Newport et al v. Burger King Corporation

Filing 193

ORDER GRANTING IN PART AND DENYING IN PART BURGER KING CORPORATION'S MOTION TO DISMISS WILLIE C. COOK'S CROSS-CLAIM AND VACATING HEARING by Judge William Alsup [granting in part and denying in part #167 Motion to Dismiss]. (whasec, COURT STAFF) (Filed on 10/5/2011)

1
2
3
4
5
6

IN THE UNITED STATES DISTRICT COURT

7
FOR THE NORTHERN DISTRICT OF CALIFORNIA
8
9
ROY D. NEWPORT, et. al.,

11
For the Northern District of California

United States District Court

10

12
13
14

Plaintiffs,

No. C 10-04511 WHA

v.
BURGER KING CORPORATION,
Defendant.

ORDER GRANTING IN PART AND
DENYING IN PART BURGER
KING CORPORATION’S
MOTION TO DISMISS WILLIE C.
COOK’S CROSS-CLAIM AND
VACATING HEARING

15

/

16

AND RELATED COUNTERCLAIMS.

17

/

18

INTRODUCTION

19

In this contract dispute, defendant Burger King Corporation moves to dismiss the action

20

pursuant to FRCP 12(b)(6). For the reasons stated below, the motion is GRANTED IN PART AND

21

DENIED IN PART.

22
23

STATEMENT
This action arises in the wake of the related class action settlement in Castaneda v. Burger

24

King Corp., No. C 08-04262 WHA, 2010 WL 2735091 (July 12, 2010). In Castaneda, a class of

25

plaintiffs alleged that architectural barriers to access to certain California Burger King restaurants

26

violated the Americans with Disabilities Act. Ten classes were certified — one for each of the

27

ten individual restaurants where plaintiffs encountered alleged access barriers. These ten

28

restaurants became known as the “Focus Ten.” Those parties entered a settlement agreement,

1

and BKC agreed to pay a total of $7.5 million. BKC then looked to the owners and operators of

2

California Burger King franchises for indemnification (Compl. ¶ 4). A group of franchisees then

3

brought this suit against BKC requesting declaratory relief over the indemnity issue (id. at ¶ 90).

4

BKC counterclaimed, seeking indemnification from California Burger King franchisees

5

(Dkt. No. 90). Willie C. Cook was a newly added party named as a counterclaim defendant.

6

The instant motion, however, concerns Cook’s cross-claims back against BKC. Cook was

and BK #2288 were two of the “Focus Ten” restaurants subject to the class certification order

9

in Castaneda. Cook was also franchisee of BK #3674, also located in Oakland. After signing

10

franchise agreements for all three locations, Cook assigned the franchise agreements and leases

11
For the Northern District of California

a franchisee of Burger King 2055 in El Cerrito and Burger King 2288 in Oakland. BK #2055

8

United States District Court

7

to Huntington Restaurants, Inc., a corporation of which Cook was the sole shareholder

12

(Amd. Cross-claim ¶¶ 6–7, 9).

13

Between 2006 and 2008, Cook personally invested $600,000 to make certain “re-imaging”

14

improvements to BK #2288 as required by the Burger King franchise agreement. Following the

15

Castaneda lawsuit, BKC sent consultants to survey BK #2288 and BK #2055. Cook was

16

instructed to implement changes to the locations in order to comply with ADA requirements.

17

These improvements cost another $110,000 (id. at ¶¶ 23–29). The costs of the ADA repairs so

18

close on the heels of substantial “re-imaging” improvements — complicated by the worldwide

19

financial crisis of the fall of 2008 — left Cook in financial strain (id. at ¶¶ 31–32).

20

In March 2009, Cook decided to sell BK #3674, one of the two Oakland stores, which had

21

been underperforming. In the preceding months, Cook had been required to install a new dining

22

room at this location. He did so, but reduced the dining room size by 20-30 seats to better

23

facilitate management of the restaurant despite the fact that BKC had denied him permission to

24

make such reductions. Cook discussed his financial difficulties with BKC, but was denied

25

permission to close the restaurant. In March 2009, Cook received a letter from BKC terminating

26

his franchise for BK #3674 because Cook had not arranged the dining room as per BKC’s

27

specification. Cook put the franchise on the market and sold it to John Mascali, a Caucasian.

