Fern Street Investments LLC et al v. K&F Restaurant Partners LLC
MEMORANDUM OPINION - The Court DENIES K&Fs Rule 12(b)(6) motion to dismiss. On or before March 18, 2015, FSI and FSC shall SHOW CAUSE in writing why the Court should not strike their negligence claim from the complaint. Signed by Judge Madeline Hughes Haikala on 3/9/2015. (KEK)
2015 Mar-09 AM 08:36
U.S. DISTRICT COURT
N.D. OF ALABAMA
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ALABAMA
FERN STREET INVESTMENTS,
LLC and FERN STREET CHACE
K&F RESTAURANT PARTNERS,
Case No. 2:13-cv-01935-MHH
MEMORANDUM OPINION AND ORDER
Plaintiffs, Fern Street Investment, LLC (“FSI”) and Fern Street Chace
Landing, LLC (“FSC”) each owned a restaurant franchise in the BirminghamHoover, Alabama metropolitan market. The restaurants closed in 2013. The
defendant, K&F Restaurant Partners, LLC, was the franchisor for the restaurants.
(Doc. 1). In this lawsuit, FSI and FSC contend that K&F violated its franchise
agreements with them. FSI and FSC allege that K&F withheld pertinent financial
information and failed to perform other obligations on which the franchisees’
successful operation of the restaurants depended.1 (Doc. 1). FSI and FSC asserts
claims against K&F for: breach of contract; fraudulent suppression and/or
misrepresentation; and negligence. (Doc. 1, ¶¶ 21-35).
K&F has moved to dismiss this action pursuant to Rules 8, 9, and 12(b)(6)
of the Federal Rules of Civil Procedure. (Doc. 10). K&F argues that neither FSI
nor FSC has met the pleading requirements of Rules 8 and 9. (Docs. 10 and 16).
Therefore, K&F asks the Court to dismiss the complaint under Rule 12(b)(6) for
failure to state a claim. (Docs. 10 and 16). FSI and FSC respond that K&F has
neither acknowledged nor addressed the factual allegations in the complaint,
allegations that satisfy Rules 8 and 9. (Doc. 15). For the reasons discussed below,
the Court denies K&F’s motion to dismiss.
STANDARD OF REVIEW
A complaint must contain “a short and plain statement of the claim showing
that the pleader is entitled to relief.” Fed. R. Civ. P. 8(a)(2). A Rule 12(b)(6)
motion to dismiss tests the sufficiency of a complaint against the legal standard of
Rule 8. In a complaint, a plaintiff must describe the factual basis for his claims,
but Rule 8 generally does not require “detailed factual allegations.” Bell Atl. Corp.
v. Twombly, 550 U.S. 544, 555 (2007) (quoting Conley v. Gibson, 355 U.S. 41, 47
FSI and FSC entered Franchise Agreements with K&F on November 15, 2010 and June 25,
2012, respectively. (Doc. 1, ¶ 11). The two franchise agreements are essentially identical, and the
Court refers to the agreements collectively. (Doc. 1 ¶ 11).
(1957)). It does, however, “demand[ ] more than an unadorned, the-defendantunlawfully-harmed-me accusation.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).
Pleadings that contain nothing more than “a formulaic recitation of the elements of
a cause of action” do not meet Rule 8 standards nor do pleadings based upon mere
“labels or conclusions” or “naked assertions” without supporting factual
allegations. Twombly, 550 U.S. at 555, 557.
“To survive a motion to dismiss, a complaint must contain sufficient factual
matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’”
Iqbal, 556 U.S. at 678. “Thus, the pleading standard set forth in Federal Rule of
Civil Procedure 8 evaluates the plausibility of the facts alleged, and the notice
stemming from a complaint’s allegations.” Keene v. Prine, 477 Fed. Appx. 575,
583 (11th Cir. 2012) (citing Evans v. McClain of Ga., Inc., 131 F.3d 957, 964 n.2
(11th Cir. 1997)), and Hamilton v. Allen-Bradley Co., 244 F.3d 819, 823-24 (11th
Rule 9 provides a heightened pleading requirement for fraud claims. “In
alleging fraud or mistake, a party must state with particularity the circumstances
constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a
person’s mind may be alleged generally.” Fed. R. Civ. P. 9(b). A description of
“the circumstances constituting fraud” should include information regarding the
nature of the alleged misstatement or omission, “the time and place” of the
statement, the identity of the person who provided or omitted material information,
and the way in which the plaintiff relied on the misstatement or omission.
