Yumilicious Franchise LLC v. Barrie et al
Filing
17
MEMORANDUM OPINION AND ORDER: For the reasons stated, the court grants in part and denies in part Yumilicious's 8 Motion to Dismiss Counterclaims but will allow Defendants to replead all of their counterclaims, except those based on breach of contract and alleged violations of the DTPA, FTC Act, and Business Opportunity Acts of Texas and South Carolina, which the court dismisses with prejudice. In light of the courts ruling as to Yumilicious's Motion to Dismiss Counterclaims, th e court denies as moot Yumilicious's Motion for a More Definite Statement. The court also grants Yumilicious's Motion to Strike Defendants' general denial but will allow Defendants to file an amended answer. Yumilicious's Motio n to Strike Defendants' jury demand is denied without prejudice. Accordingly, the court strikes Defendants' answer and orders Defendants to file an amended answer and counterclaims by 8/28/2014, that cure the deficiencies herein noted. (Ordered by Judge Sam A Lindsay on 8/14/2014) (tln)
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF TEXAS
DALLAS DIVISION
YUMILICIOUS FRANCHISE, L.L.C.,
Plaintiff,
v.
MATT BARRIE; KELLY GLYNN;
BRIAN GLYNN; and WHY NOT, L.L.C.,
Defendants.
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Civil Action No. 3:13-CV-4841-L
MEMORANDUM OPINION AND ORDER
Before the court is Yumilicious’s Motion to Dismiss Counterclaims, for a More Definite
Statement, and to Strike (Doc. 8), filed January 8, 2014. This motion actually includes four separate
motions. After carefully considering the motions, briefs, pleadings, and applicable law, the court
grants in part and denies in part Yumilicious’s Motion to Dismiss Counterclaims and will allow
Defendants to replead those claims that the court determines do not fail as a matter of law; denies
as moot Yumilicious’s Motion for a More Definite Statement; grants Yumilicious’s Motion to
Strike Defendants’ general denial but will allow Defendants to file an amended answer; and denies
without prejudice Yumilicious’s Motion to Strike Defendants’ jury demand.
I.
Factual and Procedural Background
This action was brought on December 12, 2013, by Yumilicious Franchise, L.L.C.
(“Plaintiff” or “Yumilicious”) against Defendants Why Not, L.L.C (“Why Not”); Matt Barrie; Kelly
Glynn; and Brian Glynn1 (collectively, “Defendants”) for alleged breaches of two franchise
1
The court refers to Matt Barrie, Kelly Glynn, and Brian Glynn herein collectively as “Individual Defendants.”
Memorandum Opinion and Order - Page 1
agreements. Yumilicious is a self-serve frozen yogurt franchise concept. Yumilicious launched its
first yogurt shop in 2008 in the Uptown neighborhood of Dallas, Texas. Since that time,
Yumilicious has expanded to thirteen locations in the Dallas-Fort Worth, Texas area. In 2010, Why
Not entered into two franchise agreements with Yumilicious to open two yogurt shops in South
Carolina – one in the Forest Acres/Columbia area and one in Lexington. The Individual Defendants,
as principals of Why Not, entered into the Principals’ Guaranty and Assumption Agreement
(“Guaranty Agreement”) wherein they personally guaranteed to Yumilicious that franchisee Why
Not would pay in a timely fashion all of its obligations under the franchise agreements.
Yumilicious contends that Defendants breached the franchise agreement for the Columbia
location by closing the yogurt store without prior authorization from Yumilicious. Yumilicious
further contends that Defendants breached the franchise agreements by failing to pay royalties and
pay for yogurt products that they ordered. Yumilicious seeks to recover damages that it allegedly
sustained as a result of Defendants’ breaches of the franchise agreements, including royalties and
unpaid invoices for products and supplies. Yumilicious also seeks attorney’s fees under the
Guaranty Agreement, as well as costs of suit, and prejudgment and postjudgment interest.
Defendants, on the other hand, maintain that the South Carolina yogurt shops were doomed
from the beginning and that they had no option but to close the Columbia store because Why Not
is unable to obtain proprietary Yumilicious-approved yogurt products at a reasonable price.
Defendants contend that Why Not was induced by Yumilicious’s fraudulent statements regarding
franchise costs and the national availability of products to enter the franchise agreements to open
stores in South Carolina. Defendants contend that, despite Yumilicious’s false assurances to the
contrary, Why Not was unable to obtain proprietary yogurt products at a reasonable price or the cost
Memorandum Opinion and Order - Page 2
at which Dallas area yogurt stores were able to obtain products because Yumilicious subsequently
entered into a contract with a supplier in Dallas, Texas, that would not deliver products to South
Carolina unless Why Not agreed to place large expensive pallet-sized orders. Defendants contend
that Why Not’s only other option was to purchase products from other national suppliers (that were
presumably approved by Yumilicious) at a cost that was 20 to 40 percent higher than that paid by
Dallas stores. Defendants have asserted counterclaims for breach of contract, fraud, negligent
misrepresentation, and violations of the Texas Deceptive Trade Practices Act (“DTPA”). Defendants
seek actual, consequential, and incidental damages in excess of $1 million; punitive and treble
damages; unspecified statutory relief under Texas’s franchise laws; and attorney’s fees. In addition,
or alternatively, Defendants seek to have the franchise agreements voided through a declaratory
judgment action.
