Reeder v. Kermit Johnson, Alphagraphics, Inc.

• Citation: 723 F. Supp. 1428
• Decision Date: 17 October 1989
• Docket Number: No. 89-C-0364A.,89-C-0364A.
• Parties: Dennis L. REEDER and Jan L. Reeder, Plaintiffs, v. KERMIT JOHNSON, ALPHAGRAPHICS, INC., a Utah corporation, Alphagraphics, Inc., an Arizona corporation, Alphagraphics Franchising, Inc., an Arizona corporation, and Does I through X inclusive, Defendants.
• Court: U.S. District Court — District of Utah

723 F. Supp. 1428

Dennis L. REEDER and Jan L. Reeder, Plaintiffs, v. KERMIT JOHNSON, ALPHAGRAPHICS, INC., a Utah corporation, Alphagraphics, Inc., an Arizona corporation, Alphagraphics Franchising, Inc., an Arizona corporation, and Does I through X inclusive, Defendants.

No. 89-C-0364A.

United States District Court, D. Utah, C.D.

October 17, 1989.

Joseph R. Fox, Sandy, Utah, David J. Hodgson, Salt Lake City, Utah, for plaintiffs.

Mark O. Van Wagoner and Christopher J. Condie, J. Garry McAllister, Salt Lake City, Utah, for defendants.

ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTION TO DISMISS

ALDON J. ANDERSON, Senior District Judge.

I. INTRODUCTION

The defendants filed a motion to dismiss the plaintiffs' complaint. Following a hearing on the matter held on July 21, 1989, the Court took the matter under advisement. After reading the parties' memoranda and reviewing the applicable law, the Court is now prepared to issue its ruling.

In their motion to dismiss and its accompanying memorandum, the defendants argue that the complaint is barred by prior judgments, that it fails to state a claim, and that two of plaintiffs' claims are time barred by the statute of limitations. For the reasons stated below, the Court holds that res judicata bars this action against the defendant Alphagraphics Franchising, Inc., an Arizona corporation. In all other respects, however, the defendants' motion to dismiss is denied.

II. FACTUAL BACKGROUND¹

The plaintiffs, Dennis L. Reeder and his wife Jan L. Reeder, allege civil violations of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §§ 1961-1965, ("RICO") against the defendants, Kermit Johnson ("Johnson"), Alphagraphics, Inc., a Utah corporation ("Alphagraphics Utah"), Alphagraphics, Inc., an Arizona corporation ("Alphagraphics Arizona"), Alphagraphics Franchising, Inc., an Arizona corporation ("Alphagraphics Franchising"),² and several unnamed Does. Specifically, plaintiffs allege that the defendants acted and conspired to defraud the plaintiffs while using the United States mail and wires. See Verified Complaint ¶¶ 8, 9.

According to the plaintiffs' allegations, in 1980 Kermit Johnson proposed that the plaintiffs enter with him into a limited partnership for the purpose of acquiring an Alphagraphics franchise print shop in Salt Lake County, which Johnson represented that he could obtain. In July of the same year, the limited partnership was formed with Johnson as the general partner and Jan Reeder as a limited partner. Jan Reeder contributed $10,000 to the partnership and became a sixteen-percent limited partner, Johnson obligated himself for the purchase of certain equipment and became a sixty eight-percent general partner, and another partner, not a party to this lawsuit, contributed cash and received a sixteen-percent limited partnership interest. Dennis Reeder became an employee of the partnership.

After formation of the partnership, it entered into a franchise agreement with Alphagraphics Franchising and created Alphagraphics Store No. 16. At this time, according to the plaintiffs, Johnson failed to disclose that he was the controlling shareholder of Alphagraphics Utah; that he owned the name Alphagraphics in Utah; that his stores, unlike No. 16's, were not franchise stores and did not pay franchise fees; and that Alphagraphics Utah received either one-half or sixty two-percent (the complaint mentions both figures) of the franchise fees paid by No. 16 and other independent franchisees in Utah. Plaintiffs allege that the payments made by them to the defendants, including the initial franchise fee and monthly franchise fees, constituted fraud and that Johnson conspired with Alphagraphics Arizona and Alphagraphics Franchising to defraud the plaintiffs and obtain money from them.

