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6-07.VYLENE [impl. covenant to negotiate franchise renewal].doc

Stipulation, and assumed the remainder of the franchise through December 31, 1985, as a debtor in possession.   With regard to Vylene's right to renew the franchise contract, paragraph three of the order provided that the "issue of the franchisee's right to extend the franchise for an additional eight (8) year period is reserved for decision if and when the Debtor gives the Creditor Naugles, Inc. the required notice as per the Franchise Agreement."

In October 1985, approximately two months prior to the end of the ten-year term of the franchise agreement, Vylene notified Naugles of its desire to extend the franchise.   Naugles mailed to Vylene its offer to extend the franchise.   Vylene's attorney rejected the offer arguing that Naugles' proposal was "so *1474 obviously onerous that no one could operate the business except at a loss."

On November 23, 1985, Naugles opened a new company-owned restaurant approximately 1.4 miles from Vylene's location.   The new restaurant offered a new menu which differed from the menu offered at Vylene's restaurant in that it offered smaller portions at a lower price.   The new restaurant also gave out coupons which were redeemable at participating Naugles restaurants.   Vylene did not participate in the coupon program.   It is undisputed that the new restaurant had a negative impact on Vylene's sales.

On December 30, 1985, one day prior to the expiration date of the franchise agreement, Vylene filed an adversary proceeding against Naugles in bankruptcy court asserting claims for relief based on Naugles' alleged refusal to negotiate for an extension of the franchise agreement and other alleged misconduct concerning the performance of the agreement.   Naugles' answer to the complaint alleged that the proceeding was a non-core proceeding and stated that it did not consent to the jurisdiction of the bankruptcy court.   Naugles also filed counterclaims for trademark violations, unfair competition, misappropriation of trade secrets, and for possession of the real property held by Vylene under sublease from Naugles.   Naugles then moved for a preliminary injunction to prevent Vylene from continuing to use Naugles' federally registered trademarks.   While the motion for injunction was under submission, Naugles moved for relief from the automatic stay in order to pursue repossession of the franchise.

The bankruptcy judge held that Naugles' counterclaims and motion for preliminary injunction concerned the continued use of property by the debtor, and thus the case

Seg. 6, item 7 (2007)

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