KNIGHTS FRANCHISE SYSTEMS, INC. v. SAIRAM, INC. et al

Filing 19

OPINION. Signed by Judge John Michael Vazquez on 9/14/17. (sr, )

NOT FOR PUBLICATION
UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY

KNIGHTS FRANCHISE SYSTEMS, INC.,
Civil Action No. 17-00932

Plaintiff
OPINION
V.

SAIRAM, INC. & NIMESH PATEL,

Defendants.

John Michael Vazguez, U.S.D.J.

This matter comes before the Court on Plaintiff Knights franchise Systems, Inc.’s (“KFS”
or “Plaintiff’) unopposed motion for default judgment against Defendants Sairam, Inc. (“Sairam”)
and Nimesh Patel (“Patel”) under Fed. R. Civ. P. 55(b)(2). D.E. 16. The Court reviewed all
submissions made in support of the motion, and considered the motion without oral argument
pursuant to fed. R. Civ. P. 78(b) and L. Civ. R. 78.1(b). For the reasons that follow, Plaintiffs
motion is GRANTED.
I.

FACTS1 AND PROCEDURAL HISTORY
KFS signed a Franchise Agreement (the “Agreement”) with Sairam on November 28,

2005, that governed the operation of a 96-room Knights Inn motel in Indiana for an initial three-

year term. Compl.

¶J 8-9.

After the expiration of the initial period, Section 5 of the Agreement

provided for an automatic three-year extension unless either party exercised its right to terminate.

The facts of this matter derive from the Complaint as well as the affidavits and exhibits
submitted in conjunction with Plaintiffs motion for default judgment. See Trustees ofthe
Teamsters Pension Trust Fund ofPhila. & Vicinity v. Riccelli Premium Proditce, Inc., 2011 WL
1114175, at *1 (D.N.J. Mar. 23, 2011).

See Affidavit of Suzanne Fenimore (“Fenimore Aff.”) Ex. A,

§

5.2. The Agreement required

Sairam to make periodic payments to KFS for recurring fees, which consisted of royalties,
reservation fees, taxes, interest, and other fees. Compi.

¶ 10. In addition, Sairam agreed to pay

interest on any past due amounts, at the lesser of “L5% per month or the maximum rate permitted
by applicable law

.

.

.

.“

Fenimore Aff. Ex. A,

§ 7.3.

KFS could terminate the Agreement, afier

giving Sairam notice, if Sairam discontinued operating the business as a Knights Inn location or
lost possession of the facility. Id.

§ 11.2. In the event of a termination, Sairam agreed to pay

liquidated damages pursuant to a formula set forth in the Agreement. Id.

§ 12.1. In addition,

Section 17.6.3 of the Agreement is a forum selection clause, which provides that Sairam consented
to personal jurisdiction and venue in a New Jersey state or federal court. Id.

§ 17.6.3.

Nimesh Patel, Vice President of Sairam, also signed a Guaranty, which provided that upon
a default under the Agreement, Patel would personally perform each unpaid or unperformed
obligation of Sairam. Compi.

¶ 17-18; Fenimore Aff. Ex. B. In addition, the Guaranty expressly

stated that Patel was bound by the forum selection clause in the Agreement. Fenimore Aff. Ex. B.
On or about April 12, 2016, Sairam lost possession of the facility, allegedly due to a
sheriffs sale. Compl.

¶ 20; Fenimore Aff. Ex. C. Consequently, on July 26, 2016, KFS gave

notice to Sairam of its unilateral termination of the Agreement and advised Sairam that is was
required to pay KFS $28,868.55 in liquidated damages.

Compi.

¶ 21. The same day, KFS

informed Sairam that, as of July 26, 2016, it owed an estimated $56,309.94 in outstanding recurring
fees. F enimore Aff. Ex. C. Sairam failed to pay either.
On February 13, 2017, KFS filed a complaint against Defendants for the premature
termination of the Agreement alleging, among other things, that Sairam breached the Agreement
due to its failure to pay various fees that were contractually owed to KFS. Compi.

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¶J 26-31, 37-

40. KFS also alleged that Patel breached his Guaranty. Id.

¶J 45-48. Defendants did not answer,

move, or otherwise respond to KFS’s complaint. On May 11, 2017 this Court granted KF S’s letter
request for a three week extension to seek the entry of default and default judgment until June 2,
2017 in order to explore settlement in this matter. D.E. 8, 9. On June 2, 2017 KFS requested an
entry of default against Defendant, Nimesh Patel. D.E. 11. As a result, the Clerk of the Court
entered default against Defendant Nimesh Patel on June 7, 2017 for failure to plead or otherwise
defend.2
KFS then requested that the Court allow it to use the May 22, 2017 date of proper service

on Defendant Sairam, despite the fact that it was outside the 90-day window specified in Federal
Rule of Civil Procedure 4(m).3 D.E. 13. The Court granted KFS’s request. D.E. 14. Thereafter,
on July 7, 2017 KFS requested an entry of default against Sairam. D.E. 11. As a result, the Clerk
of the Court entered default against Sairam on July 7, 2017. On July 14, 2017, KFS filed this
motion for default judgment. D.E. 16. KFS seeks $26,868.55 in liquidated damages,5 $63,881.02
in outstanding recurring fees, and $5,989 in interest. Fenimore Aff.

2

¶ 17.

Rule 55(a) of the Federal Rules of Civil Procedure directs the Clerk of the Court to enter a party’s
default when that party “against whom a judgment for affinnative relief is sought has failed to
plead or otherwise defend, and that failure is shown by affidavit or otherwise.” Fed. R. Civ. P.
5 5(a).
Rule 4(m) requires that “[i]f a defendant is not served within 90 days after the complaint is
filed, the court—on motion or on its own after notice to the plaintiff—must dismiss the action
without prejudice against that defendant or order that service be made within a specified time.
But if the plaintiff shows good cause for the failure, the court must extend the time for service
for an appropriate period.” Fed. R. Civ. P. 4(m).
On August 29, 2017, the Court ordered KFS to provide additional proof of proper service on
Sairam,D.E. 17, andKFS did so. D.E. 1$.
Under the Agreement, liquidated damages are the “[c]ombined [f]ees then in effect for the
[fi acility multiplied by the lesser of 12 or the number of full calendar months remaining on the
unexpired current [t]erm at the date of termination.” Fenimore Aff. Ex. A, § 12.1. The average
combined monthly fees when the Agreement was terminated were $2,239.04 and more than twelve
months remained on the current term. As a result, liquidated damages are calculated as twelve
times $2,239.04, plus interest. F enimore Aff. ¶ 22-26.
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II.

LAW AND ANALYSIS
A. Standard of Review

Federal Rule of Civil Procedure 55 allows for the entry of default against a party that fails
to plead or otherwise defend against claims. Fed. R. Civ. P. 55. “The entry of a default judgment
is largely a matter of judicial discretion, although the Third Circuit has emphasized that such
‘discretion is not without limits,

.

.

.

and [has] repeatedly state[d] [its] preference that cases be

disposed of on the merits whenever practicable.” Chanel, Inc. v. Gordashevsky, 558 F. Supp. 2d
532, 535 (D.N.J. 2008) (quotingHritzv. Woma Corp., 732 F.2d 1178, 1181 (3d Cir.1984)).

In entering a default judgment, a court must determine whether (1) it has personal and
subject matter jurisdiction; (2) the defendants were properly served; (3) the complaint sufficiently
pleads a cause of action; and (4) the plaintiff has proven damages. Days Inns Worldwide, Inc. v.
Jinisha Inc., No. 14-6794, 2015 WL4508413, at *1 (D.N.J. July 24, 2015). Additionally, a court
must determine the appropriateness of default judgment by weighing (1) the prejudice suffered by
the party seeking default judgment; (2) whether the party subject to the default has a meritorious
defense; and (3) the culpability of the party subject to default. Id. at *2.
B. Jurisdiction and Service

When a default judgment is sought against a party that has not filed responsive pleadings,
the court “has an affirmative duty to look into its jurisdiction both over the subject matter and the
parties.” Ramada Worldwide Inc. v. Benton Harbor Han Ohm, L.L.C., No. 05-3452, 2008 WL

2967067, at *9 (D.N.J. July 31, 200$) (quoting Williams v. L(fe Say. &Loan, $02 F.2d 1200, 1203
(lOthCir. 1986)).

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i. Subject ]‘Iafter Jurisdiction

The Court has subject matter jurisdiction over this matter. Diversity jurisdiction exists
when “the matter in controversy exceeds the sum or value of $75,000.

.

.

and is between citizens

of different states.” 2$ U.S.C. 1332(a). Plaintiff KFS is a Delaware corporation with its principal
place of business in Parsippany, New Jersey. Defendant Sairarn is an Indiana corporation with its
principal place of business in Indiana, and Defendant Patel is domiciled in Indiana. Compi.
3. In addition, KFS alleges that it is owed more than $75,000 in damages. Id.

¶J 1-

¶ 30, 40, 4$.

ii. Personal Jurisdiction

The Court has personal jurisdiction over Defendants. Personal jurisdiction can be waived
through a contractual forum selection clause. Ramada, 200$ WL 2967067, at *10. Here, Section
17.6.3 of the Agreement and the Guaranty provide that Defendants consent to and waive their
objection “to the non-exclusive personal jurisdiction of.

.

.

the United States District Court for the

District of New Jersey for all cases and controversies under the Agreement.” F enimore Aff. Ex.
A,

§ 17.6.3. Thus, Defendants consented to personal jurisdiction in New Jersey by signing the

Agreement and Guaranty.
iii.

Sufficiency of Proof of Service

“Before the Court can enter default judgment, it must find that process was properly served
on the Defendant[s].” Teamsters Pension Fund of Phi/a. & Vicinity v. Am. Helper, Inc., No.11-

624, 2011 WL 4729023, at *2 (D.N.J. Oct. 5, 2011) (citing Gold Kist, Inc. v. Lattrinbitrg Oil Co.,
Inc., 756 F.2d 14, 19 (3d Cir. 1985)). One way that Defendant Patel, as an individual, may be
served is by “leaving a copy of [the summons and complaint] at the individual’s dwelling or usual
place of abode with someone of suitable age and discretion who resides there.”

F.R.C.P.

4(e)(2)(B). Here, Plaintiffs Process Server, Recon Management Group (“Recon”), served Patel’s

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wife, $weta Patel, at Patel’s usual place of abode. D.E. 5. Patel’s wife is alleged to be of suitable
age, discretion, and a resident of Patel’s home. Id. Therefore, the Court finds that service of the
summons and complaint was proper on Patel.
As a corporation, Sairam may be properly served “by delivering a copy of the summons
and of the complaint to an officer, a managing or general agent, or any other agent authorized by
appointment or by law to receive service of process

.

.

.

.“

F.R.C.P. 4(h)(1)(B). Here, a Recon

process server, personally served Defendant Patel on behalf of Sairam on May 22, 2017. D.E. 10.6
Patel is the sole owner of Sairam and Sairam’s registered agent. D.E. 18. Therefore, the Court
finds that service of the summons and complaint was also proper on Patel.
C. Sufficiency of Plaintiffs Causes of Action

Next, the Court must determine whether the complaint states a proper cause of action. The
Court must accept all well-pleaded factual allegations in the pleadings as true, except as to
damages. Chanel, Inc., 558 F. Supp. 2d at 53 5-36.

Counts Two, Four and Six state valid causes of action for breach of contract.7 Under New
Jersey law, to state a claim for breach of contract, a plaintiff must allege that there is (1) a valid
contract; (2) plaintiff performed under the contract; (3) defendant’s breach of the contract; and (4)
resulting damages. Lacroce v. lvi fortuna Roofing, Inc., No. 14-7329, 2017 WL 431768, at *5

6

The Recon process server originally improperly served process on Sairam. Rather than
personally serving the registered agent of Sairam, Inc., the process server served Mr. Patel’s
wife. D.E. 13. KFS brought this error to the Court’s attention and asked to use the date upon
which proper service of Sairam, Inc. was effectuated, May 22, 2017, despite the fact that this
date was outside the 90-day window specified in federal Rule of Civil Procedure 4(m). Id. As
noted, the Court permitted the May 22, 2017 service date to be used. D.E. 14.
Counts One asserts a claim for accounting, Count Three asserts a claim for actual damages, and
Count Five asserts a claim for unjust enrichment. See Compl. ¶ 22-25, 33-36, 41-44. These
counts are only relevant if the Court does not award liquidated damages. Because the Court will
award liquidated damages, it will not address these alternate claims.
‘

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(D.N.J. Jan. 31, 2017). KFS’s allegations here are sufficient. In Counts Two and Four, KFS
alleges that Sairam breached the Agreement by failing to pay KFS recurring fees and liquidated
damages after the Agreement was terminated. KFS alleges that it demanded payment, and has
been damaged by Sairam’s failure to pay the outstanding amounts due. Compi.

¶J 26-32, 37-40.

In Count Six, KF$ alleges that Patel breached the Guaranty by failing to satisfy Sairam’s
obligations under the Agreement and that, as a result, KFS suffered damages. KFS also established
that it performed under both the Agreement and the Guaranty. Id.

¶J 21, 45-48.

D. Damages
While the factual allegations of the complaint “will be taken as true,” the amount of

damages must still be proven. Comdyne L Inc. v. Corbin, 90$ F.2d 1142, 1149 (3d Cir. 1990)
(citation omitted). KFS is claiming damages of an amount equal to the recurring fees plus interest
and liquidated damages. Fenimore Aff.

¶J 22-27. Recurring fees, as described in Section 7 of the

Agreement, Section 4 of the Special Stipulations Addendum, and Schedule C of the Agreement,
consisted of royalties, reservation fees, taxes, interest, and other fees. Compi.

