JTH Tax LLC v. CMB Tax Serv.

Decision Date07 March 2022
Docket Number4:21-cv-00022-M
PartiesJTH TAX LLC d/b/a LIBERTY TAX SERVICE f/k/a JTH TAX, INC., Plaintiff/Counter Defendant, v. CMB TAX SERVICE, LLC, JEFFREY SERBUS, AND CINDY SERBUS, Defendants/Counter Claimants.
CourtU.S. District Court — Eastern District of North Carolina
ORDER

RICHARD E. MYERS II, CHIEF UNITED STATES DISTRICT JUDGE.

These matters come before the court on a Motion to Dismiss Counterclaim [DE 42] and Motion to Strike Jury Demand [DE 44] filed by Plaintiff/Counter Defendant JTH Tax LLC d/b/a Liberty Tax Service ("Liberty"), and a Motion for Show Cause Order and Finding of Contempt [DE 46] filed by Defendants/Counter Claimants CMB Tax Service, Jeffrey Serbus and Cindy Serbus ("the Serbuses"). For the reasons that follow, the court grants in part and denies in part the motion to dismiss, grants the motion to strike, and reserves judgment on the motion for a show cause order, as set forth herein.

I. Motion to Dismiss

Liberty initiated this action on March 5, 2021, and filed the operative Amended Complaint on March 12, 2021, alleging generally that the Serbuses breached franchise agreements with Liberty by failing to comply with the agreements' post-termination obligations and covenants. Am. Compl. DE 9. At the parties' request, the court issued a Consent Order for Preliminary Injunction on March 23, 2021, regulating (as agreed) the parties' conduct related to the subject transactions. Ord., DE 33. In response to the Amended Complaint, the Serbuses filed an Answer and Counterclaim, in which they allege the following causes of action: (1) breach of contract, (2) defamation, (3) unfair or deceptive trade practices in violation of N.C. Gen. Stat. § 75-1.1, et seq., (4) conversion, (5) tortious interference with prospective economic advantage, and (6) "punitive damages" under N.C. Gen. Stat. § 1D-1. DE 38.

In the current motion, Liberty seeks an order dismissing the counterclaims in their entirety for the Serbuses' failure to state plausible claims for relief. Liberty contends that all non-contract claims are barred by the economic loss rule, all claims based on North Carolina law are improper in light of the parties' agreement to apply Virginia law, and, in the alternative, the Serbuses fail to allege facts supporting plausible claims based on either North Carolina or Virginia law. The Serbuses respond that Liberty improperly relies on its own allegations in seeking dismissal of the Serbuses' claims; concede that Virginia law applies to the second, fourth, and fifth claims, but argue that North Carolina law properly applies to the third claim; and contend that the factual allegations support plausible claims for relief. Liberty replies that the Serbuses' failure to file an amended pleading restating claims two, four, and five under Virginia law dooms those claims and that, taking all allegations made by the parties in this case as true, the Serbuses still fail to state plausible claims for relief.

A. The Serbuses' Statement of Facts[1]

The following are relevant factual allegations (as opposed to statements of bare legal conclusions, unwarranted deductions of fact, or unreasonable inferences) made by the Serbuses in the operative Counterclaim (DE 38), which the court must accept as true at this stage of the proceedings pursuant to King v. Rubenstein, 825 F.3d 206, 212 (4th Cir. 2016).

As part of its tax preparation business, Liberty has developed a system for the operation of tax preparation offices, in which a franchisee owns and operates a tax preparation organization using Liberty's name and services within a designated territory and agrees to pay Liberty royalties and other fees. To assist with building out its franchises, Liberty relies on area developers, who assist Liberty with the sale and resale of franchise territories in exchange for half of the royalties paid to Liberty by its franchises.

At franchise locations, the franchisees must bear the costs of operating the stores, including but not limited to, leasing the locations, securing equipment, and hiring employees. To generate income, franchisees charge fees to customers for preparation of the customers' tax returns. Because the preparation of tax returns at franchisee store locations is done using Liberty's software, tax preparation fees charged to customers are processed by Liberty. Liberty then transmits the fees, less any offsets for royalties or other amounts owed, to its franchisees.

Liberty also directly owns and operates certain store locations. At these locations, Liberty collects all the fees charged to customers. Liberty does not directly operate all of its stores because the overhead of owning and operating certain stores renders many stores unprofitable, presenting a business risk passed on by Liberty to its franchisees. However, when the fees generated by a store exceed overhead, Liberty stands to gain by directly operating a store, rather than collecting royalties from its franchisees.

