Colo. Coffee Bean Llc v. Peaberry Coffee Inc.

Decision Date01 April 2010
Docket NumberNo. 09CA0130.,09CA0130.
Citation251 P.3d 9
PartiesCOLORADO COFFEE BEAN, LLC, a Colorado limited liability company; Double R Coffee, LLC, a Colorado limited liability company; MLT Taylor, LLC, a Colorado limited liability company; Peak Java Company, a Colorado corporation; JFK, LLC, a Colorado limited liability company; CZ–DM, Inc., a Colorado corporation; JKKR, LLC, a Colorado limited liability company; Peak Mountain Coffee, Inc., a Colorado corporation; King Soopers JM, Inc., a Colorado corporation; and ABC Sales, Inc., a Colorado corporation, Plaintiffs–Appellants,v.PEABERRY COFFEE INC., a Colorado corporation; Peaberry Coffee Franchise, Inc.; William I. Tointon; James T. Orr; and Perkins Coie, LLC, a Washington limited liability partnership, Defendants–Appellees.
CourtColorado Court of Appeals

OPINION TEXT STARTS HERE

Podoll & Podoll, P.C., Richard B. Podoll, Robert C. Podoll, Dustin J. Priebe, Greenwood Village, Colorado, for PlaintiffsAppellants Colorado Coffee Bean, LLC; MLT Taylor, LLC; Peak Java Company; JFK, LLC; CZ–DM, Inc.; JKKR, LLC; Peak Mountain Coffee, Inc.; King Soopers JM, Inc.; and ABC Sales, Inc.Law Office of D. Bruce Coles, P.C., Donald Coles, Denver, Colorado, for PlaintiffAppellant Double R Coffee, LLC.Wheeler Trigg O'Donnell LLP, Hugh Q. Gottschalk, Andrew M. Unthank, Denver, Colorado, for DefendantsAppellees Peaberry Coffee, Inc., Peaberry Coffee Franchise, Inc., William I. Tointon, and James T. Orr.Rothgerber Johnson & Lyons LLP, Frederick J. Baumann, Hilary D. Wells, Denver, Colorado, for DefendantAppellee Perkins Coie, LLC.Campbell Latiolais & Ruebel PC, Casey A. Quillen, Denver, Colorado, for Amicus Curiae Colorado Civil Justice League.Faegre & Benson LLP, Heather Carson Perkins, Jeffrey A. Brimer, Denver, Colorado, for Amicus Curiae International Franchise Association.Hall & Evans, L.L.C., John E. Bolmer, Denver, Colorado, for Amicus Curiae American Association of Franchisees and Dealers.Campbell Latiolais & Ruebel, P.C., Casey A. Quillen, Denver, Colorado, for Amicus Curiae Colorado Defense Lawyers Association.

Roberts Levin Rosenberg, PC, Bradley A. Levin, Denver, Colorado, for Amicus Curiae Colorado Trial Lawyers Association.Opinion by Judge WEBB.

This case arises from plaintiffs' purchase of Peaberry Coffee franchises. Plaintiffs appeal pretrial orders striking their jury demands and bifurcating the trial. They also appeal the judgment entered following a bench trial dismissing all of their claims against defendants, Peaberry Coffee, Inc. (the parent company); its wholly owned subsidiary, Peaberry Coffee Franchise, Inc. (PCFI); William I. Tointon, the sole shareholder of the parent company and its chief operating officer; James T. Orr, the parent company's vice president of franchising; and Perkins Coie, LLP, franchising counsel to the parent company.1 The judgment also awarded PCFI damages on counterclaims against seven plaintiffs.

We vacate the judgment dismissing plaintiffs' third claim against the Peaberry defendants to the extent that it alleged fraudulent nondisclosure of the parent company's historic losses, because we conclude that the trial court erred in treating integration and nonreliance clauses (the exculpatory clauses) in the transactional documents as precluding plaintiffs' reliance on nondisclosure of these losses. We also vacate the judgment in favor of PCFI on its counterclaims and the judgment dismissing the fraudulent nondisclosure and aiding and abetting fraudulent nondisclosure claims against Perkins Coie. However, inconsistencies in the court's findings and conclusions require that we remand for further findings on the viability of the fraudulent nondisclosure claims. The judgment is otherwise affirmed, as are the pretrial orders.

I. Facts

Since 1990, the parent company or its predecessor has operated as a roaster, wholesaler, and retailer of gourmet coffee. It owned and operated up to 20 retail locations (the company stores) in and around Denver.