Yumilicious moved on January 8, 2014, to dismiss all of Defendants’ counterclaims under
Federal Rule of Civil Procedure 12(b)(6). Alternatively, Yumilicious moves for a more definite
statement and contends that Defendants should be required to replead their claims with more
specificity. Yumilicious also contends that Defendants’ jury demand and general denial in response
to its Original Complaint (“Complaint”) should be stricken.
II.
Plaintiff’s Motion to Dismiss
A.
Standard Applicable to Plaintiff’s Motion to Dismiss
To defeat a motion to dismiss filed pursuant to Rule 12(b)(6) of the Federal Rules of Civil
Procedure, a plaintiff must plead “enough facts to state a claim to relief that is plausible on its face.”
Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007); Reliable Consultants, Inc. v. Earle, 517
F.3d 738, 742 (5th Cir. 2008); Guidry v. American Pub. Life Ins. Co., 512 F.3d 177, 180 (5th Cir.
Memorandum Opinion and Order - Page 3
2007). A claim meets the plausibility test “when the plaintiff pleads factual content that allows the
court to draw the reasonable inference that the defendant is liable for the misconduct alleged. The
plausibility standard is not akin to a ‘probability requirement,’ but it asks for more than a sheer
possibility that a defendant has acted unlawfully.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)
(internal citations omitted). While a complaint need not contain detailed factual allegations, it must
set forth “more than labels and conclusions, and a formulaic recitation of the elements of a cause of
action will not do.” Twombly, 550 U.S. at 555 (citation omitted). The “[f]actual allegations of [a
complaint] must be enough to raise a right to relief above the speculative level . . . on the assumption
that all the allegations in the complaint are true (even if doubtful in fact).” Id. (quotation marks,
citations, and footnote omitted). When the allegations of the pleading do not allow the court to infer
more than the mere possibility of wrongdoing, they fall short of showing that the pleader is entitled
to relief. Iqbal, 556 U.S. at 679.
In reviewing a Rule 12(b)(6) motion, the court must accept all well-pleaded facts in the
complaint as true and view them in the light most favorable to the plaintiff. Sonnier v. State Farm
Mutual Auto. Ins. Co., 509 F.3d 673, 675 (5th Cir. 2007); Martin K. Eby Constr. Co. v. Dallas Area
Rapid Transit, 369 F.3d 464, 467 (5th Cir. 2004); Baker v. Putnal, 75 F.3d 190, 196 (5th Cir. 1996).
In ruling on such a motion, the court cannot look beyond the pleadings. Id.; Spivey v. Robertson, 197
F.3d 772, 774 (5th Cir. 1999). The pleadings include the complaint and any documents attached to
it. Collins v. Morgan Stanley Dean Witter, 224 F.3d 496, 498-99 (5th Cir. 2000). Likewise,
“‘[d]ocuments that a defendant attaches to a motion to dismiss are considered part of the pleadings
if they are referred to in the plaintiff’s complaint and are central to [the plaintiff’s] claims.’” Id.
(quoting Venture Assocs. Corp. v. Zenith Data Sys. Corp., 987 F.2d 429, 431 (7th Cir. 1993)). In
Memorandum Opinion and Order - Page 4
this regard, a document that is part of the record but not referred to in a plaintiff’s complaint and not
attached to a motion to dismiss may not be considered by the court in ruling on a 12(b)(6) motion.
Gines v. D.R. Horton, Inc., 699 F.3d 812, 820 & n.9 (5th Cir. 2012) (citation omitted).
The ultimate question in a Rule 12(b)(6) motion is whether the complaint states a valid claim
when it is viewed in the light most favorable to the plaintiff. Great Plains Trust Co. v. Morgan
Stanley Dean Witter, 313 F.3d 305, 312 (5th Cir. 2002). While well-pleaded facts of a complaint
are to be accepted as true, legal conclusions are not “entitled to the assumption of truth.” Iqbal, 556
U.S. at 679 (citation omitted). Further, a court is not to strain to find inferences favorable to the
plaintiff and is not to accept conclusory allegations, unwarranted deductions, or legal conclusions.
