Understand the complexities and nuances of the Bankruptcy Code to better advise clients and prepare for court.
By Daniel Gill
Rent-a-Wreck of America Inc.'s Chapter 11 case was filed in bad faith and for improper purposes, a Delaware bankruptcy judge ruled Feb. 13.
The company filed bankruptcy not to deal with its distressed finances, but as an attempt to thwart a longtime adversary, Judge Laurie Selber Silverstein of the U.S. Bankruptcy Court for the District of Delaware found.
David Schwartz founded Rent-a-Wreck, a car rental business, in 1973.
John J. Fitzgerald came to own the company. Schwartz maintained his franchise in Los Angeles, but without a written franchise agreement and without paying royalties.
That relationship spawned litigation. After two trials and several appeals, the courts decided that Schwartz had a royalty-free franchise agreement to run a Rent-a-Wreck used car business in West Los Angeles for his lifetime, the court said. Fitzgerald spent more than $2.7 million trying to wrest the franchise from Schwartz, it said.
Rent-a-Wreck filed Chapter 11 in July 2017. It filed a motion to reject some executory contracts, including the franchise agreement with Schwartz.
Rent-a-Wreck’s bankruptcy case wasn’t filed in good faith, the court held.
The company didn’t establish that it was insolvent or in financial distress. It didn’t offer any testimony of how it tried to prevent a bankruptcy filing or to make itself more profitable before filing, the court said.
The filing was merely a method to continue to litigate, or to relitigate, Schwartz’s right to the L.A. franchise, the court held.
Rent-a-Wreck was represented by Saul Ewing Arnstein & Lehr LLP. Schwartz was represented by Cohen Seglias Pallas Greenhall & Furman.
The case is In re Rent-a-Wreck of Am., Inc. , 2018 BL 48230, Bankr. D. Del., No. 17-11592 (LSS), 2/13/18 .
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