In 2002, Tointon decided to embark on a franchising program and hired Fred Nielsen, who served as president of the parent company from 2002 to 2005 but was not named as a defendant, to direct the program. The parent company retained Perkins Coie to form PCFI as franchisor and draft various documents, including the Uniform Franchise Offering Circular (UFOC), the contents of which are regulated by the Federal Trade Commission (FTC), and the franchise agreement. In 2003, Orr joined the parent company.

PCFI sold ten franchises between December 2003 and June 2004. Eight of the plaintiffs responded to a posting about franchise availability on the PCI website and bought franchises directly from PCFI. Each of them received a UFOC, testified that a principal understood it or had it reviewed by an attorney, and executed a closing acknowledgment along with a franchise agreement. Two plaintiffs bought franchises from an existing franchisee and succeeded to its franchise agreement. All franchise agreements are materially identical.

As relevant here, plaintiffs pleaded claims of fraudulent nondisclosure, negligent misrepresentation, alter ego, and violation of the Colorado Consumer Protection Act, sections 6–1–101 to –1120, C.R.S.2009, (CCPA) against the Peaberry defendants. They pleaded claims of fraudulent nondisclosure, negligent misrepresentation, violation of the CCPA, and aiding and abetting fraudulent nondisclosure against Perkins Coie. PCFI counterclaimed against seven plaintiffs to recover royalties under the franchise agreement.

In rulings based on a provision of the franchise agreement, an earlier trial judge struck plaintiffs' jury demand as to the claims against the Peaberry defendants, and the trial court ruled that the claims against Perkins Coie were triable to the court. During discovery, the Peaberry defendants asserted the attorney-client privilege as to all communications with Perkins Coie. The trial court rejected plaintiffs' challenge to the privilege based on the crime-fraud exception. Then the court bifurcated trial of the claims against Perkins Coie, reasoning that in a joint trial either the Peaberry defendants or Perkins Coie would be prejudiced, to the extent that Perkins Coie sought to use those privileged communications in its own defense.

According to plaintiffs, the Peaberry defendants sought to exploit a failed business model by selling franchises but fraudulently not disclosing that most of the company stores were unprofitable and the parent company had suffered significant financial losses each year. Plaintiffs emphasized that the defendants did not disclose any financial information about the parent company and disclosed only gross sales of the company stores. They also pointed out that franchisee information packets sent to them included an article, published by the Denver Business Journal in 2003, quoting Nielsen as saying that “Peaberry is profitable now,” which the trial court found to have been false.

The Peaberry defendants presented the franchising program as legitimate based on evidence that the parent company's losses were related to its rapid growth, some company stores were profitable, and retail sales had increased in the years immediately before the franchising program. They primarily challenged plaintiffs' reliance based on the exculpatory clauses, wherein plaintiffs disclaimed reliance on representations other than as contained in the transactional documents. They also asserted that the “earnings claim” in Exhibit J to the UFOC, which included no financial information on the parent company and only gross sales of the company stores, complied with FTC regulations.

The bifurcation order provided that the claims against the Peaberry defendants would be tried first. At the conclusion of plaintiffs' case, the trial court dismissed the CCPA claim against all defendants under C.R.C.P. 41(b) for lack of public impact. Following trial, the court entered detailed written findings of fact and conclusions of law drafted by counsel for the Peaberry defendants, as edited by the court (the decision). The decision contains some inconsistencies between sections that the court changed and those which it did not.

The decision resolved all claims and counterclaims in favor of the Peaberry defendants. The court found that plaintiffs had failed to prove “PCFI was formed for a fraudulent purpose,” and was “not persuaded that the Defendants embarked on a franchising program as part of a scheme to defraud Plaintiffs.” It also found that Exhibit J “complied with the FTC requirements applicable to the earnings claim,” and was “not otherwise misleading or deceptive.” However, the court determined that the UFOC “does not provide a safe harbor against a common law fraud claim.”

On the nondisclosure claim, the court found that “Peaberry actively concealed material financial facts from the Plaintiffs,” of which plaintiffs were ignorant, and that [t]he concealed facts were withheld with the intent that the Plaintiffs purchase their franchises ignorant of the true facts.” Nevertheless, the court found against plaintiffs on reliance: as to losses at the company stores, because information from which profitability could be calculated was publicly available and based on language in the UFOC; and as to losses by the parent company, because the exculpatory clauses precluded reliance on any information outside the transactional documents.

The court entered a final judgment awarding PCFI breach of contract damages against seven plaintiffs, dismissing all remaining claims against Perkins Coie based on the decision, and awarding PCFI attorney fees under the franchise agreement, in an amount to be determined.

On appeal, plaintiffs challenge dismissal of their claims against all defendants for fraudulent nondisclosure and violation of the CCPA; dismissal of their alter ego claim against PCFI; dismissal of their negligent misrepresentation and aiding and abetting...

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