In re Dan Mazzola ( 2020 )

By order of the Bankruptcy Appellate Panel, the precedential effect
of this decision is limited to the case and parties pursuant to
6th Cir. BAP LBR 8024-1(b). See also 6th Cir. BAP LBR 8014-1(c).
File Name: 20b0001n.06
BANKRUPTCY APPELLATE PANEL
OF THE SIXTH CIRCUIT
IN RE: DAN MAZZOLA, INC., ┐
Debtor. │
___________________________________________ │
ROCKNE’S, INC., │
│
Appellant, > No. 19-8007
│
│
v. │
DAN MAZZOLA, INC., │
│
Appellee. │
┘
On Appeal from the United States Bankruptcy Court
for the Northern District of Ohio at Akron.
No. 5:18-bk-52271—Alan M. Koschik, Judge.
Argued: November 13, 2019
Decided and Filed: January 28, 2020
Before: BUCHANAN, HARRISON, and OPPERMAN, Bankruptcy Appellate Panel Judges.
_________________
COUNSEL
ARGUED: Ray L. Weber, RENNER, KENNER, GREIVE, BOBAK, TAYLOR & WEBER
CO., L.P.A., Akron, Ohio, for Appellant. Peter G. Tsarnas, DAY KETTERER, LTD., Akron,
Ohio, for Appellee. ON BRIEF: Ray L. Weber, Laura J. Gentilcore, RENNER, KENNER,
GREIVE, BOBAK, TAYLOR & WEBER CO., L.P.A., Akron, Ohio, Michael J. Moran,
GIBSON & MORAN, Cuyahoga Falls, Ohio, for Appellant. Peter G. Tsarnas, DAY
KETTERER, LTD., Akron, Ohio, for Appellee.
No. 19-8007 In re Mazzola, Inc. Page 2
_________________
OPINION
_________________
MARIAN F. HARRISON, Bankruptcy Appellate Panel Judge. Dan Mazzola, Inc. (“the
Debtor”) operates a family restaurant pursuant to a franchise agreement with Rockne’s Inc.
(“Rockne’s”). Rockne’s asserts that it terminated the Debtor’s franchise agreement prior to the
Debtor’s bankruptcy filing and asserts that a chapter 11 plan is not feasible because the Debtor
cannot use its trade name and trade dress to operate a restaurant. The bankruptcy court ruled that
the franchise agreement had not been terminated prepetition and denied Rockne’s motion to
convert or dismiss, or in the alternative for relief from the automatic stay. For the reasons that
follow, the Panel affirms.
ISSUE ON APPEAL
The sole issue on appeal is whether the bankruptcy court erred when it denied Rockne’s
motion to convert or dismiss the bankruptcy case, or in the alternative, grant relief from the stay.
The answer to that question turns on whether the franchise agreement was terminated prepetition.
JURISDICTION AND STANDARD OF REVIEW
On May 20, 2019, the Panel entered an order holding that the bankruptcy court’s order
denying the motion to convert or dismiss the case is a final order because it locks into place
certain pieces of the bankruptcy puzzle. (B.A.P. Order, ECF No. 11, May 20, 2019.) The
bankruptcy court’s order is both procedurally complete and is determinative of substantive rights
because the order determined that the franchise agreement had not been terminated prepetition.
A bankruptcy court’s determination as to whether to convert or dismiss a case is reviewed
for an abuse of discretion. Mitan v. Duval (In re Mitan), 573 F.3d 237, 247 (6th Cir. 2009); In re
Creekside Senior Apartments, L.P., 489 B.R. 51, 62 (B.A.P. 6th Cir. 2013).
“An abuse of discretion occurs only when the [bankruptcy] court ‘relies upon
clearly erroneous findings of fact or when it improperly applies the law or uses an
erroneous legal standard.’” In re Bever, 300 B.R. 262, 264 (6th Cir. BAP 2003)
(quoting Corzin v. Fordu (In re Fordu), 209 B.R. 854, 857–58 (6th Cir. BAP
No. 19-8007 In re Mazzola, Inc. Page 3
1997)). “We will find an abuse of discretion only upon a definite and firm
conviction that the [bankruptcy] court committed a clear error of judgment.” In re
Kisseberth, 273 F.3d 714, 721 (6th Cir. 2001). The question is not “not how the
reviewing court would have ruled, but rather whether a reasonable person could
agree with the bankruptcy court’s decision.” In re M.J. Waterman & Assocs.,
227 F.3d 604, 608 (6th Cir. 2000).
In re Henry, 534 B.R. 721, 722 (B.A.P. 6th Cir. 2015). “The particular factual findings of the
bankruptcy court are reviewed for ‘clear error.’” In re Jackson, 554 B.R. 156, 159 (B.A.P. 6th
Cir. 2016), aff’d, No. 16-4021, 2017 WL 8160941 (6th Cir. Oct. 18, 2017) (citing Behlke v.
