MTR Capital, LLC v. LaVida Massage Franchise Dev., Inc., 17-CV-13552-TGB

CourtUnited States District Courts. 6th Circuit. United States District Court (Eastern District of Michigan)
Writing for the CourtTERRENCE G. BERG UNITED STATES DISTRICT JUDGE
PartiesMTR CAPITAL, LLC, Plaintiff, v. LAVIDA MASSAGE FRANCHISE DEVELOPMENT, INC. et al., Defendants.
Decision Date06 November 2020
Docket Number17-CV-13552-TGB

MTR CAPITAL, LLC, Plaintiff,
v.
LAVIDA MASSAGE FRANCHISE DEVELOPMENT, INC. et al., Defendants.

17-CV-13552-TGB

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF MICHIGAN SOUTHERN DIVISION

November 6, 2020


FINDINGS OF FACT AND CONCLUSIONS OF LAW

Joaquin Esquivia, an engineer from Colombia, aspired to open a business in the United States. Through his company, Plaintiff MTR Capital ("MTR"), Esquivia and his wife invested in a franchise opportunity with Defendant LaVida Massage Franchise Development, Inc. ("LaVida"). After the venture failed, MTR brought this lawsuit against LaVida, its President Peggy Davis, and its Area Developer Duane Goodwin, claiming that they induced MTR to invest in a LaVida spa franchise by making false statements and fraudulent omissions. The parties were unable to settle their dispute and opted instead for a bench trial, which was held before the Court over four days between January 27-31, 2020.

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After the evidence closed, the parties requested the opportunity to submit proposed findings of fact and conclusions of law. After carefully considering all of the testimony and documentary evidence presented at trial, as well as the detailed post-trial submissions and exhibits filed by both parties, and the governing law in the area, the Court concludes that the preponderance of evidence supports Plaintiff's claim of a violation of the Florida Deceptive and Unfair Trade Practices Act, and Plaintiff is entitled to damages in the amount of the initial $39,000 franchise fee. As to all other claims, Plaintiff failed to meet its burden, and judgment must be entered in favor of Defendants.

INTRODUCTION

LaVida Massage Franchise Development, Inc. is a franchisor located in Brighton, Michigan. Defendant Peggy Davis is LaVida's President. Defendant Duane Goodwin is LaVida's Area Developer for the southeast United States.

On February 17, 2015, Plaintiff MTR Capital Inc., through its owner Joaquin Esquivia, entered into a Franchise Agreement with LaVida for the operation of a "LaVida Massage" center to be located in Kendall, Florida. Joint Final Pretrial Order, ECF No. 70, PageID.1123. Plaintiff alleges his decision to invest approximately $450,000 into his LaVida franchise was based on misrepresentations made by the Defendants and that he was

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eventually forced to shutter the business due to poor performance after only a year and a half. Id. Plaintiff seeks to recoup his entire investment, which amounts to $541,644.82 after operating costs and salaries. Id. at PageID.1121.

Plaintiff brings claims for (1) fraudulent inducement and misrepresentation; (2) negligent misrepresentation; (3) violations of Florida's Deceptive and Unfair Trade Practices Act ("FDUTPA"), Fla. Stat. §501.203(3); and (4) violations of the Florida Franchise Act ("FFA"), Fla. Stat. § 817.416.1 Compl., ECF No. 1, PageID.17-22.

The crux of Plaintiff's case turns on three misrepresentations allegedly made by Defendants before Plaintiff signed the franchise agreement. Specifically, Plaintiff alleges that Defendants misrepresented (1) the facts concerning the unit-level economics of LaVida franchises; (2) the amount of the initial investment required to start a LaVida franchise; and (3) the full story of how existing LaVida franchises were performing. Joint Final Pretrial Order, ECF No. 70, PageID.1123.

At trial, Plaintiff presented Esquivia, Davis, Goodwin and franchise law attorney Keith Kanouse as witnesses. Esquivia testified regarding the timeline of events in developing the venture,

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the content and nature of his communications with Defendants throughout the process, and the reasons he believes the business eventually closed. Tr. 1/274/20, ECF No. 72, PageID.1204-58. Defendant Davis testified to the way that LaVida worked with franchisees and the nature of the information and guidance it supplied them, as well as to the success rates of LaVida franchises on the whole. Tr. 1/28/20, ECF No. 73, PageID.1383-1490; Tr. 1/29/20, ECF No. 74, PageID.1534-39. Defendant Goodwin testified to the financial management training that he generally gives to franchisees, to his performance and experiences as a LaVida franchisee himself, and to specific conversations he had with Esquivia and his partners regarding financial planning, marketing, and management. Tr. 1/29/20, ECF No. 74, PageID.1534-1628. Kanouse testified regarding the presale disclosures required of franchisors, the required disclosures when a franchisee is terminated or their business fails, and customs and practices within the franchise industry. Tr. 1/29/20, ECF No. 74, PageID.1628-79.