¶ 10. Moreover, the

Agreement provides that Sairam is liable for interest, at a rate of 1.5% per month or the maximum
rate permitted bylaw, whichever is less, on all past due amounts owed to KFS. Fenimore Aff. Ex.
A,

§ 7.3.

KFS provided an itemized list of the recurring fees that remained due and owing as of

the termination date, which establishes that at the time of termination Sairam owed $63,881.02,
inclusive of interest. Fenimore Aff. Ex. D.
As per Section 12.1 of the Agreement, the liquidated damages, before interest, was equal
to “[c]ombined [flees then in effect.. multiplied by the lesser of 12 or the number of full calendar
.

months remaining in the unexpired current [t]erm at the date of [t]ermination.” Fenimore Aff. Ex.
A,

§ 12.1. “Whether a liquidated damages clause is enforceable is a question of law for the court

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to decide.” Naporano Assocs., L.P. v. B & F Builders, 309 N.J. Super. 166, 176 (App. Div. 1998)
(citing Wasserman Inc. v. Township ofMiddletown, 137 N.J. 238, 238 (1994)). In Wasserman

,

Inc., the Court noted that when a liquidated damages clause for a commercial transaction is

negotiated by parties with comparable bargaining power, the ultimate issue is whether the amount
of liquidated damages is reasonable, either at the time of contract formation or the breach. 137 N.J.
238, 251. But “[a] term fixing unreasonably large liquidated damages is unenforceable on grounds
of public policy as a penalty.” Ramada Worldwide Inc. v. Khan Hotels LLC, No. 16-2477, 2017

WL 187384, at *6 (D.N.J. Jan. 17, 2017) (quoting Restatement (Second) of Contracts

§

356(1)

(1981)).
KFS’s claims for liquidated damages do not require any further evidentiary proof if they
are for a sum certain, such as an amount that was contractually agreed upon. See, e.g., Super 8
Motels, Inc. v. B & J (Radha), LLC, No. 05-5713, 2006 WL 3256828, at *5 (D.N.J. Nov. 9, 2006).
Moreover, there is no suggestion that the parties had unequal bargaining power. Finally, the
amount of liquidated damages appears reasonable. KFS’s actual damages, which it could recover
instead of liquidated damages, would be the lost recurring fees that KFS would have received but
for the premature termination. Fenimore Aff.

¶ 19. By comparison, the outstanding amount of

recurring fees with prejudgment interest here ($63,881.02) covered about two years of fees and
there was roughly a year and a half left under the current three-year Agreement term. As a result,
KFS has provided sufficient proof that Defendants are liable for a total of $26,868.55 in liquidated

damages. KF$ also established that it is entitled to receive $5,989 in interest due to the outstanding
amount of liquidated damages owed.
In sum, KFS sufficiently establishes that it is owed $96,738.57 in total damages.
F. Default Judgment Factors

$

Before entering a default judgment, district courts must determine the appropriateness of
default judgment by weighing (1) the prejudice suffered by the party seeking default judgment; (2)
whether the party subject to the default has a meritorious defense; and (3) the culpability of the
party subject to default. Jinisha, 2015 WL 4508413, at *2.
Here, all three factors weigh in favor of the Court entering a default judgment. KF$ would
not be able to recover damages owed according to the Agreement and the Guaranty, and would be
unfairly prejudiced if no default judgment is entered. Days Inns Worldwide, Inc. v. Tulszooja
Hosp., LLC, No. 15-5576, 2016 WL 2605989, at *3 (D.N.J. May 6, 2016); Jinisha, 2015 WL
4508413, at *2.

Next, considering that Defendants have not responded to this matter,

“Defendant[s] ha[ve] put forth no evidence or facts containing any information that could provide
the basis for a meritorious defense.” HICA Educ. Loan Corp. v. $urikov, No. 14-1045, 2015 WL
273656, at *3 (D.N.J. Jan. 22, 2015). Based on the allegations in the Complaint, the Court also
does see a basis for a meritorious defense. Lastly, Defendants’ failure to answer, without providing
any reasonable explanation, permits the court to draw an inference of culpability.

mt ‘1 Union of

Painters v. Andrews Window Servs. LLC, No. 15-3583, 2016 WL 3234516, at *3 (D.N.J. June 7,
2016) (citing Slover v. Live Universe, Inc., No. 08-2645, 2009 WL 606133, at *2 (D.N.J. Mar. 9,
2009)). As a result, the Court finds that default judgment is warranted.
III.

CONCLUSION

For the reasons set forth above, Plaintiffs motion for default judgment (D.E. 16) is
GRANTED. Accordingly, the Court will enter judgment against Defendants in the amount of

$96,738.57. An appropriate Order accompanies this Opinion.
Dated: September 14, 2017

çt/

John Michael Vazquez, T4S.D0
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