Smith v. Quizno's Master LLC (In re Bouley)

• Decision Date: 27 November 2013
• Docket Number: Adversary No. 13–01008–BAH.,Bankruptcy No. 10–14948–BAH.
• Court: United States Bankruptcy Courts. First Circuit. U.S. Bankruptcy Court — District of New Hampshire
• Parties: In re Paul BOULEY & Cynthia Bouley, Debtors. Timothy P. Smith, Chapter 7 Trustee, Plaintiff, v. The Quizno's Master LLC, et al., Defendants.

503 B.R. 524

2013 BNH 016

In re Paul BOULEY & Cynthia Bouley, Debtors.Timothy P. Smith, Chapter 7 Trustee, Plaintiff,

v.The Quizno's Master LLC, et al., Defendants.

Bankruptcy No. 10–14948–BAH.

Adversary No. 13–01008–BAH.

United States Bankruptcy Court, D. New Hampshire.

Nov. 27, 2013.

John J. Washburn, Law Office of John Washburn, Nashua, NH, for the Plaintiff.

Peter N. Tamposi, The Tamposi Law Group, Nashua, New Hampshire & Fredric A. Cohen Cheng Cohen, LLC, Chicago, IL, for the Defendants.

Memorandum Opinion

BRUCE A. HARWOOD, Chief Judge.

I. INTRODUCTION

This is the defendants' motion to dismiss the plaintiff's complaint under Federal Rule of Civil Procedure 12(b)(6). The defendants assert that the plaintiff's claims are untimely under the franchise agreement governing the relationship of the parties. The defendants also claim that the plaintiff has brought this suit in the wrong forum. The plaintiff responds with an attempt to undermine the franchise agreement as a whole. He argues that the defendants procured the agreement by fraud and that the agreement is itself unconscionable. Ultimately, the plaintiff wants the Court to deem the relevant provisions of the agreement ineffective as a matter of law so that this proceeding may continue. For the reasons set forth below, the Court shall deny the motion to dismiss and transfer this proceeding to the United States District Court for the District of Colorado.

This Court has authority to exercise jurisdiction over the subject matter and the parties pursuant to 28 U.S.C. §§ 1334, 157(a), and U.S. District Court for the District of New Hampshire Local Rule 77.4(a). This is a non-core proceeding, related to a case arising under title 11 of the United States Code. The parties have consented to this Court entering final orders pursuant to 28 U.S.C. § 157(c)(2).

II. FACTS

The plaintiff in this adversary proceeding is the chapter 7 trustee (the “Plaintiff”) of the bankruptcy estate of Paul and Cynthia Bouley (the “Debtors”), who once owned and operated an unprofitable and ultimately unsuccessful Quizno's franchise. The defendants are an assortment of corporate entities and two individuals, Richard E. Schaden and Richard F. Schaden (collectively the “Defendants”).¹ The entities are each incorporated in Delaware and have their principal place of business in Colorado. The individuals reside in Colorado. These individuals and entities are—or were—involved with owning and operating the national Quizno's sandwich franchise.

For the purpose of this motion to dismiss, the Court accepts the allegations in the complaint as true. The Plaintiff alleges the Defendants exploited the Debtors' lack of business knowledge, fraudulently duping them into signing the franchise agreement (the “Agreement”) without fully disclosing the costs and risks of owning and operating a Quizno's sandwich franchise. According to the Plaintiff, the Defendants perpetrated this scheme on a massive scale involving thousands of other people just like the Defendants.² The Defendants profited from this scheme by charging royalty and advertising fees to the Debtors, as well as selling them the food and supplies necessary to run the sandwich business, all at inflated prices. Eventually the scheme drove the Debtors out of business and into bankruptcy.

This series of events began in May 2005 when the Debtors attended a Quizno's informational seminar on how to become Quizno's franchisees. The Plaintiff alleges the seminar was highly structured and very misleading, falsely showing the great success of many Quizno's franchisees. The Defendants made many representations at the seminar, including statements about the average profitability of Quizno's franchises, how supportive Quizno's was of its franchisees, and how easy it would be for the Debtors to open their own location. At this meeting, the Debtors obtained a franchise application and other materials. This application was approved during the May 2005 meeting, and the Plaintiff alleges that despite this approval, the Defendants should have been aware of the Debtors' unsuitability to become Quizno's franchisees. Notably, the application and other materials did not include a copy of a disclosure document, the Uniform Franchise Offering Circular, which the Plaintiff alleges the Federal Trade Commission requires franchisors to provide to prospective franchisees.

