Bankruptcy Court permits assumption of Hampton Inn franchise agreement despite property improvement defaults

A recent decision from the United States Bankruptcy Court for the Southern District of Ohio—In re Welcome Group 2, LLC, 2025 WL 3230487 (Bankr. S.D. Ohio Nov. 19, 2025)—addresses whether a hotel franchisee operating as a debtor in chapter 11 bankruptcy may assume its franchise agreement with its franchisor despite certain monetary and nonmonetary defaults related to a property improvement plan (PIP). The ruling provides important guidance for franchisors and franchisees navigating assumption of franchise agreements in bankruptcy—particularly where nonmonetary defaults are at issue.

Hilliard Hotels, LLC (Franchisee), operates a Hampton Inn under a franchise agreement with Hilton Franchise Holding LLC (Franchisor). As part of the agreement, Franchisee was required to complete a PIP within a specified period, which was subsequently extended by Franchisor. Franchisee failed to complete the PIP by both the initial and modified deadlines and also accrued unpaid pre-bankruptcy franchise fees. After filing for chapter 11 protection, Franchisee sought to assume the franchise agreement and cure its monetary and nonmonetary defaults pursuant under the provisions of the United States Bankruptcy Code.

Franchisor opposed assumption and moved for relief from the automatic stay, arguing that the PIP default was incurable, that the franchise agreement could not be assumed without Franchisor’s consent, and that Franchisee’s noncompliance harmed the Hilton brand and intellectual property interests.

The bankruptcy court denied Franchisor’s motion for relief from the automatic stay and authorized Franchisee’s assumption of the franchise agreement in bankruptcy.

The bankruptcy court’s analysis focused on several key issues:

• Business Judgment

The court deferred to Franchisee’s business judgment (which is the standard for assessing assumption of a contract by a debtor in bankruptcy), finding that assumption of the franchise agreement would benefit the bankruptcy estate by increasing occupancy and average daily rates post-PIP completion.

• Materiality and Economic Harm of the Default

The bankruptcy court rejected Franchisor’s argument that the PIP default was a material, incurable breach prohibiting assumption. The court adopted the view that only material or economically harmful nonmonetary defaults bar assumption under the Bankruptcy Code and found that the PIP default did not meet that threshold.  For instance, the court found that:

• Franchisor had knowingly entered into the franchise agreement with Franchisee with a three-year PIP completion window, indicating that immediate compliance was not essential to the contract’s essence.
• Despite the PIP default, Franchisee maintained high customer ratings and continued to generate revenue from the hotel, undermining Franchisor’s claims of brand harm.
• Franchisor continued to work with Franchisee post-default, granting extensions and approving renovation plans, and never issued a termination notice prior to bankruptcy (so the franchisee agreement remained in place as of the bankruptcy filing).
• No evidence was presented indicating that Franchisor suffered substantial economic detriment as a result of the PIP default.

• Time Periods for Curing Monetary and Nonmonetary Default

Franchisee proposed to cure the monetary default (unpaid franchise fees of $133,699.99) within seven to thirty days after plan confirmation, and to complete the PIP within fourteen to twenty-four months. The court found these cure periods reasonable and prompt under the circumstances, noting Franchisee’s ongoing efforts and substantial expenditures ($1.5 million to date) toward PIP compliance.

• Adequate Assurance of Future Performance

The bankruptcy court found that Franchisee demonstrated access to sufficient funds ($360,000–$410,000 in liquid assets, plus anticipated investor contributions of at least $1 million) to complete the PIP and cure the defaults. The court also noted that Franchisee was current on post-petition franchise obligations and had a track record of successfully completing similar property improvement plans. The court concluded that future performance was “more probable than not.”

• Compensation for Pecuniary Loss

Franchisor claimed entitlement to attorney fees and costs as actual pecuniary loss but failed to present evidence or amend its proof of claim to substantiate these amounts. The court reserved the issue for later determination but did not find it a bar to assumption.

Conclusion

The decision underscores that nonmonetary defaults, even if technically incurable, do not necessarily preclude assumption in bankruptcy unless they are material or cause substantial economic harm. Franchisors should be aware that ongoing cooperation and lack of enforcement actions may undermine arguments that such defaults are material. Franchisees, on the other hand, must provide credible evidence of their ability to cure defaults and perform in the future to satisfy the relevant requirements for assuming franchise agreements under the Bankruptcy Code. Facts matter; and the franchisee in this case was able to provide sufficient facts and testimony to support assumption.

This case serves as a reminder that bankruptcy courts will closely scrutinize the nature and impact of defaults, the parties’ course of dealing and a debtor’s proposed cure and future performance when determining whether assumption of a franchise agreement is warranted. 

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