Eisen (In re Behlke), 358 F.3d 429, 433 (6th Cir. 2004) (citations omitted)).
In this appeal, the factual finding that the bankruptcy court reached is that the franchise
agreement had not been terminated prepetition. This finding required the bankruptcy court to
interpret the contract. Questions of contract interpretation are reviewed de novo. Bender v.
Newell Window Furnishings, Inc., 681 F.3d 253, 259 (6th Cir. 2012); Kraus Anderson Capital,
Inc. v. Bradley (In re Bradley), 507 B.R. 192, 196 (B.A.P. 6th Cir. 2014).
FACTS
Rockne’s is an Ohio corporation that owns and operates seven restaurants in northeast
Ohio. Additionally, Rockne’s has franchise agreements with two other parties, including the
Debtor. The Shannon family own all the shares of Rockne’s. Mark Shannon is the current
President.
The Debtor operates a Rockne’s franchise (“the Stow Restaurant”) located at
4240 Hudson Drive, Stow, Ohio. The Debtor and Rockne’s entered into their original franchise
agreement in 2007 for a ten-year term. In February 2017, the parties executed a new franchise
agreement effective January 1, 2017 (“the Franchise Agreement”). Dan Mazzola, the principal
of the Debtor, had operated an additional Rockne’s franchised restaurant which failed prior to
February 2017. That restaurant was not owned or operated by the Debtor, however, that failure
gave rise to certain outstanding debts owed by Mr. Mazzola to Rockne’s pursuant to a guaranty.
In March or April of 2018, there was an outbreak of E. coli bacteria in the United States
linked to romaine lettuce. On April 20, 2018, Rockne’s sent a memorandum to all its locations,
No. 19-8007 In re Mazzola, Inc. Page 4
including the Stow Restaurant, informing them that the romaine lettuce purchased from their
authorized supplier was safe because it was sourced from Mexico, while the recall on romaine
lettuce was for produce from Yuma, Arizona. But then, on April 26, 2018, Rockne’s sent a
memorandum to all its locations, including the Stow Restaurant, ordering them to cease serving
romaine lettuce and directing them to dispose of any romaine lettuce currently in stock. On
May 3, 2018, Rockne’s sent another communication to all its restaurants, again stating that
romaine lettuce was not to be served. A third notice was sent on May 10, 2018. On May 21,
2018, Rockne’s sent a certified letter to the Debtor ordering it to immediately cease serving
romaine lettuce. The parties stipulated that between April 23, 2018, and May 21, 2018, the
Debtor served to the public more than 150 salads containing romaine lettuce at the Stow
Restaurant. The parties also stipulated that multiple other Rockne’s restaurants ordered romaine
lettuce and served salads containing romaine lettuce during that timeframe.
On July 2, 2018, Rockne’s sent a certified letter to the Debtor purporting to terminate the
Franchise Agreement. Rockne’s called the serving of romaine lettuce “a serious violation of The
[Franchise] Agreement.” (Notice of Termination of Franchise Agreement at 1, Ex. H.)1 The
notice further stated that the violation “placed public health in jeopardy” and “threatened the
existence of the entire Rockne’s franchise system.” (Id.) In addition to the alleged violation
caused by serving romaine lettuce, Rockne’s cited additional reasons for termination of the
Franchise Agreement, including: an allegation that the Debtor was insolvent, an allegation that
the Stow Restaurant used its kitchen to prepare food for another restaurant, and an allegation that
the Stow Restaurant manager was employed at another restaurant in violation of the Franchise
Agreement. (Id. at 2.) The notice offered to forgive $160,000 in debt owed by the Debtor, as
well as pay an additional sum of $100,000 for furniture, fixtures, and equipment, and to employ
Dan Mazzola as a General Manager at the Stow Restaurant under an at-will employment
agreement. The letter gave the Debtor 15 days to respond. (Id. at 3.)
1All lettered Exhibits herein refer to the exhibits attached to the Amended Stipulations of the Movant,
Rockne’s, Inc. and the Debtor and Debtor-in-Possession, Dan Mazzola, Inc. (Case No. 18-52271 ECF No. 63-2 (Jan.
