Coraud LLC v. Kidville Franchise Co., 14–cv–9105 (JSR).

• Decision Date: 12 June 2015
• Docket Number: No. 14–cv–9105 (JSR).,14–cv–9105 (JSR).
• Citation: 109 F.Supp.3d 615
• Parties: CORAUD LLC, Plaintiff, v. KIDVILLE FRANCHISE COMPANY, LLC, Andrew Stenzler, Harry R. Harwood, Jr., Ash Robinson, and Joseph Sexton, Defendants.
• Court: U.S. District Court — Southern District of New York

109 F.Supp.3d 615

CORAUD LLC, Plaintiff,

v.KIDVILLE FRANCHISE COMPANY, LLC, Andrew Stenzler, Harry R. Harwood, Jr., Ash Robinson, and Joseph Sexton, Defendants.

No. 14–cv–9105 (JSR).

United States District Court, S.D. New York.

Signed June 12, 2015.

William Michael Garner, Garner & Ginsburg, PA, Minneapolis, MN, for Plaintiff.

Kevin Michael Shelley, Kaufmann Gildin & Robbins LLP, New York, NY, for Defendants.

MEMORANDUM

JED S. RAKOFF, District Judge.

This action arises out of plaintiff Coraud LLC's ("Coraud's") 2012 purchase of a franchise for a childcare center from defendant Kidville Franchise Co. ("Kidville"). After Coraud allegedly sustained losses in its first two years operating the franchise, it brought this action against Kidville and individual defendants Andrew Stenzler, Harry R. Harwood, Jr., Ash Robinson, and Joseph Sexton, alleging common law claims and violations of the New York State Franchise Sales Act ("NYFSA") and New Jersey Franchise Practices Act ("NJFPA"). On January 9, 2015, defendants moved to dismiss certain of Coraud's claims against Kidville and to dismiss the individual defendants from the action entirely. In a March 2, 2015 Order, the Court granted the motion in part and denied it in part. Specifically, the Court granted defendants' motion to dismiss with respect to Coraud's common law fraud and negligent misrepresentation claims, Coraud's claims against defendants Harwood and Robinson under the NYSFA, Coraud's claim against Kidville under the NJFPA, and Coraud's demands for a jury trial and for punitive and exemplary damages; and the Court denied defendants' motion with respect to Coraud's claims against Kidville, Sexton, and Stenzler under the NYSFA and Coraud's demand for consequential damages. This Memorandum explains the reasons for those rulings.

The following allegations, which the Court accepts as true for purposes of this motion only, are taken from the Complaint. Kidville operates and franchises facilities used for the "care and development" of young children. Complaint ¶¶ 11, 24. In August 2011, husband and wife Paul and Catharine Wilder, the founders of plaintiff Coraud, contacted Kidville about becoming a franchisee. Id. ¶ 15. This was the first of a series of conversations and meetings with Kidville employees leading up to Coraud's eventual purchase of a franchise in April 2012. Id. ¶ 25.

The Wilders' primary contact at Kidville was defendant Joe Sexton, Kidville's Senior Manager of Franchise Development. Id. ¶ 10. Sexton worked with the Wilders to develop a "business model" in advance of their purchase of a franchise. Id. ¶ 16. The "model" was effectively a profit and loss spreadsheet that included inputs for revenue—such as "payment for classes, income from birthday parties, and income from special events"—and inputs for expenses—such as "contract labor, advertising and promotion, and operating supplies." Id. The Wilders, who had no experience with the type of calculations the business model required, "were completely dependent on Sexton and Kidville in completing the" spreadsheet and informed Sexton that they needed his help. Id. The Wilders then worked with Sexton on the model over a number of weeks, see id. ¶¶ 20–22, 23, ending up with a final version that calculated first-year revenues of $600,000 and a net income of $43,901. Id. ¶ 23. Sexton told the Wilders that the expense inputs they used in the business model were accurate and that the revenue inputs were "in the ball park" and "on track." Id. ¶¶ 21, 23.

Additionally, Sexton provided the Wilders with market and demographic analyses for territories in New Jersey, where the Wilders had expressed interest in opening their franchise. Id. ¶ 16. Among the markets discussed was the suburban town of Westfield, New Jersey, which the Wilders had identified as a preferred market and which Sexton described as one of the "top ten locations." Id. ¶ 19. After receiving additional information from Sexton about Westfield, as well as other locations, the Wilders settled on Westfield to open their franchise. Id. ¶¶ 19, 26.

In February 2012, Kidville provided the Wilders with a revised copy of its Franchise Disclosure Document (the "FDD"), a prospectus that a franchisor is required by law to provide to potential franchisees.Id. ¶¶ 17, 24. Among other information, the FDD stated that the cost of opening an "annex facility," the type of franchise that the Wilders eventually opened, was $259,405 to $417,750 (exclusive of certain specified costs). Id. ¶ 24. In addition, the FDD contained "statistics on the status of the franchise system," but failed to include any mention of Kidville's affiliate, J.W. Tumbles, which franchised children's gyms and had had certain outlets shut down in the previous years. Id.

