Cousins Subs Systems Inc v. Better Subs Development Inc et al
Filing
94
ORDER signed by Chief Judge Charles N Clevert, Jr on 9/30/2011 Denying 56 Motion for Summary Judgment on the complaint; Granting in part and Denying in part 59 Motion for Summary Judgment on the counterclaims; and Granting 61 Motion to Strike defendants' jury demand. Telephonic Scheduling Conference before Chief Judge Charles N Clevert Jr. set for 11/23/2011 at 09:30 AM. The court will initiate the call (cc: all counsel) (nts)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF WISCONSIN
COUSIN SUBS SYSTEMS INC.,
Plaintiff,
v.
Case No. 09-C-0336
BETTER SUBS DEVELOPMENT INC.,
BETTER SUBS RESTAURANT LLC,
JAMES B. RAILING,
KAREN E. RAILING,
SHANTEL E. VAUGHN,
Defendants and
Counterclaim Plaintiffs,
v.
WILLIAM F. SPECHT,
ESTATE OF JAMES F. SHEPPARD,
DONALD A. MORELLO, and
MORELLO FRANCHISE DEVELOPMENT CO., INC.
Counterclaim Defendants.
DECISION AND ORDER DENYING PLAINTIFF COUSIN SUBS SYSTEMS, INC.’S
MOTION FOR SUMMARY JUDGMENT ON THE COMPLAINT (DOC. 56),
GRANTING IN PART AND DENYING IN PART PLAINTIFF AND COUNTERCLAIM
DEFENDANTS’ MOTION FOR SUMMARY JUDGMENT ON DEFENDANTS’
COUNTERCLAIMS (DOC. 59), GRANTING PLAINTIFF AND COUNTERCLAIM
DEFENDANTS’ MOTION TO STRIKE DEFENDANTS’ JURY DEMAND (DOC. 61),
AND SETTING TELEPHONIC STATUS CONFERENCE
Cousins Subs, Inc. sued defendants for breach of various contracts related to the
failure of the defendants to appropriately develop Cousins Subs franchises in Indiana.
Defendants counterclaimed, joining former and current representatives of Cousins, alleging
that Cousins and its representatives induced defendants to sign the contracts with
fraudulent representations regarding personnel and profit forecasts.1 The estate of James
Sheppard was dismissed from the counterclaims by a stipulation (Doc. 53) and order dated
August 26, 2010. Plaintiffs move for summary judgment and dismissal of the complaint,
the counterclaims, as well as an order striking defendants’ jury demand. Because the
three motions are intertwined with similar legal arguments and facts, the court decides
them together.
This dispute involves three contracts that appear to waive the grounds for
defendants’ counterclaims. However, there is conflicting evidence of what was said
between Cousins’ area developer Donald Moreno and defendant James Railing, such as
whether Moreno intentionally gave Railing false data knowing that Railing would rely on the
data to develop profit forecasts for the proposed franchises.
Notwithstanding the wide discrepancy between the parties’ version of the facts,
plaintiffs maintain that they are entitled to summary judgment. Plaintiffs’ motion for
summary judgment and dismissal of the complaint must be denied, as well as the motion
for summary judgment and dismissal of the counterclaims involving intentional fraud. As
to the remaining counterclaims, plaintiffs’ motion for summary judgment will be granted.
Plaintiffs’ motion to strike defendants’ jury demand will be granted as well.
FINDINGS OF FACT
This once promising relationship gone terribly wrong has a wide and sometimes
confusing array of parties. Cousins Subs, Inc., a Wisconsin corporation with its principal
1
For purposes of resolving the pending m otions, any reference to plaintiffs includes
Cousins Subs, Inc., W illiam Sprecht, Donald Morello, and Morello Franchise Developm ent Co., Inc., all of
whom are current or form er representatives of Cousins, or operate Cousins franchises. Defendants
include Railing and his fam ily, who tried to establish the franchises in Indiana.
2
place of business in Menomonee Falls, WI, is a restaurant franchise that sells submarine
sandwiches. (Resp. to Pl. SOF ¶ 5.) William Specht was the Chief Executive Officer of
Cousins at all relevant times. (James B. Railing Decl. ¶ 118.)
Donald Morello played various roles. First, he was a Cousins’ franchise owner of
several restaurants in the Madison, WI area. (James B. Railing Decl. ¶ 14.) He was also
the President of Dane County Franchise Development Co (James B. Railing Decl. ¶ 19)
and the owner of Morello Franchise Development Co., Inc. (James B. Railing Decl. ¶ 154.)2
Morello acted as a franchise broker for Cousins, and performed consulting services for
Cousins. (Pl. PFOF ¶ 25.) Finally, he was a Selling Agent for Cousins, through which he
received fees and commissions from Cousins. (James B. Railing Decl. ¶ 28.)
Finally, Morello Franchise Development Co., Inc. is an area development company
in southern Wisconsin, including the area around Madison, WI. (James B. Railing Decl.
¶ 154.) The company owns several Cousins restaurants, and its representatives have
consulted for Cousins. (James B. Railing Decl. ¶ 154; Pl. PFOF ¶ 25.)
On the side of defendants, James Railing was a citizen and resident of Indiana, as
well as a former practicing attorney. (James Railing Decl. ¶¶ 3, 6.) Independent of his law
practice, he worked with financial matters related to existing franchises. (James B. Railing
Decl. ¶¶ 6, 8-11.) Among the several defendants, Railing had the most interaction with
the plaintiffs, as described below.
2
The court is not clear if these are separate com panies, or are the sam e com pany
referred to in different ways.
3
Railing’s wife, Karen Railing, and daughter in law, Shantel Vaughn, were citizens
and residents of the State of Indiana. (Def. PFOF ¶¶ 4, 5.) Both women had limited
contact with plaintiffs.
Railing, his wife, and daughter in law contributed to create Better Subs
Development, Inc. (“BSD”) and Better Subs Restaurants, LLC (“BSR”) under Indiana law.