23, 2019).)
No. 19-8007 In re Mazzola, Inc. Page 5
The Debtor responded to the notice of termination on July 17, 2018. The Debtor called
the allegations in the notice of termination “categorially false.” Regarding serving romaine
lettuce, the Debtor stated “No product ever received by [the Debtor] or served to the public
contained infected product nor was there ever a reported sickness, threat or otherwise from [the
Stow Restaurant]. In short, there was no threat of danger to the public.” (July 17, 2018 Letter to
Rockne’s, Ex. I.) The Debtor also stated that it was “solvent as defined both under the United
States Bankruptcy Code and the Ohio Revised Code.” (Id. at 2.) The Debtor also refuted the
allegations that the Stow Restaurant kitchen was being used to prepare food for another
restaurant and that any of its management had failed to devote his or her full time and best efforts
to the management of the restaurant. Further, the Debtor asserted that the letter was simply an
attempt to take control of the last independent franchise of Rockne’s without making a
reasonable buy-out offer. (Id.)
The Debtor continued to operate the Stow Restaurant following the receipt of the notice
of termination. On September 18, 2018, Rockne’s filed suit in the Northern District of Ohio
seeking to enjoin the Debtor from further use of the Rockne’s trademark and trade dress.
Rockne’s, Inc. v. Dan Mazzola, Inc., Case No. 5:18-cv-02145 (“District Court Case”). The
Debtor filed a chapter 11 bankruptcy petition on September 21, 2018, which stayed the District
Court Case.
On October 9, 2018, Rockne’s filed a motion to dismiss or convert the Debtor’s
bankruptcy case, or in the alternative, asked for relief from the automatic stay to pursue the
District Court Case (“Motion to Dismiss”). In its Motion to Dismiss, Rockne’s asserted that
because the Franchise Agreement had been terminated prepetition, the Debtor had no possibility
of a successful reorganization. The Debtor objected to the motion, arguing that Rockne’s did not
have grounds to terminate the Franchise Agreement and that reorganization was possible. The
bankruptcy court held an evidentiary hearing on the motion on January 28 and 29, 2019. At the
hearing, the parties agreed that the determination of whether the Franchise Agreement had been
terminated was dispositive of the Motion to Dismiss and consented to the bankruptcy court
entering a final order.
No. 19-8007 In re Mazzola, Inc. Page 6
Following stipulations by the parties, testimony from the principals of the Debtor and
Rockne’s, and others, and consideration of numerous exhibits, the bankruptcy court held “that
the Franchise Agreement remained in force as of the petition date, is an executory contract of the
debtor-in-possession’s estate, and is protected against unilateral termination pursuant to
11 U.S.C. § 362(a) absent relief from stay.” (Mem. Decision at 33, Bankr. No. 18-52271, ECF
No. 69, March 27, 2019.) Accordingly, the bankruptcy court denied the Motion to Dismiss.
Rockne’s timely filed this appeal.
DISCUSSION
Both Rockne’s and the Debtor spent considerable time in their briefs and at oral argument
arguing, quite passionately, their version of the facts, or more accurately, the facts they deem
important. Ultimately, though, there is little disagreement about the facts. The parties only take
issue with the bankruptcy court’s factual finding that the sale of romaine lettuce during the E.
coli outbreak constituted a threat or danger to public health or safety, and the finding that
Rockne’s had not successfully terminated the Franchise Agreement based upon that alleged
threat.
The Panel is not a finder of fact. In reaching our decision, the Panel applies the facts
which were stipulated to by the parties at trial. The Panel has reviewed the bankruptcy court’s
findings for clear error and finds none. Thus, utilizing these facts, the Panel agrees that
Rockne’s did not successfully terminate the Franchise Agreement prior to the filing of the
bankruptcy petition.
In reaching this result, the Panel begins by examining the Franchise Agreement.
Article XIV.A, paragraph 3 of the Franchise Agreement provides:
Franchisee shall be deemed to be in default and Franchisor may, at its option,
terminate this Agreement and all rights granted hereunder, without affording
Franchisee any opportunity to cure the default, effective immediately upon notice
(Section XXI) by Franchisor to Franchisee, upon the occurrence of any of the
following events:
....
No. 19-8007 In re Mazzola, Inc. Page 7
3. If a threat or danger to public health or safety results from the
construction, maintenance or operation of the Franchised
Business[.]
(Franchise Agreement at 21-22, Exhibit A.)