R2 Invs. LDC v. Phillips, 401 F.3d 638, 642 (5th Cir. 2005) (citations omitted). The court does not
evaluate the plaintiff’s likelihood of success; instead, it only determines whether the plaintiff has
pleaded a legally cognizable claim. United States ex rel. Riley v. St. Luke’s Episcopal Hosp., 355
F.3d 370, 376 (5th Cir. 2004). Stated another way, when a court deals with a Rule 12(b)(6) motion,
its task is to test the sufficiency of the allegations contained in the pleadings to determine whether
they are adequate enough to state a claim upon which relief can be granted. Mann v. Adams Realty
Co., 556 F.2d 288, 293 (5th Cir. 1977); Doe v. Hillsboro Indep. Sch. Dist., 81 F.3d 1395, 1401 (5th
Cir. 1996), rev’d on other grounds, 113 F.3d 1412 (5th Cir. 1997) (en banc). Accordingly, denial
of a 12(b)(6) motion has no bearing on whether a plaintiff ultimately establishes the necessary proof
to prevail on a claim that withstands a 12(b)(6) challenge. Adams, 556 F.2d at 293.
A statute of limitations may support dismissal pursuant to Rule 12(b)(6) when it is evident
from a plaintiff’s pleadings that the action is time-barred and the pleadings fail to set forth or raise
Memorandum Opinion and Order - Page 5
some basis for tolling the statute. Jones v. Alcoa, Inc., 339 F.3d 359, 366 (5th Cir. 2003) (citations
omitted).
B.
Analysis
1.
DTPA
Defendants’ DTPA claim is based on alleged violations of the Federal Trade Commission’s
Franchise Rule (“FTC Act”), and the Business Opportunity Acts of Texas and South Carolina.
Plaintiff contends that Defendants’ DTPA claim is barred by the statute of limitations applicable to
such claims. Plaintiff asserts that while it is not entirely evident why Defendants believe that the
disclosures by Plaintiff made in conjunction with the May 2010 franchise agreements violate the
DTPA, Defendants’ allegations make clear that any such claim is time-barred. Defendants contend
that Plaintiff’s request for dismissal on this ground is not proper because it is based on the Columbia
franchise agreement attached to Plaintiff’s motion to dismiss, which is outside the pleadings.
DTPA claims are subject to a two-year statute of limitations. Tex. Bus. & Com. Code §
17.565 (Vernon 2011). Contrary to Defendants’ assertion, the Franchise Agreement attached to
Plaintiff’s motion to dismiss is considered part of the pleadings because it is referred to in
Defendants’ pleadings and is central to their counterclaims. See Collins, 224 F.3d at 498-99.
Moreover, as previously noted, a statute of limitations may support dismissal pursuant to Rule
12(b)(6) when it is evident from a party’s pleadings that the action is time-barred and the pleadings
fail to set forth or raise some basis for tolling the statute. Jones, 339 F.3d at 366.
With respect to their DTPA claim, Defendants allege Plaintiff violated the DTPA because
it provided Defendants with a franchise disclosure agreement (“FDD”) that was materially deficient.
Defs.’ Ans. & Countercl. ¶ 27. Defendants contend that the FDD provided to them was deficient
Memorandum Opinion and Order - Page 6
because, among other things, it is dated June 8, 2008, but the Forest Acres franchise agreement is
dated May 2010. Defendants further assert that the FDD incorrectly states that Plaintiff provided
earnings financial performance representations on April 19, 2010, six weeks before Defendants
signed both franchise agreements.
Regardless of the date specified on the FDD, Defendants appear to acknowledge that they
received the FDD in May 2010, which according to the franchise agreement submitted by Plaintiff,
is the date when Defendants signed the franchise agreements. Thus, the two-year statute of
limitations for any DTPA claim based on alleged deficiencies in the FDD expired in May 2012, long
before Plaintiff filed this action and Defendants asserted their counterclaims. Defendants’ DTPA
claim is therefore barred by the statute of limitations applicable to such claims and will be dismissed
with prejudice.
2.
Fraud and Negligent Misrepresentation
Plaintiff contends that Defendants’ pleadings do not satisfy Rule 9(b)’s heightened pleading
requirement and are insufficient to state claims for fraud and negligent representation. Plaintiff
further asserts that it is uncertain regarding the basis of Defendants’ fraud and negligent
misrepresentation claims. Defendants respond and clarify that their fraud claim is based on the
allegations in paragraph six of their pleadings which, according to Defendants, satisfy Rule 9(b)’s
particularity requirement. Defendants do not specifically address Plaintiff’s contentions regarding
their negligent misrepresentation claim.
The parties acknowledge that Texas law applies to Defendants’ contract and tort claims. In
Texas, the elements of common law fraud are: “(1) a material misrepresentation; (2) that was false;
(3) made with knowledge of its falsity or recklessness as to its truth; (4) made with the intention that
Memorandum Opinion and Order - Page 7
it should be acted upon by another party; (5) relied upon by another party[;] and (6) causing injury.”
Flaherty & Crumrien Preferred Income Fund, Inc. v. TXU Corp., 565 F.3d 200, 212 (5th Cir. 2009).
The material misrepresentation element “can be met if the defendant concealed or failed to disclose
a material fact when a duty to disclose existed.” United Teacher Assocs. Ins. Co. v. Union Labor Life
Ins. Co., 414 F.3d 558, 567 (5th Cir. 2005).