(Def. PFOF ¶¶ 1, 2.) BSD’s principal place of business is in Indiana, and Railing is the
president and sole shareholder of BSD. (Def. PFOF ¶¶ 1, 3.) Railing, his wife, and
daughter in law are all members of BSR. (Def. PFOF ¶¶ 3-5.)
The saga begins in earnest on August 23, 2006. (James B. Railing Decl. ¶ 12.)
That day, Railing, his wife and daughter in law all attended a Cousins Discovery Day to
learn more about becoming Cousins franchisees. (James B. Railing Decl. ¶ 12.) They
were taken on a tour of eight regional Cousins Subs stores by Patrick McCabe, who was
the Real Estate Manager for Cousins Subs. (James B. Railing Decl. ¶ 14.) Conversations
took place, and Cousins was generally introduced, but these conversations contain
disputed statements.
Between this first day and the signing of the contracts, there were numerous phone
conversations between Railing and various representatives of Cousins. Additionally,
Railing reviewed significant amounts of information regarding Cousins stores, potential
sites, and other matters necessary to start a restaurant. These issues are hotly debated,
and will be discussed below.
In less dispute is the paperwork that passed between the parties. In addition to his
phone conversations, Railing had several email exchanges. (See, e.g., Def. PFOF ¶ 15.)
Also, Cousins representatives sent several documents to the defendants, some of which
4
required defendants to respond with information. The first important document received
was the Uniform Franchise Offering Circular, which stated in relevant part that “Cousins
does not furnish or authorize its salespersons to furnish any oral or written information
concerning the actual or potential, sale, costs, income, or profits of a Cousins Sub Shop.
Actual results vary from unit to unit, and Cousins cannot estimate the results of any
particular franchise.” (Pl. PFOF ¶ 18.) Additionally, the UFOC indicated that “[T]he
Franchise Agreement and the Area Development Agreement contain a number of
provisions that may affect your legal rights, including a waiver of a right to jury trial, ...
Cousins recommends that you carefully review all of these provisions, and the entire
contracts, with a lawyer.” (Pl. Jury Demand Br. at 3.)
Next, defendants received and executed the franchise disclosure questionnaire.
Railing, his wife, and daughter in law received and executed their separate questionnaires.
(Pl. PFOF ¶ 19.) Each person stated that they “discussed the benefits and risks of
operating a Cousins Subs shop with an attorney, accountant, or other professional advisor”
and they understood “the risks of operating a Cousins Sub Shop.” (Pl. PFOF ¶ 20.) They
admitted that no representative of Cousins “made any statement or promise concerning
the total amount of revenue the Cousins Subs will generate” and that no representative of
Cousins “made any statement of the likelihood of success that you might expect to achieve
from operating a Cousins Subs.” (Pl. PFOF ¶ 22.)
The third document received prior to the execution of the contracts was an updated
September 5, 2006, UFOC. (Pl. PFOF ¶ 24.) This UFOC identified Morello and Morello
Franchise Development Co. as Franchise brokers for Cousins, and stated that Morello
Franchise Development Co. engaged in franchise development services for Cousins. (Pl.
5
PFOF ¶ 25.) Railing reviewed this document prior to executing the contracts. (Pl. PFOF
¶ 26.)
But Railing was considering more than opening a few franchises. He was also
considering the creation of an area development company that would establish multiple
stores. Accordingly, Railing executed an Area Developer Questionnaire. (Pl. PFOF ¶ 59.)
This questionnaire provides in pertinent part that no representative of Cousins “made any
statement or promise concerning the revenues, profits or operating costs of a Cousins subs
Shop Operated by Cousins Subs Systems, Inc. or its franchisees,” and that no
representative of Cousins “made any statement or promise regarding the amount of money
you may earn in developing and/or operating Cousins Subs.” (Pl. PFOF ¶ 61.)
After this research period, Cousins and defendants entered three contracts. First,
they executed a franchise agreement for a restaurant in Columbus, Indiana (“Columbus
Agreement”). Second, they executed a franchise agreement for a restaurant in Scottsburg,
Indiana (“Scottburg Agreement”). Third, Cousins and BSD executed an Area Development
Agreement (“ADA”).
On September 20, 2006, BSR and Cousins executed the Columbus Agreement. (Pl.
PFOF ¶ 27.) Moreover, Railing, his wife and daughter in law executed a personal guaranty.
(Pl. PFOF ¶ 30.) The franchise agreement provides in relevant part:
FRANCHISEE acknowledges that it has not received, any
warranty or guaranty, express or implied, as to the potential
volume, profits, or success of the business venture
contemplated by this Agreement[.] FRANCHISEE
acknowledges that it has read this Agreement and the
FRANCHISOR’S Uniform Franchise Offering Circular and that
it has no knowledge of any representation by the
FRANCHISOR, or its officers, directors, shareholders,
employees, or agents that are contrary to the statements made
6
in the FRANCHISOR’S Uniform Franchise Offering Circular or
the terms herein.”3
(Pl. PFOF ¶ 40.) Additionally, the Columbus Agreement indicated that “FRANCHISOR
AND FRANCHISEE IRREVOCABLY WAIVE TRIAL BY JURY IN ANY ACTION,
PROCEEDING OR COUNTERCLAIM, WHETHER AT LAW OR IN EQUITY, BROUGHT
BY EITHER OF THEM.” (Pl. Jury Demand at 3) (emphasis retained). The Columbus
Agreement also contained terms requiring defendants to pay various fees based upon
gross receipts rather than net profit. (Pl. PFOF ¶¶ 38-39.)
The Columbus restaurant opened in December 2006. (Pl. PFOF ¶ 48.) However,
the Columbus restaurant achieved only $200,000 annualized actual sales revenue. (Def.
PFOF ¶ 167.) To remain profitable, it needed to earn $382,500. (Def. PFOF ¶ 185.) In
February 2008, defendants attempted a remodeling of the restaurant but the restaurant
closed by October of 2008. (Pl. PFOF ¶ 52.)
On November 25, 2007, BSR and Cousins executed the Scottsburg Agreement.