Debtor Paul Bouley signed the Agreement in June 2005, relying on the many representations of the Quizno's representatives. Both Debtors signed personal guarantees of the obligations in the Agreement.³ During the signing process, Quizno's representatives allegedly coached and directed the Debtors on where to sign and discouraged them from reviewing the Agreement in detail. Neither Debtor had any experience reviewing or negotiating detailed contracts such as the Agreement. According to the complaint, Paul Bouley stated that he wanted to have a lawyer review the Agreement and was told it would be a waste of money, that nothing in the Agreement could be changed, and that insisting upon having counsel review the Agreement would needlessly delay the process. The Defendants' representatives assured the Debtors that their advice was in the Debtors' best interests.

After much difficulty, the Debtors opened their Quizno's location in Belmont, New Hampshire, in 2006. The Plaintiff alleges that the Defendants forced the Debtors to use an unsuitable location and that the Defendants should have known it was unsuitable. The Defendants also did not provide the promised support to aid the Debtors in opening the store. Specifically, the Debtors were required to spend $6,000 on particular items for a “grand opening” of their new location, but many of the items were unusable. Additionally, the Defendants did not provide the Debtors with any assistance with difficulties they had with their new landlord, the town, and a contractor, whom the Defendants had approved.

The operation of the store itself did not go well. The Plaintiff alleges that the Defendants engaged in a scheme to conceal the profit they made by requiring the Debtors to purchase food and other necessary supplies from specific vendors. The Defendants told the Debtors they were receiving volume discounts on these supplies, but in reality the Debtors purchased them at inflated prices. The Defendants allegedly received the benefit of these sales in the form of “kickbacks” from the vendors. The Plaintiff claims that this scheme was so extensive that the Defendants' true business model was actually to profit mainly from the selling of supplies to franchisees, like the Debtors. All the while, the Defendants hid this setup from the Debtors and made them think they were getting a good deal.

The Defendants purportedly made the operation of the Debtors' store difficult by effectively requiring the Debtors to participate in coupon programs. These programs forced the Debtors to sell their food at a large discount, without reimbursement from the Defendants. The Plaintiff alleges that the coupon program, on top of the supply scheme, effectively made it impossible for the Debtors to perform the terms of the Agreement.

The Plaintiff also alleges that during the entire time the Debtors' store was operational, the Defendants told them their location was doing well, despite knowing that it was unprofitable. During these communications, the Defendants promised to go on an “advertising blitz” that would soon make the store even more profitable. The Plaintiff alleges that the Defendants never engaged in any real advertising of the Debtors' store, despite requiring them to regularly pay a hefty fee, earmarked for such costs. In July of 2010, after several years of trying to make it work and despite their best efforts, the Debtors finally confronted the reality that their Quizno's franchise was unsustainable. They closed the store and filed a petition under chapter 7 of the Bankruptcy Code several months later.

Timothy P. Smith was appointed chapter 7 trustee soon after the Debtors filed their bankruptcy petition. In January 2013, he filed the ten count complaint that instigated this adversary proceeding. The counts in the complaint are as follows: (I) violation of the New Hampshire Consumer Protection Act—N.H.Rev.Stat. Ann. § 358–A; (II) breach of contract; (III) breach of the implied covenant of good faith and fair dealing; (IV) unjust enrichment; (V) intentional misrepresentation and fraud in the inducement; (VI) promissory fraud; (VII) breach of fiduciary duty; (VIII) negligence; (IX) negligent misrepresentation, and (X) civil conspiracy. In response to the complaint, the Defendants moved to dismiss pursuant to Rule 12(b)(6), alleging that the Plaintiff failed to state a claim for which relief could be granted.⁴ The Defendants attached a copy of the Agreement to the motion to dismiss, as the Plaintiff had not attached a copy to the complaint.

The Defendants make two arguments in their motion to dismiss. First, they argue that the claims asserted in the complaint are untimely under the Agreement. Section 21, paragraph 21.4 of the Agreement provides for a one year limitations period on claims between the parties:

Franchisee and the Bound Parties agree not to bring any claim asserting that any of the Marks are generic or otherwise invalid. Except with regard to Franchisee's obligation to pay Franchisor and its affiliates Royalty payments, the Marketing and Promotion Fee and other advertising fees, and other payments due from Franchisee pursuant to this Agreement or otherwise, any claims between the parties must be commenced within one (1) year from the date on which the party asserting the claim knew or should have known of the facts giving rise to the claim, or such claim shall be barred. The parties understand that such time limit might be shorter than otherwise allowed by law.⁵

The Defendants argue that “it was incumbent upon [the Plaintiff] to assert [the] claims by...