El Toro Grp., LLC v. Bareburger Grp., LLC

• Decision Date: 14 January 2021
• Docket Number: 12930,Index No. 651018/18,Case No. 2020-00695
• Citation: 190 A.D.3d 536,141 N.Y.S.3d 3
• Parties: EL TORO GROUP, LLC, et al., Plaintiffs–Respondents, v. BAREBURGER GROUP, LLC, et al., Defendants–Appellants.
• Court: New York Supreme Court — Appellate Division

190 A.D.3d 536

141 N.Y.S.3d 3

EL TORO GROUP, LLC, et al., Plaintiffs–Respondents,

v.BAREBURGER GROUP, LLC, et al., Defendants–Appellants.

12930

Index No. 651018/18

Case No. 2020-00695

Supreme Court, Appellate Division, First Department, New York.

ENTERED: January 14, 2021

Certilman Balin Adler & Hyman, LLP, East Meadow (John H. Gionis of counsel), for appellants.

Marco & Sitaras, PLLC, New York (George Marco of counsel), for respondents.

Renwick, J.P., Manzanet–Daniels, Kapnick, Kern, Kennedy, JJ.

Order, Supreme Court, New York County (Barry R. Ostrager, J.), entered September 24, 2019, which, insofar as appealed from, denied defendants' motion to dismiss the amended complaint except for the first and fifteenth causes of action, unanimously modified, on the law, to dismiss the second, fourth, fifth, seventh, eighth, twelfth through fourteenth, and sixteenth causes of action in their entirety; the third cause of action as asserted by El Toro Group, LLC, NGM Management Group, LLC, Columbus Village LLC, and FiDi District LLC, as well as the third cause of action as asserted by Midtown East NY, LLC and Fuber LLC except to the extent it is based on rebates, mark-ups, and brand development fees, as against all defendants except Bareburger Group, LLC (Franchisor) and George Rodas, and to the extent it seeks punitive damages; so much of the sixth cause of action as seeks rescission of the franchise agreements and Step–In Rights (SIR) Agreement, and so much as is asserted by El Toro; so much of the ninth cause of action as seeks rescission of the franchise agreements; so much of the tenth cause of action as relates to breaches that occurred before March 2, 2012, as is based on the Bareburger mark, and as is asserted on behalf of El Toro; so much of the eleventh cause of action as is based on the promise to advance funds; so much of the eleventh cause of action as is based on the promise to buy plaintiffs' restaurants, with leave to replead; and the seventeenth cause of action as against all defendants other than Franchisor and TIDM Corp., and to declare that the franchise agreements are enforceable and that Franchisor or its assignee has the right to operate NGM's, Columbus's, FiDi's, Midtown's, and Fuber's (the Companies') restaurants, and otherwise affirmed, without costs.

The second and third causes of action allege violation of General Business Law (GBL) § 687. The second cause of action seeks the equitable remedy of rescission of the franchise agreements and SIR Agreement, and must be dismissed because plaintiffs have a complete and adequate remedy at law, which is the damages they seek in the third cause of action¹ (see Rudman v. Cowles Communications, 30 N.Y.2d 1, 13, 330 N.Y.S.2d 33, 280 N.E.2d 867 [1972] ). Moreover, it is impracticable to restore the status quo ( id. ). If defendants were to return the royalties, franchise fees, rebates, mark-ups, management fees and other charges they collected from plaintiffs, there is nothing the plaintiffs could give in exchange that would return the parties to the positions they were in prior to entering into the franchise agreement and SIR Agreement.

The third cause of action as asserted by El Toro must be dismissed because El Toro did not enter into a franchise agreement but rather a Multi–Unit Operator Agreement, which, moreover, states that it is not a franchise agreement and does not grant to El Toro any right to use the marks or "the System." The third cause of action as asserted by NGM, Columbus, and FiDi must be dismissed because these plaintiffs' franchise agreements were executed more than three years before the commencement of this action (see GBL 691[4] ; Jung Hing Leung v. Lotus Ride, 198 A.D.2d 155, 156, 604 N.Y.S.2d 65 [1st Dept. 1993] ). The third cause of action as asserted by Midtown and Fuber must be dismissed except to the extent it is based on rebates, mark-ups, and brand development fees. To the extent it is based on alleged untrue or misleading statements of fact made by Franchisor and Rodas and on defendants' failure to disclosure nonparty Stavroulakis's action and defendant Spiridon Apostolatos's ownership interest in Franchisor at the time he and/or defendant Apostolatos CPA, PLLC prepared financial statements in connection with Franchise Disclosure Documents (FDDs), the cause of action fails to allege how these plaintiffs were harmed. In contrast, plaintiffs allege that the excessive rebates collected by Franchisor made it virtually impossible for franchisees to earn a profit and that the excessive and undisclosed franchise fees, advertising fees, mark-ups and other charges left them unable to operate their Bareburger restaurants without incurring losses.