Defendants contend that LaVida did not make any material misrepresentations or material omissions to Plaintiff regarding startup costs or the performance of existing LaVida franchises before Plaintiff signed the franchise agreement. Joint Final Pretrial Order, ECF No. 70, PageID.1130. Defendants further argue that

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they did not intend to make any future performance projections to Plaintiff, and that any losses Plaintiff's franchise suffered were caused by Plaintiff's poor management and excessive building costs—and not the actions of the Defendants. Id. Benjamin Pryor and Mark Davis testified for the Defendants. Pryor is Director of Operations for LaVida and testified to his interactions with Plaintiff's representatives during the start-up period of their franchise and how their performance compared to that of other LaVida franchisees. Tr. 1/29/20, ECF No. 74, PageID.1680-1702. Mark Davis, CEO of LaVida, testified as to how he builds relationships with and supports new franchisees, as well as his experience working with Plaintiff and the new franchise. Tr. 1/30/20, ECF No. 75, PageID.1709-52.

FINDINGS OF FACT

In August 2014, Joaquin Esquivia, who was living in Colombia and pursuing an E-2 visa in the United States, contacted a U.S.-based franchise broker named Bernardo Yibirin to obtain information regarding franchise opportunities in the United States. Test. of Joaquin Esquivia, Tr. 1/27/20, ECF No. 72, PageID.1210-12. Yibirin presented Esquivia with a variety of options. Of those, Esquivia eventually focused on the opportunity presented by a LaVida franchise. Joint Final Pretrial Order, ECF No. 70, PageID.1135; Test. of Joaquin Esquivia, Tr.1/27/20, ECF No. 72,

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PageID.1210-12. Esquivia was interested in using his investment in the LaVida franchise to satisfy the E-2 visa's investment condition. Test. of Joaquin Esquivia, Tr. 1/27/20, ECF No. 72, PageID.1301-02. Esquivia enlisted his childhood friend and business associate Reynaldo Cordoba to help him start up and eventually run the franchise. Cordoba Dep. 74:2-3, ECF No. 65-1, PageID.831.

On October 13, 2014, a conference call was held with Esquivia, Cordoba, Yibirin, and Defendant Duane Goodwin. Id. at 75:12-14, PageID.831. During the phone call, the parties discussed the LaVida franchise business, but Goodwin stated that he could not make any specific earnings claims. Of the conversation, Yibirin testified: "Goodwin. He was very-very professional, very quiet and not talking about numbers. I asked him, 'Can you give him more information?' 'I'm sorry; I cannot provide. They have to sign the FDD, talk with other franchisees, and they can provide the information.'" Yibirin Dep. 92:9-14, ECF No. 69, PageID.1102. When asked more specifically "[i]f Duane made any earnings claims about LaVida Massage franchise during this conference call," Yibirin responded, "Never." Id. at 50:10-13, PageID.1092.

On October 14, 2014, Goodwin sent Cordoba, Esquivia and Yibirin an email with an attached Excel spreadsheet, which he stated was "a helpful tool to understand cost and volume impacts

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on the business as you collect your various data points to evaluate the franchise opportunity." Pl.'s Ex. C, ECF No. 1, PageID.73; Test. of Duane Goodwin, Tr. 1/29/20, ECF No. 74, PageID.1542-51, 1564-66. The spreadsheet contained "model" income and expense figures and could be used to project revenue based on data entered into the form. Cordoba employed the tool by inputting numbers into the spreadsheet to assess different scenarios. Test. of Joaquin Esquivia, Tr. 1/28/20, ECF No. 73, PageID.1347-49.

Also on October 14, 2014, LaVida sent Esquivia and Cordoba franchise documents to review, including LaVida's 2014 "Franchise Disclosure Document" ("FDD"). Defs.' Ex. 1, ECF No. 62-1, PageID.783. The FDD represented that the estimated initial investment costs to start a LaVida franchise were $160,250 to $290,000. Id. The FDD did not include any financial performance data in "Item 19," which is where any financial projections made by a franchisor to a franchisee must be made. Test. of Peggy Davis, Tr. 1/28/20, ECF No. 73, PageID.1388-90. Defendants chose not to make a disclosure in Item 19 because certain LaVida franchisees were not performing well, and Defendants believed that disclosing the performance of the handful of struggling franchisees would reflect poorly on the LaVida brand. Id. Defendants also failed to disclose in Item 20 of the FDD that certain franchise locations had

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ceased operations in 2014, including one in Royal Palm, Florida. Test. of Peggy Davis, Tr. 1/28/20, ECF No. 73, PageID.1417.

MTR electronically acknowledged receipt of the FDD on October 20, 2014. Joint Final Pretrial Order, ECF No. 70, PageID.1137. Esquivia testified that he read the FDD. Tr. 1/27/20, ECF No. 72, PageIDs.1230, 1236, 1240. Cordoba took only a superficial look at the FDD. Cordoba Dep. 83:16-19, ECF No. 65-1, PageID.833. Cordoba does not recall anything in particular that stood out in the FDD. Id. at 84:1-3, PageID.833. No one from LaVida represented to Cordoba that the FDD was a simple standard form document. Id. at 172:3-7, PageID.855. Cordoba felt the FDD was a legal document that should be reviewed by an attorney. Id. at 172:20-173:2, PageID.855. Esquivia did not hire an attorney to review the FDD. Test. of Joaquin Esquivia, Tr. 1/27/20, ECF No....

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