November, 2009

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SBA Franchise Page

Wednesday, November 18th, 2009

This link http://www.sba.gov/smallbusinessplanner/start/buyafranchise/index.html
has a wealth of information related to purchasing a franchise, sponsored by the U.S. Small Business Administration (SBA).

At the link you will find an overview of what franchising is and some tips on purchasing a franchised business; a Consumer Guide to Purchasing a Franchise; links to the American Franchisee Association (AFA) and International Franchise Association (IFA); two Frequently Asked Question pages; and a Guide on how to purchase an existing franchise from a franchisee.

This is an excellent source for persons seeking information on the world of franchising.

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Beneficiary’s Right to Demand an Accounting of a Trust

Tuesday, November 17th, 2009

The Maryland Court of Special Appeals in Johnson v. Johnson, interpreting Maryland Code section 14-405, supports the position of the beneficiaries of an A/B Trust to demand an annual accounting of all receipts and disbursements from both Trust A and Trust B. Upon demand by any beneficiary, the Trustee must provide an accounting of both Trusts. The Court held:

Because James has a future interest in the Trust, despite the uncertainty of his actually benefitting from that future interest, we hold that he is entitled to an accounting from the Trustee. Maryland Code (1974, 2001 Repl. Vol.), § 14-405(j)(1) of the Estates and Trust Article (“ET”) lists several categories of people who are permitted to request an accounting of trust property and transactions. The relevant parties included in the list are “The beneficiary or the beneficiary’s legal representative.” ET § 14-405(j)(1)(ii). In response, “(2)The trustee shall provide a written accounting of all trust property and trust transactions for the previous year, or for a longer period if needed for tax purposes, upon request by and at reasonable times to a person authorized in paragraph (1) of this subsection.” ET § 14-405 (j)(2). In In re Clarke’s Will, 198 Md. 266, 81 A.2d 640 (1951), the Court of Appeals expounded on who was permitted to request an accounting. The Court stated that, “[i]f the petitioner has any interest at all he is entitled to invoke the court’s protection.” Id. at 273 (citations omitted). The Court continued by explaining that “[t]he mere fact that future interests are involved will not defeat the power to declare rights . . . .” Id.

When last confronted with this issue, we relied on In re Clarke’s Will, 198 Md. 266, 81 A.2d 640, Austin W. Scott and William Fratcher’s The Law of Trusts, and George Bogert’s Treatise on the Law of Trusts and Trustees and we held that “[t]he fact that a beneficiary has only a future interest . . . does not preclude him from compelling the trustee to account.” Jacob v. Davis, 128 Md. App. 433, 448, 738 A.2d 904 (1999).

With regard to the request for an accounting of Trust A, in addition to Trust B, the Court held:

Alternatively, Catherine contends that if James is entitled to an accounting, it should be limited to Trust B. We disagree and conclude that James can request an accounting of the entire Trust. While his interest in Trust B is more defined, he has an interest in Trust A and how Catherine manages it. While Catherine is living, she has access to both trusts and the management of Trust A potentially affects the proceeds available for Trust B. In short, the trusts are inextricably linked and limiting James’s right to an accounting of Trust B will not satisfy the Trustee’s legal responsibility to him.

We now adopt this reasoning and conclude that a trustor cannot, by including limitations in the Trust instrument, circumscribe the trustee’s duty to account to beneficiaries. This conclusion is in line with recognized Maryland law regarding trusts and accountings.

The relevant portion of Maryland Code § 14-405 – Administration by Trustee, states as follows:

(j) Accountings — In general. —

(1) The following persons in the order listed may request an accounting of trust property and transactions:

(i) The transferor or the transferor’s legal representative;

(ii) The beneficiary or the beneficiary’s legal representative;

(iii) The guardian of the person of the beneficiary;

(iv) An adult member of the beneficiary’s family or that family member’s legal representative; or

(v) A person interested in the trust property or a person interested in the welfare of the beneficiary, either of whom the court determines to have a legitimate interest.

(2) The trustee shall provide a written accounting of all trust property and trust transactions for the previous year, or for a longer period if needed for tax purposes, upon request by and at reasonable times to a person authorized in paragraph (1) of this subsection.

Interestingly, the Maryland Court of Appeals granted certiorari and agreed to hear an appeal of the Johnson v. Johnson case. Stay tuned!

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Five Questions Every Franchise Owner Should Ask

Monday, November 2nd, 2009
Questions

Questions

Every franchisee, before purchasing a franchise, receives from the franchisor a Federal Disclosure Document (“FDD”), which includes the franchise agreement that will eventually be executed by the franchisor and franchisee. This article contains five questions every franchisee should ask when reviewing a franchise agreement.

  1. Minimum Royalty Fees. Does the franchise agreement require the payment by the franchisee of minimum monthly or yearly royalty fees, regardless of the amount of actual revenue the franchisee generates? At the end of a month or year, a franchisee may have to write the franchisor a check to cover the minimum franchise fee if the royalty fee paid by the franchisee fell short of the minimum royalty fee called for in the franchise agreement. This is certainly a fact that all franchisees must be aware of prior to execution of the franchise agreement.
  2. Termination by Franchisee. Does the franchise agreement allow the franchisee to terminate the agreement without cause, or upon a material breach of the agreement by the franchisor? A franchisee’s right to terminate the franchise agreement is arguably the most important right granted to a franchisee, since a franchisee may be able to terminate an agreement if its business gets into financial trouble or if the franchisor fails to comply with its obligations under the franchise agreement. The right to terminate will also permit a distressed franchisee to avoid the fees and other obligations owed to the franchisor before disaster strikes.
  3. Post-Termination Non-Competition Covenant. Does the franchise agreement contain a post-termination covenant not-to-compete, and if so, is it reasonable? A post-termination covenant not-to-compete is the franchisor’s attempt to prohibit a franchisee from competing with the franchisor during the period immediately following termination or expiration of the franchise agreement. Courts across the country have held that in order to be enforceable, a non-competition covenant must be reasonable in scope and duration. In other words, a non-compete that prohibits competition for 10 years, or across the entire United States, will most likely be held unreasonable and therefore unenforceable. A franchisee must pay careful attention to the language of a non-compete prior to signing.
  4. Dispute Resolution. Carefully review the franchise agreement to determine exactly how and where disputes with the franchisor must be resolved. With regard to how, some franchise agreements call for arbitration, others litigation, and some a mix of both procedures. With regard to where, most franchise agreements call for dispute resolution in the home jurisdiction of the franchisor. Some but not all state laws allow the franchisee to sue or arbitrate in its home state, regardless of what the franchise agreement says. Because of the added expense a franchisee must bear in the event of a dispute being held in a place other than the franchisee’s home state, a franchisee whose state does not add such a protection must be aware of this fact and possibly add language allowing the franchisee to sue or arbitrate in its home state.
  5. Territory. Some franchise agreements grant a franchisee an “exclusive” territory. This means that the franchisee is protected from competition from other franchisees and the franchisor as well inside this exclusive territory. Most franchisees view a protected territory as a must, believing that such market protection will allow the franchisee’s business to flourish. With that in mind, read the “Territory” section carefully in order to determine exactly what is being granted. Can the franchisor compete with the franchisee in the territory? Are there development or sales quotas that must be met in order to retain exclusive territory status? Can supermarkets or other wholesalers compete with the franchisee? These and other questions must be answered to gain a complete understanding of the issue.

Interested in Learning More? Have  Questions?

Contact Raymond McKenzie at 301-330-6790 or ray@mckenzie-legal.com

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