(Pl. PFOF ¶ 53.) The pertinent provisions and the personal guaranties mirror those for the
Columbus Agreement. (Pl. PFOF ¶¶ 54-55.) The Scottsburg restaurant opened in March
of 2008. (Def. PFOF ¶ 171.) While the parties are not as clear with respect to financial
figures, the court interprets the filings to indicate that the Scottsburg restaurant provided
similar earnings that were significantly below the breakeven marker of $382,500. The
Scottsburg restaurant closed in September 2008. (Pl. PFOF ¶ 57.)
3
As stated above, the court believes that the Uniform Franchise Offering Circular refers to
the two UFOCs described above.
7
On November 14, 2006, BSD and Cousins executed the ADA. (Pl. PFOF ¶ 63.)
Railing also executed a personal guaranty. (Pl. PFOF ¶ 64.) The ADA provides in relevant
part that BSD would develop twenty restaurants that would open according to a schedule
over a ten year period. (Pl. PFOF ¶¶ 67-69.) If the parties did not comply with the
schedule, Cousins could terminate. (Pl. PFOF ¶ 71.) Additionally, the ADA stated “there
are no other oral or written understandings or agreements between FRANCHISOR and
AREA DEVELOPER relating to the subject matter of this Agreement.” Finally, the ADA
indicated that “FRANCHISOR AND AREA DEVELOPER IRREVOCABLY WAIVE TRIAL
BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM, WHETHER AT LAW
OR IN EQUITY, BROUGHT BY EITHER OF THEM.” (Pl. Jury Demand at 3) (emphasis
retained).
Following the closure of the Scottsburg restaurant, no further restaurants were
opened.
BSD did not comply with the schedules per the ADA. (Pl. PFOF ¶ 74.)
Additionally, a $40,000 executed promissory note connected to the ADA has not been
paid. (Pl. PFOF ¶ 75.)
CONCLUSIONS OF LAW
As indicated above, this decision discusses three motions. First, the court will
analyze the two motions for summary judgment inasmuch as they involve similar
arguments from the defendants in their answers and counterclaims. Second, the court will
analyze the motion to strike the jury demand with reference to arguments made in the
summary judgment analysis. It is noted that the case involves the laws of Wisconsin and
Indiana. The parties have not addressed choice of law and the documents at issue provide
8
that Wisconsin law governs, but, as the parties suggest, the choice between Wisconsin
and Indiana law does not appear to affect this decision.
A.
Summary Judgment Standard
Summary judgment is appropriate if there are no disputed issues of material fact
and the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(a);
Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). In deciding a motion for summary
judgment, the court must view all facts and draw all inferences from those facts in the light
most favorable to the non-moving party. Schuster v. Lucent Technologies, Inc., 327 F.3d
569, 573 (7th Cir. 2003). However, the non-moving party may not simply rest on its
allegations; rather, it must come forward with specific facts that would support a jury’s
verdict in its favor. Van Diest Supply Co. v. Shelby County State Bank, 425 F.3d 437, 439
(7th Cir. 2005). The non-moving party must show that the disputed fact is material, or
outcome-determinative, under applicable law. Local 1545, United Mine Workers v. Inland
Steel Coal Co., 876 F.2d 1288, 1293 (7th Cir. 1989). However, credibility determinations
“are jury functions, not those of a judge.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242,
254 (1986).
In its complaint, Cousins claims that: (1) defendants breached the Columbus
Agreement; (2) defendants breached the Scottsburg Agreement; (3) defendants breached
the Area Devevelopment Agreement; (4) defendants breached the promissory note; (5)
defendants breached their guaranties of the franchise agreements; and (6) that Railing
breached his guaranty of the Area Development Agreement. Defendants maintain that the
contracts are void. In their combined affirmative defenses and counterclaims, defendants
argue that plaintiffs jointly and severally provided fraudulent data, made fraudulent
9
promises, and hid material facts that induced defendants to sign the contracts, rendering
the contracts void. They counterclaim for: (1) intentional misrepresentation; (2) strict
liability misrepresentation; (3) negligent misrepresentation; (4) breach of all the contracts
for a failure to provide assistance; (5) violations of the Wisconsin Deceptive Trade
Practices Act; (6) violations of the Wisconsin and Indiana statutes governing franchises;
(7) violations of Wisconsin and Indiana theft statutes; and (8) recission.
Plaintiffs respond that the economic loss doctrine, no-reliance clauses in the
contracts and other paperwork, and parol evidence rule bars these claims, and that
defendants have failed to show representations that were not opinions or puffery.
B.
Economic Loss Doctrine
The economic loss doctrine is a judicially created rule that “preclude[es] contracting
parties from pursuing tort recovery for purely economic or commercial losses associated
with the contract relationship.” Kaloti Enters., Inc. v. Kellogg Sales Co., 2005 WI 111, ¶ 27,
283 Wis.2d 555, 699 N.W.2d 205 (quotations omitted). “Economic loss” is defined as
“damages resulting from inadequate value because the product is inferior and does not
work for the general purposes for which it was manufactured and sold.” Id. at ¶ 29.
Although the economic loss doctrine precludes recovery for many fraud claims that
cause purely economic damages, it applies to goods and not services. Ins. Co. of N. Am.
v. Cease Elec. Inc., 2004 WI 139, ¶ 53, 276 Wis. 2d 361, 688 N.W.2d 462. Courts
consider the totality of the circumstances when determining whether a contract
predominantly involves a good or service. 1325 N. Van Buren, LLC v. T-3 Group, Ltd.,
2006 WI 94, ¶ 42, 293 Wis. 2d 410, 435, 716 N.W.2d 822. At issue here are whether the
two Cousins Subs Systems, Inc., Franchise Agreements and the Area Development
10
Agreement between Cousins Subs Systems and Better Subs Restaurants predominantly
provide a good or a service.
Plaintiffs argue that the agreements are “predominantly licenses for the right to
distribute Cousins’ products,” citing CERAbio LLC v. Wright Med. Tech, 410 F.3d 981 (7th
Cir. 2005), and “numerous courts” recognizing that franchises involve exchanges of goods.
