One-O-One Enterprises, Inc. v. Caruso

• Decision Date: 31 August 1987
• Docket Number: Civ. A. No. 86-1959.
• Citation: 668 F. Supp. 693
• Parties: ONE-O-ONE ENTERPRISES, INC., et al., Plaintiffs, v. Richard E. CARUSO, et al., Defendants.
• Court: U.S. District Court — District of Columbia

668 F. Supp. 693

ONE-O-ONE ENTERPRISES, INC., et al., Plaintiffs, v. Richard E. CARUSO, et al., Defendants.

Civ. A. No. 86-1959.

United States District Court, District of Columbia.

August 31, 1987.

COPYRIGHT MATERIAL OMITTED

Allan S. Hoffman and Samuel H. Seymour, Washington, D.C., for plaintiffs.

Michael A. Schlanger, Jeffrey F. Liss and Stephen R. Mysliwiec, Washington, D.C., for defendants.

CHARLES R. RICHEY, District Judge.

I. INTRODUCTION.

This case arises out of an agreement between defendants, who owned over 70 Rustler Steak Houses, and plaintiffs, who owned 39 debt-ridden Ponderosa Steak Houses. Pursuant to the agreement, plaintiffs sold ten Ponderosas to defendants, converted 25 of their remaining 29 Ponderosas to Rustlers and gave defendants an option to purchase plaintiffs' 25 Rustlers. Despite this Agreement, plaintiffs fell deeper into debt and ultimately filed this law suit.

Defendants are charged with common law fraud, securities fraud and violating the Racketeer Influenced and Corrupt Organizations Act ("RICO") for allegedly making material misrepresentations that induced plaintiffs to enter into the Agreement. Plaintiffs also claim defendants breached the Agreement by not providing plaintiffs' 25 Rustlers with adequate marketing and promotional services.¹ Defendants move to dismiss the complaint for failure to state a claim and improper venue. Upon consideration of the allegations in the light most favorable to plaintiffs, the Court will grant without prejudice defendants' motion to dismiss for failure to state a claim and dismiss as moot defendants' motion to dismiss for improper venue.

II. THE FACTUAL ALLEGATIONS IN THE COMPLAINT.

Although three plaintiffs are named, two are corporations owned and controlled by the same individual, namely Ulysses G. Auger, Sr. Mr. Auger is the president and controlling stockholder of Guld, Inc., and together with his wife owns 100% of Guld. Mr. Auger is also the vice president of One-O-One Enterprises, Inc., which is owned in its entirety by Guld. One-O-One owns the 39 Ponderosas which were the cause of plaintiffs' indebtedness and the reason for entering the Agreement.

The only corporate defendant is For Trish Co., Inc., a shell corporation created solely for the purpose of carrying out the Agreement. For Trish was owned by defendants Richard Caruso and James Sullivan, For Trish's president and vice president. Caruso and Sullivan also owned a controlling interest in Tenly Co., which is not a party to this case. Tenly owned, among other things, more than 70 Rustler Steak Houses.

The seeds of this law suit were plaintiffs' 39 flailing Ponderosa Steak Houses. Despite plaintiffs repeated efforts to make a profit, these restaurants continued to lose substantial sums of money. So much money was lost that Mr. Auger personally guaranteed approximately $10 million in loans to keep the restaurants afloat. Thus, it was no surprise that Mr. Auger desparately wanted to pass his money-losing Ponderosas on to other investors.

In June 1984 Mr. Auger commenced negotiations with two prospective purchasers, namely Richard Caruso and James Sullivan. Auger, Caruso and Sullivan negotiated for nine months, drafting several preliminary agreements. On February 4, 1985, For Trish and One-O-One executed an Agreement, which provided the following: 1) that One-O-One would sell 10 Ponderosas to For Trish and convert 25 of its remaining 29 Ponderosas to Rustlers; 2) that Tenly would provide plaintiffs' 25 Rustlers with training, on-going advice on operations, and marketing services for six years; 3) that For Trish had a six year, $100 option to acquire plaintiffs' 25 Rustlers; 4) that all profits from plaintiffs' Rustlers would be used to reduce Mr. Auger's $10.2 million debt and that Mr. Auger would be liable for any debt in excess of $10.2 million; 5) if For Trish exercised the option to acquire plaintiffs' 25 Rustlers, For Trish would assume Mr. Auger's debt up to $10.2 million less the amount by which the profits from plaintiffs' Rustlers reduced the debt.

Plaintiffs' fraud, securities fraud and RICO claims do not arise out of this Agreement, but arise out of representations that were only included in the preliminary draft agreements. Mr. Auger alleges that Sullivan and Caruso made two promises in the preliminary draft agreements that were not included in the executed Agreement. First, that Caruso and Sullivan would retain their controlling interest in Tenly for as long as Mr. Auger was personally liable for the $10.2 million debt. See Complaint ¶ 20. Second, that Tenly would maintain and expand the Rustlers. See Complaint ¶ 20 ("representations").