The parties spent some time arguing whether the Debtor’s action of selling romaine lettuce
after Rockne’s had directed its franchisees not to sell romaine constituted a danger or threat to
the public such that Article XIV.A.3 could be invoked. The Debtor argues that using romaine
from a safe source did not create a threat or danger to public health and safety. Rockne’s asserts
that all romaine lettuce posed a threat during that time, which is why it instructed all its stores to
stop selling romaine lettuce.
The bankruptcy court held “the Court does not conclude that romaine lettuce did not
constitute a threat to public safety from April 26 to June 19, 2018. It did. A risk does not need
to have a certain outcome to be a threat.” (Mem. Decision at 28 n.4.) The Panel finds that the
bankruptcy court’s conclusion is not clearly erroneous. The Franchise Agreement allows
Rockne’s to be the determiner of product suppliers.2 The Debtor presented no evidence to the
bankruptcy court that it had the right to substitute its own judgment for Rockne’s in this regard.
Rockne’s argues that based on its finding that the sale of romaine lettuce constituted a threat,
the bankruptcy court should have ruled that the Franchise Agreement had been terminated
immediately upon receipt of the prepetition Termination Letter. But the bankruptcy court found
that the Termination Letter was not effective for immediate termination because Rockne’s waited
until the threat had passed before it tried to terminate the Debtor’s Franchise Agreement.3
2The Debtor agreed to operate the Restaurant in conformity with the standards that the Franchisor
prescribed, including “use only such food items, supplies and forms as conform with the Franchisor’s standards and
specifications as contained in the Manuals.” (Franchise Agreement, Art. V.N.1, Ex. A at 9.) Likewise, in Article
V.N.2, the Debtor agreed “[t]o sell or offer for sale only such food items and services as meet Franchisor’s uniform
standards of quality and quantity, . . . and to refrain from any deviation from Franchisor’s products, methods,
techniques, standards and specifications[.]” (Franchise Agreement, Art. V.N.2, Ex. A at 9.)
3The bankruptcy court also hinted that the termination was a pretext since “[o]ther Rockne’s restaurants
sold romaine lettuce during the temporary prohibition, including after receiving three of the four notices that the
Debtor received, and faced no substantive disciplinary action.” (Mem. Decision at 28.) The Panel’s decision is
based solely on its interpretation of Article XIV.A.3 without regard to Rockne’s motivations in seeking termination.
No. 19-8007 In re Mazzola, Inc. Page 8
In essence, the bankruptcy court held that XIV.A.3 is an “emergency” provision, which can
only be utilized for immediate termination while a threat or danger is on-going. Rockne’s argues
the Franchise Agreement does not contain such a requirement. Because this question is a matter
of contract interpretation, the Panel undertakes a de novo review.
Rockne’s argues that the plain language of the provision does not include a timing
requirement. This argument is not persuasive because the converse is also true. The plain
language does not state that the Franchise Agreement can be terminated due to a past danger or
threat. The contract is silent as to whether a threat must be current or on-going to utilize the
provision.
When a contract is silent as to a particular matter, courts use salutary tools of construction to
determine the parties’ intent. “In determining the intent of the parties, the court must read the
contract as a whole and give effect to every part of the contract, if possible.” Beasley v. Monoko,
Inc., 958 N.E.2d 1003, 1011–12 (Ohio Ct. App. 2011) (citing Clark v. Humes, 10th Dist. No.
06AP–1202, 2008 WL 435003 (Ohio Ct. App. Feb. 19, 2008)). Additionally, “[p]arties to any
contract are bound toward one another by standards of good faith and fair dealing.” McLemore
v. McLemore, No. 13802, 1994 WL 579866, at *2 (Ohio Ct. App. Oct. 19, 1994) (citing Bolling
v. Clevepak Corp., 484 N.E.2d 1367, 1376 (Ohio Ct. App. 1984)). Thus, “when a contract is
susceptible to a fraudulent interpretation as well as an honest one, the latter should be
presumed.” Ebie v. Teledyne Indus., Inc., 859 F.2d 152, 1988 WL 98366, at *4 (6th Cir. 1988)
(Table). The Sixth Circuit has affirmed that “‘the implied covenant of good faith is a
construction aid that helps a court determine the intent of the parties; it cannot be used to add
terms to the contract when there is no evidence that the parties intended that those terms be
included.’” Thomasville Furniture Indus., Inc. v. JGR, Inc., 3 F. App’x 467, 472 (6th Cir. 2001)
(quoting Metro Commc’ns Comp. v. Ameritech Mobile Commc’ns, 984 F.2d 739, 743 (6th
Cir.1993)).
