Farooqi v. Carroll (In re Carroll)

• Citation: 464 B.R. 293
• Decision Date: 13 December 2011
• Docket Number: Adversary No. 11–03321.,Bankruptcy No. 11–31005–13.
• Parties: In re Michael David CARROLL, Debtor.Anjum A. Farooqi, Plaintiff, v. Michael David Carroll, Defendant.
• Court: U.S. District Court — Northern District of Texas

464 B.R. 293

In re Michael David CARROLL, Debtor.Anjum A. Farooqi, Plaintiff,
v.
Michael David Carroll, Defendant.

Bankruptcy No. 11–31005–13.

Adversary No. 11–03321.

United States Bankruptcy Court, N.D. Texas, Dallas Division.

Dec. 13, 2011.

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Eliot Shavin, SMU Legal Clinic, Dallas, TX, for Plaintiff.

Joyce W. Lindauer, Joyce W. Lindauer, Attorney at Law, Dallas, TX, for Defendant.

MEMORANDUM OPINION BARBARA J. HOUSER, Bankruptcy Judge.

The Court tried this adversary proceeding (the “Adversary”) on November 7–8, 2011. Plaintiff, Anjum A. Farooqi (“Farooqi”), is an individual residing in Irving, Texas, who moved to Texas from New

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York City with the hope of purchasing a Salad Bowl Cafe. Defendant, Michael David Carroll (“Carroll”), is an individual residing in Irving, Texas, who filed for relief under chapter 13 of the Bankruptcy Code on February 14, 2011. At the relevant times, Carroll was chairman, chief executive officer, president and chief financial officer of the Salad Bowl Franchise Corporation and an owner and officer of its parent company, The Salad Bowl, Inc. In the Adversary, Farooqi seeks to (i) liquidate his claims against Carroll, and (ii) have his claims determined to be nondischargeable in Carroll's bankruptcy case.

An issue arose at trial which had not been briefed by the parties. Thus, post-trial briefs were required, the last of which was submitted on November 23, 2011, after which the Court took the Adversary under advisement. For the reasons explained more fully below, the Court has authority to hear and determine the claims asserted in the Adversary pursuant to 28 U.S.C. §§ 1334 and 157(b). See infra at pp. 15–22. The Court may enter a final judgment and a monetary judgment in the Adversary. Morrison v. W. Builders of Amarillo (In re Morrison), 555 F.3d 473, 479–80 (5th Cir.2009). This Memorandum Opinion contains the Court's findings of fact and conclusions of law pursuant to Federal Rules of Bankruptcy Procedure 7051 and 9014.

I. FACTUAL AND PROCEDURAL BACKGROUNDA. Initial Meeting and Negotiations

At some point prior to the summer of 2009, Farooqi began to tire of life in New York City and of his job in the food service division of a local hospital. Farooqi visited his sister in Dallas in the late summer of 2009 in order to look for a new career opportunity. Ideally, Farooqi wanted to purchase a restaurant given his background in food service.¹ While here, Farooqi contacted a business broker named Peggy Miller (“Miller”) about purchasing a restaurant franchise or some other existing restaurant.² Farooqi also contacted a loan broker named Ana Marshall (“Marshall”), who was to assist him with obtaining financing for any restaurant that he might choose to purchase. Miller introduced Farooqi to Carroll, who, as noted previously, was the chairman, chief executive officer, president, and chief financial officer of the Salad Bowl Franchise Corporation (“Franchise Corporation”), a wholly-owned subsidiary ³ of The Salad Bowl, Inc. (“Inc.”) (Franchise Corporation and Inc. will be collectively referred to herein as

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the “Salad Bowl Entities”).⁴ Carroll had listed a Salad Bowl Café located at 4000 N. MacArthur, Suite 122, Irving, Texas as a franchise location that was for sale (the “Las Colinas Salad Bowl”).

After being introduced by Miller, Farooqi and Carroll began to discuss the possibility of Farooqi purchasing the Las Colinas Salad Bowl. On September 25, 2009, Carroll sent Farooqi a Franchise Disclosure Document, dated June 5, 2009, containing information about (i) Franchise Corporation, and (ii) Carroll's personal bankruptcy filing in 2006.⁵ See Defendant's Exhibit 2 (the “Franchise Disclosure Document”). The Franchise Disclosure Document contained no reference to any litigation against Carroll or the Salad Bowl Entities. In fact, the Franchise Disclosure Document stated that there was no such litigation. See Defendant's Exhibit 2, p. 3.