See, e.g., Heating & Air Specialists, Inc. v. Lennox Indus., Inc., 180 F. 3d 923, 932 (1st Cir.
1999); TWB Distrib., LLC v. BBL, Inc., 2009 WL 5103604 (W.D. Ky. 2009). However,
reliance on CERAbio is misplaced for two reasons. First, CERAbio did not involve a
franchise relationship or an area development agreement, but rather the sale of all assets
of a business.
Id. at 984.
That “technological knowledge,” including patents, was
transferred did not alter the fundamental nature of the contract because the sale included
all of the assets. Further, the transferee company in Cerabio sued for fraud when it
discovered that a chemical ingredient required to produce the transferor’s bone
replacement product was no longer available, rendering the technology useless. In
addition, the two cases cited by plaintiffs to demonstrate that “courts all over” find that
franchises involve the sale of goods addressed a franchise that sells heating and air
conditioning products and a distribution agreement for the sale of “ReVive” brand skin care
products. Selling a restaurant franchise is not the same as selling all of the assets of a
business or even the sale of air conditioner products or cosmetics. While some franchises
involve the sale of goods, that is not true of them all.
The twenty-eight page Area Development Agreement confers the “right and
obligation to develop a number of COUSINS SUBS Shops utilizing the Marks and the
System within the Exclusive Area ....” The area developer solicits franchises and assists
11
the franchisor “in rendering certain services to certain Franchisees within the Exclusive
Area.”
The Franchise Agreements refer to the method of preparing food, the use of
certain marks, the specifications for equipment, fixtures, and signs, training and assistance,
operating systems, and uniform standards. While plaintiffs may provide some goods to the
franchisee, the primary focus of the agreements is the granting of a franchise and the
corollary systems, standards, and marks. These services provide the appropriate look and
atmosphere of a restaurant, and the franchisee, in turn, provides a place to sit and eat.
Indeed, the dispute between the parties has nothing to do with the characteristics of the
food or any goods, but rather the services contemplated by the agreement.
It should further be noted that the economic loss doctrine requires parties to pursue
contractual remedies. See Harley-Davidson Motor Co. v. Power Sports, Inc., 319 F.3d
973, 981 (7th Cir. 2003). In this case the defendants seeks damages and the recission
of the franchise agreements. Accordingly, the court holds that Wisconsin’s economic loss
doctrine is not applicable here.
C. Fraud Claims
As mentioned above, defendants assert fraud claims and defenses, including
negligent fraud, strict liability fraud, and intentional fraud. The court will first analyze
whether the basic fraud claims of negligent fraud and strict liability fraud can be maintained
against the no-reliance clauses as a matter of law. Next, the court will consider whether
the no-reliance clauses are a defense to intentional fraud as a matter of law. If a claim can
be brought as a matter of law, the court can consider whether there are facts sufficient to
support it.
1.
Basic Fraud, No-Reliance Clauses, and Integration Clauses
12
In Wisconsin, fraud has three elements: (1) the defendant must have made a
representation of fact to the plaintiffs; (2) the representation of fact must be false; and (3)
the plaintiffs must have believed and relied on the misrepresentation to his detriment or
damage. Tietsworth v. Harley Davidson, 270 Wis.2d 146, 677 N.W.2d 233, 239 (2004).
Statements of fact must relate to a present issue of fact, not something to occur in the
future. Hartwig v. Bitter, 29 Wis.2d 653, 657, 139 N.W.2d 644 (1966). Additionally, noreliance clauses are enforceable, Extra Equipamentos E Exportacao LTDA v. Case Corp.,
541 F.3d 719, 724 (7th Cir. 2008), and integration clauses work to exclude oral
communications from the written contract. See Wright-Moore Corp. v. Ricoh Corp., 908
F.2d 128, 141 (7th Cir. 1990).4
The claims for basic fraud include strict liability misrepresentation and negligent
misrepresentation.5 These cannot be maintained against the no-reliance and integration
clauses of the contracts. Intent is irrelevant to this analysis and the clear contractual
clauses bar defendants from relying on any information not contained in the contract. As
a matter of law, no-reliance clauses are enforceable, and defendants signed such a clause.
Hence, as a matter of law, defendants basic fraud claims cannot defend against plaintiffs’
claims.
4
In effect, the parol evidence rule accom plishes the sam e as the integration clause.
W hile plaintiffs pile-on their argum ents by m entioning the parol evidence rule without further explanation,
the court understands that it is analyzing that argum ent along with the integration clause.
5
Defendants have not contended plaintiffs’ assertion that Indiana does not recognize strict
liability or negligent m isrepresentation. (Pl. Br. at n. 4.)
13
The facts vividly illustrate this logic. At issue is whether providing incorrect financial
data to Railing is actionable.6
Railing, an attorney, was provided two UFOCs, two
questionnaires, and three contracts, all of which contained express provisions denying his
ability to rely on representations of financial data and other purported promises. To the
extent that a representative of Cousins made a false representation of fact, Railing could
not rely on those statements by the express and very clear terms of these documents.
Ultimately, whether by the no-reliance clauses, the integration clauses, or the parol
evidence rule, defendants cannot maintain these fraud claims challenging solely whether
there was a false representation of fact. The strict liability fraud and the negligent fraud
counterclaims must be dismissed.
2.
Intentional Fraud, No-Reliance Clauses, and
Integration Clauses
The analysis changes when intent is involved. In addition to the fraud elements
above, Wisconsin adds the following: (4) the representations must have made with the
knowledge that it was false or recklessly without caring whether it was true or false; and
(5) the representation must have made with the intent to deceive and to induce defendants
to act on it to their detriment or damage. Tietsworth, 270 Wis. 2d at 157.
