Avon Hardware Co. v. Ace Hardware Corp.

• Decision Date: 28 October 2013
• Docket Number: Docket No. 1–13–0750.
• Citation: 998 N.E.2d 1281,376 Ill.Dec. 348,2013 IL App (1st) 130750
• Parties: AVON HARDWARE COMPANY, d/b/a Avon Ace Hardware, Michael A. Clark, Beverly A. Clark, Yido, Inc., d/b/a Mr. Mike's Ace Hardware, Debbie Pasciak, and Michael Pasciak, Plaintiffs–Appellants, v. ACE HARDWARE CORPORATION, Defendant–Appellee.
• Court: United States Appellate Court of Illinois

2013 IL App (1st) 130750

998 N.E.2d 1281

376 Ill.Dec. 348

AVON HARDWARE COMPANY, d/b/a Avon Ace Hardware, Michael A. Clark, Beverly A. Clark, Yido, Inc., d/b/a Mr. Mike's Ace Hardware, Debbie Pasciak, and Michael Pasciak, Plaintiffs–Appellants,

v.ACE HARDWARE CORPORATION, Defendant–Appellee.

Docket No. 1–13–0750.

Appellate Court of Illinois,

First District, First Division.

Oct. 28, 2013.

Kenneth A. Wexler, Kara A. Elgersma, and Amy E. Keller, all of Wexler Wallace LLP, of Chicago, and Patrick R. Burns, of Lindquist & Vennum PLLP, and Gordon Rudd and David M. Cialkowski, both of ZImmerman Reed PLLP, both of Minneapolis, Minnesota, for appellants.

Norman M. Leon and John A. Hughes, both of DLA Piper LLP, of Chicago, for appellee.

Gary W. Leydig, of Riordan, Fulkerson, Hupert & Coleman, of Chicago, and Dady & Gardner PA (Ronald K. Gardner, John D. Holland, and Kristy L. Zastro, of counsel), of Minneapolis, Minnesota, for amicus curiae Coalition of Franchisee Associations, Inc.

Marc N. Blumenthal, of Law Offices of Marc N. Blumenthal, of Chicago, for amicus curiae American Franchise Association.

OPINION

Justice HOFFMAN delivered the judgment of the court, with opinion.

¶ 1 The plaintiffs, Avon Hardware Company, doing business as Avon Ace Hardware, Michael A. Clark, Beverly A. Clark, Yido, Inc. (Yido), doing business as Mr. Mike's Ace Hardware, Debbie Pasciak, and Michael Pasciak, appeal from the circuit court order which dismissed their complaint alleging various claims of common-law and statutory fraud based on statements made by the defendant, Ace Hardware Corporation (Ace), in connection with the parties' franchise agreement.¹ We affirm.

¶ 2 On September 28, 2012, the plaintiffs filed an amended complaint, alleging the following facts and claims. In 2000, Ace created a concept store plan, known as “Vision 21,” which consisted of large Ace stores aimed at competing with “big box” retailers, such as Home Depot and Lowe's. In 2006, the Pasciaks, through their corporation, Yido, entered into a franchise agreement with Ace to operate a Vision 21 store in Indianapolis. On September 15, 2006, Ace provided the Pasciaks a “pro forma” document, dated June 1, 2006, containing sales and cash flow forecasts. The Pasciaks allege that the pro forma document led them to believe their store would be successful. Ace also provided them, as regulated but not required by federal law, a Uniform Franchise Offering Circular (UFOC).² See 16 C.F.R. § 436.1 et seq. (2006). According to the complaint, this document contained misleading historical financial data regarding the performance of existing Ace hardware stores. The complaint alleges that Ace sent the pro forma document to Wells Fargo in order to assist the Pasciaks in obtaining a loan to close the deal with Ace. After the pro forma document was submitted, Wells Fargo did not approve the loan. The complaint alleges that, following the initial loan denial and without input from the Pasciaks, Ace manipulated the numbers in the pro forma document in order to satisfy Wells Fargo's financing requirements.

¶ 3 The Pasciaks' store, Mr. Mike's Ace Hardware, opened in February 2007 and never approached the forecasted sales and revenue provided in the pro forma document. The complaint alleges that Ace stated that Mr. Mike's would make $1,875,000 in sales in its first year and increasingly more in the following years; in fact, the store made $1,421,998 in its first year and eventually failed. The complaint also alleges that Ace knew the store would never make the $1,875,000 and used fraudulent and misleading historical sales and projected figures to entice the Pasciaks to open the store. Following the store's failure, the Pasciaks learned that Ace had manipulated the numbers contained in the pro forma and UFOC documents, and they filed suit.

¶ 4 In 2007, the Clarks, through their corporation, Avon Hardware Company, similarly entered into a franchise agreement with Act to operate a Vision 21 store in Avon, Indiana. Like the Pasciaks, the Clarks allege that Ace provided pro forma and UFOC documents which contained false and misleading financial information. They also allege that Ace manipulated its pro forma numbers to satisfy Wells Fargo's financing requirements, allowing the Clarks to obtain the necessary loan to open their store in September 2008. Ace had projected that the Avon Ace store would make $1,445,000 in sales in its first year; the store, however, made only $731,994 and eventually failed in November 2009. According to the complaint, Ace used its fraudulent and misleading projected and historical sales figures to entice the Clarks into opening their store. After the store's failure, the Clarks became aware that Ace manipulated the pro forma and UFOC figures and filed suit.