The third cause of action, which also alleges omissions and misrepresentations in the FDDs, audited financial statements, and franchise agreements, is asserted against all defendants, but must be dismissed as against all but Franchisor and Rodas because Franchisor is the only defendant that was a party to the franchise agreements, and the FDDs were issued by Franchisor and certified (for the timely GBL 687 claims) by Rodas. Although Mr. Apostolatos and his firm audited Franchisor's financials, plaintiffs failed to show loss causation from those defendants' work.

The third cause of action must also be dismissed as against Franchisor's members, defendants KMVA Holdings, LLC, Gamma, LLC, Yuri Gagarin Returns, LLC, EVP Holdings, LLC, and Negroponte, LLC, and most of the owners of those LLCs, Mr. Apostolatos, George Dellis, Euripides Pelakanos (Euripides), and John Simeonidis, because in another part of the order, from which plaintiffs did not cross-appeal, the fifteenth cause of action, seeking to pierce the corporate veil, was dismissed. The third cause of action must also be dismissed as against TIDM and defendants Re–Grub, LLC, Be My Burger, LLC (BMB), Eftychios Pelekanos (Eftychios), Demetrios Voiklis, and Apostolatos, LLC because it makes no specific allegations against them.

The demand for punitive damages in the third cause of action must also be dismissed because under each franchise agreement the franchisee waived any right to punitive damages.

The fourth cause of action, which alleges that all defendants violated 15 U.S.C. § 1120, must be dismissed because plaintiffs were not injured by nor did they sustain any damages in consequence of the fraudulent transfer of the Bareburger mark from nonparty Bareburger Inc. to Franchisor.

The fifth cause of action seeks rescission of the franchise agreements and SIR Agreement due to fraud, and must be dismissed because plaintiffs have an adequate remedy at law, i.e., the damages for breach of these contracts sought in the tenth cause of action (see Rudman, 30 N.Y.2d at 13, 330 N.Y.S.2d 33, 280 N.E.2d 867 ).

The sixth cause of action, to the extent it seeks rescission of the franchise agreements and SIR Agreement, must be dismissed (see Rudman, 30 N.Y.2d at 13, 330 N.Y.S.2d 33, 280 N.E.2d 867 ). In addition, plaintiffs were not damaged by Franchisor's alleged breach of the franchise agreements by failing to provide a valid trademark.

To the extent it seeks to rescind the promissory note that the Companies signed in May 2017, on the ground that Franchisor allegedly breached the note by never advancing any funds, the sixth cause of action may proceed (see Markov v. Katt, 2018 N.Y. Slip Op. 30558[U], *6, 2018 WL 1587683 [Sup. Ct., N.Y. County 2018], affd 176 A.D.3d 401, 109 N.Y.S.3d 295 [1st Dept. 2019] ). The tenth cause of action does not seek damages for breach of the note. However, since El Toro is not a party to the promissory note and does not claim to be a third-party beneficiary thereof, it lacks standing to sue for breach.

The motion court providently exercised its discretion in denying defendants' motion to dismiss all claims related to the promissory note based on another action pending ( CPLR 3211[a][4] ). We note that, by orders entered December 17, 2019, the court to which Franchisor's action against the Companies on the promissory note was assigned (Joel M. Cohen, J.) denied Franchisor's motion for summary judgment in lieu of complaint and transferred the case to Justice Ostrager.

The eighth cause of action and the ninth cause of action to the extent it seeks a declaratory judgment rescinding the franchise agreements must be dismissed (see Rudman, 30 N.Y.2d at 13, 330 N.Y.S.2d 33, 280 N.E.2d 867 ). However, to the extent the ninth cause of action seeks a declaratory judgment rescinding the SIR Agreement due to lack of consideration, it may proceed (except for the demand for punitive damages). Franchisor failed to show any consideration it gave in exchange for plaintiffs' promises in the SIR Agreement (see Strong v. Sheffield, 144 N.Y. 392, 394, 39 N.E. 330 [1895] ). The fact that TIDM would operate the Companies' restaurants on behalf of Franchisor is not consideration, because the original franchise agreements already gave Franchisor step-in rights and allowed it to assign its rights (see Ripley v. International Rys. of Cent. Am., 8 N.Y.2d 430, 441, 209 N.Y.S.2d 289, 171 N.E.2d 443 [1960] ). Damages for breach of the SIR Agreement would not give plaintiffs a complete and adequate remedy at law, because defendants seek to use various clauses of the SIR Agreement to shield themselves from liability for breach of the franchise agreements.

To the extent any of the breaches of contract alleged in the tenth cause of action occurred before March 2, 2012 (e.g., with respect to NGM's 2011 franchise agreement), the cause of action is time-barred (see CPLR 213[2] ; Ely–Cruikshank Co. v. Bank of Montreal, 81 N.Y.2d 399, 402, 599 N.Y.S.2d 501, 615 N.E.2d 985 [1993] ). To the extent the breaches are related to the Bareburger mark, the cause of action must be dismissed because plaintiffs suffered no damages as a result of the breaches (see Markov v. Katt, 176 A.D.3d at 401–402, 109 N.Y.S.3d 295 ).

Defendants' contention that a provision in the SIR Agreement shows...