Pizza Hut Filing Sept 20

Case 20-33353 Document 641 Filed in TXSB on 09/18/20 Page 1 of 35
IN THE UNITED STATES BANKRUPTCY COURT

FOR THE SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
In re: ) Chapter 11
)
NPC International, Inc., et al.,1 ) Case No. 20-33353 (DRJ)
)
) (Jointly Administered)
)
Debtors. ) Re: Docket No. 510
______________________________________________________________________________
LIMITED OBJECTION OF PIZZA HUT, LLC TO MOTION OF DEBTORS FOR

ENTRY OF ORDERS (I)(A) APPROVING BID PROCEDURES FOR SALE OF
DEBTORS’ ASSETS, (B) SCHEDULING AUCTION FOR AND HEARING TO
APPROVE SALE OF DEBTORS’ ASSETS, (C) APPROVING FORM AND MANNER
OF NOTICE OF SALE, AUCTION, AND SALE HEARING, (D) APPROVING
ASSUMPTION AND ASSIGNMENT PROCEDURES, AND (E) GRANTING RELATED
RELIEF AND (II)(A) APPROVING SALE OF DEBTORS’ ASSETS, (B) AUTHORIZING
ASSUMPTION AND ASSIGNMENT OF EXECUTORY CONTRACTS AND
UNEXPIRED LEASES, AND (C) GRANTING RELATED RELIEF
Pizza Hut, LLC (“Pizza Hut”), by and through its undersigned counsel, hereby files
this limited objection (the “Objection”) to the Motion of the Debtors for Entry of Orders
(I)(A) Approving Bid Procedures for Sale of Debtors’ Assets, (B) Scheduling Auction for Hearing
and Hearing to Approve Sale of Debtors Assets, (C) Approving Form and Manner of Notice of
Sale, Auction, and Sale Hearing, (D) Approving Assumption and Assignment Procedures, and
(E) Granting Related Relief and (II)(A) Approving Sale of Debtors’ Assets, (B) Authorizing
Assumption and Assignment of Executory Contracts and Unexpired Leases, and (C) Granting
Related Relief [Docket No. 510] (the “Motion”). In support of this Objection, Pizza Hut relies
upon the Declaration of J. Charles Short in Support of Limited Objection of Pizza Hut, LLC to
1
The debtors in the above-referenced chapter 11 cases (the “Debtors”), along with the last four digits of each Debtor’s
federal tax identification number, are NPC International, Inc. (7298); NPC Restaurant Holdings I LLC (0595); NPC
Restaurant Holdings II LLC (0595); NPC Holdings, Inc. (6451); NPC International Holdings, LLC (8234); NPC
Restaurant Holdings, LLC (9045); NPC Operating Company B, Inc. (6498); and NPC Quality Burgers, Inc. (6457).
The Debtors’ corporate headquarters and service address is 4200 W. 115th Street, Suite 200, Leawood, KS 66211.
Motion of the Debtors for Entry of Orders (I)(A) Approving Bid Procedures for Sale of Debtors’
Assets, (B) Scheduling Auction for Hearing and Hearing to Approve Sale of Debtors Assets,
(C) Approving Form and Manner of Notice of Sale, Auction, and Sale Hearing, (D) Approving
Assumption and Assignment Procedures, and (E) Granting Related Relief and (II)(A) Approving
Sale of Debtors’ Assets, (B) Authorizing Assumption and Assignment of Executory Contracts and
Unexpired Leases, and (C) Granting Related Relief (the “Short Declaration”), which is being filed
contemporaneously herewith and is incorporated herein as if set forth in full. In further support of
this Objection, Pizza Hut respectfully represents as follows:
PRELIMINARY STATEMENT2
1. By the Motion, the Debtors seek to (1) complete the Wendy’s sale process that they
began pre-petition, to which Pizza Hut has no objection, and (2) run a skewed bidding process for
the Pizza Hut Assets. As contemplated, the Pizza Hut sale process misses a critical opportunity to
maximize value for the estate and is predestined to mire the Debtors, the Ad Hoc Group, and Pizza
Hut in litigation regarding a franchisor’s fundamental consent right to establish a mutually-aligned
relationship with its franchisee. That is because the Bidding Procedures reflect a key
misunderstanding regarding the value that underlies the Debtors’ (and any franchisee’s)
business—the brand’s trademark. The Debtors have nearly unfettered discretion and authority to
sell their personal property, real estate interests, and the corporate structure that underlie their
businesses. However, the Debtors hold a mere license to use the Pizza Hut brand, and that license
comes with certain strings attached. For good reason—Pizza Hut is the steward of the brand
name. Pizza Hut takes this stewardship seriously by, among other things, creating and enforcing
2
Capitalized terms not otherwise defined herein shall have the meanings ascribed to such terms the Short Declaration
or the Debtors’ proposed Bid Procedures, located at Docket No. 510-1, as applicable.
2
brand standards, marketing Pizza Hut products nationwide, and approving franchisees who will
represent Pizza Hut’s iconic trademarks with pride to the betterment of the entire system. Indeed,
the Pizza Hut brand represents the core value of more than 100 franchisees’ businesses in the
United States and many more across the world; it creates jobs for tens of thousands of people; and
Pizza Hut is committed to protecting it fiercely. Those franchisees rely on Pizza Hut and one
another, especially the Debtors, who hold approximately 20% of the total traditional Pizza Hut
restaurant footprint in the United States, to succeed. As a result, while what is at stake for the
Debtors is of course central to these cases, Pizza Hut must enforce its contractual rights, including
its consent rights in the context of the proposed sale of the Pizza Hut Assets, to protect the brand
and the broader Pizza Hut system.
2. For these reasons and others set forth herein, Pizza Hut is compelled to point out to
this Court certain critical infirmities in the proposed Bidding Procedures. To be clear, Pizza Hut
is fully supportive of a sale process that maximizes value for stakeholders in these cases. However,
this process must take place within the guardrails of the Debtors’ contractual obligations and
provide potential bidders with a full and fair opportunity to participate.
3. Any successful franchise depends on the mutually-beneficial partnership between
franchisor and franchisee. “At its core, franchising is about the franchisor’s brand value, how the
franchisor supports its franchisees, how the franchisee meets its obligations to deliver the products
and services to the system’s brand standards and most importantly – franchising is about the
relationship that the franchisor has with its franchisees.”3 The relationship is one of “mutual
interdependence and reliance” that requires cooperation and commitment from the outset: “In the
3
What is a Franchise?, INTERNATIONAL FRANCHISE ASSOCIATION, https://www.franchise.org/faqs/basics/what-is-a-
franchise (last visited Sept. 11, 2020) (emphasis added).
3
very beginning, the franchisor must communicate to the prospective franchisee what the mission,
goals, and vision of the franchise system are and the route the franchise system must take to achieve
them. If the prospective franchisee purchases a franchise without this knowledge, then the
relationship is off to a rocky start.”4
4. With this bedrock principle top of mind, Pizza Hut has a fundamental interest in
ensuring that the Debtors’ Bid Procedures allow for the appropriate time, communication, and
structure to identify and secure franchisees who will operate as strong partners in keeping with
Pizza Hut’s brand standards. A fairly-designed sale process will both maximize value for creditors
and ensure that NPC’s Pizza Hut restaurants can achieve long-term success with high-quality
operational performance and exceptional customer experiences, which will benefit all of the
Debtors’ stakeholders and parties in interest.
5. The most critical flaw of the Debtors’ Bid Procedures is that they ignore the
fundamental importance of the franchisor-franchisee relationship. By failing to recognize and
incorporate Pizza Hut’s consent rights – both in the context of the Bid Procedures and more broadly
in an RSA that allows a credit bid – the process is doomed to fail. Without Pizza Hut’s consent to
a change of control, the Debtors will not be selling an operating Pizza Hut franchise, but brand-
less leasehold interests and personal property, resulting in lower sale proceeds and diminished
returns to the Debtors’ creditors. A fundamental misunderstanding of a franchise’s value is
evidenced by many provisions of (or omissions in) the Bid Procedures and – perhaps most tellingly
– by the Debtors’ total refusal to consult with Pizza Hut regarding the Bid Procedures prior to
filing and their inexplicable resistance to Pizza Hut engaging with potential bidders throughout the
process.
4
See id.
4
6. Moreover, the Bid Procedures include a host of limitations that chill bidding,
including provisions that will meaningfully narrow the scope and, potentially, the quality of
potential bidders. For example, the Bid Procedures (i) expressly favor all-in bidders (i.e., a
WholeCo Bid or, at least, bids for all of the Pizza Hut Assets), (ii) include no process for bids on
specific markets (despite substantial interest from existing and potential new Pizza Hut franchisees
in such markets), (iii) demand value in excess of an arbitrarily-set Minimum Reserve Price, and
(iv) state an intent to cancel the process entirely in the event the Debtors do not receive bids for
each and every Pizza Hut store. As such, the Debtors (and the Lenders5) are effectively locking in
the Lenders’ credit bid and attempt to purchase the Pizza Hut Assets, thereby relegating the Bid
Procedures to mere window dressing. By skewing the Bid Procedures in favor of the Lenders as
bidders, the Debtors wrongly presume that Pizza Hut will consent to the Lenders as a franchisee,
as Pizza Hut presently has not consented to the Lenders as a franchisee.
7. Pizza Hut has no interest in watching potential franchisees flounder under the
proposed process from a distance, nor will it allow the Debtors to strip it of its rights. To be clear,
Pizza Hut is not opposed to the timely sale of the Pizza Hut Assets. To the contrary, Pizza Hut
looks forward to welcoming new, qualified franchisees into the Pizza Hut family. To that end,
Pizza Hut will continue to work with the Debtors to formulate bid procedures that work in the
context of a change of control of a Pizza Hut franchise,6 but the Bid Procedures as drafted do not
and will not lead to the closing of any sale.
5
The term “Lenders” refers to the PTL Required Lenders and the 1L Required Lenders.
6
Although the Debtors declined Pizza Hut’s offers to review and provide input on the Bid Procedures prior to the
filing of the Motion, Pizza Hut sent the Debtors a markup of the Bid Procedures days in advance of filing this
Objection. The Debtors neither responded to the suggested changes, nor did they take Pizza Hut up on its offer to
discuss the proposed changes.
5
RELEVANT BACKGROUND
A. The Pizza Hut® Story.
8. Pizza Hut was built on the belief that pizza night should be special, and, for all the
changes the company and its industry have seen over the years, that founding principle remains a
cornerstone. For more than six decades, Pizza Hut has provided superior-quality food and
industry-leading service, all while establishing itself as an innovation powerhouse, pop culture
leader, and, above all, a beloved brand that brings people together.
9. Founded in 1958 by two college students who borrowed $600 from their mother,
Pizza Hut began as a single restaurant in Wichita, Kansas. The brothers opened a second location
six months later and, within a year, there were six. They began franchising in 1959, and soon
Pizza Hut, with its signature red roof, came to be seen across America as the most reliable
restaurant in town.
10. In 1971, Pizza Hut became the number one pizza restaurant company in the world
in both sales and number of locations, a position it retained for decades on account of favorites
like Original Pan® and innovations like Meat Lover’s®, Bigfoot®, Original Stuffed Crust®, the
Triple Treat Box®, and Big Dipper®. Its leadership position was further strengthened by high-
impact ad campaigns, including those featuring Ringo Starr, The Monkees, and memorable slogans
like “Gather ’Round the Good Stuff”®, “The Best Pizzas Under One Roof”®, and “No One
Outpizzas the Hut”®.
11. To best serve its customers, Pizza Hut has long been adept at evolving to meet
customer demand. Most recently, Pizza Hut has successfully enhanced product quality, improved
the speed of service, introduced a loyalty program, and upgraded its technology for online ordering
and delivery. Pizza Hut has also expanded its menu beyond pizza and offers something for the
6
whole family, including wings, pastas, the P’Zone®, desserts, fries, and gluten-free options. The
company also recently appointed new leaders to sharpen the distinctive positioning of the brand,
and under their leadership Pizza Hut has gained new-found momentum. In fact, at this critical
moment for the restaurant industry, Pizza Hut has benefited significantly as a sought-after delivery
and carry-out option. In May, Pizza Hut U.S. recorded its highest delivery and carry-out average
sales week in the last 8 years.7
12. While Pizza Hut is rapidly evolving to meet customer and market changes, the
company has also recommitted to its roots: iconic pizzas that set the bar; superior-quality taste that
exceeds expectations; sharp, distinctive advertising with a focus on value that excites; and a
customer experience that satisfies. Today, Pizza Hut remains an excellent investment opportunity
for franchisees, with a return in four to five years when a franchisee follows best practices and is
appropriately (and not over) leveraged. Pizza Hut’s recent asset development strategy focuses on
transitioning its asset base to modern delivery and carry-out-focused assets in line with current
consumer and industry trends. While the efforts underway predated the spread of COVID-19, the
pandemic has validated Pizza Hut’s need to transition.
13. After all these years, Pizza Hut believes now—as much as at any point in its iconic
history—that pizza night should be special and that the company that came to define pizza for
generations remains America’s pizza of choice.
B. The Nature of the Pizza Hut Franchisor-Franchisee Relationship.
14. The relationship between Pizza Hut and its franchisees is a unique, symbiotic
relationship. Unlike a typical contract or vendor arrangement, Pizza Hut and its franchisees are
involved in a mutually beneficial, long-term business relationship where both parties work together
7
See Short Decl. Ex. E (Yum! Brands, Inc., (Form 8-K)).
7
on a daily basis and have ongoing responsibilities to one another over a 20+-year term that
represent key components to operational success. For instance, Pizza Hut provides support for its
franchisees by providing operational training for each franchisee’s leadership and staff, developing
marketing strategies, setting health and safety standards,8 and developing the menu with new and
exciting product offerings to be sold at Pizza Hut locations, among other services. In turn, as Pizza
Hut’s representatives in the marketplace, franchisees are obligated not just to make royalty and
advertising payments, but also adhere to the health, safety, and brand standards of Pizza Hut and
otherwise meet their obligations as brand ambassadors.
15. The benefit of a Pizza Hut franchise system further includes access to certain
licensed Pizza Hut intellectual property and other proprietary information, including, without
limitation, trademarks; distinctive signs; logos; food recipes; uniforms; various trade secrets;
training manuals and job aids; brand standards; advertising materials; access to the PizzaHut.com®
website, Pizza Hut mobile app, online ordering, Hut Rewards® loyalty program, and other
confidential information; and in some instances, architectural designs; equipment specifications;
location layout plans; and other proprietary inventory (collectively, the “Proprietary Information”).
16. In Pizza Hut’s drive to ensure that customers enjoy a consistent and excellent
experience at its restaurants, the brand employs a series of criteria to evaluate its franchisees’
operational performance, including: (a) health and food safety (e.g., ensuring the health and safety
of customers and employees), (b) operational processes (e.g., ensuring that food is produced to
Pizza Hut’s exacting standards, thereby meeting customer expectations), (c) speed (e.g., ensuring
8
A recent example of health and safety standards that Pizza Hut has developed involves the response of its franchisees
to the COVID-19 pandemic. The standards include social distancing, upgrading its already industry-leading hygiene
policies, establishing team member mask and temperature-taking protocols, and employing other socially responsible
health and safety standards.
8
that customers receive their Pizza Hut fare in a timely manner), and (d) customer experience (based
on direct input from customers at Pizza Hut locations and through digital platforms) (collectively,
the “Ops Criteria”). Pizza Hut calculates the Ops Criteria for each franchisee enterprise and
compares it to the other franchisees, calculating the averages over a rolling thirteen-month period
to provide a balanced and accurate picture of how a franchisee’s enterprise is functioning. This is
commonly referred to as the “rack and stack.”
17. Each franchisee’s actions directly impact the Pizza Hut brand, and if one franchisee
fails to meet its obligations, such failings may have a direct, adverse impact on the Pizza Hut
enterprise as a whole, and, necessarily, other franchisees. One example of this is the failure of a
franchisee to remit its contractually obligated advertising payments, which in turn, shrinks the pot
of funds available for all franchisees to engage in critical national advertising campaigns and can
put the Pizza Hut brand at a competitive disadvantage.9 Specifically, if a franchisee fails to remit
its payments to the advertising fund, the annual advertising budget will be reduced, meaning fewer
advertisements out in the marketplace. Another example is reflected in Pizza Hut’s proprietary
customer feedback metric. Customers generally perceive that they are dining “at Pizza Hut” and
not, for example “at an NPC restaurant that licenses the Pizza Hut brand.” If, for example, an NPC
location has particularly poor customer feedback ratings, the customer perception of that location
will very likely affect another franchisee-owned location right down the street or even on the other
side of the country. The larger the franchisee, the greater the impact.
9
See, e.g., Short Decl., Ex. A (CAA Ex. C, Location Franchise Agreement, Section 17.01) (requiring the franchisee
to contribute to an advertising fund that is in turn used for advertising across the Pizza Hut System).
9
C. Pizza Hut’s Ordinary Course Involvement in Franchisee-to-Franchisee Sale

