In re DeRosa, Bankruptcy No. 8700054
| Decision Date | 08 September 1989 |
| Docket Number | Bankruptcy No. 8700054,Adv. No. 870077. |
| Citation | 103 BR 382 |
| Parties | In re James DeROSA and Roberta De Rosa, Debtors. James DeROSA and Roberta DeRosa, Plaintiffs, v. BOSTON BAKERY & ITALIAN FOOD SPECIALTY, INC. and Carl DiStefano, Defendants. |
| Court | U.S. Bankruptcy Court — District of Rhode Island |
Joseph S. Votta, Jr., Votta & Votta Law Offices, Ltd., Providence, R.I., for debtors.
David A. Schechter, Providence, R.I., for defendants.
DECISION AND ORDER
On March 29, 1989, we entered a judgment in favor of the plaintiffs, the DeRosas, rescinding the June 6, 1986 franchise agreement, and awarding them damages in the amount of $36,342.24, after finding that the defendant franchisors, Carl DiStefano and the Boston Bakery and Italian Food Specialty, Inc. ("Boston Bakery") had breached the franchise agreement. In that decision, we considered only plaintiffs' breach of contract claim, which we believed (and still do believe) was dispositive. Left undecided in our June 6 decision, were plaintiffs' claims alleging negligent misrepresentation (count 1); violation of state franchise statutes (count 4); intentional misrepresentation (count 5); and fraud and deceit (count 6). We noted that consideration of these additional claims would be deferred "until a later time, if needed." (See Decision and Order dated March 29, 1989, p. 1, n. 2). Nevertheless, on June 2, 1989, we entered an order granting the defendants' Motion for Alteration or Amendment of Judgment pursuant to Fed. R.Civ.P. 59(e), because we were persuaded by the defendants' argument that "to avoid piecemeal litigation and for purposes of judicial economy, the wiser course is for this Court to decide all of the plaintiffs' claims in the first instance, before submitting the judgment to review on appeal." (See Order dated June 2, 1989, p. 2). Since that "later time" has arrived, we have before us again for consideration, the plaintiffs' remaining counts which were not adjudicated in our March 29, 1989 Decision and Order.
Initially, we note that the "clear and convincing" standard of fraud and misrepresentation is not applicable here, as it would be in a § 523 nondischargeability proceeding,2 since it is the debtors who are the plaintiffs, and who assert a state law cause of action for negligent and intentional misrepresentation. In order for the plaintiff-debtors to establish such a state law cause of action, the following elements must be proven: (1) a misrepresentation of a material fact; (2) which representation is in fact false (whether made innocently, negligently or knowingly); (3) which was made to induce the plaintiff to act in a certain manner in reliance thereon; (4) which representation is relied upon by the plaintiff; and (5) with damage resulting therefrom. Halpert v. Rosenthal, 107 R.I. 406, 267 A.2d 730 (1970); Silvia v. Wicks, 116 R.I. 545, 359 A.2d 33 (1976) ( Halpert, supra); Associates in Anesthesia v. Mutual Ben. Life, 504 A.2d 477, 479 (R.I.1986) (). In Rhode Island, we are to consider "not whether the representation is knowingly false, but whether the other party believed it to be true and thus was misled by such misrepresentations into making the contract." Halpert, supra, 107 R.I. at 414, 267 A.2d 730 (citing Watkins v. Grady County Soil & Water Conservation District, 438 P.2d 491, 495 (Okla.1968)).
James DeRosa testified, and we find that the following statements/representations were made by Carl DiStefano while the parties were negotiating the franchise agreement:
1. DiStefano assured the DeRosas that they would make a 100% profit on everything that they bought from his bakery ("the mother store") and sold in their (DeRosas') store. Specifically, DiStefano told DeRosa that operating costs and expenses would run about $2500 per week, and that he would take in about $5,000 per week, for a net profit of approximately $2500 per week. These oral representations are evidenced by figures which DiStefano put in writing for DeRosa, as inducement to enter into the franchise relationship. (See Plaintiffs' Exhibits 1, 2, 3, 4).3
2. DiStefano also represented to DeRosa that because his (DiStefano's) store would be doing all the baking, DeRosa wouldn't be burdened with that, and instead, could concentrate on just selling his (DiStefano's) "superior" product. DiStefano also declared himself "the best damn baker in all of New England," and told plaintiffs that their business could be just as successful as his, because DiStefano was doing the baking.4
3. Because he was fully aware of their lack of experience, DiStefano promised not only to teach the DeRosas how to run the business, but also to train them in the implementation of efficient business methods, product information, and the baked goods sales business in general. In fact, in our March 29, 1989 decision, we found that the franchise fee of $15,000 was paid to DiStefano and the Boston Bakery primarily for the assistance, advice and business expertise which the DiStefanos were to pass on to the DeRosas in this new (to them) venture.5
4. While negotiating the terms of the franchise, DiStefano told DeRosa that everything on the product list (Plaintiffs' Exhibit 15) would be available, and that all of the product he supplied would be fresh baked, daily. In this regard, DiStefano stated that if DeRosa found anything wrong with any of the product, he could return it for replacement.
