Schwartzco Enters. LLC v. TMH Mgmt., LLC

• Decision Date: 17 November 2014
• Docket Number: No. 14–CV–1082 ADSGRB.,14–CV–1082 ADSGRB.
• Citation: 60 F.Supp.3d 331
• Parties: SCHWARTZCO ENTERPRISES LLC, a New York Limited Liability Company; The Meat House–Roslyn, LLC, a New York Limited Liability Company; and Arnold M. Schwartz, an individual resident of New York, Plaintiffs, v. TMH MANAGEMENT, LLC, a New Hampshire Limited Liability Company; TMH Ventures, LLC, a New Hampshire Limited Liability Company; Meat House Franchising, LLC; a New Hampshire Limited Liability Company; Justin Rosberg, an individual resident of New Hampshire; Thomas Brown, an individual resident of New Hampshire; and Kerry Miller, an individual resident of Massachusetts, Defendants.
• Court: U.S. District Court — Eastern District of New York

60 F.Supp.3d 331

SCHWARTZCO ENTERPRISES LLC, a New York Limited Liability Company; The Meat House–Roslyn, LLC, a New York Limited Liability Company; and Arnold M. Schwartz, an individual resident of New York, Plaintiffs

v.TMH MANAGEMENT, LLC, a New Hampshire Limited Liability Company; TMH Ventures, LLC, a New Hampshire Limited Liability Company; Meat House Franchising, LLC; a New Hampshire Limited Liability Company; Justin Rosberg, an individual resident of New Hampshire; Thomas Brown, an individual resident of New Hampshire; and Kerry Miller, an individual resident of Massachusetts, Defendants.

No. 14–CV–1082 ADSGRB.

United States District Court, E.D. New York.

Signed Nov. 17, 2014.

Brown & Kannady, by: David J. Meretta, Esq., Scott T. Kannady, Esq., of Counsel, Denver, CO, for the Plaintiffs.

The Richard Rosen Law Firm, PLLC, by: Richard L. Rosen, Esq., John A. Karol, Esq., of Counsel, New York, NY, for the Plaintiffs.

Tompkins McGuire Wachenfeld & Barry LLP by: William C. Kelly, Esq., of Counsel, Newark, NJ, for the Defendant Thomas Brown.

No Appearances for the Defendants TMH Management, LLC, a New Hampshire Limited Liability Company; TMH Ventures, LLC, a New Hampshire Limited Liability Company; Meat House Franchising, LLC; a New Hampshire Limited Liability Company; Justin Rosberg, an individual resident of New Hampshire; and Kerry Miller, an individual resident of Massachusetts.

MEMORANDUM OF DECISION AND ORDER

SPATT, District Judge.

On February 19, 2014, the Plaintiffs Schwartzco Enterprises, LLC (“Schwartzco”), a New York limited liability company; the Meat House—Roslyn LLC (“TMH Roslyn”), a New York limited liability company; and Arnold M. Schwartz, an individual resident of New York (collectively the “Plaintiffs”) filed a complaint containing 17 causes of action against the Defendants TMH Management, LLC (“TMH Management”); TMH Ventures, LLC (“TMH Ventures”); Meat Housing Franchising, LLC (“MHF”); Justin Rosberg (“Rosberg”); Thomas Brown (“Brown”); and Kerry Miller (“Miller”) (collectively the “Defendants”). In essence, the Plaintiffs alleged that the Defendants orchestrated a fraudulent scheme involving the sale of MHF franchise and area developer rights to the Plaintiffs in violation of certain state franchising laws and regulations, among other statutes.

Each of the Defendants defaulted, except for Brown, a managing member of MHF. Only one claim, the fifteenth cause of action sounding in an alleged violation of the New York Franchise Sales Act, N.Y. Gen. Bus. Law §§ 680 et seq. (the “NYFSA”), directly referenced Brown.

On July 24, 2014, Brown moved pursuant to Federal Rule of Civil Procedure (“Fed. R. Civ.P.”) 9(b) to dismiss the complaint for failure to plead with the requisite particularity.

On September 19, 2014, the Plaintiffs cross-moved pursuant to Fed.R.Civ.P. 15(a) for leave to file an amended complaint. The proposed amended complaint contains 21 causes of action, none of which are specifically directed toward Brown alone.

In opposing the Plaintiffs' cross-motion to amend the complaint, Brown primarily contests the futility of the proposed causes of action. Indeed, Brown does not argue that the proposed amendment was prompted by bad faith on the part of the Plaintiffs or that the Plaintiffs unduly delayed in seeking leave to amend. Rather, Brown conclusorily asserts that he “would certainly be prejudiced by allowing such an amendment, which consists no less than 74 pages and often reads as a legal brief, because it would force him to expend significant additional resources in responding thereto and unnecessarily delay his rightful dismissal from this litigation.” (Brown's Reply Br., at 10.) The Court notes that to the extent the proposed amended complaint contains legal arguments, Brown has had ample opportunity to respond to those arguments, thereby minimizing any prejudice.

Where, as here, the Plaintiff seek to amend his complaint while a motion to dismiss is pending, a court “has a variety of ways in which it may deal with the pending motion to dismiss, from denying the motion [to dismiss] as moot to considering the merits of the motion in light of the amended complaint.” Roller Bearing Co. of Am., Inc. v. Am. Software, Inc., 570 F.Supp.2d 376, 384 (D.Conn.2008) (internal quotation marks and alteration omitted). “An amendment to a pleading is futile if the proposed claim could not withstand a motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6).” Annunziato v. Collecto, Inc., 293 F.R.D. 329, 333 (E.D.N.Y.2013) (citing Lucente v. Int'l Bus. Machs. Corp., 310 F.3d 243, 258 (2d Cir.2002) ). “Therefore a proposed amendment is not futile if it states a claim upon which relief can be granted.” Waltz v. Board of Educ. of Hoosick Falls Cent. School Dist., No. 1:12–CV–0507 (GTS)(CFH), 2013 WL 4811958, *4 (N.D.N.Y. Sept. 10, 2013) (citations omitted).

“As the [P]laintiffs do not seek to add new defendants and [Brown] had sufficient opportunity to respond to the proposed amended complaint, the merits of the motion to dismiss will be considered in light of the proposed amended complaint.” Haag v. MVP Health Care, 866 F.Supp.2d 137, 140 (N.D.N.Y.2012). “Indeed, if the proposed amended complaint cannot survive the motion to dismiss, then plaintiffs' cross-motion to amend will be denied as futile.” (citing Dougherty v. Town of N. Hempstead Bd. of Zoning Appeals, 282 F.3d 83, 88 (2d Cir.2002) ).

I. BACKGROUND

Unless otherwise stated, the following facts are drawn from the proposed amended complaint, and construed in a light most favorable to the non-moving parties, the Plaintiffs.

A. The Parties

Schwartz, a surgeon, is the 100% owner of Schwartzco.

The Meat House franchise system includes butcheries that prepare and sell retail meats, fine cheeses, wine, groceries, prepared foods, and other gourmet food items.

TMH Management was established by The Meat House franchise system to manage The Meat House stores and franchises. Rosberg and the non-party Jason Parent (“Parent”) are the co-founders and members of TMH Management, and Rosberg is its registered agent.

TMH Ventures was established by The Meat House franchise system to facilitate investment in and development of The Meat House brand. According to a 2012 Franchise Disclosure Documents (“FDDs”), TMH Ventures “is an operations management company created to undertake joint business ventures with Area Developers in California, Florida, Oklahoma and New York.” Rosberg and Brown are co-founders and members of TMH Ventures, and Rosberg is its registered agent.

MHF was established by the Meat House franchise system for the purpose of selling Meat House franchises. MHF is the franchisor and holder of the trademark for The Meat House franchise system. Rosberg is MHF's registered agent. Rosberg is also allegedly a “control” person of MHF under § 691(3) of the NYFSA.

The non-party Parent is the Managing Member and President of MHF and co-founder and member of TMH Management and TMH Ventures. Parent is also allegedly a “control” person of MHF under § 691(3) of the NYFSA.

Brown is the Chief Businesses Development Officer, Executive Vice President of Sales & Marketing, and a Managing Member of MHF, as well as an officer of TMH Management and TMH Ventures. He is a co-founder and member of TMH Ventures. Brown is also allegedly a “control” person of MHF under § 691(3) of the NYFSA.

Miller was another principal of the Meat House, but has since declared bankruptcy. The Plaintiffs are pursuing their claims against Miller in an adversarial bankruptcy proceeding.

B. Factual History

Beginning in early 2010, the Defendants allegedly pursued Schwartz, the sole investor in Schwartzco, to induce him to invest in acquisition rights to franchise and develop The Meat House stores in Westchester, New York; New York City; and Long Island.

The Defendants allegedly targeted Schwartz through his nephew, Cary Tober, a low-level employee in the Meat House franchise system. The Plaintiffs ultimately invested more than $2 million in The Meat House franchise system.

According to the Plaintiffs, the Defendants made “material false misrepresentations (and/or omissions)” verbally and in writing to the Plaintiffs; “used false, inflated, and misleading cherry-picked information, and generated numerous fraudulent financial spreadsheets and financial statements about the Meat House's current business and profitability (including false earnings claims), and what Plaintiffs could expect to generate in New York, with [the] Defendants operating the business.” (Proposed Amended Compl. [“Amended Compl.”], at ¶ 4.). The Plaintiffs also assert that the Defendants violated the federal franchise disclosure law, including 16 C.F.R. 436.1 et seq. (the “FTC Act”), and the NYFSA by failing to provide sufficient disclosures.

The Plaintiffs point to the individual defendants, including Brown, as “active participants” “independent of the [Defendant] entities” in the fraudulent scheme. (Id. at ¶ 11.)

The Plaintiffs contend that, as a result of the Defendants' fraudulent scheme, they entered into various agreements with certain of the Defendants and opened an area development entity and ultimately one franchised location, TMH–NY, in Roslyn, New York.

Despite the fact that TMH–NY was fully funded by Schwartzco, TMH Ventures reserved a 5% ownership interest for itself and the Defendants appointed TMH Management as its sole “manager.” In this way, the Defendants retained equity and control over TMH–NY without bearing any financial risk. The Defendants allegedly abused their fiduciary responsibilities and funneled Schwartz's money towards opening TMH–NY as an expensive “show piece” location unable to operate at a profit.

According to the Plaintiffs, Brown and Rosberg were “directly responsible” for feeding Tober with much of the data that was utilized in misrepresentations to Schwartz, including financial information regarding operational expenses, profits, and build-out costs, in order to create a false and overly favorable impression of The Meat...