Most
importantly, though, exculpatory clauses are not enforceable when the fraud is carried out
6
These are the only m isrepresentations existing at the tim e the statem ents were m ade;
future prom ises and guarantees are not candidates as m isrepresentations because they were not false at
the tim e they were m ade. For exam ple, Railing contends that Morello m ade prom ises about the future
profits Cousins franchises could expect, that Cousins em ployee Patrick McCabe m ade prom ises about
the average incom e of Cousins franchises visited on Discovery Day (Def. PFOF ¶ 104), that Morello
reviewed and approved as accurate for use in future predictions of success num bers produced by Railing
(e.g., Def. PFOF ¶¶ 119-146), that Morello told Railing he could expect around $390-465,000 in sales
revenue (Def. PFOF ¶¶ 143-146), and other predictions of future financial data. These were not false at
the tim e the representation was m ade.
14
intentionally or recklessly.7 Merten v. Nathan, 108 Wis. 2d 205, 212, 321 N.W. 2d 173
(1982).8
It is axiomatic that the no-reliance clauses and integration clauses are rejected in
this analysis as a matter of law pursuant to Merten. Viewing the remaining facts in the light
most favorable to the defendants, there is a genuine issue of material fact whether
representatives of Cousins intentionally misrepresented material facts to the defendants.
Numerous times, defendants recount instances where Cousins representatives provided
false financial data. As one example, Morello provided financial data to Railing about a
Cousins restaurant in Fitchburg, Wisconsin. (James B. Railing Decl. ¶ 39.) In an email that
defendants have provided as an exhibit, Morello advised Railing that Fitchburg grossed
between $314,500 to over $421,000. (James B. Railing Decl. ¶ 39.) In discovery,
defendants received financial data from the only Cousins restaurant in Fitchburg. (James
B. Railing Decl. ¶ 155.) In 2005, Fitchburg grossed $289,145. (James B. Railing Decl. ¶
167.) In 2006, Fitchburg grossed $269,745. (James B. Railing Decl. ¶ 167.)
Morello was a sales agent of Cousins who received commissions. Even if he did
not know the actual sales data of this location outside his territory, his alleged
representations were made on behalf of Cousins through his role as a paid agent and
7
As Judge Hand wrote, “... the ingenuity of draftsm en is sure to keep pace with the
dem ands of wrongdoers, and if a deliberate fraud m ay be shielded by a clause in a contract that the
writing contains every representation m ade by way of inducem ent, or that utterances shown to be true
were not an inducem ent to the agreem ent, [a party could defraud others] through the sim ple expedient of
placing such a clause ... in the contracts which their dupes are asked to sign.” Arnold v. National Aniline &
Chemical Co., 20 F.2d 364, 369 (2d Cir.1927)
8
Indiana fraud is sim ilar to W isconsin intentional fraud, requiring: (1) a m aterial
m isrepresentation of past or existing fact which (2) was untrue, (3) was m ade with knowledge of or in
reckless ignorance of its falsity, (4) was m ade with the intent to deceive, (5) was rightfully relied upon by
the com plaining party, and (6) which proxim ately caused the injury or dam age com plained of." Lawyers
Title Ins. Corp. v. Pokraka, 595 N.E.2d 244, 249 (Ind. 1992). No reliance clauses are not enforceable
against fraud claim s. Jenkins v. Nelson Properties, Inc., 439 N.E. 2d 686, 694 (Ind. Ct. App. 1982).
15
were, at a minimum, made recklessly. In the light most favorable to the nonmoving party,
Morello knew that Railing relied on these statements to develop financial forecasts
because he communicated with Railing about those forecasts many times. (E.g., Def.
PFOF ¶¶ 119-146.) Indeed, he even represented numerous times that Railing predicted
sales revenue of not less than $400,000. (E.g., James B. Railing Decl. ¶ 117.) And, quite
obviously, everyone involved knew that Railing was making these financial forecasts to
open a Cousins restaurant. When Railing signed the three contracts, Morello received a
$5,000 commission. (James B. Railing Decl. ¶ 147.) Over-calculating expected revenue
by nearly double of what was actually received – which was in line with many other Cousins
restaurants – was a fatal error for defendants and their restaurants. Under this view of the
facts most favorable to defendants, there is a genuine issue of material fact.9
According to Railing’s version of the facts, Cousins has created a complex system
of deceit designed to extract significant royalties even as franchise locations fail. If true,
this complexity cannot be defended by a well-drafted contract. Ingenious wrongdoers
cannot immunize their wrongdoing from the law with a single clause. Accordingly, the
motion for summary judgment on the complaint must be denied because the intentional
fraud claims are in defendants’ answer. Likewise, the motion for summary judgment
against the counterclaims for intentional fraud must be denied.
3. Duty to Disclose Morello as a representative of Cousins
The parties give significant effort to whether Morello presented himself as an agent
of Cousins or an agent of Morello Franchise Development, Co. Related is their debate
9
Certainly, the court will entertain any evidentiary m otions the parties believe are
appropriate, particularly with respect to the discrepancy in the depositions of Railing and Morello.
16
about how much Railing had to vet the document, and whether he should have signed a
document containing the no-reliance and integration clauses. This discussion appears to
derive from the parties belief that the above fraud discussion is an all or nothing gambit,
and they have not properly separated intentional fraud from basic fraud. In light of the
above discussion on fraud, the court considers moot the issues of whether Cousins had
a duty to disclose Morello as a sales agent, and whether Railing should have objected to
the no-reliance and integrations clauses. The issue is the intent to provide specific false
facts already in existence, and this issue is not informed by these two arguments; whether
defendants knew or did not know Morello was a sales agent has no impact on whether he,
as an agent of Cousins, intentionally provided false facts to defendants.
D.
Breach of Contract
To succeed on a breach of contract claim, a party must show: (1) a valid contract;
(2) breach of that contract; and (3) damages. See Wior v. Anchor Indus., 669 N.E.2d 172,
175 (Ind. 1996); Mgmt. Computer Servs. v. Hawkins, Ash, Baptie & Co., 557 N.W.2d 67,
75-78 (Wis. 1996); Riegleman v. Krieg, 679 N.W.2d 857, 862-63 (Wis. Ct. App. 2004).
