Tilted Kilt Franchise Operating, LLC v. 1220, LLC, Case No. 15-cv-10377
| Decision Date | 29 July 2016 |
| Docket Number | Case No. 15-cv-10377 |
| Parties | TILTED KILT FRANCHISE OPERATING, LLC, Plaintiff, v. 1220, LLC, ROBERT BAROUD, EMIL BAROUD, ANTHONY BAROUD and PETER BAROUD, Defendants. |
| Court | U.S. District Court — Northern District of Illinois |
MEMORANDUM OPINION & ORDER
Plaintiff Titled Kilt Franchise Operating, LLC ("Tilted Kilt") filed a two-count complaint against 1220, LLC ("1220"), Robert Baroud, Emil Baroud, Anthony Baroud, and Peter Baroud (collectively, "Defendants") seeking declaratory judgment and further relief consistent with the declaratory judgment that Tilted Kilt seeks. Tilted Kilt contends that Defendants breached their developer agreement in a material and non-curable way pursuant to the Federal Trade Commission's Rule on Franchising, the Illinois Franchise Disclosure Act, and the Wisconsin Franchise Investment Law, justifying Tilted Kilt in terminating the developer agreement. Tilted Kilt seeks a declaratory judgment stating that Defendants' conduct violated the terms of the developer agreement and constituted good cause for termination and that Tilted Kilt is justified in terminating the developer agreement without providing Defendants a "cure" period. Currently before the court are Defendants' motion to dismiss Tilted Kilt's complaint, Defendants' motion to consolidate, and Tilted Kilt's motion to dismiss Defendants' counterclaims.
II. BACKGROUND1
Tilted Kilt is the franchisor of a nationwide chain of restaurants bearing the same name. Defendant 1220 is an Illinois limited liability company owned in equal parts by four brothers—Robert Baroud ("Robert"), Emil Baroud ("Emil"), Anthony Baround ("Anthony"), and Peter Baroud ("Peter") (collectively "Barouds"). In 2007, 1220 became a Tilted Kilt area developer. 1220 was granted development rights for a territory comprised of certain counties in Illinois, Wisconsin, and Indiana for a period of twenty-five years ("AD Agreement"). As an area developer, 1220 is responsible for the following: (1) soliciting and referring to Tilted Kilt for its consideration qualified prospective franchisees; (2) performing site acquisition services for restaurants located within its territory; and (3) providing opening and ongoing operational support to Tilted Kilt franchises within its territory. According to the AD Agreement, Robert, Emil, Anthony, and Peter each personally guaranteed all of 1220's obligations.
The AD Agreement between Tilted Kilt and Defendants contained the following provisions:
[Memo. in Support of Defs. Mot. to Dismiss, Ex. 1, AD Agreement, p. 17, ECF No. 7.]
[Memo. in Support of Defs. Mot. to Dismiss, Ex. 1, AD Agreement, p. 18, ECF No. 7.]
In addition to the above-cited sections of the AD Agreement, Defendants also agreed that before any offer or sale of a franchise, they would "take reasonable steps to confirm that the information contained in any written materials, agreements and other documents related to the offer or sale of franchises is true, correct and not misleading at the time of such offer or sale, and the offer of sale of such franchise will not at that time be contrary to or in any violation of any applicable state law related to the registration of the franchise offering." [Memo. in Support of Defs. Mot. to Dismiss, Ex. 1, AD Agreement, p. 17, ECF No. 7.]
Tilted Kilt alleges that Defendants repeatedly breached these provisions of the AD Agreement from July 2009 until December 2012 by making misleading financial performance representations to prospective franchisees, Chris Gochis ("Gochis") and Michael Roscioli ("Roscioli") in connection with the offer or sale of a franchise. More specifically, Tilted Kilt alleges that Defendants told Gochis and Roscioli that "franchised Titled Kilt restaurants generated average annual revenues of $2.5 million" [Compl. ¶ 17, ECF No. 1.], "annual gross sales at the Tilted Kilt restaurant in Woodridge, Illinois were $3.5 million" [Id.], and "a franchised Tilted Kilt restaurant in Gurnee Mills would generate between $3 and $5 million in annual sales and would have 'no problem' meeting the projection [the] Baroud[s] had prepared and provided to Roscioli and Gochis." [Id. ¶ 24.] Tilted Kilt argues that each of thesestatements made to Riscioli and Gochis was false and misleading when made and not contained in Tilted Kilt's then-current franchise disclosure document. Not only did the statements violate the AD Agreement with Tilted Kilt, they violated federal and state laws and they adversely affected the reputation and goodwill of Tilted Kilt.