FindWhat Investor Grp. v. FindWhat.com, 658 F.3d 1282, 1296 (11th Cir. 2011).
PROCEDURAL AND FACTUAL BACKGROUND
FSI and FSC each owned an Izzo’s Illegal Burrito restaurant franchise in the
Birmingham- area. (Doc. 1, ¶ 11). To make the two Izzo’s restaurants successful,
FSI and FSC “hir[ed] experienced store managers; properly staffed each location;
invest[ed] significant amounts of personal capital; adher[ed] to all contractual
obligations set forth in the Franchise Agreements; and stay[ed] current on all
payments owed to Defendant.” (Doc. 1, ¶ 13). FSI and FSC allege that “[d]espite
these efforts, [they] consistently sustained losses until [they] were forced to cease
operations in August of 2013 and October 2013, respectively.” (Doc. 1, ¶ 13).
In June 2010, K&F provided a franchise disclosure document to FSI. The
document “summarized certain provisions of the Izzo’s franchise agreement and
offered the opportunity to operate an Izzo’s franchise.”
(Doc. 1, ¶ 10). FSI and
FSC also relied upon K&F’s verbal and written representations when FSI and FSC
K&F gives franchise disclosure documents to potential franchisees. The document provides all
pertinent financial and corporate information regarding the franchise. A franchise disclosure
document was attached to Fern Street’s complaint as Exhibit “A”. (Doc. 1, ¶¶ 17, 27-28). A
complaint includes all documents attached to it as an exhibit or those incorporated by
reference. Fed. R. Civ. P. 10(c); see also Thaeter v. Palm Beach Cnty. Sheriff’s Office, 449 F.3d
1342, 1352 n. 7 (11th Cir. 2006).
decided to “mov[e] forward with [the] investment and tak[e] the necessary action
to fund the investment.” (Doc. 1, ¶ 14, ¶ 16). Specifically, FSI and FSC:
relied on representations regarding initial start-up investment and
capital contributions that [d]efendant deemed necessary to operate the
franchise. According to a budget furnished by [d]efendant, the initial
start up costs and capital contributions required was undervalued by
nearly twenty percent (20%). In addition, [d]efendant profoundly
underestimated the working capital necessary to operate the franchise
for the first six (6) months after opening.
(Doc. 1, ¶ 14).
FSI and FSC state that the franchise disclosure document
“conveyed a perceived soundness of the Izzo’s business model (‘Izzo’s System’).”3
(Doc. 1, ¶ 17). However, according to FSI and FSC, K&F did not, in fact, have “a
workable business model and intentionally misrepresented this fact to [p]laintiffs,
which induced [p]laintiffs to enter into the Franchise Agreements and suffer
significant damages.” (Doc. 1, ¶ 18). Before FSI and FSC became franchisees of
Izzo’s, K&F had two other franchisees in Louisiana. (Doc. 1, ¶ 18). K&F “has
since purchased one of these franchises and discontinued the sale of franchises all
together.” (Doc. 1, ¶ 18).
FSI and FSC allege that K&F’s failure to adhere to its obligations under the
franchise disclosure document and the franchise agreements caused them (FSI and
FSC) to sustain losses, which ultimately forced them to close the two restaurants.
The franchise disclosure document describes Izzo’s System’s techniques, processes, and
procedures for menu items. Plans for marketing, restaurant establishment, purchasing, and
inventory control methods, accounting methods, sales and promotional techniques, and personnel
training also are described in the franchise disclosure document. (Doc. 1, ¶ 17).
