Park v. Jack's Food Systems, Inc.

• Decision Date: 20 November 1995
• Docket Number: No. 95-1410.,95-1410.
• Citation: 907 F. Supp. 914
• Parties: Thomas PARK, et al. v. JACK'S FOOD SYSTEMS, INC., et al.
• Court: U.S. District Court — District of Maryland

907 F. Supp. 914

Thomas PARK, et al. v. JACK'S FOOD SYSTEMS, INC., et al.

No. 95-1410.

United States District Court, D. Maryland.

November 20, 1995.

Michael D. Sendar, Georgetown, Washington, DC, for plaintiff.

Leonard C. Greenebaum, Shelby F. Mitchell, Paul F. Kirgis, Washington, DC, for defendant.

MEMORANDUM

MOTZ, Chief Judge.

Thomas Park, Chris Collingwood, and Karl Evangelisti have brought suit against Jack's Food Systems, Inc., J.F.S., Inc. ("J.F.S."), Jerry's Systems, Inc. ("Jerry's"), Adam Schwartz, George Palmer, and John Nickum. Plaintiffs assert several claims, including violations of 18 U.S.C. § 1962(c), common law causes of action for breach of contract and fraud, and violations of Maryland's Franchise Law. This court has federal question jurisdiction under 28 U.S.C. § 1331 and 18 U.S.C. § 1964, and supplemental jurisdiction over the state law claims.

Defendants have moved for dismissal under Fed.R.Civ.P. 12(b)(6) of the RICO and Maryland Franchise Law claims (Counts I, II, and IV) for failure to state claims upon which relief can be granted. They have moved for summary judgement on the breach of contract and fraud counts (Counts III and IV).

In my judgment plaintiffs have failed to allege facts sufficient to meet the continuity prong of "pattern" as established by the Fourth Circuit. Therefore, I will dismiss plaintiffs' RICO claim pursuant to Rule 12(b)(6). Since that is the only federal claim that plaintiffs have asserted, I will decline to exercise my supplemental jurisdiction over their state law claims under 28 U.S.C. § 1367.

I.

In December 1988, Jordie Fainberg bought Jack's Famous Delis ("JFD") franchises from Defendant Jack's Food Systems, Inc., a Maryland Corporation owned by Defendant Adam Schwartz.¹ Jack's Food Systems originally acquired the JFD franchises from Jack's of Lombard Street, Inc. ("Lombard"), and Schwartz still remains liable on a promissory note made to Lombard. As part of the purchase arrangement, Fainberg and JFD assumed Schwartz's promissory note obligation to Lombard and signed an additional promissory note to Jack's Food Systems. Am.Compl. at ¶ 10. As security, Jack's Food Systems retained rights in JFD, including the right to receive franchise fees and to exercise control over JFD in case of default. Id.

Schwartz also is the president and owner of Defendant Jerry's, which markets Jerry's Sub franchises along the east coast, and Defendant J.F.S., which is based at Jerry's headquarters and which was allegedly formed for the purpose of receiving the assets of Jack's Food Systems. Id. at ¶ 8. Defendants George Palmer and John Nickum were employees of JFD in charge of marketing and selling JFD franchises. They simultaneously worked for Schwartz at Jerry's, marketing Jerry's Subs franchises. Id. at ¶ 12.

Fainberg began to market JFD franchises in early 1989 by advertising throughout Washington, D.C., and by sending out franchise offering circulars and information packets called "Financial Facts" to prospective franchisees. In late spring 1990, JFD began to experience serious financial problems which jeopardized its ability to meet its obligations under both promissory notes. Am. Compl. at ¶ 16; see also Pls.' Ex. 1. Schwartz, through his corporations Jack's Food Systems and Jerry's, allegedly took control at this time over all JFD operations pursuant to the purchase agreement. Am. Compl. at ¶ 17. It is alleged that Schwartz then orchestrated a scheme to defraud future JFD franchisees through salesmen Nickum and Palmer by misrepresenting and omitting facts about JFD's deteriorating financial condition, financing options, site availability, and refund policies.

Plaintiffs Thomas Park and Karl Evangelisti responded to advertisements for JFD franchises, and Plaintiff Chris Collingwood responded to an advertisement for a Jerry's Subs franchise. After various contacts with Defendant Palmer over the telephones, through the mails, and face-to-face meetings, plaintiffs entered into franchise agreements with JFD in November 1990, August 1991, and July 1991. Plaintiffs aver that Nickum and Palmer fraudulently misrepresented the financial viability of JFD, the availability of suitable sites for the franchises, the willingness and ability of JFD to provide financing, and the refund policies regarding the $25,000 franchise fee. Defendants pressured the plaintiffs into paying the full franchise fees at the time of the agreement rather than at the time of site selection as they had previously. Am.Compl. at ¶ 20. This, according to the Complaint, was intended to enhance short-term revenues before JFD's imminent financial collapse. Id. at ¶ 18.