Defendants argue that plaintiffs breached their contract when they failed to provide
assistance in site selection, and that Specht ratified the decision to remain at the Columbus
site. Defendants rely on a contract clause stating that Cousins, “use reasonable efforts to
help analyze FRANCHISEE’s market area, to help determine site feasibility, and to assist
in the selection of the location, which must be approved by FRANCHISOR.” (Pl. PFOF ¶
37.) They also rely on an expert who opined that the help provided by plaintiffs was below
industry standards. Plaintiffs contend that defendants admit they were solely responsible
for site selection, that Cousins was not obligated to help with site selection until Railing had
17
made his decision, and that Cousins only promised reasonable assistance, not industry
standard assistance.
At the heart of the clause in contention is “reasonable efforts.” In the light most
favorable to the nonmoving party, Cousins does not appear to have made any effort at all
and instead relied solely upon Railing’s previous review of the area. There are two
obstacles to plaintiffs’ motions: (1) whether or not it was reasonable to rely on a thirdparty’s efforts is a matter for the jury; and, (2) as discussed above, viewing the facts in the
light most favorable to the defendants, Railing’s review was based on intentionally provided
fraudulent facts. For either of these reasons, there is a genuine issue of material fact.
Therefore, plaintiffs’ motion must be denied with respect to defendants counterclaims for
breach of contract.
E.
Violation of the Wisconsin Deceptive Trade Practices
Where the language of a statute is clear and unambiguous, Wisconsin courts apply
the plain words of the statute and ordinarily proceed no further. State ex rel. Kalal v. Circuit
Court for Dane County, 271 Wis.2d 633, 681 N.W.2d 110 (Wis. 2004). Wis. Stat. § 100.18
provides protections for the public against fraudulent representations contained in “in a
newspaper, magazine or other publication, or in the form of a book, notice, handbill, poster,
bill, circular, pamphlet, letter, sign, placard, card, label, or over any radio or television
station, or in any other way similar or dissimilar to the foregoing, an advertisement,
announcement, statement or representation of any kind to the public.” Wis. Stat. §
100.18(1). “Public” can include just one person. Kailin v. Armstrong, 252 Wis.2d 676, 709,
643 N.W.2d 132 (Wis. App. 2002). The deciding factor as to whether the advertisement
was provided to the public is whether the two parties have a particular relationship. Id.
18
By the plain meaning of the statute, Wis. Stat. § 100.18 is a false advertising statute.
Viewing the facts in the light most favorable to defendants, the fraudulent representations
made by Cousins were not contained in any sort of advertisement in any way similar to
those listed in § 100.18. They were not made to the public as a whole. Rather, they were
made on an individualized basis to Railing through emails, phone conversations, and face
to face meetings where the parties already had established an ongoing relationship when
Railing made contact with Cousins. Even if defendants were to point to Discovery Day as
evidence of advertisement to the public, there are insufficient facts to demonstrate that this
was open to the public rather than a particular class of people who had previously shown
interest in opening a Cousins franchise. Defendants have failed to show how Cousins
advertised similarly to the methods listed under § 100.18, or how Cousins advertised
ownership of its franchises to the public. Therefore, defendants counterclaims pursuant to
Wis. Stat. § 100.18 must be dismissed.
G.
Violations of Statutes governing Franchises
1.
Wisconsin Franchise Investment Law
The Wisconsin Franchise Investment Law provides in pertinent part that it shall
“apply when a sale is made in this state or when an offer to sell is made or accepted in this
state[.]” Wis. Stat. §553.59(1). Additionally, “[f]or the purpose of this section, an offer to
sell is made in this state if the offer either originates in this state or is directed by the offeror
to this state and received by the offeree in this state.” Wis. Stat. §553.59(2).
19
Plaintiffs make a jurisdictional argument,10 relying on Maryland Staffing Services,
Inc. v. Manpower, Inc., 936 F. Supp. 1494, 1507 (E.D. Wis.1996), to suggest that the court
find that “WFIL [does] not apply to the out-of-state franchisee.” (Pl. Br. at 23.) Plaintiffs,
however, are wrong on the law; Maryland Staffing held that:
the complaint fails to allege that any facts which would support
an inference that the offer was received by Maryland Staffing
in Wisconsin. Maryland Staffing was a Maryland franchise, not
a Wisconsin franchise. Accordingly, the court concludes that
Count 12 fails to state a claim upon which relief can be granted
and therefore will be dismissed.
Id., 936 F. Supp. at 1506 (emphasis added).
Reviewing the plain meaning of the statute, there are two ways that an offer to sell
can be made: (1) an offer originates in Wisconsin; or (2) an offer is directed by the offeror
to Wisconsin and the offer is received by the offeree in Wisconsin. Wis. Stat. §553.59(2).
The statute applies when either of the following occurs: (1) a sale or an offer to sell occurs
in Wisconsin; or (2) an offer to purchase is made and accepted in Wisconsin. Wis. Stat.
§553.59(1).
Viewing the facts in the light most favorable to defendants, Cousins sent the final
contract to Railing.
This offer originated in Wisconsin, satisfying the § 553.59(2)
requirement that an offer to sell originate in Wisconsin. This also satisfies the § 553.59(1)
requirement that an offer to sell originate in Wisconsin. By the plain meaning of the
statute, Cousins, a Wisconsin company, will be held to the legal standards of Wisconsin.
Thus, summary judgment on this claim must be denied.
2.
Indiana Franchise Disclosure Act
10
Plaintiffs curiously m aintain that under W isconsin law the econom ic loss doctrine can
apply to this case but that the W FIL cannot apply.
20
Indiana’s Franchise Disclosure Act (“IFDA”), Ind. Code § 23-2-2.5-1 et seq, requires
disclosure of various information. In pertinent part, § 27 provides:
It is unlawful for any person in connection with the offer,
sale or purchase of any franchise, ... directly or
indirectly...(2) to make any untrue statements of a
material fact or to omit to state a material fact necessary
in order to make the statements made, in the light of
circumstances under which they are made, not
misleading; or (3) to engage in any act which operates or
would operate as a fraud or deceit upon any person.”
Ind. Code § 23-2-2.5-27. Fraud includes “any promise or representation or prediction as
to the future not made honestly or in good faith.” Ind. Code § 23-2-2.5-1(f).