28
2

1

He was permitted by BKC to continue operating the restaurant with the reduced-sized dining

2

room (id. at ¶¶ 34–36, 39).

3

The financial strain began to affect Cook’s health. In July 2009, he underwent triple

4

bypass heart surgery. Cook began to fall behind on his financial obligations to BKC, and owed

5

$50,000 in past franchise fees by the end of 2009. BKC refused to negotiate regarding the

6

amount due (id. at ¶¶ 40, 42).

7

In December 2009, Cook was deposed in connection with the Castaneda litigation.

8

Only four days after his deposition testimony, Cook received a letter of notice of default, and

9

three days after that a termination notice. Later that month, HRI filed Chapter 11 bankruptcy
(id. at ¶¶ 43–44, 45). In July 2010, the Castaneda settlement allocated $1.8 million to BK #2055

11
For the Northern District of California

United States District Court

10

and BK #2288. That month, on the same day Cook’s wife of over 30 years died, BKC presented

12

him with a bill for $1.8 million. Cook ultimately either sold or transferred his remaining

13

franchises (id. at ¶¶ 48–48, 52).

14

After the sale of all of his franchises, Cook “learned of other discriminatory treatment.”

15

BKC allegedly required Cook “to pay a substantial mark-up over that which BKC paid to the

16

owner of the leased property. Cook also learned that BKC has had a historical practice of

17

charging African-American franchisees a substantially higher mark-up on its leases than it

18

charges other non-black franchisees” (id. at ¶ 53).

19

After Cook was named as a party in BKC’s counterclaim, Cook brought a cross-claim

20

against BKC (Dkt. No. 151). Cook alleges seven claims for relief: (1) breach of the franchise

21

agreements; (2) declaratory relief under 28 U.S.C. 2201; (3) breach of the duty of good faith and

22

fair dealing with respect to BK #2055 and BK #2288; (4) breach of the duty of good faith and fair

23

dealing with respect to BK #3674; (5) intentional infliction of emotional distress; (6) negligence;

24

and (7) discrimination. This order follows full briefing.

25

ANALYSIS

26

To survive a motion to dismiss, a complaint must contain sufficient factual matter,

27

accepted as true, to state a claim for relief that is plausible on its face. FRCP 12(b)(6); Ashcroft v.

28

Iqbal, 129 S. Ct. 1937, 1949 (2009). A claim is facially plausible when there are sufficient
3

1

factual allegations to draw a reasonable inference that the defendants are liable for the misconduct

2

alleged. While a court “must take all of the factual allegations in the complaint as true,” it is

3

“not bound to accept as true a legal conclusion couched as a factual allegation.” Id. at 1949–50

4

(quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)). “[C]onclusory allegations of law

5

and unwarranted inferences are insufficient to defeat a motion to dismiss for failure to state a

6

claim.” Epstein v. Wash. Energy Co., 83 F.3d 1136, 1140 (9th Cir. 1996) (citation omitted).

7

1.

8

BKC moves to dismiss the claims alleging breach of contract and seeking declaratory

9

STANDING.

relief because Cook lacks standing to bring the claims. BKC argues that because Cook assigned
the franchise agreements for BK #2055 and BK #2288 to HRI, only HRI — not Cook, its sole

11
For the Northern District of California

United States District Court

10

shareholder — has standing to sue (Br. 5–6).

12

The “irreducible constitutional minimum of standing” contains three elements:

13

(1) plaintiff must have suffered an injury in fact that is concrete and particularized, (2) there must

14

be a causal connection between the injury and defendant’s conduct, and (3) it must be likely,

15

as opposed to speculative, that the injury will be redressed by a favorable decision. Lujan v.

