What happens to the assets of the Franchisee in the event of insolvency and liquidation regarding claims from both the Franchisor and Guarantor in a Buona franchise?
Buona Franchise · 2025 FDDAnswer from 2025 FDD Document
Guarantor hereby expressly subordinates any claim Guarantor may have against Franchisee, upon any account whatsoever, to any claim that Franchisor may now or hereafter have against Franchisee.
In the event of insolvency and consequent liquidation of the assets of Franchisee through bankruptcy, by an assignment for the benefit of creditors, by voluntary liquidation, or otherwise, the assets of Franchisee applicable to the payment of the claims of both Franchisor and Guarantor shall be paid to Franchisor and shall be first applied by Franchisor to the amounts due to Franchisor from Franchisee.
Guarantor does hereby assign to Franchisor all claims which they may have or acquire against Franchisee or against any assignee or trustee in bankruptcy of Franchisee; provided however, that such assignment shall be effective only for the purpose of assuring to Franchisor full payment of all amounts due under the Franchise Agreement.
Source: Item 22 — CONTRACTS (FDD page 78)
What This Means (2025 FDD)
According to Buona's 2025 Franchise Disclosure Document, in the event that a franchisee becomes insolvent and their assets are liquidated through bankruptcy, assignment for the benefit of creditors, or voluntary liquidation, the assets will be distributed in a specific order. The assets of the franchisee that are applicable to cover the claims of both Buona (the franchisor) and any guarantor will be paid to Buona first. Buona will then apply these assets to cover any amounts owed to them by the franchisee.
This means that Buona has priority over the guarantor in receiving payments from the franchisee's assets during liquidation. The guarantor's claims are subordinated to Buona's claims, ensuring that Buona is paid first for any outstanding debts. This arrangement protects Buona's financial interests in the event of a franchisee's financial distress.
Furthermore, the guarantor assigns all claims they may have against the franchisee to Buona. This assignment is specifically to ensure that Buona receives full payment of all amounts due under the Franchise Agreement. This provides an additional layer of security for Buona, as they can pursue claims against the franchisee through the guarantor's assigned rights. This clause is typical in franchise agreements to protect the franchisor's financial interests and ensure the stability of the franchise system.