Transactions.
18. Because the standard length of each franchise agreement is at least a 20-year term,
and its restaurants are more than 98% franchised, Pizza Hut carefully handpicks each new
franchisee it invites into the Pizza Hut System. During its sixty-one year tenure as a franchisor,
Pizza Hut has continually refined its process of vetting, selecting, and training its franchisees. As
such, Pizza Hut’s practices are time-tested and add significant value to the continued operations
of franchisees across the Pizza Hut business.
19. In its general course of business, Pizza Hut regularly receives indications of interest
from potential franchisees. Parties interested in joining the Pizza Hut franchisee family reach out
to Pizza Hut both when they are interested in a Pizza Hut franchise in general, as well as when a
particular franchise is available for sale. Upon receiving any inquiry or application from a potential
franchisee, Pizza Hut evaluates each franchisee candidate using a multi-step vetting process (the
“Franchisee Approval Process”).
20. Generally speaking, when evaluating a potential franchisee, Pizza Hut first
conducts a candidate assessment. This candidate assessment process entails, among other things:
(a) vetting each candidate’s background and operational qualifications, financial strength,
10
proposed geographic area and footprint, and development approach; (b) a review of mandatory
personal information, including franchisee applications, credit and background checks, financial
asset verification, and a franchisee questionnaire; (c) requiring a “Key Operator(s)” to reside in the
proposed market(s); and (d) validating that the franchisee candidate will directly own at least a
10% stake in the franchise business and/or that a Key Operator who lives and works in the relevant
market will have a similar interest.
21. If the candidate satisfies Pizza Hut’s baseline criteria, Pizza Hut invites the potential
franchisee to participate in a series of meetings with Pizza Hut’s corporate leaders. The candidate
first attends a “Potential New Franchisee Meeting” at Pizza Hut’s CORE (Center of Restaurant
Excellence) with certain members of the Pizza Hut leadership team and select Pizza Hut cross-
functional experts. Then, each Pizza Hut team member who attends the Potential New Franchisee
Meeting completes a candidate evaluation survey, and Pizza Hut informs the candidate whether or
not they have been selected to move forward to the next step of the process (i.e., whether that
candidate may be preliminarily approved to review potential transactions and apply to purchase a
particular franchise).
22. Once Pizza Hut preliminarily approves a franchisee candidate to consider particular
franchise transactions, the review process moves to a more tactical phase. Pizza Hut evaluates the
restaurants and markets for sale to analyze whether the proposed franchisee candidate is qualified
for the particular deal, considering, for example, geographic location, the operational state of the
portfolio, pro forma store count, the proposed G&A structure, acquisition capital, post-transaction
capitalization and leverage, ongoing capital to execute asset transformation and business
fluctuations, and Pizza Hut’s development and asset upgrade expectations. The evaluation process
11
is unique to each potential franchisee candidate (e.g., the traits of a proposed operator of 10 stores
will necessarily differ from the traits of a proposed operator of 300 stores).
23. Provided that the franchisee candidate is approved to enter the Pizza Hut system
and take on the assets in question, Pizza Hut and the proposed franchisee typically enter into a
series of agreements that operate as a whole to govern the entire franchisee enterprise (whether
that involves a handful of locations or 500 locations) and the relationship between the parties. This
reflects an understanding between both parties that the franchise relationship extends well beyond
an individual store-level approach, and an intent to approach it holistically. Depending on the
bespoke needs and core competencies of the franchisee candidate and of the characteristics of the
locations subject to the transaction, these agreements may offer unique benefits across a
franchisees’ entire restaurant portfolio, such as development incentives, an assessment of market
demand and, where appropriate, a modification of capital obligations, amendments to the
underlying franchise agreements, and more. Any such benefits extend beyond Pizza Hut’s
underlying contractual obligations in the course of a sale, but are intended to maximize value and
ensure long-term success for the incoming franchisee.
24. Often, Pizza Hut and an incoming franchisee negotiate a “consent agreement” –
like the CAA in the case of NPC – in connection with the incoming franchisee’s entry into the
Pizza Hut system. These consent agreements are tailored to the individual needs of the new
franchisee (here, the purchaser(s)) and take careful consideration to formulate and negotiate. The
consent agreements, where necessary, are a critical piece of the puzzle when bringing a new
franchisee into the Pizza Hut family.
25. Then the transition begins. The transition process includes issuing new store
numbers to the new franchisee and vendors so that prior accounts can been transitioned smoothly,
12
and installing new credit card payment systems and terminals. The transition process also involves
setting up training sessions, and assigning and scheduling meetings for the new franchisee with a
territory coach, an existing franchisee mentor, and a Pizza Hut leadership team member. Each of
these assignments and meetings is designed to help ensure a franchisee’s smooth transition into
the Pizza Hut family and to set up the franchisee for long-term success. Beginning with in-store
training and ending with onboarding classes, this process alone takes 45 days; the entire franchisee
evaluation and selection process typically takes at least 90 days10 from start to finish.11
26. The Franchise Approval Process was developed over many years and is a critical
factor in Pizza Hut’s business decisions, both for new and existing franchisees. The process is
designed to put franchisees in a position to achieve optimal success while also protecting other
franchisees in the Pizza Hut system, and ultimately, the Pizza Hut brand. Absent undergoing this
intense vetting and training process, Pizza Hut cannot be confident that a franchisee will be
successful, and without a strong opportunity for success, could not enter into a 20-year franchise
agreement. Additionally, because the impact of a new franchisee on the entire system is
significant, in addition to the Franchise Approval Process, Pizza Hut maintains a host of rights
under the operative relationship documents to help protect the brand and in turn, its family of
franchisees.
10
This process can take longer depending on the proposed store footprint. For instance, the CAA took months for
Pizza Hut and NPC to negotiate in part due to the size of the transaction.
11
Even when each existing franchisee is already a known quantity in the Pizza Hut system, Pizza Hut still conducts
additional due diligence on that franchisee to ensure they are the right fit for the particular set of stores. For example,
Pizza Hut evaluates the existing franchisee’s tenure in the Pizza Hut system and considers, among other things,
whether the existing franchisee is in good standing (i.e., that it has and continues to satisfy all of its contractual
obligations), and the historical and current operations of each franchisee’s Pizza Hut locations. Pizza Hut also
evaluates how the existing franchisee’s stores might be impacted by the addition of any new stores to the franchisee’s
existing Pizza Hut portfolio. This includes, but is not limited to, the proximity of the new stores to the existing stores
and the long- and short-term operational performance of the existing stores.
13
27. By way of example, with respect to the Governing Documents,12 Pizza Hut has
several rights (the “Pizza Hut Rights”) that apply with respect to the transactions contemplated by
the Motion, including broad consent rights both to the transaction and to the change of control
aspects, including the identity of the proposed new franchisee.13
28. With respect to the Debtors, the Pizza Hut Rights are most prominently established
in the CAA, which operates as an omnibus agreement that streamlines, modifies, and inexorably
links the NPC Franchise Agreements. Pizza Hut and NPC entered into the CAA in connection
with Pizza Hut’s consent to NPC’s acquisition of the business in early 2018 (the “Acquisition”),
which changed the direct and indirect owners of the franchisee (i.e., a change of control event).
For a variety of reasons, including the size of the proposed restaurant footprint, Pizza Hut
negotiated a host of protections as a condition to its consent to the new ownership.14 NPC, on the
12
Certain governing documents dictate and inform the franchisor-franchisee relationship between Pizza Hut and NPC
(the “Governing Documents”). The Governing Documents include that certain Consent and Amendment Agreement
(the “CAA,” which is attached to the Short Declaration as Ex. A), the 2003 Territory Franchise Agreement (the “TFA,”
the form of which is attached to the Short Declaration as Ex. B), the 2003 Location Franchise Agreement (the “2003
LFA,” the form of which is attached to the Short Declaration as Ex. C), the 2016 Location Franchise Agreement (the
“2016 LFA,” the form of which is attached to the Short Declaration as Ex. D, and together with the TFA and the 2003
LFA, the “NPC Franchise Agreements”), the transformation amendment (the “Transformation Amendment”), and any
other applicable agreements that govern the entirety of the relationship between Pizza Hut and NPC. Absent the
assumption and assignment of the Governing Documents, purchasers of the Pizza Hut Assets will be unable to use
Pizza Hut’s trade and other marks or otherwise operate a Pizza Hut franchise.
13
Under the CAA, with respect to the transfer of interests of a franchisee or the applicable franchise agreement, a
Change of Control is deemed to occur if: (a) the Control Group (i.e., Todd Boehly and Mark Walter) ceases to