On or about September 28, 2009, Farooqi attended a meeting with Carroll, Marshall and Leith Caddell (“Caddell”),⁶ an employee of the Salad Bowl Entities to discuss the details of Farooqi's possible purchase of the Las Colinas Salad Bowl. Specifically, Farooqi wanted to know (i) what other assets would be sold to him in addition to the franchise itself, (ii) the types of training generally provided by the Salad Bowl Entities to its franchisees, and (iii) other details related to the purchase of the Las Colinas Salad Bowl. ⁷ Farooqi asked Marshall to attend the meeting with him because he considered Marshall to be his “right hand person” and was heavily reliant on Marshall to read and interpret any legal documents that might be required. Farooqi testified that he was relying on Marshall because he had no real experience in the negotiation of a business deal or with franchise documentation. In short, Farooqi admitted that he was very inexperienced and unsophisticated in these types of business transactions.⁸ At that meeting a purchase price of $150,000 was agreed upon for the Las Colinas Salad Bowl.

The parties met again the following day to finalize their proposed transaction. At that time Farooqi was asked to sign a 30–day option to purchase agreement with Inc. (the “Option Agreement”). See Plaintiff's Exhibit 1.⁹ However, Farooqi was concerned about the form of the Option Agreement as proposed by Carroll and Inc.¹⁰ As a result of his concerns, the Option

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Agreement was amended to include what the parties called an option-out provision (the “Opt–Out Provision”), which would allow Farooqi to receive a return of his $25,000 if he could not obtain financing or if Inc. was unable to provide requested information, which information was needed for final approval of Farooqi's loan application.¹¹ Farooqi, Caddell and Marshall all testified that the Opt–Out Provision was added to the Option Agreement in order to provide extra assurances to Farooqi, who was concerned about being able to obtain a $150,000 loan and close on his purchase of the Las Colinas Salad Bowl within the 30–day window otherwise provided in the Option Agreement.¹² Farooqi and Carroll agreed that Farooqi would pay $25,000 at the time of the signing of the Option Agreement (as amended to include the Opt–Out Provision), which payment would represent the franchise fee for the Las Colinas Salad Bowl and would ultimately be applied towards the $150,000 purchase price for the Las Colinas Salad Bowl if Farooqi proceeded to close on his purchase of that restaurant.

Farooqi testified that he understood and considered the $25,000 to be part of the purchase price of the franchise itself, rather than a separate fee for the Option Agreement.¹³ Farooqi also testified that he understood the Option Agreement to limit Carroll's ability to sell the Las Colinas Salad Bowl to another party for at least 30 days while Farooqi secured his loan, rather than limiting Farooqi's ability to purchase the Las Colinas Salad Bowl. ¹⁴

B. Execution of the Option Agreement and Post–Option Period Communications

According to Farooqi, Marshall and Caddell, after repeated assurances from Carroll that the 30–day period in the Option Agreement would not apply to the Opt–Out Provision and that Inc. would provide all financial information requested by Farooqi, Farooqi agreed to enter into the Option Agreement. ¹⁵ Farooqi and Carroll executed the Option Agreement (as amended to include the Opt–Out Provision) on September 30, 2009 at a Kinko's store near Carroll's office. After signing the Option Agreement, Farooqi handed Carroll a check for $2,500 instead of $25,000. The error was discovered and Farooqi wired $25,000 to Carroll a few days later.¹⁶ Farooqi obtained these funds from his mother; he did not have $25,000 on his own with which to make this payment.

Marshall testified that (i) she had been researching financing options for Farooqi during September 2009; (ii) she encountered some difficulties obtaining a financing package, as Farooqi had only an average

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credit score; (iii) most commercial lenders structured their loan packages in far larger dollar amounts than Farooqi was interested in borrowing; ¹⁷ (iv) based upon her research, New England Commercial seemed like Farooqi's best financing option, (v) while Farooqi was “pre-approved” for a loan with New England Commercial in late September 2009, that “pre-approval” did not guarantee that Farooqi would receive final approval for a loan; (vi) final approval of Farooqi's loan with New England Commercial was still contingent on the provision of detailed financial information about the Salad Bowl Entities; and (vii) Farooqi paid a $4,500 fee to New England Commercial as a loan-processing fee.¹⁸ According to Marshall's testimony, some of the information requested by New England Commercial was not usually requested by commercial lenders, but New England Commercial was requiring the information here because (i) the Salad Bowl Entities were a fairly new franchise operation, and (ii) Farooqi did not have previous experience running a franchise restaurant.¹⁹

Immediately after the Option Agreement was signed, Marshall began requesting information from Carroll in order to complete Farooqi's loan application with New England Commercial.²⁰ Marshall testified that she repeatedly requested a variety of information from Carroll; information that was never provided despite Carroll's repeated assurances that he would provide any and all information requested.²¹ In fact, Farooqi testified that Carroll often complained to him about Marshall's requests and questioned why Carroll was being asked to provide the requested information.²² Finally, on October 30, 2009, the last day of the option period, Carroll sent Marshall another copy of the Franchise Disclosure Document, which Carroll had previously provided to Farooqi on September 25, 2009.²³ Despite Carroll's repeated assurances before the Option Agreement was signed that all requested...