Thomas Klutz obtained a franchise from Kahala Franchise Corp. to operate a Samurai Sam's restaurant. Under their agreement, Klutz could transfer the franchise only if he obtained Kahala's approval and paid a transfer fee. Without telling Kahala, Klutz sold the restaurant to William Thorbecke. Thorbecke signed a note for the price. When Kahala learned of the deal, the franchisor told Thorbecke to stop using the Samurai Sam's name. Thorbecke stopped paying on the note, and Klutz filed a claim for the unpaid amount. In defense, Thorbecke asserted breach of contract and fraud. Are these defenses effective against Klutz?

Yes they are

Explanation:

With a franchise, one is given permission to use another Company's name, brand or any other thing decided in the agreement with the franchisee agreeing to pay the franchisor for this permission / license.

Usually, as was the case here, the franchisor requires knowledge of a sale of a franchise because it carries their name.

Thomas Klutz knew of this agreement and yet neglected to tell William Thorbecke.

When Kahala found out about this they demanded understandably that Mr. Thorbecke stop using their intellectual property because they didn't give him permission.

This must have caused Mr. Thorbecke some sort of losses and so he decided to stop paying the note on the basis of fraud and breach of contract.

He would be right in both cases because there has been a breach of contract as he can no longer engage in Business properly. A business he bought and paid for in good will. Also he was sold the restaurant without being told that it was a franchise so he thought he had bought an original and this constitutes fraud due to misrepresentation.