Defendants’ contend that they were induced by Plaintiff’s false statements to enter into the
franchise agreements and Guaranty Agreement. “Texas law has long imposed a duty to abstain from
inducing another to enter into a contract through the use of fraudulent misrepresentations.” Haase
v. Glazner, 62 S.W.3d 795, 798 (Tex. 2001) (footnote and citation omitted). Fraudulent inducement
is a subcategory of fraud that arises in the context of contracts. See id. The elements of fraudulent
inducement are the same as those for fraud, “plus an additional element that the fraud related to an
agreement between the parties.” In re VNA Inc., 403 S.W.3d 483, 487 (Tex. App.–El Paso 2013,
orig. proceeding) (citing Haase, 62 S.W.3d at 798-99). Thus, for a fraudulent inducement claim, the
elements of fraud must be alleged as they relate to an agreement between the parties. See id.
To state a claim for negligent misrepresentation under Texas law, a plaintiff must allege that:
(1) the representation is made by a defendant in the course of his business, or in a
transaction in which he has a pecuniary interest; (2) the defendant supplies ‘false
information’ for the guidance of others in their business; (3) the defendant did not
exercise reasonable care or competence in obtaining or communicating the
information; and (4) the plaintiff suffers pecuniary loss by justifiably relying on the
representation.
First Nat’l Bank of Durant v. Trans Terra Corp. Int’l, 142 F.3d 802, 809 (5th Cir. 1998) (quoting
Federal Land Bank Ass’n v. Sloane, 825 S.W.2d 439, 442 (Tex. 1991)).
Memorandum Opinion and Order - Page 8
Rule 9(b) “is an exception to Rule 8(a)’s simplified pleading” and requires a party “alleging
fraud or mistake . . . [to] state with particularity the circumstances constituting fraud or mistake.”
United States ex rel. Grubbs v. Kanneganti, 565 F.3d 180, 185 (5th Cir. 2009) (internal citation
omitted). “What constitutes ‘particularity’ will necessarily differ with the facts of each case.” Guidry
v. Bank of LaPlace, 954 F.2d 278, 288 (5th Cir. 1992). Rule 9(b)’s heightened pleading requirement
applies to fraud and negligent misrepresentation claims when they are based on the same factual
allegations. See Benchmark Elecs., Inc. v. J.M. Huber Corp., 343 F.3d 719, 724 (5th Cir. 2003). “At
a minimum, Rule 9(b) requires allegations of the particulars of time, place, and contents of the false
representations, as well as the identity of the person making the misrepresentation and what he
obtained thereby.” Id. (quoting Tel-Phonic Servs., Inc. v. TBS Int’l, Inc., 975 F.2d 1134, 1139 (5th
Cir. 1992)). “Put simply, Rule 9(b) requires the who, what, when, where, and how to be laid out.”
Benchmark Elecs., Inc., 343 F.3d at 724 (citation and internal quotation marks omitted).
It is not entirely clear what factual allegations Defendants are relying on to support their
negligent misrepresentation claim. To the extent Defendants intended to assert a claim for negligent
misrepresentation based on the same factual allegations as their fraud claim, Rule 9(b)’s heightened
pleading requirement applies to both claims. After reviewing Defendants’ pleadings, the court
concludes that paragraph six, when read in conjunction with paragraphs thirteen through twenty-two,
is sufficiently specific at this stage to state claims based on fraud, fraudulent inducement, and
negligent misrepresentation. The essence of these claims is that Plaintiff made false statements
regarding franchise costs and products suppliers to induce Defendants into entering the franchise
agreements and Guaranty Agreement and to open yogurt stores in South Carolina, and that
Defendants relied on these statements to their detriment in deciding to enter the franchise agreements
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and open stores in South Carolina. According to Defendants’ pleadings, the statements were made
by Yumilicious’s CEO Salina Pham at various meetings that took place before May 2010 in
Yumilicious’s Dallas offices. The court will therefore deny Plaintiff’s motion to dismiss with
respect to Defendants’ fraud and negligent misrepresentation claims based on these allegations.
3.
Breach of Contract
Plaintiff contends that Defendants have failed to plead a valid contract claim because:
with regard to damages, Why Not’s Answer provides no explanation of the harm it
allegedly suffered as a result of the breaches of the identified sections. For example,
Why Not asserts that Yumilicious breached the agreement by failing to perform
on-site evaluations or inspections. Answer ¶ 29(a)-(b). But Yumilicious cannot
determine how such a breach, if it occurred, would have caused damages to Why
Not. Likewise, Why Not complains of a lack of operational advice, id. ¶ 29(c), but
offers no explanation as to how such a lack of advice caused Why Not damages. Why
Not also asserts a breach of Paragraph VII.D (“Sourcing”), despite the fact that this
paragraph in the Agreement does not impose any obligations on Yumilicious; the
burdens of that section relate only to Why Not. See Franchise Agreement § VII.D
(Ex. A, App. 15).