FSI and FSC claim that K&F violated the franchise disclosure document and
franchise agreements in the following ways:
[K&F] (a) provided no demographic information related to either
restaurant location; (b) required [p]laintiffs to purchase overpriced
equipment and signage; (c) required [p]laintiffs to use an out-of-state
marketing firm which was inexperienced and incapable of providing a
proper marketing plan for the Birmingham-Hoover Metropolitan
market; (d) failed to use or apply the two percent (2%) advertising fee
in [p]laintiffs’ Market Area or otherwise use for [p]laintiffs’ benefit;
(e) required [p]laintiffs to use its Aloha Point of Sales system, which
improperly collected Louisiana state sales tax from customers instead
of Alabama state sales tax causing [p]laintiffs to incur significant
damages as Louisiana tax is lower; (f) required [p]laintiffs to purchase
supplies and products which were overpriced and at a higher rate than
other Izzo’s locations owned by [d]efendant; (e) [sic] unreasonably
withheld approval in allowing [p]laintiff to use local vendors for
certain like-kind and quality products which would have no effect on
the quality of [p]laintiff’s products or facility; and (f) [sic] did not
provide adequate or effective training to [p]laintiff’s personnel; (g)
[sic] upon information and belief, [d]efendant charged [p]laintiffs
higher prices for certain required products than other franchisees or
corporate owned restaurants.
(Doc. 1, ¶ 19). FSI and FSC seek compensatory damages for the losses they
incurred as a consequence of K&F’s conduct. (Doc. 1, pp. 1, 10).
Breach of Contract
“The elements of a breach-of-contract claim under Alabama law are (1) a
valid contract binding the parties; (2) the plaintiffs’ performance under the
contract; (3) the defendant’s nonperformance; and (4) resulting damages.” Shaffer
v. Regions Fin. Corp., 29 So. 3d 872, 880 (Ala. 2009) (internal quotations
In their complaint, FSI and FSC allege (1) that they entered into valid,
enforceable franchise agreements with K&F (Doc. 1, ¶ 22); that they performed
their obligations under the franchise agreements (Doc. 1, ¶ 23); (3) that K&F
breached the franchise agreements in various ways (Doc. 1, ¶¶ 19, 24); and (4)
that both franchisees “have been harmed and suffered damages.” (Doc. 1, ¶ 25).
According to the complaint, FSI and FSC were damaged because they “invest[ed]
significant amounts of personal capital”4 and “sustained losses until [both] were
forced to cease operations.” (Doc. 1, ¶ 13).
K&F is critical of the plaintiffs’ damages allegations, but the Court finds
those allegations adequate to survive a Rule 12(b)(6) motion. As a matter of
federal pleading standards, the allegation places K&F on notice of the nature of the
damages that FSI and FSC seek. Therefore, the Court denies K&F’s motion to
dismiss the breach-of-contract claim in count 1. See South Florida Water Mgm’t
Dist, 84 F.3d at 406.
Fraudulent Suppression or Misrepresentation
Under Alabama law, to state a claim for fraudulent suppression, a plaintiff
must allege: “‘(1) that the defendant had a duty to disclose material facts; (2) that
FSI and FSC both are LLCs. The Court is unsure how either LLC invested “personal capital,”
but the parties may explore the issue in discovery.
the defendant concealed or failed to disclose those facts; (3) that the concealment
or failure to disclose induced the plaintiff to act; and (4) that the defendant’s action
resulted in harm to the plaintiff.’” Cook’s Pest Control, Inc. v. Rebar, 28 So. 3d
716, 724-25 (Ala. 2009) (quoting Booker v. United Am. Ins. Co., 700 So. 2d 1333,
1339 n. 10 (Ala. 1997). Similarly, to plead a fraudulent misrepresentation claim, a
plaintiff must allege: “(1) a false representation; (2) that the false representation
concerned a material existing fact; (3) that the plaintiff relied upon the false
representation; and (4) that the plaintiff damaged as a proximate result of the
reliance.” Billy Barnes Enters. Inc. v. Williams, 982 So. 2d 494, 499 (Ala. 2007)
(internal quotations and citation omitted).