The Complaint avers that Schwartz, as a financially interested creditor in JFD, directed all of this through his various corporations. Id. at ¶¶ 17, 18, 22. The alleged scheme lasted until March 1992 when Jack's Food Systems foreclosed on JFD, eighteen months in total. Id. at ¶ 42. Jack's Food Systems purchased the assets of JFD at the foreclosure sale and then transferred these assets to a new corporation, J.F.S., which presently operates the JFD franchise system. Park, Collingwood, and Evangelisti never obtained sites for their franchises and thus never opened a Jack's Famous Deli. Their franchise fees have not been refunded. Plaintiffs assert that fifteen other prospective franchisees in the Washington, D.C. area were similarly defrauded. Am.Compl. at ¶ 44.²

II.

Plaintiffs contend that over an eighteen month span each defendant associated himself or itself with an enterprise engaged in interstate commerce and participated in such enterprise through a pattern of racketeering activity in violation of 18 U.S.C. § 1962(c). In Count I, the plaintiffs aver an associationin-fact enterprise consisting of the named defendants. In Count II, plaintiffs claim that JFD was the enterprise, and that the named defendants participated in JFD and conducted its affairs through a pattern of racketeering activity.

A. Pleading Predicate Acts Under RICO

18 U.S.C. § 1962(c) prohibits the participation by persons in the affairs of an enterprise through a pattern of racketeering activity.³ "Racketeering Activity" is broadly defined to include the commission of several federal statutory and state common law offenses. 18 U.S.C. § 1961(1). These "predicate acts" include mail fraud⁴ and wire fraud⁵ in violation of federal law. Id.

Plaintiffs claim RICO liability in that the defendants committed mail and wire fraud in carrying out a scheme to defraud prospective JFD franchisees. Am.Compl. at ¶ 47, 50. Defendants submit that with respect to each defendant, the plaintiffs have not alleged the requisite two predicate acts to maintain a RICO suit.

1. Defendants George Palmer and John Nickum

Whatever may constitute a "pattern" (see infra), it is indisputable that to maintain a section 1962(c) action, at least two predicate acts must be pleaded against each defendant. 18 U.S.C. § 1961(5); Morley v. Cohen, 610 F.Supp. 798, 811-12 (D.Md.1985) (citing Battlefield Builders, Inc. v. Swango, 743 F.2d 1060, 1061 (4th Cir.1984) (J. Winter)); Temporaries, Inc. v. Maryland Nat. Bank, 638 F.Supp. 118, 121 (D.Md.1986). With respect to both George Palmer and John Nickum, at least two predicate acts are clearly alleged.

The Complaint states that in September 1990, Palmer telephoned plaintiff Park regarding the possibility of Park owning a JFD franchise and that he misrepresented the financial condition of JFD. See Am. Compl. at ¶ 31. Subsequently, Palmer mailed to Park the information packet which fraudulently overstated JFD's financial viability. Id. at ¶¶ 12, 14, 31. In February 1991, Palmer telephoned Plaintiff Collingwood advising him that it would be more advantageous to consider purchasing a JFD franchise rather than a Jerry's Subs franchise at a time when JFD was in poor financial condition. Id. at ¶ 36. Palmer called Collingwood again in furtherance of the alleged scheme and mailed Collingwood the "Financial Facts." See id. at ¶ 37. Palmer also fraudulently misrepresented to Plaintiff Evangelisti the financial condition of JFD over the phone. Am.Compl. at ¶ 40. The Complaint therefore sufficiently alleges the threshold requirement of predicate acts as to Palmer.

As to Nickum, plaintiffs claim that in late July 1991 Nickum made several fraudulent telephone calls to Collingwood regarding financing options. Id. at ¶ 37. Furthermore, between August and November 1991, Nickum mailed monthly flyers called "Locations Under Review" in furtherance of the scheme. Id. at ¶ 41. He also mailed a letter to Evangelisti in November 1991 telling him to seek a location on his own, after Evangelisti had been assured a location would be found for him. Id. at ¶¶ 41, 40. Finally, the Complaint alleges that fifteen others in the Washington, D.C. metropolitan area were defrauded in the same way by the same defendants. Am.Compl. at ¶ 44. The threshold of predicate acts has been pleaded with respect to Nickum as well.⁶

2. Defendants Adam Schwartz, Jack's Food Systems, J.F.S., and Jerry's

Schwartz, J.F.S. and Jerry's contend that even if the predicate acts are sufficiently alleged against Nickum and Palmer, the Complaint does not contain averments that they personally committed any predicate acts. Defendants argue that plaintiffs are trying to impute liability for the predicate acts of Nickum and Palmer to Schwartz and the corporate defendants since the latter were part of the RICO "enterprise." Defs.' Mem.Supp. at 4-6. Such imputed liability, they assert, is prohibited under Judge Black's decision in United States v. Crysopt Corp., 781 F.Supp. 375 (D.Md.1991).

In Crysopt, the government contended that in determining whether a corporate defendant engaged in a pattern of racketeering activity, the court could consider the predicate acts of the "enterprise" as a whole, not merely the predicate acts committed by the corporate defendant itself. See id. at 384. Judge Black rejected this...