The United States Bankruptcy Court for the District of Delaware recently issued an opinion discussing the tension between using bankruptcy as a legitimate tool to maximize value versus using bankruptcy merely as a litigation tactic. In the case, In re Rent-A-Wreck of America, Inc., 580 B.R. 364 (Bankr. D. Del. 2018), Judge Laurie Selber Silverstein interpreted the facts before her to come down firmly on the litigation tactic side of the equation. On that basis, Judge Silverstein dismissed the case as a bad faith filing. Although the circumstances of the case likely are not common among companies contemplating bankruptcy, the case nevertheless provides a stark warning on the limitations of Chapter 11.
The case involved debtors Rent-A-Wreck of America, Inc. (“RAWA”) and its wholly-owned subsidiary Bundy America, LLC. (“Bundy,” collectively with RAWA, the “Debtors”). RAWA was essentially a holding company. Bundy America, LLC was a franchisor that sold and administered car rental franchises across the country. The Debtors were part of a larger group of private companies owned by J.J.F. Management Services, Inc. (“JJFMS”). JJFMS purchased the Debtors in 2006 by acquiring the stock of publically owned RAWA and taking it private. Before the 2006 acquisition even closed, the Debtors found themselves locked in litigation with David Schwartz, who founded the company in 1973. Schwartz operated a Rent-A-Wreck franchise in Los Angeles pursuant to an alleged unwritten franchise agreement between Schwartz and RAWA. The parties thereafter embarked on nine years of litigation regarding the terms of Schwartz’s relationship with the overall franchise enterprise, including two trips to the U.S. Fourth...