Why Not’s only actual mention of damages is entirely conclusory. Why Not
states, without explanation, that “both stores were doomed to fail, and inevitably for
Counter-Plaintiffs to lose their investments and put personal assets and the business
relationships of other unrelated businesses at risk.” Answer ¶ 29(d). There is no
explanation as to why Yumilicious’s alleged breaches led to this result or why any
such supposed harm was “inevitable.” Why Not also states that “[t]here are numerous
other . . . breaches of the franchise agreement,” but does not even hint at what these
other breaches might entail.
Pl.’s Mot. 13-14.
The elements of a breach of contract claim under Texas law are: “(1) the existence of a valid
contract; (2) performance or tendered performance by the plaintiff; (3) breach of the contract by the
defendant; and (4) damages sustained by the plaintiff as a result of the breach.” Smith Int’l, Inc. v.
Memorandum Opinion and Order - Page 10
Egle Grp., LLC, 490 F.3d 380, 387 (5th Cir. 2007). As reflected above, Plaintiff’s motion to dismiss
focuses on whether Defendants have alleged sufficient facts to satisfy the damages element.
Defendants did not respond to Plaintiff’s contentions or assert any arguments in support of
their contract claim. Defendants’ pleadings state the followingin conclusory fashion regarding their
contract claim:
Breach of the Franchise Agreement(s)
37.
All of the above constitutes breach of the franchise agreement(s) by
[Yumilicious] hereby causing [Defendants] damages in an amount in excess
of the minimum jurisdictional limits of this court.
Defs.’ Ans. & Countercl. 8. The only factual allegations that appear to support Defendants’ breach
of contract claim, based on the franchise agreements, are as follows:
The Franchise Agreement(s)
29.
Representative breaches of the Franchise Agreement(s) by Yumilicious
Franchisor include:
a.
Paragraph V.B. On Site Evaluation - none was provided for either
store.
b.
Paragraph V.F. Inspections and On Site Evaluations - None were
conducted.
c.
Paragraph V.H. Operational Advice - As examples: None was
provided when critical assistance was requested for failing stores;
wrong information was provided in operation of franchisor mandated
equipment; no help was provided for inventory management and cash
flow management in light of constraints imposed as a consequence of
having a sole approved distributor for required product.
d.
Paragraph VII. Sourcing - The Franchisor has failed to provide
approved suppliers capable of supplying Why Not with food and
beverage items on a basis that allows the South Carolina stores to
succeed. Instead both stores were doomed to fail, and inevitably for
Memorandum Opinion and Order - Page 11
Counter-Plaintiffs to lose their investments and put personal assets
and the business relationships of other unrelated businesses at risk.
Id. at 6-7.
It is unclear from Defendants’ sparse pleadings why they believe that they suffered damages
as a result of Plaintiff’s alleged failure to conduct required site inspections and evaluations. Their
contract claim based on these alleged breaches of the franchise agreements is therefore insufficient
as pleaded.
With respect Defendants’ allegations in paragraph 29(c), the Columbia franchise agreement
requires Plaintiff as the franchisor to provide a number of services to assist franchisees. One such
service is operational advice. Pl.’s App. 10. Section V.H., referred to by Defendants, provides in
this regard: “Operational Advice. Advice and written materials concerning techniques for managing
and operating Yumilicious Stores, including new developments and improvements in System
equipments and System products.” Id. The allegations in paragraph 29(c) of Defendants’ Answer
and Counterclaim regarding Plaintiff’s alleged failure to provide operational advice are related to
Defendants’ contentions in paragraph 29(d) and other paragraphs of their pleadings that they lost
their investment in the franchises and other personal assets because they were unable to obtain
Yumilicious mandated proprietary products at a fair market price. According to Defendants’
pleadings, the regional supplier approved by Yumilicious would not deliver products to Why Not
in South Carolina unless it agreed to order and pay for large pallet-sized quantities of products.
Defendants therefore allege that they had to obtain essential proprietary products from national
suppliers at a much higher cost than that paid by the Dallas area franchises.
Memorandum Opinion and Order - Page 12
The sourcing section of the Columbia franchise agreement relied on by Defendants
specifically requires franchisees to obtain products from Yumilicious-approved and designated
suppliers. This section also allows Yumilicious to designate itself as the sole approved supplier of
products. The franchise agreement permits franchisees to obtain products from alternate sources;
however, any request in this regard must be submitted to Yumilicious in writing, and Yumilicious
has absolute discretion to approve, deny, or revoke its prior approval of an alternative supplier.
Here, as best as the court can ascertain from Defendants’ pleadings, Why Not could not
financially afford to purchase pallet-sized quantities of products from the supplier approved and
designated by Yumilicious, so it presumably obtained Yumilicious’s approval to obtain products
from another source, which was also prohibitively expensive. The Columbia franchise agreement,
however, does not require Yumilicious to provide Defendants with access to proprietary products
at a low cost or fair market price; nor does it guarantee Defendants will earn a certain amount of
profit as Yumilicious franchisees. As a result, Defendants’ damages could not have been caused by
Plaintiff’s alleged breaches of the franchise agreement(s) pertaining to product sourcing or advice
regarding product sourcing. Defendants’ contract claim on this basis therefore fails as a matter law.
