WW, LLC v. The Coffee Beanery LTD

Filing

UNPUBLISHED AUTHORED OPINION filed. Originating case number: 1:05-cv-03360-AMD. Copies to all parties and the district court/agency. [998551262].. [09-1774]

WW, LLC v. The Coffee Beanery LTD

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Case: 09-1774

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Date Filed: 03/23/2011

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UNPUBLISHED UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT

No. 09-1774

WW, LLC, A Maryland Limited Liability Corporation trading as The Coffee Beanery Cafe; DEBORAH WILLIAMS; RICHARD WELSHANS, Plaintiffs - Appellants, v. THE COFFEE BEANERY LTD; JOANNE SHAW; JULIUS L. SHAW; KEVIN SHAW; KURT SHAW; KEN COXEN; WALTER PILON; OWEN STERN, Defendants - Appellees.

Appeal from the United States District Court for the District of Maryland, at Baltimore. Andre M. Davis, District Judge. (1:05cv-03360-AMD)

Argued:

December 9, 2010

Decided:

March 23, 2011

Before NIEMEYER, DUNCAN, and KEENAN, Circuit Judges.

Reversed and remanded by unpublished opinion. Judge Niemeyer wrote the opinion, in which Judge Duncan and Judge Keenan joined.

ARGUED: Harry Martin Rifkin, Lutherville, Maryland, for Appellants. Karl V. Fink, PEAR SPERLING EGGAN & DANIELS, PC, Ann Arbor, Michigan, for Appellees. ON BRIEF: Joshua R. Fink, PEAR SPERLING EGGAN & DANIELS, PC, Ann Arbor, Michigan, for Appellees.

Dockets.Justia.com

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Unpublished opinions are not binding precedent in this circuit.

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NIEMEYER, Circuit Judge: WW, LLC, a Maryland limited liability company, Richard

Welshans, and Deborah Williams commenced this action against The Coffee Beanery, Ltd., a Michigan corporation, and individual

officers of The Coffee Beanery, alleging that the defendants made material misrepresentations that induced the plaintiffs to enter into a franchise agreement with The Coffee Beanery. district court stayed this action to allow the parties The to

proceed to arbitration in the Eastern District of Michigan, as required by the franchise agreement. district court in the Eastern After arbitration, the of Michigan entered

District

judgment on the arbitration award in favor of The Coffee Beanery and its officers. The district court in this case then

dismissed this action "in accordance with the [Eastern District of Michigan] judgment." Subsequently, the Sixth Circuit reversed the judgment of the Eastern District including of its Michigan and vacated clause, the franchise the

agreement,

arbitration

prompting

plaintiffs here to file a motion to reopen this action under Federal Rule of Civil Procedure 60(b)(5) (authorizing a court to reopen a judgment that is based on an earlier judgment that has been reversed or vacated). The district court declined to

reopen this action, and the plaintiffs filed this appeal.

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For

the

reasons

that

follow,

we

reverse

and

remand

for

further proceedings in the district court.

I The Coffee Beanery franchises specialty retail coffee

stores, cafes, kiosks, coffee carts, and coffee bars, and it is registered in Maryland, allowing it to offer and sell franchises in Maryland. a a In married May 2003, Richard Welshans the and Deborah of in

Williams, purchasing

couple, to

investigated a

possibility store

franchise

operate

Coffee

Beanery

Annapolis, Maryland, and, pursuant to their inquiry, The Coffee Beanery mailed them a copy of the Uniform Franchise Offering Circular franchise for the State of Maryland, Welshans and together Williams with a form in

agreement,

which

received

early June 2003.

About a week later, Kevin Shaw, the vice-

president of The Coffee Beanery, visited Welshans and Williams in Annapolis to discuss more particularly the possibility of entering into a franchise agreement. Several days later,

Welshans and Williams attended a Coffee Beanery "discovery day" in Flushing, Michigan, during which they were given a tour of a Coffee Beanery Cafe store and engaged in further discussions about entering into a franchise. At the conclusion of

"discovery day," Welshans signed a franchise agreement with The Coffee Beanery for the operation of a franchised Coffee Beanery

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Cafe

store

in

Annapolis.