Plaintiffs contend that defendants have not supported their fraud claims, they have
not shown bad faith, and that the statutes of limitations has expired. In part, defendants
argue that the IFDA is being used to counter plaintiffs’ claims rather than assert a
substantive claim, so the statute of limitations should not apply.
This analysis differs with the fraud analysis above in that the many promises of
future performance are evidence in support of § 27(3). Not only do defendants’ claims
under the IFDA survive for the same reasons as the intentional fraud claims, the many
promises are additional support to permit this claim to go to trial.
There were many different conversations by phone and by email with several
different employees of Cousins. Among the many examples, there were different promises
that Railing’s stores would gross more than $400,000, which proved untrue. Additionally,
Railing was provided false financial data of existing restaurants, and Morello advised that
Railing use lower predictions of costs. With these examples of deceit that would lead to
21
poor restaurant performance, Cousins continued to negotiate with Railing. Viewing the
facts in the light most favorable to defendants, this was negotiating in bad faith.
Finally, the statute of limitations had not expired prior to the filing of the complaint.
The complaint was filed in March 2009. There are many possible dates that the court
could use as the start of the statute of limitations. The Columbus restaurant opened in
2006, and was closed in October 2008. Railing points to his purported discovery that
Morello was an employee of Cousins in 2008 as the time when the statute of limitations
should begin. It was not until discovery that defendants learned of the false financial data.
Certainly, in the first year of operation, a restaurant may not be profitable for
reasons other than the basis of these fraud claims. Additionally, because the future
promises are a part of this claim, their discovery would begin the statute of limitations; the
discovery of the false financial data is not conclusive.
Determining an exact date when defendants discovered the fraud is a vain endeavor
on these facts. Obviously, when the Columbus location closed in 2008, it should have
been quite clear to defendants that plaintiffs had made false promises about the annual
profits from the restaurant. However, its not clear when defendants would have reasonably
learned that such promises were made in bad faith.
It is possible that defendants discovered the fraud less than two years before the
filing of the complaint.11 Various fraudulent representations would have been discovered
about the time of the Columbus restaurant’s closing. The discovery of Morello as an
employee of Cousins was one alleged fraud among many, and is not conclusive of the
11
The court rejects defendants' argum ent that the statute of lim itations does not m atter
because this is a defense to plaintiffs' claim s; this is a counterclaim , and, thus, not a defense.
22
discovery of all of the fraud. For example, defendants certainly knew that the promises of
McCabe were false even if they did not know he acted in bad faith. In the absence of a
convincing argument and supportive facts from plaintiffs as to when the defendants should
have discovered the alleged fraud, the court finds that the fraud was discovered when the
Columbus restaurant closed in October 2008. This is within the statute of limitations, as
the complaint was filed in March 2009.
H. Violations of Theft Statutes
1. Wisconsin Statute § 943.20
The parties have advanced arguments on Wis. Stat. § 943.20 governing theft-byfraud, relying on their fraud claims analyzed above, but neither address the law in detail.
Because the intentional fraud claims must survive a motion to dismiss viewing the facts in
the light most favorable to defendants, Wis. Stat. § 943.20 claim of defendants must also
survive.
2. Indiana Code § 34-43-4-2
The Indiana Code provides compensation where property is converted. Ind. Code
§ 34-43-4-2. The parties, in their belief that this is an all-or-nothing dispute, in large part
continue to rely on their previous arguments concerning fraud, and whether a contract is
properly the subject of this act. However, this argument is moot.
Defendants have not provided evidentiary support that any property was converted.
While the two restaurants were open, there is no evidence that anyone other than
defendants operated them. The two restaurants have been closed, but there is still no
indication that Cousins now operates that property, or any other property formerly owned
by defendants. Certainly, Cousins has received money from defendants. However, money
23
is not property.12 Section 34-43-4-2 requires some sort of property – in the cases, usually
real estate, but also any other tangible property – to be lost by defendants and controlled
by plaintiffs. If plaintiffs controlled either restaurant, or controlled other tangible property
of the defendants, § 34-43-4-2 would apply. However, the loss of money is sufficiently
covered by the fraud claims, and the court declines to stretch the Indiana Code beyond
recognition.13 Accordingly, defendants’ counterclaim under Indiana Code § 34-43-4-2 must
be dismissed.
I.
Rescission
In Wisconsin and Indiana, contracts may be rescinded if induced by fraudulent
representations. Wickenhauser v. Lehtinen, 734 N.W.2d 855 (Wis. 2007) (rescission of
contract and restorative damages “are entirely consistent when fraud or misrepresentation
is the cause of the claim); A.J.’s Automotive Sales, Inc. v. Freet, 725 N.E.2d 955, 967 (Ind.
Ct. App. 2000) (“Fraud in the inducement of a contract is a proper basis for rescission”).
However, parties seeking rescission must return anything earned through the contract
within a reasonable amount of time. Schwabe v. Chantilly, Inc., 226 N.W.2d 452, 457
(Wis. 1975) (recognizing that a party to a contract cannot first elect to reap the benefits of
a contract and then sue for rescission of that contract); American Cent. Life Ins. Co. v.
Rosenstein, 92 N.E. 380, 381 (Ind. Ct. App. 1910).
12
The m any cases this court has reviewed suggest this basic principle, including Cornwell
v. Gray Loon Outdoor Marketing Group, Inc., 906 N.E.2d 805 (Ind. 2009), Romanowski v. Giordano
Management Group, LLC, 896 N.E.2d 558 (Ind. App. 2008), and McLemore v. McLemore, 827 N.E.2d
1135, (Ind. App. 2005).
13
W ithout the conversion of property, the court does not find m erit in plaintiffs’ argum ent
that the statute of lim itations should apply. Plaintiffs’ argum ent is m oot.
24
Plaintiffs urge the court to find that the execution of the Scottsburg and Area
Development Agreement contracts was an affirmation of the earlier Columbus contract, as
was the failure of the defendants to take active steps to rescind the contracts following their
discovery of alleged fraud. In plaintiffs’ argument, it is implicit that the discovery of the
fraud is believed to be the signing of the contracts.
