In re Rent-A-Wreck of Am., Inc.

580 B.R. 364

IN RE: RENT–A–WRECK OF AMERICA, INC., et. al., Debtors.

Case No. 17–11592 (LSS)

United States Bankruptcy Court, D. Delaware.

Signed February 13, 2018

Aaron S. Applebaum, Saul Ewing Arnstein & Lehr LLP, Philadelphia, PA, Christopher Combest, Travis J. Eliason, Faye B. Feinstein, Quarles & Brady LLP, Chicago, IL, Mark Minuti, Saul Ewing Arnstein & Lehr LLP, Wilmington, DE, for Debtors.

Timothy Jay Fox, Jr., Brya Michele Keilson, Office of the United States Trustee, U.S. Department of Justice, Wilmington, DE, for U.S. Trustee.

OPINION ¹

LAURIE SELBER SILVERSTEIN, UNITED STATES BANKRUPTCY JUDGE

In In re Integrated Telecom Express, Inc.² the Third Circuit theorized and rejected the idea that any entity willing to undergo a bankruptcy proceeding could lawfully take advantage of the redistributive provisions of the United States Bankruptcy Code. The Court recognized that provisions like the capping of claims, the discharge of debts and avoidance powers can only be used by financially distressed debtors whose goals further the structure and purpose of the Code, After examining the record in this case under the good faith standard enunciated in this Circuit, I conclude that these bankruptcy cases are concrete examples of the hypothetical cases envisioned by the Third Circuit. Debtors filed these cases because they could. These privately-owned debtors are not in financial distress (or at least they have not proven they are), and they seek to use 11 U.S.C. § 365 to redistribute value from a long-time adversary to enrich their ultimate shareholder. Accordingly, I grant the motion to dismiss these voluntarily filed bankruptcy cases.

I. Background/ Corporate Structure

There are two debtors in these cases: Rent–A–Wreck of America, Inc. ("RAWA"³ ) and its wholly owned subsidiary, Bundy American, LLC ("Bundy," and together with RAWA, "Debtors"). Bundy is in the business of selling and administering franchises for the operation of "Rent–A–Wreck" vehicle rental businesses.⁴ A "Rent–A–Wreck" franchisee operates a car rental business for the value minded customer who is comfortable renting an older model vehicle. As of the filing of the bankruptcy petitions, there were 76 Rent–A–Wreck franchises in 28 states and the country of St. Maarten as well as a master franchisee located in Oslo, Norway, which administers sub-franchises in Iceland, Norway and Sweden.⁵ RAWA is described as "principally" a holding company for its operating subsidiary, Bundy,⁶ but it also runs the reservation system for Bundy and for non-debtor affiliated entities also in the vehicle rental business.⁷ RAWA also provides certain management and backroom services to Bundy and its subsidiaries.⁸

Bundy currently has between four and six wholly owned, non-debtor subsidiaries.⁹ Priceless Rent–A–Car LLC offers vehicle rental franchises under the name of "Priceless" and "NextCar."¹⁰ As of December 12, 2016, there were 35 Priceless franchises and 1 NextCar franchise open and operating in the United States.¹¹ Consolidated American Rental Insurance Company, LTD offers insurance services to Rent–A–Wreck franchisees, and perhaps others.¹² MBRC, LLC is a company owned Rent–A–Wreck franchise located in Baltimore, Maryland.¹³ Embarc Chicago, LLC is no longer in business, but operated a Rent–A–Wreck vehicle rental business at Chicago's Midway airport from November 2011 through November 2015.¹⁴ Rent–A–Wreck Leasing, LLC is described as dormant¹⁵ as is Priceless–Rent–A–Car of Maryland, Inc.¹⁶

RAWA and Bundy are part of a much larger group of private companies owned by J.J.F. Management Services, Inc. ("JJFMS"). JJFMS is "a management company that oversees the property and operations management of automobile dealerships and vehicle rental facilities throughout the Mid–Atlantic States and Florida."¹⁷ JJFMS's primary principal is John J. Fitzgerald, Jr., who is an owner, president, chief executive officer and chairman of the JJFMS board of directors.¹⁸ He is also a director and the chairman of RAWA's board of directors.¹⁹

Mr. Fitzgerald, directly or indirectly, through JJFMS, owns a number of other businesses.²⁰ For example, one of his entities, All Car Leasing, Inc., trades under the name NextCar All Vehicle Rental, and operates 16 vehicle rental businesses.²¹ All Car Leasing and Bundy share, at a minimum, office space and a website, and it would appear that Debtors and various non-debtor entities share some backroom services provided by RAWA.²² There are intercompany allocations among Debtors and non-debtor entities, but there is no written document memorializing the sharing arrangement.²³ Further, in May, 2017 (shortly before the bankruptcy filing), Bundy sold KFL, LLC to JJFMS for $180,000, which Debtors state exceeded the appraised value of that asset.²⁴ KFL, LLC leases (or can lease) vehicles to Rent–A–Wreck franchisees, and perhaps others.²⁵