16

Defenders of Wildlife, 504 U.S. 555, 560–61 (1992).

17

It is a well-established principle of corporate law that a shareholder cannot bring an

18

individual direct claim for relief for an injury done to the corporation by a third party.

19

United States v. Stonehill, 83 F.3d 1156, 1160 (9th Cir. 1996). A shareholder does have standing,

20

however, when he has been “injured directly and independently of the corporation.”

21

RK Ventures v. City of Seattle, 307 F.3d 1045, 1057 (9th Cir. 2002).

22
23

A.

Breach of the Franchise Agreement.

Cook’s first claim is for breach of the franchise agreements. In order for Cook to have

24

standing to bring this claim, he must demonstrate that he was injured independently of HRI as a

25

result of the alleged breach of the franchise agreements.

26

Cook alleges that BKC’s failure to disclose “vital developments in disability access laws”

27

violated the franchise agreement and prevented him from “successfully manag[ing] each of the

28

subject franchises” (Amd. Cross-claim ¶ 61). Cook has indeed been injured independently of his
4

1

corporation by the alleged breaches of the franchise agreements. Following the $7.5 million

2

Castaneda award, BKC brought a suit for indemnification, and named Willie C. Cook personally

3

as a counter-defendant, not his corporation HRI (Dkt. No. 90). As a result of the alleged breach,

4

Cook has “been forced to incur attorney’s fees to defend BKC’s indemnity and guaranty

5

demands” (Amd. Cross-claim ¶ 66).

6

Cook has thus been injured directly and independently of HRI. There is a demonstrated

7

causal connection between Cook’s injury and BKC’s alleged breach of the franchise agreements,

8

and it is likely that the injury would be redressed by a favorable judgment. Cook has thus

9

satisfied all three elements necessary to establish standing.
The only binding precedent cited by BKC is Sherman v. British Leyland Motors, Ltd.,

11
For the Northern District of California

United States District Court

10

601 F.2d 429, 440–41 (9th Cir. 1979). Sherman, however, did not involve a factual situation

12

similar to the one involved here. In Sherman, the plaintiff never deviated from its corporate

13

identity, nor suffered any injury distinguishable from injury to the corporation. Id. at 439.

14

The situation here is distinguishable. Cook was named as an individual in BKC’s own suit for

15

indemnification. Cook thus has standing to assert a claim for breach of the franchise agreement.

16

Accordingly, BKC’s motion to dismiss the claim for breach of contract is DENIED.

17

B.

Declaratory Relief.

18

Cook’s second claim is for declaratory relief under 28 U.S.C. 2201. Section 2201(a)

19

allows a court in a “case of real controversy” to “declare the rights and other legal relations of any

20

interested party seeking such declaration, whether or not further relief is or could be sought.”

21

Cook seeks a determination of the rights and obligations of the parties and requests the following

22

declarations: (1) BKC’s negligence was the basis for the Castaneda lawsuit; (2) BKC is not

23

entitled to indemnification from Cook if BKC was negligent or acted unlawfully, and (3) BKC is

24

not entitled to indemnification from Cook for attorneys fees or costs incurred in connection with

25

the Castaneda lawsuit.

26

BKC argues that Cook has no standing to request declaratory relief, reiterating its earlier

27

argument that Cook has no standing as an individual. Section 2201, however, allows “any

28

interested party” to seek declaratory relief. BKC itself named Cook individually as a party when
5

1

seeking indemnification, and now intends to hold him liable for $1.8 million of the Castaneda

2

award. Cook is undeniably an “interested party.” BKC’s motion to dismiss Cook’s claim for

3

declaratory relief is DENIED.

4

2.

BREACH OF DUTY OF GOOD FAITH AND FAIR DEALING.