beneficially own a majority of the voting power of the outstanding Voting Stock of the NPC Parties; (b) the Control
Group ceases to beneficially own at least 30% of the Economic Ownership Interests of the NPC Parties; (c) a majority
of the members of the board or other governing body of any NPC Party ceases to be a member of the Control Group
or is not designated by the Control Group; or (d) there is any direct or indirect sale, lease, exchange, or other transfer,
in one transaction or a series of related transactions (including by way of merger, consolidation, liquidation, or
dissolution), of all or substantially all of the assets of NPCI, taken as a whole, to any Person other than one or more
of the Wholly-Owned Subsidiaries of NPCRH I. See Short Decl. Ex. A (CAA, at section 3(b)).
14
The CAA also amended Pizza Hut’s system-wide rights of termination of the applicable franchise agreement
(whether the Regional Franchise Agreements, once executed, or the existing Franchise Agreements), such that NPC’s
default under one agreement triggers defaults under other agreements, whether at the store-only level, the regional
level, or across the franchisee’s entire portfolio. This nuanced cross-default approach is a hallmark of the Governing
Documents.
14
other hand, as consideration for Pizza Hut’s consent and certain concessions, agreed, among other
things, to: (a) formalize a geographically-based division and regional structure, (b) meet certain
operational and performance criteria, (c) enter into new regional franchise agreements, (d) revise
language in the Franchise Agreements, (e) revise financial covenants, (f) enter into certain brand
partnership initiatives with Pizza Hut, and (g) install and maintain certain “Key Personnel.” Pizza
Hut would not have consented to the Acquisition absent these reciprocal concessions from NPC
because of NPC’s size in proportion of the balance of the system and given the need for these
protections in light of the new equity ownership structure.
29. Practically speaking, the Pizza Hut Rights, among other things,15 permit Pizza Hut
to (a) terminate a potential franchisee’s application process and/or prevent a change in control in
an existing franchisee’s interests by exercising its rights of first refusal (the “ROFR”) and first
offer (the “ROFO”),16 and (b) withhold its consent to the change of control, including (i) with
respect to the transaction in its entirety or in part, including the proposed size of the ultimate
franchisee’s existing footprint; (ii) based on the qualifications of the proposed franchisee or its
failure to complete the Pizza Hut training program to Pizza Hut’s satisfaction; (iii) based on Pizza
Hut’s view that the proposed franchisee will not be able to meet its obligations under the Governing
Documents; and (iv) whether the existing franchisee proposing to transfer its assets is in default
15
The foregoing summary, which is presented here merely for illustrative purposes and is qualified in full by the
relevant agreements, does not encompass the full span of the Pizza Hut Rights, demonstrates the criticality of Pizza
Hut to any proposed change of control process.
16
Pizza Hut is entitled to exercise its ROFR with respect to any Change of Control or transfer by an owner of NPC of
more than 20% ownership of a franchisee that would result in a Change of Control. See Short Decl. Ex. A (CAA, at
§ 3(b)). Pizza Hut has 60 days to exercise its ROFR. See id., at § 3(b). Pizza Hut also has ROFRs under the NPC
Franchise Agreements. See, Short Decl. Ex. B (TFA, at Art. XVI.G); Short Decl. Ex. C (2003 LFA, at § 14.6); Short
Decl. Ex. D (2016 LFA, at § 14.6). Under each of the 2003 LFA and 2016 LFA, a Change of Control occurs when
an interest of 10% or greater is transferred. Id. Pizza Hut is entitled to exercise its ROFO under the same circumstances
as its ROFR.
15
under the Governing Documents.17 Further, if NPC intends to issue stock in reorganized NPC to
new owners, or transfers its interest in its Pizza Hut restaurants, or the franchised business
generally, NPC is in violation of the CAA or the applicable NPC Franchise Agreement, and if such
violative transfer is not cured within 30 days, Pizza Hut is entitled to terminate all of the NPC
Franchise Agreements.18
D. The Debtors’ Incurable Defaults Under the Governing Documents.
30. NPC is Pizza Hut’s largest domestic franchisee, by far. It operates in 27 states
representing approximately 20% of the total restaurants in the Pizza Hut system. In that capacity,
the Debtors as franchisees have access and the right to use certain of Pizza Hut’s Proprietary
Information.
31. The Debtors have a long history with Pizza Hut. NPC opened its first franchise
restaurant in 1962 and – over several decades – engaged in a series of acquisitions that expanded
the enterprise to its current breadth. For many of its formative years, NPC was a leading franchisee
in the Pizza Hut system. Indeed, Pizza Hut sold many of its own restaurants to NPC during a wave
of refranchising transactions in the 1990s and 2000s.
32. Unfortunately, this changed over time. As of the Petition Date, NPC is a bottom-
quartile performing franchisee and is not in good standing, as required by the Governing
Documents. As of Q1 2020, prior to COVID (which has impacted the measurement of certain
17
The CAA provides that no Transfer shall involve any Transferee (other than the Control Group) receiving or being
entitled to access any PH Trade Secrets. See Short Dec. Ex. A (CAA, § 3(b)(ii)). The CAA further provides that the
NPC Parties will not, without the prior written consent of Pizza Hut, amend their organizational documents “or take
or permit to be taken any other action in any manner that (A) results in a Change of Control or the failure of the Control
Group to Control NPCI.” Id., at § 3(f). Additionally, the CAA provides that except as otherwise expressly provided
in the CAA, Pizza Hut’s written consent is required prior to any change in NPC’s ownership of the NPC Franchise
Agreements or the proposed transfer of all or substantially all of the assets required to, among other things, run a Pizza
Hut business. Id., at § 3(j)
18
See id., at Ex. D, clause (r)(5).
16
operating metrics), 11 of NPC’s 18 regions were performing in the bottom quartile, and 16 of
NPC’s 18 regions were performing in the bottom half in key operational metrics. This illustrates
the importance of ensuring a process that allows for strong new ownership that can bring restaurant
expertise and operational focus to the table.19 NPC has committed numerous prepetition monetary
defaults and non-monetary defaults and failures. These defaults, some of which constitute cross-
defaults across the Governing Documents, include, but are not limited to: (a) failing to negotiate
in good faith and execute certain of the NPC Franchise Agreements, pursuant to § 8(a) the CAA;
(b) failing to maintain sufficient capital as required by § 9(b) of the CAA; (c) exceeding its
consolidated total debt to consolidated EBITDA ratio in violation of § 9(e) of the CAA; (d) failing
to maintain distinct executive management personnel in the roles of Chief Executive Officer and
Chief Operating Officer, pursuant to § 4 of the CAA; and (e) failing to seek approval for
replacements of the Chief Executive Officer and Chief Operating Officer within the 90 days
following such individuals’ departures, pursuant to § 4(a) of the CAA (collectively, the “Incurable
Defaults”).20 In addition to these Incurable Defaults, NPC has also failed to satisfy certain
expectations that it would improve its operations as set forth in the CAA. Importantly, although
the Debtors have offered for sale or assignment NPC Franchise Agreements, which represent the
bulk of value of their Pizza Hut Assets, the Debtors’ sale process presumes that these Incurable
19
This performance is despite NPC’s express commitment to operational improvement in the CAA: “NPCI aspires to
be a leading, top-quartile franchise operator, and recognizes its responsibility to demonstrate the successful operation
of Pizza Hut restaurants for other franchisees in the PHLLC System. To that end, NPCI intends to initiate material
structural and operational changes to help improve its current performance upon closing. Accordingly, NPCI shall
endeavor to maintain each and all of the Regional Territories in at least the 2nd quartile (top fifty percent (50%) (a
“Top Half Performer”) of the Pizza Hut restaurant system[.]” See Short Decl. Ex. A (CAA, at § 6(a)).
20
In addition to the Incurable Defaults NPC committed prior to the Petition Date, NPC has failed to take action to
post letters of credit as required under the Governing Documents. Post-petition, Pizza Hut drew down on the existing
letters of credit in connection with NPC’s prepetition monetary defaults. However, Pizza Hut is obligated to have
sufficient letters of credit in place at all times under the Governing Documents. Accordingly, the Debtors are in default
under the Governing Documents post-petition, which defaults will need to be cured prior to the assumption and
assignment of the Governing Documents under section 365 of the Bankruptcy Code.
17
Defaults will not preclude assignment of the NPC Franchise Agreements without providing a
solution or offering any path to resolve these issues prior to delving into this intense and
accelerated sale timeline.
OBJECTION
A. The Bid Procedures are Fatally Flawed and Chill Bidding.
a. The Bid Procedures Ignore Pizza Hut’s Contractual Rights.
33. As set forth above, Pizza Hut has a number of rights under the Governing
Documents that the Debtors do not take into consideration or even acknowledge in the Bid
Procedures. Most critically, as highlighted throughout this Objection, are Pizza Hut’s consent
rights. The CAA is straightforward on this front: “Without the prior written consent of PHLLC,
no such Transfer may, directly or indirectly . . . [r]esult in a Change of Control.” See Short Decl.
Ex. A (CAA, at § 3(b)(i)); see also supra, n.17.
34. Any version of the sale contemplated in the Bidding Procedures would constitute a
Change of Control under the CAA. Specifically, a Change of Control would occur, among other
things, if: Mark R. Walter and Todd L. Boehly “cease to ultimately beneficially own, in the