Using these rules of contract interpretation, the Panel holds that in order to use Article
XIV.A.3 to terminate the Franchise Agreement without notice and opportunity to cure, the threat
or danger to the public health and safety must be ongoing. This reading allows Rockne’s to
immediately end a franchise relationship where a dangerous situation is present, while honoring
No. 19-8007 In re Mazzola, Inc. Page 9
the contract provisions which require Rockne’s to give notice and an opportunity to cure issues
that are less egregious.
The Franchise Agreement allowed Rockne’s as Franchisor to determine the “health, safety
and hygiene standards and ratings applicable to the operation of the Restaurant and the
management of the personnel as Franchisor may reasonably require.” (Franchise Agreement,
Art. V.K, Ex. A at 9.) The Debtor agreed to operate the Restaurant in conformity with the
standards that the Franchisor prescribed, including to “use only such food items, supplies and
forms as conform with Franchisor’s standards and specifications as contained in the Manuals.”
(Franchise Agreement, Art. V.N.1, Ex. A at 9.) Likewise, the Debtor agreed “[t]o sell or offer
for sale only such food items and services as meet Franchisor’s uniform standards of quality and
quantity, . . . and to refrain from any deviation from Franchisor’s products, methods, techniques,
standards and specifications[.]” (Franchise Agreement, Art. V.N.2, Ex. A at 9.) Thus, by selling
romaine lettuce despite Rockne’s directive not to do so, and from an unauthorized produce
supplier, the Debtor violated the terms of the Franchise Agreement. The breach of these duties
in Article V. is grounds for termination under Article XIV.B. However, under that section,
Rockne’s is required to give notice and an opportunity to cure. Violations of Article V are not
grounds for immediate termination under the contract. Likewise, Article XIV.A.11, which also
addresses quality control standards does not permit termination without written notice of an
opportunity to cure within three days, unless the quality control issue results in a danger to public
health and safety. These provisions demonstrate the parties’ intention that mere quality control
issues would not be a basis for an immediate termination. The parties intended that only a threat
or danger to the public warranted immediate termination, and even then, it is within the
Franchisor’s discretion.
Given the other methods of termination provided in the contract which require notice and an
opportunity to cure, the Panel holds that Article XIV.A.3 was intended to be a tool which
Rockne’s could use to immediately halt operations only when a dangerous situation was created
by the operation of the Franchise. Nothing in Article XIV.A.3, or other sections of the Franchise
Agreement, indicate that a past threat or danger can serve as grounds for immediate termination.
Moreover, no benefit is served by reading Article XIV.A.3 as allowing termination for a no-
No. 19-8007 In re Mazzola, Inc. Page 10
longer existing threat or danger. A past violation that has been remedied does not pose a threat
or danger to the public. Allowing Rockne’s to use the immediate termination clause in such an
instance, like the case before the Panel, would allow Rockne’s to sidestep the notice and
opportunity to cure requirements in Article V of the Franchise Agreement. Such a reading would
render the notice provisions superfluous.
Moreover, the Debtor does not receive a windfall from this interpretation. Repeated
violations can still lead to termination of the Franchise Agreement. Article XIV.A.12 allows for
the termination of the Franchise Agreement without a notice and opportunity to cure if the
Franchisee receives two or more notices of default under Section XIV.B. in any one calendar
year during the term of the agreement whether such defaults are cured after notice. Likewise,
failure to cure a violation can lead to termination.
The Franchise Agreement imposes a reasonableness requirement on the Franchisor. (See
Franchise Agreement, Art. V.K, Ex. A at 9. See also Tr. Jan. 29, 2019, at 117:1-3.) Requiring a
threat or danger to public health and safety to be current or on-going in order to utilize Article
XIV.A.3 to terminate the Franchise Agreement without an opportunity to cure is a reasonable
reading of the contract which allows for termination to avoid an immediate problem without
rendering other provisions requiring notice to be meaningless. The bankruptcy court did not err
in determining that Rockne’s could only invoke Article XIV.A.3 of the Franchise Agreement to
terminate without notice while there was an on-going threat or danger to public health and safety.
Once the threat or danger had passed, the Franchise Agreement required notice and an
opportunity to cure before termination.
CONCLUSION
The bankruptcy court’s factual finding that the Franchise Agreement had not been
successfully terminated prepetition is not clearly erroneous. The bankruptcy court did not err in
denying Rockne’s Motion to Dismiss. The bankruptcy court’s order is hereby AFFIRMED.