5

Cook alleges breach of the implied duty of good faith and fair dealing of all three

6

franchise agreements. It is long recognized in California law that every contract contains an

7

implied covenant of good faith and fair dealing that “neither party will do anything which will

8

injure the right of the other to receive the benefits of the agreement.” Wolf v. Walt Disney

9

Pictures & Television, 162 Cal. App. 4th 1107, 1120 (2008). The covenant, however, “is read
into contracts in order to protect the express covenants or promises of the contract, not to protect

11
For the Northern District of California

United States District Court

10

some general public policy interest not directly tied to the contract’s purpose.” Foley v.

12

Interactive Data Corp., 47 Cal. 3d 654, 690 (Cal. 1988). There is thus no obligation to deal fairly

13

or in good faith absent an existing contract. Racine & Laramie, Ltd. v. Dep’t of Parks &

14

Recreation, 11 Cal App. 4th 1026, 1032 (1992).

15
16

A.

BK #2055 and BK #2288.

Cook’s third claim is for breach of the duty of good faith and fair dealing pursuant to the

17

franchise agreements for BK #2055 and BK #2288. He alleges that during negotiations, BKC

18

“failed to disclose material facts” with the “intent to induce Cook to enter into the guaranty

19

agreements containing guarantee provisions requiring him to indemnify BKC.” He alleges that if

20

he had been aware of certain ADA obligations, “he would not have agreed to guarantee HRI’s

21

agreement to indemnify BKC in disability access claims” (Amd. Cross-claim ¶ 66). The failure

22

to disclose these facts, however, took place during the negotiation process, not while there was an

23

existing contract between Cook and BKC. There is no pre-contract covenant of good faith and

24

fair dealing in the negotiation process. Copeland v. Baskin Robbins U.S.A., 96 Cal. App. 4th

25

1251, 1259 (2002). In his opposition, Cook offers nothing in rebuttal of this argument. He has

26

thus failed to state a claim on which relief can be granted pursuant to FRCP 12(b)(6).

27

Accordingly, BKC’s motion to dismiss this claim is GRANTED.

28
6

1
2

B.

BK #3674.

Cook’s fourth claim is for breach of the duty of good faith and fair dealing of the franchise

3

agreement for BK #3674. Cook alleges that BKC breached this duty “by unreasonably refusing

4

Cook’s request to reduce the dining room only to later permit the subsequent franchisee to

5

continue to operate the franchise with the reduced dining room” (Amd. Cross-claim ¶ 70).

6

In December 2009, however, Cook transferred his interest in BK #3674 (Cook Exh. D).

7

The transfer agreement specified that each of the “Owners, Guarantors, Assignors, and

8

Assignees . . . unconditionally and absolutely releases and forever discharges BKC . . . against

9

any and all claims . . . aris[ing] out of this Agreement, the Franchise Agreement, the operation
of the Restaurant, or any other matter” (id. at 2). Cook is identified as the assignor of the transfer

11
For the Northern District of California

United States District Court

10

agreement (id. at 9). Cook thus released BKC from any claims arising out of the franchise

12

agreement of BK #3674, and cannot state claim for breach of implied duty of good faith and

13

fair dealing under this franchise agreement. Accordingly, BKC’s motion to dismiss this claim

14

is GRANTED.

15

3.

16

Cook’s fifth claim is for intentional infliction of emotional distress. The elements of

INTENTIONAL INFLICTION OF EMOTIONAL DISTRESS.

17

the tort of intentional infliction of emotional distress are: (1) extreme and outrageous conduct

18

by defendant with the intention of causing, or reckless disregard of the probability of causing,

19

emotional distress; (2) plaintiff suffered severe or extreme emotional distress; and (3) actual and

20

proximate causation of the emotional distress by defendant’s outrageous conduct. Christensen v.

21

Superior Court, 54 Cal. 3d 868, 903 (Cal. 1991).

22

Cook alleges that BKC’s extreme and outrageous behavior included pressuring him to

23

make unnecessary improvements while he was undergoing heart surgery, retaliating against him

24

for his deposition testimony in the Castaneda lawsuit by terminating his franchise agreements,

25

refusing to negotiate with him, and demanding $1.8 million on the same day that his wife of

26

30 years died. He also alleges that BKC’s behavior caused him “to suffer financial loss,

27

humiliation, mental anguish, and emotional and physical distress” (Amd. Cross-claim ¶¶ 80–81).