aggregate, directly or indirectly, at least thirty percent (30%) of the Economic Ownership Interests
of the NPC Parties” . . . or “upon the occurrence of any direct or indirect sale, lease, exchange or
other transfer, in one transaction or a series of related transactions (including by way of merger,
consolidation, liquidation or dissolution), of all or substantially all of the assets of NPCI, taken as
a whole, to any Person other than to one or more of the Wholly-Owned Subsidiaries of NPCRH
18
I.”21 See Short Decl., Ex. A (CAA, at § 3(b)); see also supra, n.13. The Debtors simply cannot
avoid the fact that any sale requires Pizza Hut’s approval to succeed.22
35. These consent rights extend not only to the franchisee of record, but also to key
elements of the transaction: size of portfolio, financial assurances, key personnel, and more. The
timing for any particular transaction depends upon a number of factors, including: (a) whether the
proposed purchaser has been pre-approved in accordance with the Franchisee Approval Process
described above, including completing a background check that typically takes third-party vendors
3-4 weeks to complete, (b) the depth of diligence a buyer has performed before bidding on a
transaction, as it is standard practice for a potential purchaser to visit each location in person,
(c) the volume and complexity of modifications required to the standard form of franchise
agreement, including whether the purchaser’s capital structure entails passive investor concepts,
non-competition modifications, personal guaranty modifications, etc., and (d) the number of
locations involved, as transferring store numbers of point of sale systems may take third-party
vendors 3-4 weeks to complete. The milestones proposed by the Debtors ignore these practical
realities of the sale process, which will inevitably result in any number of delays and incremental
transaction costs. The Debtors compound this problem by their inexplicable insistence on bringing
21
NPC’s underlying franchise agreements contain similar language. See, e.g., Short Decl., Ex. B (TFA, at Article
XVI (B)) (“The rights and duties created by this Agreement are personal to Operator, and Company has granted this
franchise in reliance on the individual or collective character, skill, aptitude, and business and financial capacity of
Operator and its principals. Accordingly, except as otherwise may be permitted in Article XVI and Article XVIII
[inapplicable here], neither Operator nor any person with an interest in Operator shall, without Company’s prior
written consent, directly or indirectly sell, assign, transfer, convey, give away, pledge, mortgage, or otherwise
encumber any direct or indirect interest in this franchise . . . . Any such purported assignment occurring by operation
of law or otherwise without Company’s prior written consent shall constitute a default of this Agreement by Operator,
and shall be null and void.”); id., at Ex. C (2003 LFA, at § 14.2) (“Except as otherwise permitted by this Section 14
and Section 15 [inapplicable here], neither Franchisee nor any Person with an interest in Franchisee may, without
PHI’s prior written consent, directly or indirectly Transfer any Interest in this Agreement or any Interest in Franchisee.
Any purported Transfer without PHI’s prior, written consent will have no effect, except to cause a default under this
Agreement.”).
22
As noted above, Pizza Hut also holds ROFR and ROFO rights with respect to any proposed new franchisee
transaction. See supra, n.16.
19
Pizza Hut into the process only immediately prior to the auction and dismissing Pizza Hut’s
contractual rights. It is self-evident that the earlier Pizza Hut can begin its evaluation process, the
more efficiently the transaction will proceed.
36. And, critically, if Pizza Hut determines not to consent to any particular proposed
purchaser because it fails to satisfy franchisee evaluation criteria, such proposed purchaser would
be left with an estate consisting merely of personal property and real estate interests, but without
the use of Pizza Hut’s trade and other marks wherein the Debtors’ core enterprise value lies. In
other words, a proposed buyer who believes that it is purchasing a Pizza Hut franchise will instead
be purchasing a generic series of leasehold interests and personal property such as ovens and hot
holds, coupled with significant de-identification costs. Pizza Hut’s legal rights in this respect,
including its consent rights, are well-settled.
37. Specifically, under section 365(c) of the Bankruptcy Code, the Debtors may not
assume (and assign) the NPC Franchise Agreements if (1) applicable law would excuse the
franchisor from accepting performance from a party other than the Debtors, and (2) Pizza Hut does
not consent to the Debtors’ assumption of the franchise agreement. See 11 U.S.C. § 365(c)(1); In
re Taylor Inv. Partners II, LLC, 533 B.R. 837, 843 (Bankr. N.D. Ga. 2015); In re O’Connor, 258
F.3d 392, 402 (5th Cir. 2001) (holding that the focus for determining whether an agreement may
not be assumed under § 365(c) is whether other applicable law restricts assumption). Federal
trademark law, including the Lanham Act, constitutes applicable law under section 365(c) that
would excuse Pizza Hut from accepting performance from a party other than the Debtors. See id.;
In re Travelot Co., 286 B.R. 447, 454-55 (Bankr. S.D. Ga. 2002) (holding that federal trademark
law, as set forth in the Lanham Act, qualifies as applicable law under § 365(c)(1)); see also In re
Trump Entm’t Resorts, Inc., 526 B.R. 116, 124 (Bankr. D. Del. 2015) (“[F]ederal trademark law
20
generally bans assignment of trademark licenses absent the licensor’s consent because, in order to
ensure that all products bearing its trademark are of uniform quality, the identity of the licensee is
crucially important to the licensor.”); In re XMH Corp., 647 F.3d 690, 695-96 (7th Cir. 2011) (“A
trademark is a shorthand designation of a brand … If without notice the seller reduces the quality
of his brand, the trademark becomes deceptive because its assurance of continuity of quality is no
longer truthful. That is why the licensee is not permitted to sublicense the trademark to a seller
over whom the trademark owner, having no contract with the sublicensee, will have no control …
[W]hile the owner will have picked his licensee because of confidence that he will not degrade the
quality of the trademarked product he can have no similar assurance with respect to some unknown
future sublicensee.”).
38. Because of the nature of trademarks – as the brand and image of a company – the
rights of the holders to consent to their use is held to be sacrosanct by bankruptcy courts and are
not impressible restraints on assignment under section 365(f) of the Bankruptcy Code. See, e.g.,
In re Rupari Holding Corp., 573 B.R. 111, 117-118 (Bankr. D. Del. 2017) (holding that section
365(c) still applied, barring the licensee from assigning the contract without the licensor’s consent,
and noting that “[a]lthough Bankruptcy Code § 365(f)(1) grants a debtor the right to assign an
executory contract regardless of a contract provision or applicable law prohibiting, restricting or
conditioning assignment, § 365(f)(1) is expressly subject to Bankruptcy Code § 365(c).”); See In
re Taylor Inv. Partners II, LLC, 533 B.R. 837, 843 (Bankr. N.D. Ga. 2015) (holding that the debtor
could not assume, even for its own use, a franchise agreement that granted the debtor-franchisee a
non-exclusive license to use the franchisor’s trademark because federal trademark law “excused
[the franchisor] from accepting performance from a party other than [the franchisee]” and the
franchisor did not consent to the debtor’s assumption of the franchise agreement.); In re Kazi
21
Foods of Michigan, Inc., 473 B.R. 887, 890 (Bankr. E.D. Mich. 2011) (holding that section 365(c)
of the Bankruptcy Code prohibited the assumption or assignment of a KFC® franchise agreement
without the consent of the franchisor); In re Wellington Vision, Inc., 364 B.R. 129, 135 (S.D. Fla.
2007) (franchise agreement not assumable or assignable by debtor where franchise agreement
required consent by franchisor to transfer interest and contained a non-exclusive license to use the
franchisor’s trademarks); In re N.C.P. Marketing Group, Inc., 337 B.R. 230 (D. Nev. 2005), aff'd,
279 F. App’x 561 (9th Cir. 2008) (affirming a bankruptcy court’s decision that a bankrupt licensee
of the Tae Bo trademark could not assume and assign the license over the objection of the licensor
under the Lanham Act).
39. Despite this underlying reality, the Bid Procedures inexplicably do not include
Pizza Hut in the sale process until some unspecified point “prior to the auction.” Motion at ¶ 17(f);
Bid Procedures Section 5. Further, as evidenced by the Joint Chapter 11 Plan of NPC
International, Inc. and its Affiliated Debtors that the Debtors filed on September 16, 2020 [Docket
No. 627] (the “Plan”), it is the Debtors’ intention to ignore Pizza Hut’s consent rights completely.
For example, the Plan contains provisions that purport to permit the Debtors to assume and assign
their executory contracts (including the Governing Documents) to the Reorganized Debtors (as
defined in the Plan) solely upon a showing of adequate assurance of future performance.23 The
Plan also seeks to read any “change of control” provisions out of all executory contracts.24 This
treatment is a direct attempt to void Pizza Hut’s contractual consent rights.
40. Excluding Pizza Hut from the process until the auction reduces the likelihood that
any transactions can be closed (certainly on the proposed timeline), which will deter parties from
23
See Plan, at § 8.1(b).
24
See id., at § 8.1(c).
22
investing the time to formulate bids and in turn chills bidding. As Pizza Hut’s consent is critical
to the consummation of any transaction involving the Pizza Hut Assets, Pizza Hut should be
included in the process much earlier and should have consent and consultation rights at nearly
every stage of the process. Without that engagement, the Debtors could spend precious estate
resources running a sale process that they cannot close.
