When Your Franchisee Files for Bankruptcy: What Every Franchisor Needs to Know Right Now

The ARC Burger story is a franchisor’s worst-case scenario. ARC Burger LLC, once one of Hardee’s largest franchisees with 77 locations across nine states, filed for Chapter 7 liquidation on April 20, 2026, in the Northern District of Georgia, reporting over $29 million in total liabilities. The collapse came after Hardee’s terminated the franchise agreement in September 2025, sued ARC in November 2025 for $6.5 million in unpaid royalties, advertising fees, and rent obligations, and watched the franchisee shut down all 77 locations. ARC isn’t alone: Sailormen (130+ Popeyes locations), Neighborhood Restaurant Partners Florida (53 Applebee’s), and a 65-unit Carl’s Jr. franchisee all filed in the first months of 2026. Overall, commercial bankruptcies increased 14% in Q1 2026 compared to Q1 2025, per the American Bankruptcy Institute. Commercial Chapter 11 filings specifically surged 37% in Q1 2026. Franchisee bankruptcies are no longer a fringe risk — they are an operating reality for every franchisor.

As soon as a franchisee files for bankruptcy, the automatic stay under 11 U.S.C. § 362 goes into effect. This means a franchisor cannot terminate the franchise agreement for pre-petition defaults — missed royalties, brand standard violations, or anything else — without first getting permission from the bankruptcy court. Even if your franchise agreement includes a clause stating that the agreement automatically terminates upon a bankruptcy filing, the Bankruptcy Code renders those “ipso facto” clauses unenforceable. You are, in effect, frozen in the relationship until the court says otherwise.

In ARC Burger, these dynamics are already front and center: United Community Bank has moved for relief from the automatic stay under section 362(d) to proceed against its collateral, arguing it is substantially under secured and not adequately protected, with a hearing set for June 17, 2026. At the same time, a landlord, Sawtooth Center L.L.C., has asked the court either to compel the chapter 7 trustee to promptly assume or reject a long-term Hardee’s restaurant lease in Billings, Montana under section 365(d)(4), or, alternatively, to grant stay relief so it can terminate the lease and relet the site. For franchisors. The takeaway is that once a large franchisee files, secured lenders and landlords will move quickly to protect their own positions, and you should expect and plan for similar stay-relief and assumption/rejection skirmishes in any franchise bankruptcy.

Regarding ARC Burger, Hardee’s actually did something right: it terminated the franchise agreement in September 2025, prior to the April 2026 bankruptcy filing. That gave Hardee’s the ability to argue the franchise relationship had already ended and to actively seek new operators for the vacated locations. Hardee’s has announced plans to assume ownership and reopen more than 40 of the former ARC locations as corporate-owned restaurants, with nearly two dozen already reopened in Georgia, South Carolina, and Mississippi. Simply stated, franchisors who monitor financial distress and act decisively to terminate pre-petition are in a stronger position than those who wait and find themselves frozen by the automatic stay after a filing.

Bankruptcy courts generally treat active franchise agreements as “executory contracts,” meaning both sides still have material obligations to perform. Under Section 365 of the Bankruptcy Code, the franchisee debtor has the right to assume or reject that agreement, subject to curing all pre- and post-bankruptcy defaults — including past-due royalties. To assume the franchise agreement, the debtor must also provide adequate assurance of future performance. If the debtor rejects the agreement, the contract is treated as breached as of the bankruptcy filing date. The franchisor’s only remaining remedies are to file claims in the bankruptcy and to seek relief from the bankruptcy automatic stay to terminate the agreement in accordance with the terms of the agreement.

A franchisee can potentially assign a franchise agreement under Section 365(f) of the Bankruptcy Code, even over the franchisor’s objection, as long as the proposed assignee provides “adequate assurance of future performance,” demonstrating financial ability, operational experience, and commitment to brand standards. Anti-assignment provisions in your franchise agreement are generally unenforceable in bankruptcy. This means a bankruptcy judge could hand your brand’s location to an operator you never approved.

What Franchisors Should Do Now

Proactive preparation is the best defense against being strangled by a drawn out bankruptcy proceeding. Franchisors should:

• Review franchise agreements now to ensure termination-for-default provisions are properly drafted and enforceable outside of bankruptcy — before a crisis hits.
• Monitor franchisee financial health closely so that pre-petition termination remains a viable option, as Hardee’s demonstrated with ARC Burger.
• File a timely proof of claim to protect royalty and fee claims in any pending bankruptcy case.
• Engage experienced franchise bankruptcy counsel immediately upon notice of a filing to evaluate whether to seek relief from the automatic stay based on brand standard violations, quality control failures, or trademark harm.

Deadlines are set early in bankruptcy cases. The window to act is often short and the consequences of inaction may be significant.