FSI and FSC allege that K&F owed them a duty to disclose information
about K&F’s flawed point-of-sales system that collected insufficient state taxes.
(Doc. 1, ¶ 34). The complaint also contains allegations that K&F should have
disclosed the unworkable franchise business model, the lack of appropriate
purchasing and inventory control methods, accounting methods, promotional
techniques, and personnel training that was required for the survival of Izzo’s
franchises. (Doc. 1, ¶ 29). FSI and FSC also allege that suppression of these
material facts induced them enter into the franchise agreements with K&F and
caused them to sustain damages. (Doc. 1, ¶ 30).
These allegations are sufficient to state a claim for fraudulent suppression.
K&F argues primarily that the Court should dismiss the fraudulent suppression
claim because FSI and FSC have not alleged that K&F had a duty to disclose.
(Doc. 16, pp. 4–5). Although K&F correctly points out that “the word ‘duty’ does
not appear in the [c]omplaint at all until it is pled in Fern Street’s negligence
count,” (Doc. 16, p. 5), FSI and FSC allege factual matter sufficient for the Court
to determine whether K&F owed the plaintiffs a duty to disclose.
The plaintiffs’ fraudulent misrepresentation claim is based on the franchise
disclosure document. FSI and FSC allege that the information within the franchise
disclosure document misrepresented the actual state of the franchise business
model. (Doc. 1, ¶ 29). FSI and FSC also allege that K&F misrepresented the
amount of the required initial investment, which was undervalued by twenty
percent, and misrepresented the amount of working capital needed to operate an
Izzo’s restaurant for its first six months. (Doc. 1, ¶¶14, 33). FSI and FSC contend
that these misrepresentations induced them to act, and they suffered damages as a
result. (Doc. 1, ¶ 30).
K&F argues that FSI and FSC failed to identify the specific parts of the
franchise disclosure document that K&F purportedly misrepresented. The Court
The plaintiffs not only attached the franchise disclosure document as
“Exhibit A” to the complaint but also specifically alleged that K&F “suppressed or
misrepresented material information regarding the required initial investment and
working capital necessary to suitably operate one of its franchises.” (Doc. 1, ¶ 28).
FSI and FSC have pled sufficient facts to avoid dismissal. See Friedlander v.
Nims, at 814 n. 3. K&F will have no trouble finding the part of the franchise
disclosure document that refers to the initial investment and working capital
amounts. FSI and FSC alleged sufficient specific facts to maintain their fraudulent
misrepresentation and suppression claims against K&F.5 Therefore, the Court
denies K&F’s motion to dismiss these claims.
To frame a negligence claim under Alabama law, the plaintiff must allege
“(1) that the defendant owed the plaintiff a duty; (2) that the defendant breached
that duty; (3) that the plaintiff suffered a loss or injury; and (4) that the defendant’s
breach was the actual and proximate cause of the plaintiff’s loss or injury.”
QORE, Inc. v. Bradford Bldg. Co., 25 So. 3d 1116, 1123 (Ala. 2009) (internal
quotations and citations omitted).
For a plaintiff “to maintain a negligence
action[,] the defendant must have been subject to a legal duty.” DiBiasi v. Joe
K&F argues that FSI and FSC did not state the time, place, or the person responsible for any
statements to them, what the statements were, how they were misled or what K&F gained from
the alleged misrepresentation. (Doc. 10, pp. 4-5). The Court disagrees. The plaintiffs allege that
the fraud occurred prior to their purchase of the two Izzo’s franchises, that the fraud caused them
to buy the franchises, a benefit to K&F, and that documents relating to the sale of the franchises
contained misleading information. Those allegations are sufficient.
Wheeler Elec. Membership Corp., 988 So. 2d 454, 460 (Ala. 2008) (internal
FSI and FSC allege that K&F “knew or should have known” about its
flawed, unworkable franchising system, that the amount of working capital needed
to operate an Izzo’s restaurant for its first six months of operation was “profoundly
underestimated,” and that the initial required investment was undervalued by
(Doc. 1, ¶¶14, 33).