28
7

1

Cook has pled sufficient facts, if accepted as true, to state a claim for relief that is plausible on its

2

face. Accordingly, BKC’s motion to dismiss Cook’s fifth claim is DENIED.
NEGLIGENCE.

3

4.

4

Cook’s sixth claim is for negligence. The elements of negligence are duty, breach of duty,

5

causation, and damages. The general rule in California is that each person has a duty to use

6

“ordinary care” and is liable for injuries caused by a failure to exercise this care. Parsons v.

7

Crown Disposal Co., 15 Cal. 4th 456, 472 (Cal. 1997).

8
9

Cook asserts that BKC owed him a duty of care, and “knew or should have known that
failure to exercise due care in its relationship with Cook would cause Cook severe emotional
distress” (Amd. Cross-claim ¶ 74–75). In support of this claim, Cook alleges the same

11
For the Northern District of California

United States District Court

10

misconduct he offered in support of his intentional infliction of emotional distress claim,

12

including unnecessary pressure to renovate while he was having health problems and BKC’s

13

demand of $1.8 million on the same day his wife died.

14

BKC argues that the only injury Cook alleges is due to breach of contract, and thus

15

contract law should govern this claim, not tort law (Br. 11). Cook alleges BKC’s actions outside

16

of termination of the franchise agreement were negligent. He also alleges that BKC breached its

17

duty of ordinary care and caused Cook emotional injury while he was ill and grieving after the

18

death of his wife. Cook has thus plead sufficient facts to state a claim for negligence.

19

BKC also argues that both tort claims are barred by the economic loss rule. The economic

20

loss rule precludes recovery under tort theories for losses that are solely economic in nature.

21

Stop Loss Ins. Brokers, Inc. v. Brown & Toland Med. Grp., 143 Cal. 4th 1036, 1057 (Cal. 2006).

22

Cook, however, claims more than purely economic damages. He seeks recovery for

23

embarrassment, mental anguish, and emotional and physical distress. The economic loss

24

rule is thus inapplicable. Accordingly, BKC’s motion to dismiss Cook’s claim for negligence

25

is DENIED.
DISCRIMINATION.

26

5.

27

Cook’s seventh claim is for discrimination in violation of 42 U.S.C. 1981 and California

28

Civil Code Section 84. Section 1981 gives all persons within the United States the same right to
8

1

make and enforce contracts “as is enjoyed by white citizens.” Section 84 prohibits cancelling or

2

terminating a dealership agreement on the basis of race.

3

BKC argues that because it was released from liability for claims relating to BK #3674,

4

the claim for discrimination must fail. This order agrees. When signing the transfer agreement,

5

Cook released BKC from any claims arising out of “this Agreement, the Franchise Agreement,

6

the operation of the restaurant, or any other matter” (Cook Exh. D at 2) (emphasis added). Cook

7

thus released BKC from liability for any sort of claim arising from BK #3674. BKC’s motion to

8

dismiss the discrimination claim is GRANTED.

9

For the foregoing reasons, BKC’s motion to dismiss is GRANTED IN PART AND DENIED IN

11
For the Northern District of California

United States District Court

10

CONCLUSION

PART. More specifically, BKC’s motion to dismiss Cook’s third, fourth, and seventh claims is

12

GRANTED. These claims are dismissed without leave to amend as they cannot be cured by

13

further factual pleading. BKC’s motion to dismiss Cook’s first, second, fifth, and sixth claims

14

is DENIED. The hearing set for October 13 is VACATED. BKC shall answer within

15

FOURTEEN CALENDAR DAYS.

16
17

IT IS SO ORDERED.

18
19
20

Dated: October 5, 2011.

WILLIAM ALSUP
UNITED STATES DISTRICT JUDGE

21
22
23
24
25
26
27
28
9