41. Sophisticated bidders for a franchise portfolio understand this issue well. As a
result, several have reached out directly to Pizza Hut to try to advance discussions regarding
whether they can receive an initial green light to bid. Because of NPC’s approach to the Bidding
Procedures, though, Pizza Hut has been forced to delay any meaningful discussions, resulting in
confusion and frustration for some as a result of the deviation from ordinary course. This could
have a meaningful deterrent impact if it continues; potential bidders are well aware that without
assurance that Pizza Hut will consent to them being a franchisee at the end of the sale process,
their work may be futile. Put simply, why would a bidder participate in the sale process when it
has no idea about whether it will be accepted as a franchisee or what assets it will, ultimately, be
able to buy?
42. Facilitating early communication is especially critical in the context of the NPC
transaction. The portfolio is large, complex, and in need of meaningful turnaround. Potential
bidders need to understand the brand’s vision, strategy, and expectations, and Pizza Hut needs to
understand the same of the potential franchisee. Further, through its consent rights, Pizza Hut has
the right to decline a candidate if its proposed portfolio is too large or otherwise does not make
commercial sense in light of its operational expertise, financial wherewithal, or geographic
footprint.
23
standard process to meet the needs of this transaction, so long as Pizza Hut has a reasonable
opportunity to exercise its rights. However, the timeline as proposed is unworkable.
c. Debtors’ Insistence on a WholeCo Transaction Chills Bidding.
48. Pizza Hut is open to any form of transaction(s) that maximize value and respect its
contractual rights. The Debtors, on the other hand, make it clear that they “are highly predisposed
to sell the Pizza Hut Assets to either a single buyer or on a divisional basis.” Motion at ¶ 10 (a)(ii);
Bid Procedures Section 1. By so boldly asserting this predisposition, the Debtors are narrowing
the scope of potential bidders by, among other things, deterring suitors interested in a smaller
restaurant footprint from participating in the process. Worse, the Debtors have indicated that they
will walk away from the sale process altogether if there is not a buyer for every single restaurant
in the portfolio, despite Pizza Hut’s overtures that it will work with the Debtors to resolve that
issue. There are many competent, interested suitors who – taken together – may provide the best
value for the portfolio as a whole. But the Debtors’ preference for a simpler sale has resulted in a
stated preference that may very well scare off those suitors. Moreover, by favoring the sale of the
entirety of the Pizza Hut Assets to a single buyer, the Debtors (and the Lenders) could be unfairly
shifting the costs and risks associated with any delayed partial divestiture to the purchaser.
d. The Minimum Reserve Price Chills Bidding.
49. The Bid Procedures provide for a Minimum Reserve Price of $325 million for the
Pizza Hut Assets. Motion at ¶ 10(a)(i); Bid Procedures Section 1. While Pizza Hut currently takes
no position with respect to the value attributed to the Pizza Hut Assets, the establishment of the
Minimum Reserve Price in the Bid Procedures is problematic for several reasons.27
27
Pizza Hut reserves all rights with respect to any valuation of the Pizza Hut Assets.
26
50. First, the Debtors have offered no explanation as to why it is necessary to set a
Minimum Reserve Price or how they arrived at the amount of the Minimum Reserve Price.
Without such information, certain bidders may be deterred from participating in the process.
51. Second, by setting a Minimum Reserve Price, combined with the Debtors’ clear
preference to consummate a sale of the entire Pizza Hut portfolio to a single buyer or in connection
with a WholeCo Transaction involving the Wendy’s Assets, smaller franchisees with a more
appropriate footprint will be deterred from participating in the process, which chills bidding.
52. Third, if the Minimum Reserve Price is not achieved, the Bid Procedures provide
that the Debtors (and the Lenders) will cancel the auction and the sale process, and the Lenders
will attempt to take the assets through a chapter 11 plan. See Motion at ¶¶ 4, 12; Bid Procedures
Section 1. Under these circumstances, if a bidder seeks to acquire a Region or Division, it has no
assurances that the time, cost, and expense involved in performing diligence and formulating a bid
will amount to anything, because it will have no idea whether bids for the entire Pizza Hut portfolio
will aggregate in an amount sufficient to meet the Minimum Reserve Price.
B. The Bid Procedures So Blatantly Favor the Lenders that the Entire Process Clearly
is Compromised.
53. The Bid Procedures chill bidding to such a degree that they are seemingly a lay-up
for the Lenders to attempt to take the Debtors’ assets through a credit bid or through a chapter 11
plan. As discussed above, the Bid Procedures create too many roadblocks for other bidders and
instead shows a clear path for the Lenders to attempt to obtain ownership the Pizza Hut Assets.
The lender-controlled process is destined to fail and is merely in place to show that some
superficial marketing process was undertaken before the Lenders attempt to seize the Debtors’
assets through an unverified credit bid that incorrectly implies that Pizza Hut consents.
27
54. By way of an additional example, there is no deadline in the Bid Procedures for the
Lenders to decide whether they will exercise their right to credit bid, and therefore, no deadline by
which the Lenders must step aside as a Consultation Party. This taints the process as the Lenders
will have their hands in every aspect of the process and can then decide when to derail the proposed
process without warning and attempt to take the assets for themselves.
55. The Lenders, who are merely providing access to cash collateral and whose liens
likely may not clear the Minimum Reserve Price, should not be permitted to exert this level of
control over the process. Among other things, before the Lenders are permitted to submit a credit
bid, the extent and value of the Lenders’ liens must be determined.28 To proceed otherwise would
do violence to this process and, to the extent the Lenders object, prove that they are attempting to
control these cases for purposes of skewing the process in their favor.
56. Perhaps most critically, the proposed process presumes that if (or when) the
Lenders attempt to acquire the Pizza Hut Assets, that Pizza Hut will consent to the Lenders as a
Pizza Hut franchisee. For several reasons, including the fact that, based on many discussions with
the Lenders, their intentions do not currently line up with Pizza Hut’s expectations of an
appropriate franchisee, Pizza Hut presently has not consented to a Change of Control where the
Lenders will own the Pizza Hut Assets. By doing so, the Debtors are ensuring that they will be
faced with a confirmation fight that will result in a significant waste of time and money and could
result in a renewed auction process or, worse, a conversion of the cases.
57. At bottom, it is unclear what value the Lenders bring to this process or these cases.
The Debtors have over $125 million of cash on hand, which amount continues to grow (for the
28
See In re Fisker Auto. Holdings, Inc., 510 B.R. 55, 61 (Bankr. D. Del. 2014) (“The law leaves no doubt that the
holder of a lien the validity of which has not been determined … may not bid its lien.”).
28
benefit of the Lenders) in large part due to the Debtors’ use of Pizza Hut’s marks.29 As such, the
level of control the Lenders are attempting to exert over this process (and these cases generally) is
unjustified and unfairly prejudices Pizza Hut and other parties in interest.30
C. The Assumption and Assignment Procedures are Likewise Flawed.
58. The Debtors’ proposed Assumption and Assignment Procedures are likewise
problematic. First, the Debtors have oversimplified the process. This is not a typical situation
involving a simple contractual arrangement or a retail bankruptcy case. The Debtors are ignoring
the complicated nuances noted above that are inherent in a franchisor-franchisee arrangement and
the complex and symbiotic nexus between a Pizza Hut franchisee and Pizza Hut.
59. Further, the Assumption and Assignment Procedures seemingly presume that Pizza
Hut will waive the numerous Incurable Defaults that NPC committed and that are a bar to the
assumption of its agreements with Pizza Hut, and, consequently, the assignment of those
agreements to one or more purchasers. Nor do the Debtors address how the Debtors can overcome
these Incurable Defaults such that they would be entitled to assume the Pizza Hut agreements.
Without such agreements, a winning bidder cannot operate a single Pizza Hut location, because it
would not be entitled to license the Pizza Hut trademarks.
60. By taking assignment of the Pizza Hut agreements, the assignee does so subject to,
among other things, Pizza Hut’s consent and other rights, capital investment requirements, the use
of Pizza Hut’s technology, and other brand-specific requirements. This appears nowhere in the
Assumption and Assignment Procedures.
29
See Docket No. 532, at p. 5
30
See Bankruptcy Process for Sale, at p. 54 (noting that “[b]ecause the first lien debt is the only party who benefits
from the early stage of the case, they may be the only willing financer. The absence of competition for the DIP loan
gives the senior lenders the ability to buy total control of the bankruptcy process, to the detriment of the other
creditors.”).
29
D. Necessary Modifications to the Bid Procedures.
61. Pizza Hut wants to see the Debtors’ sale process succeed, but as the Bid Procedures
stand now, there is little chance for success. At minimum, the Bid Procedures must provide for
the following with respect to the Pizza Hut Assets or a WholeCo Sale, as applicable:31
a. To avoid misleading potential bidders, the Bid Procedures should provide clear
and conspicuous notice that Pizza Hut has consent and other rights with respect
to:
i. the qualification of all Qualified Bidders, including any stalking horse