As Defendants did not respond to Plaintiff’s contentions and motion to dismiss their contract claim,
the court concludes that Defendants have abandoned or waived their contract claim. Thus, rather
than allow Defendants to amend their pleadings as to this claim, the court will grant Plaintiff’s
motion to dismiss with respect to Defendants’ breach of contract claim based on the franchise
agreements.
Memorandum Opinion and Order - Page 13
4.
Declaratory Judgment
Plaintiff contends that Defendants’ request for a declaratory judgment fails because
Defendants allege no factual basis to support their assertion that the franchise agreements at issue
are null and void. Plaintiff asserts that, without more, it has no way of understanding and responding
to Defendants’ bare allegations.
In Texas, “[a] contract induced by fraud is voidable, not void, and will be avoided only if the
complaining party proves it has the right to avoid the contract.” Buddy Gregg Motor Homes, Inc.
v. Motor Vehicle Bd. of the Texas Dep’t of Transp., 179 S.W.3d 589, 602 (Tex. App.—Austin 2005,
pet. denied). A party that is induced by fraud to enter into a contract may rescind the contract or sue
for damages. Fortune Prod. Co. v. Conoco, Inc., 52 S.W.3d 671, 676-77 (Tex. 2000). Rescission
is an equitable remedy used to set aside a legally valid contract because of fraud, mistake, or for
some other reason to avoid unjust enrichment. Martin v. Cadle Co., 133 S.W.3d 897, 903 (Tex.
App.—Dallas 2004, pet. denied). Rescission of a contract is a substitute for monetary damages when
damages would not be adequate. Scott v. Sebree, 986 S.W.2d 364, 368 (Tex. App.—Austin 1999,
pet. denied). Whether to grant rescission lies within the trial court’s discretion. See Gentry v.
Squires, 188 S.W.3d 396, 410 (Tex. App.—Dallas 2006, no pet.). To be entitled to rescission,
Defendants would need to allege and ultimately prove that: “(1) [they] and the defrauding party
[Yumilicious] are in the status quo, i.e., that [they are] not retaining benefits received under the
instrument[s] without restoration to [Yumilicious] or (2) there are equitable considerations that
obviate the need for the parties to be in the status quo.” Shenandoah Assoc. v. J & K Prop., Inc., 741
S.W.2d 470, 475 (Tex. App.—Dallas 1987, writ denied) (emphasis in original and internal citations
omitted). “[A]n inability to return the parties to their former position should be considered in
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determining whether rescission would be inequitable.” Gentry v. Squires Const., Inc., 188 S.W.3d
at 410.
Plaintiff contends that the parties signed the May 2010 franchise agreements and have
operated according to the terms of those agreements since that time. Ratification is an affirmative
defense that involves “the adoption or confirmation, by one with knowledge of all material facts, of
a prior act which did not then legally bind that person and which that person had the right to
repudiate.” City of The Colony v. North Texas Mun. Water Dist., 272 S.W.3d 699, 672 (Tex.
App.—Fort Worth 2008, pet. denied) (emphasis in original). A party to a contract “ratifies an
unauthorized act if, by word or conduct, with knowledge of all material facts, [it] confirms or
recognizes the act as valid.” Miller v. Kennedy & Minshew, Prof’l Corp., 142 S.W.3d 325, 342
(Tex. App.—Fort Worth 2003, pet. denied). The court in Miller explained that ratification:
may be inferred by a party’s course of conduct and need not be shown by express
word or deed. Ratification may also occur when a principal retains the benefits of a
transaction after acquiring full knowledge of his agent’s unauthorized act. The
critical factor is the principal’s knowledge of the transaction and his actions in light
of such knowledge.
Id. at 342-43 (footnotes and citations omitted). Whether a party has ratified a contract may be
determined as a matter of law if the evidence is not controverted or is incontrovertible. City of The
Colony, 272 S.W.3d at 732.
Defendants did not respond to Plaintiff’s contentions regarding their request for declaratory
judgment. Defendants instead simply request to amend their pleadings if the court finds them to be
deficient. Whether Defendants, as Plaintiff contends, ratified the franchise agreements, cannot be
determined based on Defendants’ pleadings. Dismissal based on Plaintiff’s affirmative defense of
ratification is therefore premature. Defendants’ request to void the parties’ agreements, however, is
Memorandum Opinion and Order - Page 15
not a valid basis for a declaratory judgment action. Accordingly, dismissal of Defendants’
declaratory judgment action on this ground is appropriate. The court will nevertheless allow
Defendants to replead their declaratory judgment action because the deficiency noted may be curable.