Tilted Kilt also alleges that Defendants breached the AD Agreement and violated state and federal laws by preparing a misleading projection of revenue and expenses for a Tilted Kilt restaurant which was not contained in Item 19 of Tilted Kilt's then-current franchise disclosure document and delivering it to prospective franchisees, Roscioli and Gochis. [Compl. ¶¶ 15, 23, ECF No. 1.]; see also 815 Ill. Comp. Stat. 705/16; Wis. Stat. § 553.41; 16 CFR § 436.9.
Based on these representations by Defendants, Roscioli and Gochis entered into agreements to establish franchised Tilted Kilt restaurants in the following locations: (1) Kenosha, Wisconsin in November 2009 [Compl. ¶ 18, ECF No. 1.]; (2) Vernon Hills, Illinois in July 2010 [Id. ¶ 21]; and (3) Gurnee, Illinois in December 2012 [Id. ¶ 25.] The Tilted Kilt in Kenosha did not open until March 25, 2013 and never performed financially at the levels that Defendants projected and instead sustained significant losses rather than the profits projected. [Id. ¶ 29.]
Tilted Kilt states that it first learned of these allegedly misleading financial representations provided to Riscioli and Gochis by Defendants on May 11, 2015, when an attorney for Roscioli and Gochis wrote to Tilted Kilt informing it of the misrepresentations and demanding both a refund of the fees paid to Tilted Kilt by Roscioli and Gochis to acquire their franchises and a release of their obligations under the franchise agreement. [Id. ¶ 30.]
Section 17.2 of the AD Agreement provides that Tilted Kilt can terminate the agreement if Defendants fail "to comply with any [ ] provision of this [AD] Agreement" or "engage[ ] in any conduct which may adversely affect the reputation of [Tilted Kilt] [r]estaurants or thegoodwill associated with the [Tilted Kilt] [m]arks[.]" [Memo. in Support of Defs. Mot. to Dismiss, Ex. 1, AD Agreement, pp. 24-25, ECF No. 7.] Pursuant to § 17.2 of the AD Agreement, Tilted Kilt now seeks a declaratory judgment that it is entitled to terminate the AD Agreement without providing Defendants with an opportunity to cure because it alleges that any cure period would be futile.
Defendants, in turn, filed the instant motion to dismiss, arguing that Tilted Kilt's complaint should be dismissed pursuant to Federal Rule of Civil Procedure ("Rule") 12(b)(1) as this court lacks subject matter jurisdiction because Tilted Kilt has failed to plead any monetary damages or injury. Alternatively, Defendants argue that the complaint should be dismissed pursuant to Rule 12(b)(6) for failure to state a claim due to the following: (1) Tilted Kilt's declaratory judgment action is improper and should be brought as a breach of contract claim; and (2) the relief sought by Tilted Kilt is improper according to § 17.2 of the AD Agreement and § 19 of the Illinois Franchise Disclosure Act. Both provisions require notice of termination and an opportunity to cure before a franchise can be terminated.
In addition to filing their motion to dismiss Tilted Kilt's complaint, Defendants filed a four-count counterclaim against Tilted Kilt sounding in breach of contract (Count I), seeking declaratory relief (Count II), seeking injunction relief (Count III) and alleging a violation of the Illinois Franchise Disclosure Act (Count IV). [Counterclaim, ECF No. 8.] The counterclaim arises from the same set of facts as the claims made by Tilted Kilt in its complaint. Unsure of whether a counterclaim could stand on its own, Defendants filed an independent complaint alleging the same exact cause of action as the counterclaim in the present case. See 1220, LLC v. Tilted Kilt Franchise Operating, LLC, No. 16 C 744 (Tharp, J.). Because of the relatedness ofthe two cases, Defendants have filed a motion to consolidate the case in front of Judge Tharp with the instant matter.
III. LEGAL STANDARD
Rule 12(b)(1) requires dismissal of a lawsuit if the court lacks subject matter jurisdiction. Fed. R. Civ. P. 12(b)(1). In this procedural context, the court...
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