bidders and the Lenders;
ii. the criteria for and designation of Qualified Bid(s);
iii. the selection of the stalking horse bidder(s);
iv. the form of documentation with respect to the stalking horse bidder(s);
v. the selection of the Winning Bid/the identity of the purchaser(s) of any

Pizza Hut Assets; and
vi. any proposed modifications to the Governing Documents.
b. Provide sufficient time for Pizza Hut to complete its internal candidate
approval process, including time to evaluate potential franchisees to find the
appropriate fit for each Region and/or Division.
c. Provide sufficient time for Pizza Hut to exercise its consent rights, the Pizza
Hut ROFR, Pizza Hut ROFO, and otherwise complete its internal franchisee
evaluation process.
d. Provide sufficient time for potential purchasers to complete their due diligence
to Pizza Hut’s satisfaction, including, but not limited to, perform site visits at
a sufficient number of the restaurants they propose to take over.
e. Include a Pizza Hut Cure Objection Deadline, as it relates to the Pizza Hut
Assets.
f. Given the importance of Pizza Hut’s role in the process, Pizza Hut shall be
designated as a Consultation Party with respect to bids for the Pizza Hut Assets
31
The following list is not meant to be all-inclusive and Pizza Hut reserves all rights to make further adjustments.
30
and the process generally unless and until Pizza Hut exercises its ROFR within
30 days of the Bid Deadline.
g. Pizza Hut shall have input into the diligence criteria required from bidders
before any bidders, including the Lenders, are designated as Qualified Bidders.
h. Pizza Hut shall be entitled to attend the auction and exercise its consultation
rights.
i. Provide that Pizza Hut shall be included in the process; i.e., be introduced to
potential purchasers so that Pizza Hut can commence its internal diligence
process, preferably 60 days, but at least 45 days before the Pizza Hut and
WholeCo Bid Deadlines.
j. Pizza Hut should be involved in the process significantly earlier and Potential
Bidders should acknowledge Pizza Hut’s consent rights (at least 45 days before
the Bid Deadline as part of the Non-Binding Indication of Interest Deadline).
k. The provision that permits the Debtors to cancel the auction for the Pizza Hut
Assets if they do not receive bids for every Pizza Hut store should be removed.
l. The Minimum Reserve Price should be removed; provided, however, that if