¶ 5 The pro forma documents provided to the Pasciaks and the Clarks were attached to the plaintiffs' amended complaint and contain largely similar language. The pro forma documents state, in relevant part, that the projections contained therein “including, sales, profits or earnings,” are “merely estimates and should not be considered as the actual or potential sales, profits or earnings that will be realized by any specific store operator.” Each document contains numerous estimates specific to each store, including estimated costs to open the stores, projected annual sales, estimated annual sales for the first year of business and several years thereafter, and an estimate as to the year the parties could expect to earn a profit.

¶ 6 The UFOC documents provided to the plaintiffs were also attached to the complaint and contain similar language. The Pasciaks' UFOC states, in relevant part, that as of December 31, 2005, there were 4,585 franchised Ace stores and 17 corporately owned Ace stores. Item 19 states that the average store performance numbers contained therein for fiscal years 2004 and 2003 were “based on information submitted to [Ace] by reporting member stores.” The document discloses that the financial information from its stores “has not been independently verified by [Ace]”. The average store performance numbers for 2004 were computed based on 1,477 stores which reported their financial data to Ace; the averages for 2003 were based on financial data from 1,504 stores. The footnotes to item 19 warn that the 2003 and 2004 performance data represent only about 37% of “all member Ace stores,” and that “[b]ecause we do not receive detailed financial data in a consistent format from all Members, the Statements reflect average store performance only for reporting stores.” The footnotes further warn that, out of the 1,477 reporting stores, 76 stores had annual sales below $500,000, 245 stores had sales between $500,000 and $1 million, and one store had sales of only about $42,000. Additionally, the UFOC contained a list of all franchised outlets that had closed in the three years preceding the plaintiffs' acquisitions of their Ace stores. The document, in item 20, noted that 355 Ace stores closed in 2005; over 800 stores closed between 2003 and 2005.

¶ 7 The UFOC further states that the data presented or the data contained in any pro forma document “should not be relied upon solely or considered as the probable results that will be realized by any Member.” The final paragraph of the average performance section states:

“THE DATA PRESENTED IN THIS ITEM 19 SHOULD NOT BE CONSIDERED AS THE ACTUAL, POTENTIAL OR PROBABLE RESULTS THAT WILL BE REALIZED BY YOU. WE DO NOT REPRESENT THAT YOU CAN EXPECT TO ATTAIN THESE RESULTS. A NEW MEMBER'S FINANCIAL RESULTS ARE LIKELY TO DIFFER FROM THOSE DESCRIBED IN THIS ITEM 19. SOME STORES HAVE ACHIEVED THESE RESULTS, BUT THERE IS NO ASSURANCE THAT YOU WILL DO AS WELL.”

¶ 8 The Clarks received similarly worded UFOC documents with 2004 and 2005 financial data. The data from those years represented 37% of all stores for 2004 and 41% for 2005; the language contained therein was otherwise unchanged from the documents provided to the Pasciaks.

¶ 9 The plaintiffs also signed the “Ace Hardware Membership Agreement,” after having received the pro forma and UFOC documents. Article V, section 11, of the “Ace Hardware Membership Agreement” provides that the “Member further represents and warrants” that “the Member has not received or relied upon any guarantee, whether express or implied, of the sales, revenues, profits or success of the business venture contemplated by this Agreement.”

¶ 10 Counts I and II of the amended complaint allege that Ace violated the Indiana Franchise Disclosure Act (Ind.Code Ann. § 23–2–2.5–1 et seq. (West 2006)) by providing pro forma and UFOC documents which did not comply with the guidelines for such documents. The complaint alleges that Ace purposely reported inflated historical store performance data by “fail[ing] to account for failed or failing stores” and misrepresented store averages to entice the plaintiffs into investing. It alleges that the plaintiffs reasonably relied upon the false and misleading information contained in the documents when they decided to invest with Ace. Counts III and IV are based on violations of the Illinois Consumer Fraud and Deceptive Business Practices Act (815 ILCS 505/1 et seq. (West 2006)), and counts V through X allege fraudulent inducement, fraud, and negligent misrepresentation; these claims are based on the same conduct as alleged against Ace in counts I and II.

¶ 11 Ace moved to dismiss the plaintiffs' amended complaint under sections 2–615 and 2–619 of the Code of Civil Procedure (Code) (735 ILCS 5/2–615, 2–619 (West 2012)). Ace argued that the franchise agreements contained antireliance statements in which the plaintiffs affirmatively represented that they had not received or relied upon any guarantee, express or implied, of sales, revenues, profits or success of Ace stores. According to Ace, the antireliance provision of its franchise agreement barred the plaintiffs' claims. Additionally, Ace argued...