Furthermore, plaintiffs allege that they
“requested certain financial information, including vendor product pricing, which
K&F refused to provide.” (Doc. 1, ¶ 31). FSI and FSC assert that K&F had a duty
to provide this information to them but breached that duty.
(Doc. 1, ¶¶ 34-35).
The plaintiffs assert that the breach was a “direct and proximate” cause of the
damage they suffered. (Doc. 1, ¶ 35).
K&F argues that FSI and FSC did not provide facts in the complaint to show
that K&F owed a duty to the plaintiffs. (Doc. 10, p. 5). Additionally, K&F
contends that FSI and FSC’s statement that “[the] [p]laintiffs suffered damages” is
conclusory. (Doc. 10, p. 5).
The Court disagrees. (Doc. 10, p. 5). In Alabama, “the existence of a duty
is a strictly legal question to be determined by the court.” DiBiasi, 988 So. 2d at
461. Alabama courts review several factors to determine whether a duty exists,
including: “(1) the nature of the defendant’s activity; (2) the relationship between
the parties; and (3) the type of injury or harm threatened.” DiBiasi, 988 So. 2d at
According to the complaint, the parties had a franchisor-franchisee
relationship. (Doc. 1, ¶10). Due to the nature of this relationship, K&F had access
to information FSI and FSC needed to successfully operate an Izzo’s restaurant.
This relationship placed K&F in a position of control and FSI and FSC in positions
of reliance upon K&F. These allegations are sufficient to enable the plaintiffs’
negligence claim to survive a Rule 12(b)(6) challenge.
Nevertheless, the Court questions whether FSI and FSC’s negligence claim
fails as a matter of law.
Alabama does not recognize a tort-like cause of action for the breach
of a duty created by contract, because “a negligent failure to
perform a contract . . . is but a breach of the contract.” Vines v.
Crescent Transit Co., 85 So.2d 436, 440 (Ala. 1956); see also Barber
v. Business Prods. Ctr., 677 So.2d 223, 228 (Ala. 1996) (“a mere
failure to perform a contractual obligation is not a tort”); Am. Dist.
Tel. Co. of Ala. v. Roberts & Son, 122 So. 837, 840 (Ala.1929)
(holding plaintiff cannot maintain tort action where alleged negligence
consists of failure to perform a contractual obligation).
Lehr’s Ironworks, LLC v. Rembrandt Enterprises, Inc., 2011 WL 6182092, at *4
(M.D. Ala. Dec. 13, 2011). It appears that FSI and FSC’s negligence claim is
based on FSI and FSC’s allegations that K&F failed to perform its obligations
under the franchise disclosure document and the franchise agreement.
complaint contains no independent or separate facts supporting the negligence
The Court invites FSI and FCS to show cause why the Court should not
dismiss the negligence claim pursuant to Federal Rule of Civil Procedure 1. Rule 1
states: “These rules . . . should be construed and administered to secure the just,
speedy, and inexpensive determination of every action and proceeding.” Fed. R.
Civ. P. 1; see also Boschette v. Bach, 925 F. Supp. 100, 101 (D.P.R. 1996)
(“Dismissing a complaint that fails to state a claim is the proper means to bring
about the just, speedy, and inexpensive determination of every action as mandated
by the Federal Rules of Civil Procedure.”)
(internal quotations and citations
omitted); Danow v. Borack, 197 Fed. Appx. 853, 856 (11th Cir. 2006) (district
court must “provide notice of its intent to dismiss the claims for failure to state a
claim and an opportunity for [the plaintiff] to respond prior to dismissing the
For the reasons discussed above, the Court DENIES K&F’s Rule 12(b)(6)
motion to dismiss.
On or before March 18, 2015, FSI and FSC shall SHOW
CAUSE in writing why the Court should not strike their negligence claim from the
DONE and ORDERED this March 9, 2015.
MADELINE HUGHES HAIKALA
UNITED STATES DISTRICT JUDGE
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