the Debtors demonstrate a valid basis for establishing the Minimum Reserve
Price, the provision that permits the Debtors to cancel the auction for the Pizza
Hut Assets if the Minimum Reserve Price is not met should be removed.
m. Provide that the Lenders’ Credit Bid Right shall be dependent on the validity
of their liens and to the extent they are challenged.
n. In the event that the Lenders are entitled to credit bid, the Lenders must decide
when to do so by a date certain to avoid tainting the process.
o. With respect to any WholeCo bid, the provision of “guard rails” acceptable to
Pizza Hut, including no cross-collateralization with a Wendy’s bid/assets, the
Pizza Hut and Wendy’s businesses must have separate G&A, and the like.
p. Removal of Debtors’ stated predisposition to effectuate a WholeCo

Transaction or to sell the Pizza Hut Assets to a single buyer.
q. Include overbid increments that apply specifically to the sale of a Division and
a Region and include a description of what Divisions and Regions are.
r. Include procedures for how to address bids where the Divisions and Regions
overlap.
31
62. In addition, at a minimum, the Assumption and Assignment Procedures must make
it clear that Pizza Hut has not waived the Incurable Defaults under the Governing Documents and
that it reserves all rights with respect to same. The Assumption and Assignment Procedures must
provide clear and conspicuous notice that Pizza Hut has consent and other rights with respect to
any proposed modifications to the Governing Documents, which consent may take the form of,
among other things, requiring amendments or additional agreements to supplement the Governing
Documents.
CONCLUSION
63. For the foregoing reasons, the proposed Bid Procedures are fatally flawed and,
absent substantial revisions, will result in the Debtors having to redo the sale process at great
expense and to the detriment of the Pizza Hut brand, the Debtors’ fellow franchisees, the Debtors’
estates, creditors, and stakeholders. Accordingly, the Court should not approve the Bid Procedures
as drafted.
RESERVATION OF RIGHTS
64. Nothing contained in this Objection or in the Short Declaration shall be construed
as waiver of any of the Pizza Hut Rights under the Governing Documents or as an admission that
any of the Debtors’ Incurable Defaults or any other pre- or post-petition defaults under the
Governing Documents have been waived or satisfied. Pizza Hut reserves all rights with respect
to any proposed sale, transaction, or other change of control event involving any of the Pizza Hut
Assets and the assumption and/or assignment of the Governing Documents, in all respects. Pizza
Hut reserves all rights with respect to any purported valuation of the Pizza Hut Assets. Pizza Hut
reserves all rights to supplement this Objection, including by submitting a supplemental
supporting declaration, including through argument at any hearing(s) relating to the bid
32
procedures or the sale, transfer, or other change of control event involving or relating to of any of
the Pizza Hut Assets.
WHEREFORE, Pizza Hut respectfully requests that the Court deny the Motion absent the
requested modifications set forth in this Objection.
Dated: September 18, 2020 Respectfully submitted,