For the reasons explained, while an otherwise valid agreement is not void under Texas law,
Defendants may seek to avoid and rescind the franchise agreements and Guaranty Agreement if they
were induced by Plaintiff’s alleged fraud to enter into the agreements, and they also allege sufficient
facts regarding their entitlement to rescission.
C.
Amendment of Counterclaims
Defendants request to amend their pleadings with respect to their counterclaims in the event
the court determines that they have failed to state claims upon which relief can be granted.
Defendants have not previously amended their pleadings. The court will therefore permit them to
amend their pleadings with respect to those counterclaims that the court has determined do not fail
as a matter of law, for which amendment would not be futile. Specifically, the court will allow
Defendants to replead all of their counterclaims, except those based on breach of contract and alleged
violations of the DTPA, FTC Act, and Business Opportunity Acts of Texas and South Carolina.
III.
Plaintiff’s Motion to Strike General Denial
Plaintiff moves to strike Defendants’ general denial for failure to comply with Federal Rule
of Civil Procedure 8(b). Defendants counter that Rule 8(b) does not require specific denials and
Plaintiff’s Complaint violates Rule 10(b) by mixing several disparate allegations in each of the
numbered paragraphs. Rule 8(b)(3) provides:
A party that intends in good faith to deny all the allegations of a pleading—including
the jurisdictional grounds—may do so by a general denial. A party that does not
Memorandum Opinion and Order - Page 16
intend to deny all the allegations must either specifically deny designated allegations
or generally deny all except those specifically admitted.
Fed. R. Civ. P. 8(b)(3). Rule 8(b)(2) also requires a denial to “fairly respond to the substance of the
allegation.” Fed. R. Civ. P. 8(b)(2). Rule 10(b) requires a party to “states its claims or defenses in
numbered paragraphs, each limited as far as practicable to a singe set of circumstances.” Fed. R.
Civ. P. 10(b).
In their answer, Defendants generally deny all allegations in Plaintiff’s Complaint except for
those in paragraphs three through eleven, which Defendants admit. As framed, Defendants’ general
denial of the allegations in all paragraphs of the Complaint (except for those in paragraphs three
through eleven) denies even such facts regarding the franchise agreements that form the basis of their
own counterclaims. Even if Defendants intend to deny certain allegations in the Complaint, Rule
8(b)(4) requires them to “admit the part that is true and deny the rest.” The court is aware that
Defendants have taken the position that the franchise agreements and guarantees entered into
between them and Plaintiff are void; however, this does not justify their general denial of all
allegations in the Complaint except for those in paragraphs three through eleven. Accordingly,
Defendants’ general denial of the allegations in these paragraphs is impermissible. Moreover, the
court determines that the Complaint satisfies Rule 10(b).
The court will therefore grant
Yumilicious’s Motion to Strike with respect to Defendants’ general denial and orders Defendants
to file an amended answer that complies with Rule 8(b)(3).
IV.
Plaintiff’s Motion to Strike Jury Demand
Based on language in the Columbia franchise agreement submitted in support of its motion
to dismiss, Plaintiff contends that Defendants’ jury demand should be stricken. Defendants respond
Memorandum Opinion and Order - Page 17
that the Individual Defendants are not bound by the jury waiver in the franchise agreement(s)
because they are not a party to them. Plaintiff replies that the jury waiver language in the Columbia
franchise agreement encompasses any and all disputes arising out of the franchise agreement.
Plaintiff further asserts that all three Individual Defendants signed the Guaranty Agreement, which
is attached as Attachment A to the Columbia franchise agreement. Based on the following language
in the Guaranty Agreement, Plaintiff maintains that the Individual Defendants are bound to the terms
of the Columbia franchise agreement,2 including the jury waiver language set forth in section
XIX(M) of that agreement, which provides: “Each Guarantor also makes all of the covenants,
representations, warranties and agreements of the Principals set forth in the Franchise Agreement
and is obligated to perform thereunder, including, without limitations, under Sections VI., X., XIV.,
XV., XVIII., XIX.G., H., I., and K.” Pl.’s Reply 9 (quoting Pl.’s App. 50). According to Plaintiff,
sections XIX.G, H., I., and K of the Columbia franchise agreement contain the primary dispute
resolution framework between the franchisor and franchisee and they immediately precede the jury
waiver provision in section XIX(M). Plaintiff therefore contends that the jury waiver provision
should be applied to all of Defendants’ counterclaims, regardless of whether they are brought on
behalf of the Individual Defendants. Plaintiff also notes that it is not clear from Defendants’
pleadings whether the various counterclaims are brought on behalf of the Individual Defendants or
Why Not.
The right to a jury trial under the Seventh Amendment to the Constitution may be waived by
prior written agreement of the parties. RDO Fin. Servs. Co. v. Powell, 191 F. Supp. 2d 811, 813
2
It is unclear whether the Lexington franchise agreement contains the same waiver language because Plaintiff
only provided a copy of the Columbia franchise agreement.