Subsequently,

with

The

Coffee

Beanery's consent, Welshans assigned the franchise agreement to WW, LLC, a Maryland limited liability company owned by Welshans and Williams. 2004. The store was unsuccessful and generated a cash loss each year of its operation. WW, LLC, attributed the losses to store WW, LLC, opened its Coffee Beanery Cafe store in

layout, the cash register system, the advertising program, and the nature of required equipment. More importantly, they claim

that material facts about Coffee Beanery Cafe store franchises were misrepresented or omitted during the negotiation process. WW, LLC, Welshans, and Williams commenced this action in December Law, 2005, alleging violations of the Maryland Franchise and

detrimental

reliance,

intentional They

misrepresentation, among

negligent

misrepresentation.

complained,

other

things, that the Uniform Franchise Offering Circular provided by The Coffee Beanery was incomplete and inaccurate, in violation of Maryland law. They alleged of that fact, The the and franchise that Kevin agreement Shaw (a

contained Coffee

untrue

statements officer) and

Beanery

Coffee

Beanery

made

false

statements regarding the operation and earnings of franchised stores and other matters. WW, LLC, also filed a complaint with

the Maryland Securities Commissioner.

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The

Coffee

Beanery

and

the

other

individual

defendants

filed a motion to dismiss this action or to stay it pending arbitration. Around the same time, they filed a petition to

compel arbitration in the Eastern District of Michigan, relying on the franchise agreement's arbitration clause and its forum selection clause, which provided that any legal action be

brought in the Eastern District of Michigan. In response to The Coffee Beanery's motion to stay pending arbitration and WW, LLC's motion to stay pending investigation by the Maryland an order, Securities dated Commissioner, 23, 2006, the district this court action

entered

March

staying

"pending further order of this court." In the agency action, the Maryland Securities Commissioner entered an order directing The Coffee Beanery and its officers to show cause "why a final order should not be entered ordering that Respondents cease and desist from violating the disclosure and antifraud an provisions agency of the Maryland the Franchise Law." The

Following

investigation,

Commissioner

and

Coffee Beanery entered into a consent order, in which The Coffee Beanery neither admitted nor denied the Commissioner's statement of facts and conclusions of law but agreed to the agency's

jurisdiction and its order.

The Commissioner found that The

Coffee Beanery violated the Maryland Franchise Law by making material misrepresentations of 6 fact or omissions of material

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fact

about

The

Coffee in of

Beanery

franchise without

and

by

offering

and

selling

franchises a copy

Maryland the

giving

prospective in

franchisees

required

offering

prospectus,

accordance with Maryland law. The Coffee Beanery and its

The consent order directed that officers "permanently cease and

desist from offering and selling franchises in Maryland or to any prospective Maryland franchisees in violation of the

Maryland Franchise Law."

The consent order also required The

Coffee Beanery "to make a rescission offer to the Welshans, by and through WW, LLC" allowing them to rescind the franchise

agreement on the condition that they release all claims against The Coffee Beanery and its agents. provided that it was "a Finally, the consent order order as described

disclosable

under . . . the Maryland Franchise Law."

WW, LLC, Welshans, and

Williams did not accept the rescission offer provided for in the consent order, electing to pursue their claims against The

Coffee Beanery, as asserted in this action. After arbitration the in Coffee the Beanery filed the of petition Michigan, to that compel court

Eastern

District

granted the petition, and the arbitrator subsequently found in favor of The Coffee Beanery. The arbitrator found "no intent on

the part of Respondents to mislead Claimants or misrepresent the franchise system." She determined that The Coffee Beanery had

provided WW, LLC, with "adequate, proper and timely disclosure 7

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. . . under training, lay-out

Michigan

and

Maryland with

franchise store

laws,

excellent competent resources, manuals, troubleThe

competent of the

assistance store and

location, start-up equipment available

business and

comprehensive excellent

operations, and

training

coffee

related

products,

shooting resources, and available financial assistance."

arbitrator determined that WW, LLC's lack of success was not caused by The Coffee Beanery. She determined that The Coffee

Beanery properly provided Welshans with a copy of the Uniform Franchise Offering Circular, and that WW, LLC, had not proved the elements necessary to recover for claims based on

nondisclosure of gift cards, the DMX music system, and Pepsi contract requirements. She found that Welshans did not "rely on And to

any sales or expense information provided by Respondents." with respect a to WW, LLC's claim that Kevin Shaw the failed

disclose

felony

grand

larceny

conviction,

arbitrator

concluded that it was not the kind of conviction subject to disclosure limited because Michigan and Maryland involve disclosure fraud, of laws are

to

"felonies or

that

embezzlement, property." of In

fraudulent addition, Welshans,

conversion, the

misappropriation found their "the expert

arbitrator and

testimony witness

witnesses with

Williams,

Lombardo

regard to the claim for damages, not credible."