In June of 1985, approximately four months after the parties executed the Agreement, Sullivan and Caruso sold Tenly to Sizzler Steak Houses, which phased-out the Rustlers. Although the representations were not part of the Agreement and the Agreement in no way restricted Sullivan and Caruso from selling Tenly, plaintiffs allege that the sale of Tenly to Sizzler entitles them to recover under the fraud, securities fraud and RICO laws.

III. BECAUSE THE TWO REPRESENTATIONS UPON WHICH THE FRAUD, SECURITIES FRAUD AND RICO CLAIMS ARE PREDICATED WERE BOTH EXCLUDED FROM THE AGREEMENT AND EXPLICITLY SUPERSEDED BY THE INTEGRATION CLAUSE, THE FRAUD, SECURITIES FRAUD AND RICO CLAIMS MUST BE DISMISSED.

To survive a motion to dismiss a fraud, securities fraud and RICO claim, plaintiffs must allege some fraud or misrepresentation perpetrated by defendants. See, e.g., 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5; 18 U.S.C. § 1961(1); Call Carl, Inc. v. BP Oil Corp., 554 F.2d 623, 630 (4th Cir.), cert. denied, 434 U.S. 923, 98 S.Ct. 400, 54 L.Ed.2d 280 (1977). Here, plaintiffs' fraud, securities fraud and RICO claims are predicated upon allegations that Sullivan and Caruso misrepresented during the negotiations that they would retain a controlling interest in Tenly and that Tenly would maintain and expand the Rustlers. Because the allegations in the complaint show that these representations were not in any way misrepresentations, the fraud, securities fraud and RICO clams must be dismissed.

Plaintiffs allege that while Sullivan and Caruso represented that they would retain a controlling interest in Tenly and that Tenly would preserve the Rustlers, Complaint ¶ 28, Sullivan and Caruso were negotiating to sell Tenly to Sizzler Steak Houses, which intended to convert Tenly's Rustlers to Sizzlers. Complaint ¶ 31. Plaintiffs also allege, however, that prior to executing the Agreement, Sullivan and Caruso retained a controlling interest in Tenly and Tenly preserved the Rustlers. Complaint ¶¶ 31-36. Thus, before executing the Agreement, Sullivan and Caruso did not do anything contrary to the representations. They represented that they would retain a controlling interest in Tenly and, in fact, retained their controlling interest in Tenly. Sullivan and Caruso also represented that Tenly would preserve the Rustlers and, indeed, Tenly did so. In short, prior to executing the Agreement, Sullivan and Caruso did what they represented to plaintiffs they would do. Therefore, Sullivan and Caruso did nothing constituting misrepresentation or fraud prior to executing the Agreement.

In June of 1985, approximately four months after the Agreement was executed, Sullivan and Caruso sold their controlling interest in Tenly to Sizzler and Sizzler began converting Tenly's Rustlers to Sizzlers. Complaint ¶¶ 32 & 36. By this time, however, the representations upon which the fraud, securities fraud and RICO claims are predicated had been excised from the executed Agreement. There was nothing in the Agreement preventing Sullivan and Caruso from selling their stock in Tenly. Moreover, the parties explicitly agreed that the Agreement "superseded any and all previous understandings and agreements." Complaint, Exhibit E, section 35 (emphasis added). Thus, after the Agreement was executed there were no representations binding the parties but those representations made in the Agreement. Therefore, Sullivan and Caruso did nothing after the Agreement was executed constituting fraud or misrepresentation.

Plaintiffs also argue that the representations were fraudulent because Sullivan and Caruso represented, while they were negotiating to sell Tenly to Sizzler, that they would retain their interest in Tenly. Complaint ¶ 31. Sullivan and Caruso's representations that they would retain their interests in Tenly and that Tenly would preserve the Rustlers, however, are not false simply because Sullivan and Caruso were pursuing alternative negotiations with Sizzler. To prohibit businesspersons from conducting simultaneous negotiations merely because it is possible that the terms of a prospective agreement with one party may be inconsistent with the terms of a prospective agreement with another party, where a final agreement has not been reached with either party, would prevent businesspersons from pursuing in confidence alternative business deals. This is particularly true in this case where it appeared unlikely that Sullivan, Caruso and Auger would reach an agreement of any kind with plaintiffs. On at least one occassion the negotiations had broken off. Complaint ¶ 25. Therefore, Sullivan and Caruso's representations that they would retain Tenly are not false simply because they were conducting negotiations that may have resulted in the sale of Tenly if the deal with plaintiffs fell through.

In summary, the representations were not false when made or at any time during the negotiations. Also, because the representations were excised from the Agreement and explicitly superseded by the terms of the Agreement, the representations were not continuing in nature. Therefore, the sale of Tenly by Sullivan and Caruso and Tenly's phase-out of the Rustlers cannot form the basis for a claim sounding in fraud. Accordingly, the fraud, securities fraud and RICO claims must be dismissed.

IV. PL...