predecessor, or affiliate, or anyone listed Item 2 has had a bankruptcy in the last 10 years, including personal bankruptcies, you will need to provide the case number, the Court in which the bankruptcy case was filed, the status, and a short blurb of explanation. In addition to it being a legal obligation to disclose all bankruptcies, our opinion is that transparency is always better, so you don’t cede the moral high ground in a future dispute. For example, if you got divorced five years ago and went bankrupt but don’t disclose it, later a franchisee could fail and then claim, “I have this problem with people who go bankrupt, and if I knew he went bankrupt, I never would have signed the franchise agreement.” You can’t prove the statement is true, but you’ve put yourself in a challenging situation. If you are ever unsure if something should be disclosed, discuss this with your Spadea Lignana legal team.
Sample Item 4
ITEM 4: BANKRUPTCY
On March 2, 2004, Belmont filed a petition to reorganize under Chapter 11 of the U.S. Bankruptcy Code in the District of Minnesota, 04-BR-3344. We continued to operate our business and manage our assets as a debtor-in-possession under bankruptcy court supervision. On October 2, 2005, the bankruptcy court confirmed our plan of reorganization, which restructured the rights of creditors by providing for certain payments and discharged their claims.
On March 1, 2007, Belmont Muffler Manufacturers, Inc., our affiliate, filed a petition to reorganize under Chapter 11 of the U.S. Bankruptcy Code in the District of Minnesota, 06-BR-4455.
Belmont’s president, Jane Doe, was president of Atlas, Inc., a Houston, Texas, manufacturer of automobile wheels from June 2000 until March 2002. On June 6, 2002, creditors filed an involuntary petition against Atlas for liquidation under Chapter 7 of the U.S. Bankruptcy Code. In re Atlas, Inc., No. 04-BR-555 (S.D. Tex. 2002). On July 14, 2002, the bankruptcy court entered an order for relief against Atlas. A trustee was appointed; she closed Atlas’ operations, sold its assets, and distributed the proceeds to creditors in accordance with the priorities of the Bankruptcy Code.
Belmont manager of franchise operations, Philip E. Smith, filed a bankruptcy petition under the liquidation provisions of Chapter 7 of the U.S. Bankruptcy Code on September 7, 1999, after obtaining employment with Belmont on January 1, 1998. In re Smith, No. 06-BR-6789 (D. Minn. 1999). On January 10, 2000, the bankruptcy court entered a discharge.
This is a sample section from a fictional FDD for Belmont Muffler Shops that was prepared by the Federal Trade Commission as a compliance guide for franchisors preparing their FDD. These are used to provide an idea of what these items may look like in an FDD, but keep in mind, your FDD will most likely vary significantly from these examples.