5. Additionally, but by no means least, DiStefano represented that he would make "little or no profit" on the sale of equipment to DeRosa, which, by the terms of the agreement, DeRosa was required to purchase from or through DiStefano. (See also Decision and Order of March 29, 1989 p. 2, paragraphs 7, 8, 9.)
Based upon the entire record, including the obvious fact that the DeRosas lacked any previous business experience, we find that the foregoing representations were reasonably relied upon by the DeRosas, in deciding to enter into the franchise agreement, and that they would not have done so in the absence of said representations. Given the effect of these statements and promises on the conduct of the DeRosas, that is, their decision to enter into the franchise agreement, they are also clearly material. A representation is material if "it becomes likely to affect the conduct of a reasonable man person with reference to a transaction with another person." Halpert, supra, 107 R.I. at 413, 267 A.2d 730 (citing Restatement of Contracts, § 470(2) at 891).
Two more subtle issues remain, however, and they are: (1) whether the representations made by DiStefano were statements of fact, as opposed to mere expressions of opinion; and, (2) whether said representations were false at the time they were made.
The general rule is that "an action for fraud may not be predicated upon the expression of an opinion or salesmen's talk in promoting a sale, referred to as puffing." Van Tassel v. McDonald Corp., 159 Mich.App. 745, 407 N.W.2d 6 (1987) (citing Windham v. Morris, 370 Mich. 188, 121 N.W.2d 479 (1963)). During trial, DeRosa stated that he believed and relied upon DiStefano's representations of expected profits, of the cost of the equipment, the supervision and assistance to be given, and the quality of the product to be provided under the franchise agreement. When cross-examined as to whether he understood these to be statements of fact, as compared to just sales talk, DeRosa conceded that he thought the representations regarding anticipated profits were DiStefano's best estimate, or in other words, his opinion. Although we must agree that the representation of expected profits appears to be, at most, a statement of opinion which is not actionable, it is equally as clear that DiStefano's other representations are statements of fact, and definitely actionable. DiStefano's oral representations concerning the minimal profit he would make on the equipment, the quality of his product, the amount and expertise of the assistance he would give, as well as the language in the franchise agreement which promised DeRosa the assistance of the Franchisor6 (See Plaintiffs' Exhibit 5, Section Four), and a full line of products,7 are clearly all intentional (mis)statements of fact. DiStefano made these representations as the inducement upon which the franchise agreement was negotiated, and we conclude that, but for said representations, the DeRosas would not have been persuaded to do business with him.
An additional factor to consider is that these statements involve promises to perform in the future. Such promises "may be actionable where the maker did not intend to perform the promise at the time of making it." Annot., 64 ALR3d 6, 14 (1975). Having in mind the meager and clearly inadequate assistance given to the DeRosas — an initial two week instruction, and then such advice as to "turn the pastry more," in response to customer complaints regarding quality, DiStefano's offer to purchase the business for a small fraction of what DeRosa had just invested, on the defendant's advice, and finally the 30% undisclosed "fee" taken on the equipment, we find, without doubt, that, at the time they were made, DiStefano never intended to fulfill his promises of assistance and/or supervision, never intended to offer a full line of baked goods, never intended to provide the DeRosas with a product of uniform quality for resale,8 and did intend to make an unconscionable profit on the sale of the equipment. We find these actions to be contrary to the oral and written representations, and to have been so intended by the defendants at the time each of such representations were made. Because the DeRosas believed these representations were true, and reasonably relied on them in entering into the franchise agreement, both negligent and intentional misrepresentation have been established, and...
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