On the basis of the above-mentioned representations as well as others not pertinent here, the Wilders formed Coraud LLC and, through it, signed a franchise agreement in April 2012. Id. ¶ 25; Declaration of Kevin M. Shelley ("Shelley Decl."), Ex. E (the "Franchise Agreement"). The Wilders soon learned, however, that many of the representations were inaccurate. Id. ¶ 26. For example, with respect to expenses, the cost of "building out the franchised premises" was over $680,000, or 63 percent higher than the "top end" estimate of $417,750 in the FDD. Id. ¶ 26(a). Likewise and with respect to income, although "Sexton and Kidville approved the Wilders' projections of revenues in the range of $600,000 for the first year and profits of nearly $44,000," revenues for the first year were limited to $202,000, leaving the Wilders a loss of $168,000. Id. 26(b). Additionally, Sexton and Kidville had made these various representations without alerting the Wilders to the fact that Kidville "had no experience with suburban locations"—where the Wilders chose to open their franchise, id. ¶ 26—or that J.W. Tumbles had "adverse" results operating in suburban areas. Id. ¶¶ 22, 26(c). Coraud's franchise continued to incur losses in its second year of operation, Id. ¶ 26(b), and Coraud filed this suit in November 2014.

In the motion now at issue, defendants request that the Court (1) dismiss Coraud's common law fraud and negligent misrepresentation claims; (2) dismiss Coraud's claims brought against Kidville pursuant to Section 687 of the NYFSA; (3) dismiss Coraud's NYFSA claims brought against the individual defendants; (4) dismiss Coraud's NJFPA claims against Kidville; (5) strike Coraud's jury demand; and (6) strike Coraud's demand for punitive, exemplary, and consequential damages. The Court addresses each in turn.

Under New York law,¹ to prevail on a claim of common law fraud or common law negligent misrepresentation, a plaintiff must show, among other things, "reasonable reliance" on the alleged misstatements or omissions. See J.A.O. Acquisition Corp. v. Stavitsky, 8 N.Y.3d 144, 148, 831 N.Y.S.2d 364, 863 N.E.2d 585 (2007) (listing the elements of a negligent misrepresentation claim); Lama Holding Co. v. Smith Barney Inc., 88 N.Y.2d 413, 421, 646 N.Y.S.2d 76, 668 N.E.2d 1370 (1996) (listing the elements of a fraud claim). Thus, as a general rule, where a contract contains a disclaimer of reliance on certain representations, a "party cannot, in a subsequent action ... claim it was fraudulently induced to enter into the contract by the very representation it has disclaimed reliance upon," Harsco Corp. v. Segui, 91 F.3d 337, 345 (2d Cir.1996), so long as "(1) the disclaimer is made sufficiently specific to the particular type of fact misrepresented or undisclosed; and (2) the alleged misrepresentations or omissions did not concern facts peculiarly within the seller's knowledge." Basis Yield Alpha Fund (Master) v. Goldman Sachs Grp., Inc., 115 A.D.3d 128, 980 N.Y.S.2d 21, 28 (1st Dep't 2014).

Here, defendants assert that Coraud cannot prevail on its common law claims because Coraud, when it signed the Franchise Agreement, expressly disclaimed any reliance on statements made outside of the FDD. The Court agrees.

The Franchise Agreement includes, among others, the following disclaimer:

That except as may be provided in our [Kidville's] Franchise Disclosure Document you [Coraud] have not received from us, and are not relying upon, any representations or guarantees, express or implied, as to the potential volume, sales, income, or profits of a KIDVILLE Facility, that any information you have acquired from other KIDVILLE Facility franchisees regarding their sales, income, profits, or cash flows was not information obtained from us, and that we make no representation about that information's accuracy.

Franchise Agreement at 2. Because this disclaimer covers "the very matter"—potential volume, sales, income, and profits—"as to which [Coraud] now claims it was defrauded," the disclaimer is "sufficiently specific" to bar Coraud's claim of reliance. See Danann Realty Corp. v. Harris, 5 N.Y.2d 317, 320, 184 N.Y.S.2d 599, 157 N.E.2d 597 (1959). Further, Coraud has not alleged that any of the alleged misrepresentations outside of the FDD concerned matters solely within defendants' knowledge; if the cost of opening a franchise, the expected revenue, and the desirability of the location Coraud chose could not have been discovered with the exercise of due diligence, Coraud has failed to allege it. Cf. Goldman Sachs Grp., Inc., 980 N.Y.S.2d at 30 (allegations that defendant had "access to nonpublic information regarding the deteriorating credit quality of subprime mortgages" satisfies "the peculiar knowledge exception to the disclaimer bar") (emphasis added). Accordingly, Coraud's common law claims must be dismissed.²

The Court arrives at a different result with respect to Coraud's fraud claim brought pursuant to the NYSFA. Section 687 of the NYFSA makes it unlawful for any person, "in connection with the offer, sale or purchase of any franchise," to "[m]ake any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made,...