Memorandum Opinion and Order - Page 18
(N.D. Tex. 2002). There is a presumption, however, against a waiver of the right to a jury trial. Id.
In determining whether there has been a waiver of the right to a jury trial, the federal standard for
determining the validity of a contractual waiver of the right to a jury trial applies. Id. Under this
standard, the issue is whether the waiver was made in a knowing, voluntary, and intelligent manner.
Id. As noted by the court in RDO Financial Services Company, the Fifth Circuit has not addressed
who carries the burden of proof with respect to express contractual waiver but a majority of federal
courts that have addressed the issue have concluded that such burden falls on the party seeking to
enforce the waiver. Id. Based on the reasoning in RDO Financial Services Company, this court
similarly concludes that the party seeking to enforce a waiver has the burden of establishing it.
Plaintiff therefore has the burden as to this issue. Courts consider the following factors in
determining whether a waiver was made knowingly, voluntarily, and intelligently: “(1) whether there
was gross disparity in bargaining power between the parties; (2) the business or professional
experience of the party opposing the waiver; (3) whether the opposing party had an opportunity to
negotiate contract terms; and (4) whether the clause containing the waiver was inconspicuous.” Id.
at 813-14 (footnote omitted).
Here, the parties focus on the following waiver language in section XIX(M) of the Columbia
franchise agreement, which was entered into between Why Not as franchisee and Yumilicious as
franchisor in May 2010:
M.
JURY WAIVER. FRANCHISOR AND FRANCHISEE HEREBY
UNCONDITIONALLY AND IRREVOCABLY WAIVE ANY RIGHT
TO A JURY TRIAL IN ANY ACTION ARISING OUT OF OR IN
CONNECTION WITH THIS AGREEMENT, THE RELATIONSHIP
CREATED BY THIS AGREEMENT, OR ANY OTHER
AGREEMENTS BETWEEN FRANCHISOR AND FRANCHISEE OR
Memorandum Opinion and Order - Page 19
FRANCHISOR’S AND FRANCHISEE’S RESPECTIVE AFFILIATES.
THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL
ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE
FILED IN ANY COURT. IN THE EVENT OF LITIGATION, THIS
AGREEMENT MAY BE FILED AS WRITTEN CONSENT TO A
TRIAL BY THE COURT.
Pl.’s App. 42 (emphasis in original). The words in this waiver provision are bolded and all letters
are capitalized. The waiver language is therefore conspicuous. In addition to the foregoing waiver
language, the Columbia franchise agreement provides that it is binding “upon Franchisor and
Franchisee and their respective executors, administrators, heirs, beneficiaries, assigns and successors
in interest.” Pl.’s App. 42. Such language, however, is not bolded or capitalized and is not
conspicuous, although it is set forth in a paragraph by itself. The Guaranty Agreement’s specific
reference to some sections and paragraphs of the franchise agreement, but not the specific section
and paragraph containing the jury waiver language, further undermines Plaintiff’s waiver argument.
In any event, the remaining waiver factors are not addressed by Plaintiff. The court therefore
concludes that Plaintiff has not met its burden of establishing that Defendants waived their right to
a jury trial. Moreover, because the remaining factors necessarily require the presentation of
evidence, any analysis by the court of such factors is better left to summary judgment proceedings.
The court will therefore deny without prejudice Yumilicious’s Motion to Strike Defendants’ jury
demand.
V.
Plaintiff’s Motion for More Definite Statement
In light of the court’s ruling as to Yumilicious’s Motion to Dismiss Counterclaims,
Yumilicious’s Motion for a More Definite Statement is moot and will therefore be denied as moot.
Memorandum Opinion and Order - Page 20
VI.
Conclusion
For the reasons stated, the court grants in part and denies in part Yumilicious’s Motion
to Dismiss Counterclaims but will allow Defendants to replead all of their counterclaims, except
those based on breach of contract and alleged violations of the DTPA, FTC Act, and Business
Opportunity Acts of Texas and South Carolina, which the court dismisses with prejudice. In light
of the court’s ruling as to Yumilicious’s Motion to Dismiss Counterclaims, the court denies as moot
Yumilicious’s Motion for a More Definite Statement. The court also grants Yumilicious’s Motion
to Strike Defendants’ general denial but will allow Defendants to file an amended answer.
Yumilicious’s Motion to Strike Defendants’ jury demand is denied without prejudice.
Accordingly, the court strikes Defendants’ answer and orders Defendants to file an amended
answer and counterclaims by August 28, 2014, that cure the deficiencies herein noted. No new
counterclaims may be asserted without leave of court. Failure to file an amended answer and
counterclaims by August 28, 2014, will result in dismissal of Defendants’ counterclaims without
prejudice pursuant to Federal Rule of Civil Procedure Rule 41(b) or with prejudice pursuant to Rule
12(b)(6).
It is so ordered this 14th day of August, 2014.
_________________________________
Sam A. Lindsay
United States District Judge
Memorandum Opinion and Order - Page 21
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