Each of RAWA's officers and directors (other than Steven Looney who was appointed to the board after the bankruptcy filing) is associated with JJFMS.²⁶ Bill Cash (director and president) is also an owner of JJFMS.²⁷ Gregg J. Steinbarth (director and assistant secretary) is a director, the assistant secretary and general counsel of JJFMS.²⁸ Michael DeLorenzo (director, vice president and secretary) manages All Car Leasing.²⁹ Ronald Jaffe (treasurer/assistant secretary) is the Chief Financial Officer of JJFMS.³⁰ And Jason Manelli (vice president of marketing and communications) serves in a marketing capacity for All Car Leasing.³¹ Each of these relationships with JJFMS or Mr. Fitzgerald predate JJFMS's acquisition of RAWA.³²

II. Brief History of Debtors' Litigation with David Schwartz and their Relationship

JJFMS did not always own RAWA and Bundy.

Rent–A–Wreck began as the baby of David Schwartz, who first started using the name "Bundy Rent–A–Wreck" in 1973 in connection with his auto sales business in Los Angeles.³³ While the history of the business and the Rent–A–Wreck trademark is lengthy, for purposes of this decision it is enough to say that in 1977, Mr. Schwartz and another investor created the predecessor to Bundy for the purpose of offering Rent–A–Wreck franchises; the Rent–A–Wreck mark was assigned to Bundy; and the Los Angeles County territory was excepted from the assignment.³⁴ Years (and many developments) later, Bundy, now a wholly owned subsidiary of then-publically owned RAWA, ran the Rent–A–Wreck franchise system and managed the Rent–A–Wreck mark in all locations except Los Angeles.³⁵ The relationship between RAWA and Mr. Schwartz was "somewhat unorthodox."³⁶ There was never a formal, executed franchise agreement, and while RAWA imposed certain requirements upon its franchisees, Mr. Schwartz did not abide by those requirements at his Los Angeles location.³⁷

In 2006, JJFMS completed the purchase of all outstanding RAWA stock and took RAWA private.³⁸ Even before the sale closed, however, Mr. Schwartz filed two lawsuits against RAWA challenging the sale.³⁹ In October, 2006, RAWA (now owned by JJEMS) wrote Mr. Schwartz demanding that he either provide evidence of a franchise agreement or that he stop holding himself out as a RAWA franchisee.⁴⁰ RAWA later removed the Los Angeles location from its website.⁴¹

On June 25, 2007, Mr. Schwartz sued RAWA, Bundy and JJFMS commencing the Maryland District Court Litigation presided over by the Honorable Peter J. Messitte.⁴² Mr. Schwartz sought a declaratory judgment that he had a royalty-free Rent–A–Wreck franchise pursuant to a 1985 agreement between himself, RAWA and Bundy as well as specific performance of that agreement.⁴³ Alternatively, Mr. Schwartz contended that he had an implied-in-fact contract based on a course of conduct between 1977 and 2007.⁴⁴ RAWA and Bundy asserted counterclaims, including a request for a declaration that any franchise agreement could be terminated or that any exclusive franchise agreement was an unlawful restraint on trade.⁴⁵

After two jury trials, motions for judgment notwithstanding the verdict, and two Fourth Circuit decisions, it has been determined that Mr. Schwartz has an implied-in-fact royalty and fee-free franchise agreement to run a Rent–A–Wreck used car rental business in West Los Angeles for his lifetime. The exact terms of the implied franchise agreement are undetermined.⁴⁶ Mr. Schwartz does not need to comply with RAWA's fleet requirements.⁴⁷ RAWA must keep the Los Angeles location on its website.⁴⁸ And, an order in the Maryland District Court Litigation provides: "[RAWA's] Call Center shall in no way attempt to dissuade prospective customers from connecting with [Mr. Schwartz's] business or in any way attempt to divert business from Plaintiffs' exclusive business territory to other franchises."⁴⁹ But, otherwise, the obligations of the parties to each other are unsettled.⁵⁰ In its March 10, 2015 Opinion upholding the District Court's judgment after the second jury verdict, the Fourth Circuit states: "the jury found that RAWA could exercise some control over Schwartz, but neither the jury nor the district court defined the contours of that control.... If the parties continue to disagree over how much control RAWA can exercise over Schwartz, they are free to resolve that disagreement through, for example, private negotiations or a state-law breach-of-contract action."⁵¹

Since Schwartz II , the interactions between the parties remain strained. Mr. Schwartz does not participate in required RAWA programs or non-required, authorized programs. He does not participate in focus groups with other employees and has "unsubscribed" from RAWA emails. Mr. Schwartz has three of his own websites that are not linked to the RAWA website and RAWA believes that Mr. Schwartz is not using RAWA's web-based reservation system.⁵²

For its part, RAWA only protracted the litigation. For example, the Clerk of the Maryland District Court taxed certain costs of the Schwartz litigation to RAWA, but RAWA did not pay those costs until Judge Messitte inquired into the...