Ultimately, the

arbitrator concluded that The Coffee Beanery was not liable on 8

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any claim and that WW, LLC, Welshans, and Williams should pay costs and back royalties to The Coffee Beanery. The district court for the Eastern District of Michigan confirmed the arbitration award and entered a judgment ordering WW, LLC, Welshans, and Williams to pay The Coffee Beanery

$152,766.73. Based on the judgment entered in the Eastern District of Michigan, the district court in this case entered an order on March 3, 2008, dismissing this action "[i]n accordance with the judgment . . . of the United States District Court for the Eastern District of Michigan." The judgment entered in the Eastern District of Michigan was appealed to the Sixth Circuit, and on November 14, 2008, the Sixth Circuit reversed the judgment, vacated the arbitration

award, and held that the arbitration agreement was unenforceable because of fraud in the inducement. Without reaching WW, LLC's

other arguments, the Sixth Circuit held that the arbitrator's decision that Kevin Shaw's grand larceny conviction need not have been disclosed showed a "manifest disregard for the law" because a grand larceny conviction involves misappropriation of property. The Sixth Circuit held that WW, LLC, was not bound by

the arbitration clause because The Coffee Beanery's failure to disclose mandatory, Kevin Shaw's conviction required 9 deprived WW, to LLC, "of a the

statutorily

notice"

prior

signing

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agreement and therefore, WW, LLC, was "fraudulently induced into signing" the franchise agreement. Finally, the court stated

that WW, LLC, "need not resort to arbitration to vindicate its statutory rights but may instead seek appropriate relief in a court of law." In light of the Sixth Circuit's decision reversing the

Eastern District of Michigan judgment, on which the district court in this case relied to close this case, WW, LLC, requested that the district court reopen the judgment based on Federal Rule of Civil Procedure 60(b)(5). By order dated June 1, 2009,

the district court denied the motion, stating: [T]he mere fact that the Sixth Circuit vacated the district court judgment enforcing the arbitration award resulting from the arbitral proceedings over which that court had jurisdiction is no reason for this court to vacate its judgment here. In dismissing the case, this court presumed that plaintiffs would pursue whatever alternative remedies they wished to pursue in the court having jurisdiction over the parties and their dispute, namely, the Eastern District of Michigan. While the district court relied on the general language of Rule 60(b), which provides that a court may set aside a judgment on the basis of "mistake, inadvertence, surprise, or excusable

neglect . . . or . . . any other reason justifying relief from the operation of the judgment," it did not address Rule

60(b)(5), which allows relief from a final judgment if "it is based on an earlier judgment that has been reversed or vacated."

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From the district court's order denying their motion to reopen, WW, LLC, Welshans, and Williams filed this appeal.

II We review the district court's denial of a Rule 60(b)

motion for abuse of discretion. of Southern Pines, 532 F.3d

See MLC Automotive, LLC v. Town 269, 277 (4th Cir. 2008). "A

district court abuses its discretion when it . . . fails to consider judicially recognized factors constraining its exercise of discretion . . . or commits an error of law." Bay Country

Consumer Finance, Inc. v. Fidelity Sec. Life Ins. Co., 311 Fed. App'x 580, 581 (4th Cir. 2008) (per curiam). In this case, the district court dismissed the plaintiffs' action, based on the Eastern District of Michigan judgment,

which upheld and enforced the arbitration award in favor of The Coffee Beanery. When, however, the Sixth Circuit reversed the

judgment of the Eastern District of Michigan, the conditions for application of Rule 60(b)(5) were met. That Rule provides, "On

motion and just terms, the court may relieve a party or its legal representative from a final judgment . . . [if] the

judgment . . . is based on an earlier judgment that has been reversed or vacated." Because the district court failed to

apply Rule 60(b)(5), we conclude that it abused its discretion in failing to consider judicially recognized factors

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constraining its exercise of discretion and in committing an error of law. Moreover, contained in the the existence franchise of a forum -selection even if clause we were as to

agreement

assume that it survived the vacated franchise agreement -- would not dictate a different result. That clause would not strip the

district court of jurisdiction, and it would not even mean that venue was automatically improper. See 28 U.S.C. § 1404(a); P.M.

Enterprises v. Color Works, Inc., 946 F. Supp. 435, 440 (S.D.W. Va. 1996); see also Stewart Organization, Inc. v. Ricoh Corp., 487 U.S. 22, 28 (1988). The Coffee Beanery argues that WW, LLC's appeal should be barred because WW, LLC, did not appeal the district court's

original dismissal order of March 3, 2008, which was based on the Eastern District of Michigan judgment. original Michigan dismissal judgment and order, enforcing however, the the At the time of the Eastern District was of

arbitration existed no

award viable

still for

operative,

therefore,

there

basis

appealing the district court's dismissal of this case. The Coffee Beanery also argues that WW, LLC's motion to set aside the judgment and reopen this case was untimely. We reject

this argument, too, as WW, LLC, filed its motion soon after the Sixth Circuit's mandate became final, which was the basis for its motion to reopen this case. 12

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Accordingly, we reverse the district court's order denying the plaintiffs' Rule 60(b)(5) motion and remand for further

proceedings. REVERSED AND REMANDED

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