In re Rovine Corp.

Rovine Corporation (debtor) filed for Chapter 11 bankruptcy but continued operating its business as a debtor-in-possession. Rovine was a franchisee of Burger King Corporation (BK) under a franchise agreement that allowed Rovine to use BK’s systems, service marks, and trademarks in exchange for a franchise fee. The franchise agreement obligated Rovine to pay royalties to BK and contained a noncompete covenant obligating Rovine not to compete with BK during the agreement’s term and for a certain time after the agreement ended. The franchise agreement obligated BK to maintain BK’s reputation and provide advising and consulting services to Rovine regarding the operation of Rovine’s restaurant. During the bankruptcy proceeding, Rovine rejected the franchise agreement as an executory (i.e., not fully performed) contract under 11 U.S.C. § 365(d). BK filed a complaint in the bankruptcy court seeking a temporary injunction to enforce the franchise agreement’s noncompete covenant. The bankruptcy court denied BK’s request, finding that (1) the noncompete covenant was executory in nature, (2) Rovine had rejected the noncompete covenant by rejecting the franchise agreement, and (3) because of the rejection, Rovine and its bankruptcy estate were not bound by the noncompete covenant’s obligations. BK sought reconsideration, arguing that the noncompete covenant was not an executory contract because the covenant was fully executed. BK also argued that the franchise agreement as a whole was not an executory contract because the grant of a franchise should be treated like a license, such that BK had materially performed once it granted the franchise to Rovine. In analyzing BK’s reconsideration request, the bankruptcy court considered whether the entire franchise agreement was an executory contract subject to rejection by Rovine and, if so, whether Rovine’s rejection of the agreement meant that Rovine was no longer bound by the noncompete covenant.