Rent-A-Wreck of America Inc. has filed for Chapter 11 bankruptcy in Delaware, saying lengthy and costly litigation with the company's founder had strained its liquidity and forced it into restructuring as operational losses mounted, according to a report by Law360.
Gregg Steinbarth, Rent-A-Wreck director and general counsel, said that the company began experiencing serious issues following its 2006 acquisition by JJF Management Services Inc. that included lawsuits brought by the company's founder David Schwartz.
"The costs of defending the Schwartz litigation, which lasted almost a decade, have consumed funds that could have been reinvested in the business," Steinbarth said of the lawsuits.
The acquisition and resulting litigation also came just before the 2008 recession, which stalled the expansion of Rent-A-Wreck's franchise network because financing options to purchase rental fleets became limited for potential franchisees, according to the report.
The litigation, which ended after two trials in Maryland federal court and two appeals to the Fourth Circuit, resulted in a court determination that Schwartz was entitled to own and operate, for the rest of his life, an exclusive Rent-A-Wreck franchise based near Los Angeles International Airport without paying any royalties or fees to the debtor. Steinbarth says Schwartz's franchise is too small to operate in that territory and that it uses the debtor's services without having to pay for them.
Schwartz also won a sanction’s fight against the debtor last month pursuant to which Rent-A-Wreck had to pay more than $80,000 for failing to list Schwartz's franchise on its website or via its phone call center, says the report.
The litigation originated after the 2006 acquisition of the company, with Schwartz alleging the debtors had no legal rights to use the Rent-A-Wreck name and trademarks, and that it improperly terminated his Los Angeles franchise.
Rent-A-Wreck has spent $2.7 million in legal fees and expenses defending the Schwartz litigation over the past 10 years, according to the report.
"[G]iven the long and difficult history of the parties and the fact that the Schwartz franchise derives from an unwritten franchise agreement, debtors believe that there remains a continuing risk of costly litigation with Schwartz," the declaration said.
The company came to court with about $3 million in secured debt held by its sole equity holder, JJF Management Services, and a plan to right-size its franchise network by eliminating underperforming locations.
Steinbarth said the most valuable assets held by the debtor are the Rent-A-Wreck trademarks, which are only valuable to the extent the businesses using them are viable and successful. The company is plagued by franchises with fleets that are too small to provide any financial benefit to the debtor, frequently costing more to operate than they earn, according to the declaration.
"Debtors therefore filed these Chapter 11 cases to ease the strain on their cash flow ... while they restructure and right-size the Rent-A-Wreck franchise network and internal business operations, eliminating underperforming and non-performing Rent-A-Wreck franchises," Steinbarth wrote.
The restructuring will allow the debtor to put more focus on its healthy franchises and bolster the inherent value in the Rent-A-Wreck name, as well as position the remaining locations for success after emerging from administration, he said.
The debtor is seeking $750,000 in debtor-in-possession financing from JJF to fund its operations throughout the bankruptcy, according to court documents, with $100,000 being requested on an interim basis.
A first-day hearing on the DIP motion and other requests for relief is scheduled for 11 a.m. on Friday July 28 in Wilmington before U.S. Bankruptcy Judge Laurie Selber Silverstein.
Representatives for Rent-A-Wreck declined immediate comment to Auto Rental News.
Schwartz founded Rent-A-Wreck in 1977 as an alternative to expensive car rental agencies by offering used cars to consumers for their rental needs. The company went public in 1985 and was acquired by JJF in 2006. There are currently 76 Rent-A-Wreck franchises in 28 states and on the island of St. Maarten. A master franchisee in Oslo, Norway, administers subfranchises in Iceland, Norway, and Sweden.
The company sustained more than $4 million in net operating losses as of 2015 as a result of the costly litigation with Schwartz and its underperformance during and following the 2008 recession, according to the report.