MCDERMOTT WILL & EMERY LLP
/s/ Charles R. Gibbs
Charles R. Gibbs
Texas State Bar No. 7846300
Eric Seitz
Jane A. Gerber
2501 North Harwood Street, Suite 1900
Dallas, TX 75201-1664
Telephone: (214) 295-8000
Facsimile: (972) 232-3098
Email: crgibbs@mwe.com
eseitz@mwe.com
jagerber@mwe.com
-and-
Nathan F. Coco
Pennzoil Place
700 Milam Street, Suite 1300, PMB 106
Houston, TX 77002
Telephone: (713) 653-1700
Facsimile: (713) 739-7592
Email: ncoco@mwe.com
Counsel to Pizza Hut, LLC
33
CERTIFICATE OF CONFERENCE
In accordance with Local Bankruptcy Rule 9013-1(g), I hereby certify that in an attempt to
resolve some or all of Pizza Hut’s objections, on multiple occasions I conferred with Kevin Bostel,
counsel for the Debtors, by phone and email. On Friday, September 11, 2020, there was a call
between counsel and advisors for the Debtors and counsel and advisors for Pizza Hut. On Tuesday,
September 15, 2020, Pizza Hut provided proposed changes to the Debtors’ Bid Procedures to
Debtors’ counsel. On Thursday, September 17, 2020, Pizza Hut offered to discuss Pizza Hut’s
objections. Pizza Hut and the Debtors were unable to confer prior to the filing of this Objection.
Pizza Hut intends to continue to reach out to the Debtors to resolve its objections in advance of the
hearing on this matter.

Charles R. Gibbs
CERTIFICATE OF SERVICE
I hereby certify that on September 18, 2020, a true and correct copy of the foregoing
document was served by the Electronic Case Filing System for the United States Bankruptcy Court
for the Southern District of Texas.

Charles R. Gibbs

Pizza Hut Filing Sept 20

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Pizza Hut Filing Sept 20

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Case 20-33353 Document 641 Filed in TXSB on 09/18/20 Page 1 of 35

IN THE UNITED STATES BANKRUPTCY COURT

LIMITED OBJECTION OF PIZZA HUT, LLC TO MOTION OF DEBTORS FOR

this Objection, Pizza Hut respectfully represents as follows:

Hut in litigation regarding a franchisor’s fundamental consent right to establish a mutually-aligned

and the broader Pizza Hut system.

provide potential bidders with a full and fair opportunity to participate.

3. Any successful franchise depends on the mutually-beneficial partnership between

relationship is off to a rocky start.”4

Debtors’ stakeholders and parties in interest.

fundamental importance of the franchisor-franchisee relationship. By failing to recognize and

returns to the Debtors’ creditors. A fundamental misunderstanding of a franchise’s value is

as Pizza Hut presently has not consented to the Lenders as a franchisee.

and will not lead to the closing of any sale.

A. The Pizza Hut® Story.

Outpizzas the Hut”®.

sales week in the last 8 years.7

pandemic has validated Pizza Hut’s need to transition.

generations remains America’s pizza of choice.

B. The Nature of the Pizza Hut Franchisor-Franchisee Relationship.

otherwise meet their obligations as brand ambassadors.

confidential information; and in some instances, architectural designs; equipment specifications;

commonly referred to as the “rack and stack.”

C. Pizza Hut’s Ordinary Course Involvement in Franchisee-to-Franchisee Sale

of franchisees across the Pizza Hut business.

“Franchisee Approval Process”).

market will have a similar interest.

an individual store-level approach, and an intent to approach it holistically. Depending on the

franchisees’ entire restaurant portfolio, such as development incentives, an assessment of market

demand and, where appropriate, a modification of capital obligations, amendments to the

ensure long-term success for the incoming franchisee.

franchisee into the Pizza Hut family.

aspects, including the identity of the proposed new franchisee.13

protections in light of the new equity ownership structure.

D. The Debtors’ Incurable Defaults Under the Governing Documents.

of refranchising transactions in the 1990s and 2000s.

accelerated sale timeline.

A. The Bid Procedures are Fatally Flawed and Chill Bidding.

a. The Bid Procedures Ignore Pizza Hut’s Contractual Rights.

Ex. A (CAA, at § 3(b)(i)); see also supra, n.17.

more efficiently the transaction will proceed.

including its consent rights, are well-settled.

executory contract regardless of a contract provision or applicable law prohibiting, restricting or

conditioning assignment, § 365(f)(1) is expressly subject to Bankruptcy Code § 365(c).”); See In

under the Lanham Act).

treatment is a direct attempt to void Pizza Hut’s contractual consent rights.

resources running a sale process that they cannot close.

commercial sense in light of its operational expertise, financial wherewithal, or geographic

opportunity to exercise its rights. However, the timeline as proposed is unworkable.

c. Debtors’ Insistence on a WholeCo Transaction Chills Bidding.

d. The Minimum Reserve Price Chills Bidding.

will aggregate in an amount sufficient to meet the Minimum Reserve Price.

result in a renewed auction process or, worse, a conversion of the cases.

C. The Assumption and Assignment Procedures are Likewise Flawed.

would not be entitled to license the Pizza Hut trademarks.

Assumption and Assignment Procedures.

D. Necessary Modifications to the Bid Procedures.

i. the qualification of all Qualified Bidders, including any stalking horse

ii. the criteria for and designation of Qualified Bid(s);

iii. the selection of the stalking horse bidder(s);

v. the selection of the Winning Bid/the identity of the purchaser(s) of any

vi. any proposed modifications to the Governing Documents.

l. The Minimum Reserve Price should be removed; provided, however, that if

p. Removal of Debtors’ stated predisposition to effectuate a WholeCo