Prior to the events underlying this litigation, the Serbuses were Liberty franchisees for several years. Over time, the Serbuses entered several franchise agreements with Liberty for franchises in ten territories (collectively, the "Franchise Agreements") as follows:

a. On December 22, 2015, CMB Tax entered into a Franchise Agreement with Liberty for the territory known as NC079. b. On July 5, 2016, CMB Tax entered into a Franchise Agreement with Liberty for the territory known as NC044. The Serbuses operated this Liberty franchise office at 345 Western Blvd., Jacksonville, NC.

c. On March 23, 2017, CMB Tax entered into a Franchise Agreement with Liberty for the territory known as NC045. The Serbuses operated this Liberty franchise office at 2011 Lejeune Blvd, Jacksonville, NC.

d. On March 23, 2017, CMB Tax entered into a Franchise Agreement with Liberty for the territory known as NC046. The Serbuses operated Liberty franchise offices at 521 Yopp Road, Jacksonville, NC and 1128 Western Blvd, Jacksonville, NC.

e. On March 23, 2017, CMB Tax entered into a Franchise Agreement with Liberty for the territory known as NC227.

f On May 31, 2017, CMB Tax entered into a Franchise Agreement with Liberty for the territory known as NC058. The Serbuses operated this Liberty franchise office at 474 Hwy 70 W, Havelock, NC.

g. On December 20, 2017, CMB Tax entered into a Franchise Agreement with Liberty for the territory known as NC080. The Serbuses operated this Liberty franchise office at 415 S. College Rd, Wilmington, NC.

h. On December 20, 2017, CMB Tax entered into a Franchise Agreement with Liberty for the territory known as NC081. The Serbuses operated this Liberty franchise office at 2642 Carolina Beach Rd, Suite 13, Wilmington, NC.

i. On December 20, 2017, CMB Tax entered into a Franchise Agreement with Liberty for the territory known as NC082. The Serbuses operated this Liberty franchise office at 5042 Market Street, Wilmington, NC.

j. On December 20, 2017, CMB Tax entered into a Franchise Agreement with Liberty for the territory known as NC083. The Serbuses operated this Liberty franchise office at 5202 Carolina Beach Rd, Wilmington, NC.

When the Serbuses purchased these respective franchises, they paid Liberty franchise fees for each territory, ranging from $12, 500 for their first territory to $500, 000 for several territories covering the greater Wilmington area. In addition, they paid a royalty of 14% of fees generated, plus a 5% fee for advertising. As part of its written and oral marketing, Liberty represented to the Serbuses that area developers were instructed to use the referenced resale formula in valuing franchises for resale to new franchisees and Liberty's then-CEO John Hewitt stated that the going rate for the resale of a Liberty franchise was 1.2-1.3 times the gross receipts of the franchise in the prior year. The Serbuses purchased one of their Wilmington franchises according to this formula, paying 1.25 times the gross receipts of the franchise in the prior year.

Further, the Franchise Agreements provide that, if Liberty desired to purchase the Serbuses' franchise territories, it could do so for the greater of $150, 000 or 200% of the gross receipts of the territory for the previous twelve months. In the year prior to February 26, 2021, the Serbuses' gross receipts for all of their franchises was approximately $1, 300, 000. The Serbuses' stores were among the most successful of Liberty's franchises. Randy Galley, Liberty's manager for stores in Northern Virginia, described the Serbuses' franchises as "one of the most well-run organizations" with which Liberty worked. The Serbuses worked diligently to develop their franchises as well-regarded businesses within the local community that were attentive to the franchises' customers and employees.

Beginning in 2016, the United States Department of Justice investigated Liberty for alleged tax preparer fraud in certain stores (none of which were owned by the Serbuses). In or about September 2017, Liberty fired its founder and CEO John Hewitt. Following the expiration of his non-compete agreement with Liberty in or about March 2019, Hewitt started a new tax preparation service in direct competition with Liberty. Liberty falsely believed that Hewitt reached out to the Serbuses in an attempt to recruit the Serbuses away from Liberty; however, Hewitt never contacted the Serbuses about leaving their Liberty franchises, and they had no interest in doing so.

As part of its contractual obligations under the Franchise Agreements, Liberty agrees to provide tax preparation software and technical support for such software, which franchisees are required to use to prepare tax returns. Beginning in or about January 2021, an unknown individual/entity "hacked" Liberty's...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT