Ellering v. Sellstate Realty Sys. Network, Inc.

• Decision Date: 13 July 2011
• Docket Number: Civ. No. 10–1025 (RHK/LIB).
• Citation: 801 F.Supp.2d 834
• Parties: John ELLERING, et al., Plaintiffs, v. SELLSTATE REALTY SYSTEMS NETWORK, INC., et al., Defendants.
• Court: U.S. District Court — District of Minnesota

801 F.Supp.2d 834

John ELLERING, et al., Plaintiffs,

v.SELLSTATE REALTY SYSTEMS NETWORK, INC., et al., Defendants.

Civ. No. 10–1025 (RHK/LIB).

United States District Court, D. Minnesota.

July 13, 2011.

Robert M. Einhorn, Robert Zarco, Himanshu M. Patel, Zarco Einhorn Salkowki & Brito, P.A., Miami, FL, William M. Topka, Robert B. Bauer, Severson, Sheldon, Dougherty & Molenda, P.A., Apple Valley, MN, for Plaintiffs.

Scott A. Beatty, Henderson, Franklin, Starnes & Holt, PA, Fort Myers, FL, Robert L. Meller, Justin P. Short, Best & Flanagan LLP, Minneapolis, MN, for Defendants.

MEMORANDUM OPINION AND ORDER

RICHARD H. KYLE, District Judge.

INTRODUCTION

This action arises out of an agreement between Plaintiffs John and Karen Ellering and Defendant Sellstate Realty Systems Network, Inc. (“Sellstate”), a real-estate franchise company, granting the Ellerings the exclusive right to sell Sellstate franchises in Minnesota. The Ellerings (and two related entities) have sued Sellstate and two of its officers, Arthur Darmanin and Neil Cresswell, asserting inter alia that they were fraudulently induced to enter into the agreement; they seek rescission and damages. Presently pending before the Court are (i) Plaintiffs' Motion for Summary Judgment on Count VIII of the Amended Complaint (Doc. No. 88) and (ii) Defendants' Motion for Summary Judgment on Plaintiffs' claims and on Count III of their Counterclaims (Doc. No. 83). For the reasons set forth below, Plaintiffs' Motion will be denied and Defendants' Motion will be granted as to Count VIII of the Amended Complaint. The remainder of Defendants' Motion will be held in abeyance pending an upcoming settlement conference before Magistrate Judge Brisbois.

BACKGROUND

Most of the relevant facts are undisputed. Sellstate is a Florida corporation headquartered in Fort Myers, Florida. It is a national franchisor of real-estate sales offices; it sells individuals and businesses the right to use the Sellstate name and “system” of operating procedures for real-estate sales. The Ellerings are Minnesota residents who have worked in the real-estate industry since 2004.

On November 19, 2006, John Ellering received an e-mail from Sellstate soliciting prospective franchisees to purchase Sellstate “Master Territories,” or exclusive franchising rights in a specified geographic area. Attached to the e-mail was a bar graph comparing Sellstate's growth to that of well-known real-estate company RE/Max. The graph contained two bars comparing the companies' number of agents in each of five years, labeled “Year One” through “Year Five.” The graph reflected, in each year, that Sellstate had more agents than RE/Max and that its number of agents had increased at a substantially faster rate. Text immediately below the graph drove the point home: it explained that Sellstate had enjoyed rapid growth “[s]ince [its] inception only a few years ago” and indicated that “this once in a lifetime opportunity” was coming “to your area.” ¹

John Ellering had not heard of Sellstate prior to receiving this e-mail. Intrigued, he contacted the company to express an interest in learning more about a Minnesota “Master Territory.” A short time later, he was telephoned by Michael Darmanin, Sellstate's Chief Operating Officer and son of its Chief Executive Officer, Defendant Arthur Darmanin. Michael Darmanin provided some general background information about Sellstate and explained that it was a technologically advanced company with low overhead and other costs. He encouraged the Ellerings to speak with Defendant Neil Cresswell, Sellstate's President, to learn more.

Cresswell and John Ellering spoke by telephone several days later. Cresswell provided additional information about Sellstate and invited the Ellerings to travel to Fort Myers for a face-to-face meeting about the company. They accepted that invitation and met with company officials in Florida on December 18, 2006. The Ellerings claim that at that meeting Cresswell told them: (i) they could earn $37,000 per month as Sellstate franchisees, as confirmed in handwritten notes he provided to them, and (ii) he had recently earned $250,000 in one month.² The Ellerings later met with Arthur Darmanin, who “elaborated on the revenue ... information provided earlier by Mr. Cresswell.”

Before the Ellerings met with Sellstate officials, the company had prepared a Uniform Franchise Offering Circular (“UFOC”) containing required disclosures to prospective franchisees under state and federal law. At the conclusion of their in-person meeting, Arthur Darmanin gave the Ellerings a copy of the UFOC. It provided, in pertinent part:

We do not furnish or authorize our salespersons to furnish any oral or written information concerning the actual or potential sales, costs, income or profits of your Sellstate franchise. Actual results vary from Sellstate Franchise to Sellstate Franchise. We cannot estimate the results of any particular Sellstate Franchise.

We specifically instruct our sales personnel, agents, employees and officers that they are not permitted to make any claims or statements as to the earnings, sales or profits, or prospects or chances of success, nor are they authorized to represent or estimate dollar figures as to any Franchise Business or Company–Owned unit.

In February 2007, the Ellerings entered into an Area Representative Agreement with Sellstate, pursuant to which they were granted “the exclusive right to represent ... Sellstate in procuring prospective franchisees to operate Sellstate franchised businesses in the State of Minnesota.” In return, they agreed to pay the company $168,000, of which approximately $112,000 was financed through a promissory note requiring monthly payments to Sellstate. ³ The Area Representative Agreement required, among other things, that at least three Sellstate franchises be opened in the Ellerings' Minnesota territory before the end of 2007. It also included a clause providing that the Ellerings:

acknowledge that the success of the Area Representative business is dependent upon your personal effort.... You acknowledge that neither [Sellstate] nor any other party has guaranteed to you or warranted that you will succeed in the operation of the Area Representative business nor provided any sales or income projections, forecasts or earnings claim of any kind to you. You have not relied upon any guarantee, warranty, projection, forecast or earnings claim, whether express, implied, purported or alleged, in entering into this Agreement.

Things did not go as planned after the Ellerings signed the Area Representative Agreement. They failed to achieve revenue commensurate with the projections allegedly made by Cresswell. Only one Sellstate franchise opened in the Ellerings' territory by the end of 2007, and it was owned by a company the Ellerings formed, Plaintiff Select Associates Realty, LLC (“Select Associates”). By late 2008, with the business flagging, the Ellerings decide to terminate their relationship with Sellstate and stopped making payments on the promissory note.

On July 9, 2009, the Ellerings, EJK, and Select Associates commenced an action against Sellstate, Arthur Darmanin, and Cresswell in the Lee County, Florida, Circuit Court (the “Florida Action”), asserting claims for breach of contract, fraudulent inducement, and violation of several Florida statutes. They sought rescission of the Area Representative Agreement and franchise agreement, voiding of the promissory note, and damages in an amount to be determined at trial. The defendants timely removed the action to the United States District Court for the Middle District of Florida.

On March 30, 2010, the same Plaintiffs commenced the instant action, asserting claims similar to those in the Florida Action and adding a claim (Count VIII) for violation of the Minnesota Franchise Act (“MFA”), Minn.Stat. § 80C.01 et seq. Five days later, they voluntarily dismissed the Florida Action without prejudice. On June 21, 2010, Defendants answered the Complaint and filed three counterclaims against Plaintiffs for breach of the parties' various agreements. ( See Doc. No. 7.) Plaintiffs did not file a reply to the counterclaims at that time.

By stipulation of the parties, Plaintiffs filed an Amended Complaint on April 20, 2011. ( See Doc. No. 67.) The Amended Complaint largely tracked the initial Complaint; as relevant here, Count VIII continued to assert a violation of the MFA. Defendants answered the Amended Complaint but did not re-assert the counterclaims in their Answer. ( See Doc. No. 75.) Nevertheless, on May 12, 2011, they moved for a default judgment on the counterclaims. ( See Doc. No. 78.) In an apparent response to the default judgment Motion, Plaintiffs filed a Reply to the counterclaims later that day.⁴

On May 11, 2011, Defendants moved to dismiss Count VIII as barred by the statute of limitations. ( See Doc. No. 72.) Then, on May 17, 2011, Defendants moved for summary judgment on all of Plaintiffs' claims and one of their counterclaims; they incorporated by reference the arguments they had previously made in support of dismissing Count VIII. ( See Doc. No. 83.) Plaintiffs, in turn, cross-moved for summary judgment on Count VIII. ( See Doc. No. 88.)

In light of the confusing procedural posture of the case, the Court held a conference call with counsel on June 13, 2011. In that call, the Court questioned whether it would not make sense to address Count VIII before the other claims at issue in the Motions, insofar as much of the parties' briefing had focused on that claim. The Court also questioned whether Defendants' default-judgment Motion had been rendered moot by Plaintiffs' Reply to the counterclaims. In response, counsel indicated that the parties' settlement positions were likely to change based upon the Court's disposition of Count VIII, and the Court therefore determined that it would address that claim before the others. Defense counsel also asked for...