In 1983 disputes arose between the plaintiffs and Johnson. Plaintiffs suggested that Johnson buy Jan Reeder's interest in the partnership, but Johnson refused and reportedly informed plaintiffs that as General Partner he could terminate their employment. Alternatively, Johnson suggested that the plaintiffs buy his interest for $90,000. Although plaintiffs believed that Johnson's interest was worth only $60,000, in fear of losing their investment they agreed to buy out Johnson for $90,000 and borrowed money to accomplish this. Plaintiffs claim that prior to purchasing Johnson's interest they sought and received assurances from Alphagraphics Arizona and Alphagraphics Franchising that Johnson would have nothing to do with their franchise. These assurances were given once again when Alphagraphics Arizona and Alphagraphics Franchising required the plaintiffs at a later time to enter into a new franchise agreement.³

Plaintiffs further allege that Alphagraphics Arizona, Alphagraphics Franchising, and Johnson coerced plaintiffs into buying some equipment for the store that they did not want by threatening to withhold a franchise from plaintiffs' relatives if the plaintiffs did not purchase the equipment. Plaintiffs claim that the equipment created financial hardship for them and that the equipment did not work properly and was removed eventually. Defendants again requested in 1985 that plaintiffs purchase another piece of equipment. Plaintiffs refused, and apparently the conflict between the parties continued as the plaintiffs ultimately filed suit in the Third Judicial District for Salt Lake County, State of Utah against Johnson and Alphagraphics Franchising. In response, Alphagraphics Franchising commenced arbitration proceedings in accordance with the franchise agreement between the Reeders and Alphagraphics Franchising.

The state trial judge, Judge Michael Murphy, stayed the state court action as to Alphagraphics Franchising pending arbitration of the disputes in accordance with the franchise agreement between the plaintiffs and Alphagraphics Franchising, Inc.⁴ Following a hearing before the American Arbitration Association in Tucson, Arizona, the arbitration board terminated the franchise agreement between the parties and ordered the plaintiffs to pay $18,618.48 in royalties to Alphagraphics Franchising, as well as the arbitration and attorneys fees. The arbitrators also found, pursuant to a request from Judge Murphy, no showing of unconscionability of contract between the parties to the arbitration. Judge Murphy later entered judgment essentially duplicating the arbitrator's award.

Following the disposition in state court, the plaintiffs filed suit in this Court. Count I of the complaint alleges a RICO claim predicated on mail and wire fraud, Count II alleges another mail fraud violation, and in Count III the plaintiffs claim that the defendants' acts constitute economic extortion and demonstrate a pattern of racketeering activity. Plaintiffs also allege in Count III that the defendants' scheme to defraud the plaintiffs continued through the arbitration hearing. They claim that in-house counsel for Alphagraphics Franchising and/or Alphagraphics Arizona is an arbitrator in Tucson (where the arbitration hearing in this case was held) and that he had a "working relationship with the members of the panel of arbitrators" that heard this case. Apparently, although the complaint is not specific, plaintiffs feel this relationship somehow prejudiced them.

III. ANALYSIS

As noted above, defendants move to dismiss plaintiffs' complaint on three grounds. First, defendants claim that, in light of the state court judgment, res judicata bars the action in this Court against Alphagraphics Franchising,⁵ and that defendants Johnson, Alphagraphics Utah, and Alphagraphics Arizona are collaterally estopped by the state court action from asserting their federal claims.⁶ Second, defendants argue that the plaintiffs have failed to state a valid RICO claim. Finally, defendants seek a determination from this Court that Counts II and III of the complaint are barred by the statute of limitations. The Court will address each of these contentions in turn.

A. Res Judicata or Claim Preclusion

The preclusive effect of a state court judgment in a subsequent federal lawsuit is governed by the full faith and credit statute, 28 U.S.C. § 1738, which provides that state judicial proceedings "shall have the same full faith and credit in every court within the United States ... as they have by law or usage in the courts of such State ... from which they are taken." See Marrese v. American Academy of Orthopaedic Surgeons, 470 U.S. 373, 380, 105 S.Ct. 1327, 1332, 84 L.Ed.2d 274 (1985) (quoting 28 U.S.C. § 1738). A federal court asked to determine whether a claim before it is precluded by a previous state court decision must look first to preclusion principles of the state wherein the rendering state court resides, in this case Utah.⁷ Id. at 380-83, 105 S.Ct. at 1331-33; accord Gates Learjet Corp. v. Duncan Aviation, 851 F.2d 303 (10th Cir.1988); Vance v. Utah, 744 F.2d 750 (10th Cir.1984) (applying Utah law); Braselton v. Clearfield State Bank, 606 F.2d 285 (10th Cir.1979). If state law indicates that litigation of a particular claim is barred, then the federal court must determine next whether § 1738 is applicable to the federal statute that the plaintiffs are relying on, or decide if Congress created an exception to § 1738. Marrese, 470 U.S. at 383, 105 S.Ct. at 1333. In other words, assuming the present RICO action is barred under Utah law, the Court must then decide whether Congress intended that § 1738 not apply to RICO claims. Id.

Under Utah law, one "branch" of res judicata, referred to as "claim preclusion," "bars the relitigation by the parties or their privies of a claim for relief that was once litigated on the merits and resulted in a final judgment between the same parties or their privies." Penrod v. Nu Creation Creme, Inc., 669 P.2d 873, 875 (Utah 1983) (citation omitted). Claim preclusion also prevents relitigation of claims that should and could have been brought in the prior...