Viewing the facts in the light most favorable to the defendants, the signing of the
contracts was not the fraud; it was the event that the wrongdoers were attempting to induce
by making fraudulent statements. As described above, the fraud was the false financial
data.14 This was not discovered until much later, following execution of the contract. At
some point after his stores began to fail, Railing should have realized something was
horribly wrong with his financial forecasts, and begun to consider what went wrong. During
that time, he realized that Morello was not the independent franchisee that Railing thought
him to be. But, in the light most favorable to defendants, this began to occur sometime
around the time that his first restaurant began to fail. More likely, it began when Railing’s
second restaurant generated annual profits that were similarly below the breakeven
markers of the first restaurant. Under this view of the facts, Railing did not affirm anything;
it just took time for the fraud to be discovered. Therefore, plaintiffs motion for summary
judgment on this counterclaim must be denied.
J.
Dismissal of William Specht Claims
By failing to respond to arguments, defendants have waived their counterclaims
against Specht except for their Indiana Code §23-2-2.5-29 IFDA claim. The IFDA provides
14
The court does not include the IFDA m isrepresentations under this analysis, but only the
false financial data.
25
in pertinent part: “Every person who materially aids or abets in an act or transaction
constituting a violation of this chapter is also liable jointly and severally to the same extent
as the person whom he aided and abetted.” Ind. Code § 23-2-2.5-29.
Plaintiffs maintain that Specht never made any representations to defendants, and
that defendants have not shown why officers of Cousins should be personally liable in this
case. Defendants submit: (1) that the court should rule on a motion to reopen discovery
prior to ruling on this issue, and (2) that Specht made several representations to
defendants. Defendants’ request to reopen discovery to take the deposition of James
Campbell was denied on December 3, 2010. (Doc. 84.)
Defendants rely on one alleged omission of Specht to show aiding and abetting;
when Railing informed him that Railing was working with Morello, Specht did not identify
Morello as an area developer for Cousins. (Def. PFOF ¶¶ 153-155.) It is not clear from
defendants argument, or from the proposed findings of fact why Specht should have gotten
the impression that Railing misunderstood Morello’s role with Cousins.15 Also, it is not clear
why defendants believe Specht should have known to correct Railing during this phone
conversation, other than the simple fact that Specht was the CEO of a company (and the
inference that CEOs should know everything about their companies).
Even viewing the facts in the light most favorable to defendants, there is no
evidence to show that Specht violated 23-2-2.5-29 other than, in his role as president, he
should know everything. If defendants cannot provide facts to support claims against
15
Defendants have clearly identified that Morello gave Railing a business card that did not
list Cousins. It is clear where the fraud originated. W hat’s not clear here is how Specht should have
known that Morello gave Railing the wrong business card, other than from his role as president of
Cousins.
26
Specht other than in his role as CEO of an entity, then the entity is the proper party.
Therefore, the claims against Specht will be dismissed.
PLAINTIFFS’ MOTION TO STRIKE JURY DEMAND
Lastly, plaintiffs submit that the jury demand in defendants’ answer and
counterclaims must be struck because they are contractually waived. In Indiana and
Wisconsin, contracts are interpreted according to their plain meaning. Pinkowski v.
Calumet Twp. of Lake County, Ind., 852 N.E.2d 971, 981 (Ind. Ct. App. 2006); Danbeck
v. Am. Family Ins. Co., 629 N.W.2d 150, 154 (Wis. 2001). Moreover, jury waiver clauses
are enforceable. IFC Credit Corp. v. United Bus. & Indust. Fed. Credit Union, 512 F.3d
989, 995 (7th Cir. 2008).16
In the very similar case of IFC Credit Corp, the Seventh Circuit. applied law
governing forum-selection clauses to a jury waiver in a contract. Id. at 992. The lower court
had held a jury waiver invalid because (1) it was not the subject of negotiation, (2) it did not
stand out, and (3) it was not reviewed by the waiving party’s lawyer. Id. at 992. The
Seventh Circuit rejected these arguments. Id. It dismissed the suggestion that jury waivers
are unconstitutional inasmuch as Fed. R. Civ. P. 38 allows for waiver. Id. at 994.
Moreover, the Seventh Circuit applied Carnival Cruise lines to admit boilerplate. The
Seventh Circuit held that, where parties understand that they are making a contractual
commitment, the jury waiver clause is binding. Id. at 995. Finally, the holding of IFC Corp.
implicitly rejects a finding that jury waivers are unconscionable.
16
Defendants try to use case law from the 1980s to overcom e this 2008 case. The court
does not find the argum ent convincing.
27
The plain meaning of these three contracts waives the right to a trial by jury. The
clauses were not induced by fraud; the parties knew they were signing a contract, and the
contracts contained statements in bold, capital letters revealing that they were signing
away rights. That the clauses were standard form or boilerplate is inconsequential under
IFC Credit Corp. Railing, as an attorney, had particular experience and knowledge
respecting the need to read the entire contract, including boilerplate. Defendants knew or
should have known what they were signing. While some pieces of the contract may fail
under the pressure of intentional fraud, there was nothing fraudulent about signing the jury
waiver. Accordingly, the motion to strike defendants’ jury demand must be granted. Now,
therefore,
IT IS ORDERED that plaintiff’s motion for summary judgment on the complaint is
denied.
IT IS FURTHER ORDERED that plaintiff and counterclaim defendants’ motion for
summary judgment on the counterclaims is granted in part and denied in part.
IT IS FURTHER ORDERED that plaintiff and counterclaim defendants’ motion to
strike defendants’ jury demand is granted.
IT IS FURTHER ORDERED that a telephonic status conference is scheduled for
November 23, 3011, at 9:30 a.m. The court will initiate the call.
Dated at Milwaukee, Wisconsin, this 30th day of September, 2011.
BY THE COURT
/s/ C. N. Clevert, Jr.
C. N. CLEVERT, JR.
CHIEF U. S. DISTRICT JUDGE
28
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?