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relying on IDS Life Ins. Co. v. Sunamerica Co., 103 F.3d 524, 529-30 (7th Cir. 1997) to stay litigation against defendants, including non-parties to arbitration agreement
Summary of this case from Tarrson v. BLC Partners, LPOpinion
Cause No. IP01-0228-C-T/G, IP 01-0228-C-T/K
January 14, 2002
ENTRY ON DEFENDANTS' MOTION TO DISMISS
Though this Entry is a matter of public record and is being made available to the public on the court's web site, it is not intended for commercial publication either electronically or in paper form. The reason for this caveat is to avoid adding to the research burden faced by litigants and courts. Under the law of the case doctrine, the ruling or rulings in this Entry will govern the case presently before this court. See, e.g., Trs. of Pension, Welfare, Vacation Fringe Benefit Funds of IBEW Local 701 v. Pyramid Elec., 223 F.3d 459, 468 n. 4 (7th Cir. 2000); Avitia v. Metro. Club of Chicago, Inc., 49 F.3d 1219, 1227 (7th Cir. 1995). However, a district judge's decision has no precedential authority and, therefore, is not binding on other courts, on other judges in this district, or even on other cases before the same judge. See, e.g., Howard v. Wal-Mart Stores, Inc., 160 F.3d 358, 359 (7th Cir. 1998) ("a district court's decision does not have precedential authority"); Malabarba v. Chicago Tribune Co., 149 F.3d 690, 697 (7th Cir. 1998) ("district court opinions are of little or no authoritative value"); United States v. Articles of Drug Consisting of 203 Paper Bags, 818 F.2d 569, 571 (7th Cir. 1987) ("A single district court decision . . . has little precedential effect. It is not binding on the circuit, or even on other district judges in the same district."). Consequently, though this Entry correctly disposes of the legal issues addressed, this court does not consider the discussion to be sufficiently novel or instructive to justify commercial publication of the Entry or the subsequent citation of it in other proceedings.
Defendants, BAB Holdings, Inc., and BAB Systems, Inc., filed a motion to dismiss for failure to plead fraud with particularity as is required by Federal Rule of Civil Procedure 9(b) and failure to state a claim upon which relief can be granted under Rule 12(b)(6). The Plaintiffs oppose the motion. This court now DENIES Defendants' Motion to Dismiss in part and GRANTS the Motion in part.
I. Factual and Procedural Background
This lawsuit arises out of a Franchise Agreement between Creative Foods of Indiana, Inc., ("Creative") and My Favorite Muffin, Too, Inc. ("MFM"), BAB Holdings, Inc. ("Holdings"), and BAB Systems, Inc. ("Systems"). Creative is owned by Richard and Linda Ammon. In 1997, the Ammons began negotiations with MFM to purchase two franchises. In mid-May 1997, Holdings, which is wholly-owned by Systems, purchased MFM. Negotiations continued and on August 15, Plaintiffs entered into a Franchise Agreement with MFM. During the negotiations, Plaintiffs had expressed their desire to open additional My Favorite Muffin franchises and, on September 10, Plaintiffs signed a Right of First Refusal Agreement ("Refusal Agreement"). The parties now dispute the meaning of this document. In late 1997, the Ammons submitted proposals to open another My Favorite Muffin store, but were not allowed to do so. Plaintiffs contend that when the Refusal Agreement was signed, Systems had already entered into an Exclusive Area Agreement with another local franchisee that prevented Systems or any of its satellite stores from opening new stores in a designated area. Because of this agreement, Plaintiffs contend that their Right of First Refusal was meaningless.
The extent of Holdings and Systems actual involvement in the Franchise Agreement is contested by the parties.
On January 14, 2001, Plaintiffs filed a complaint alleging that Defendants breached their contract and committed fraud. They also made a claim for treble damages under Indiana Code section 34-24-3-1. On February 21, Defendants removed the action from Marion County Superior Court to this court. On March 26, Defendants filed this motion to dismiss. Plaintiffs oppose the motion. The court now rules as follows.
II. Motion to Dismiss Standard
A. 9(b)
Federal Rule of Civil Procedure 9(b) requires allegations of fraud to pleaded with particularity. Although Rule 9(b) does not require a plaintiff to plead facts that if true would show that the defendant's alleged misrepresentations were indeed false, it does require the plaintiff to state the identity of the person making the representation, the time, place, and content of the misrepresentation, and the method by which the misrepresentation was communicated to the plaintiff. Uni* Quality, Inc. v. Infotronx, Inc., 974 F.2d 918, 923 (7th Cir. 1992). In other words, the plaintiff must plead the who, what, when, and where of the alleged fraud. Id.
The Seventh Circuit articulated the important purpose that Rule 9(b) serves:
Rule 9(b)'s particularity requirement serves an important purpose. Accusations of fraud can seriously harm a business. . . . Rule 9(b) ensures that a plaintiff has some basis for his accusations of fraud before making those accusations and thus discourages people from including such accusations in complaints simply to gain leverage for settlement or for other ulterior purposes.974 F.2d at 924 (citation omitted).
Additionally, Rule 9(b) serves the important purpose of ensuring that a defendant receives fair notice of the circumstances underlying a fraud claim brought against it. See Jepson Inc. v. Makita Corp., 34 F.3d 1321, 1327 (7th Cir. 1994) (Rule 9(b) is said to serve three main purposes: (1) protecting a defendant's reputation from harm; (2) minimizing "strike suits" and "fishing expeditions"; and (3) providing notice of the claim to the adverse party.); see also Viacom Inc. v. Harbridge Merch. Servs., Inc., 20 F.3d 771, 777-78 (7th Cir. 1994) (recognizing that the need to provide fair notice to the defendant is perhaps the most basic consideration underlying Rule 9(b)).
These important purposes figure prominently in the determination of whether Plaintiffs have satisfied Rule 9(b). Rule 8's general pleading requirement and Rule 9(b)'s particularity requirement must be read together. See, e.g., Michaels Bldg. Co. v. Ameritrust, 848 F.2d 674, 679 (6th Cir. 1988) (Rule 9(b)'s particularity requirement does not negate the general principles set out in Rule 8; rather, the two rules must be read in harmony.) (citation omitted); Tomera v. Galt, 511 F.2d 504, 508 (7th Cir. 1975) (Rule 9 must be read together with rules 8(a)(2), 8(e)(1) and 8(f)), overruled on other grounds, Short v. Belleville Shoe Mfg. Co., 908 F.2d 1385 (7th Cir. 1990); Heastie v. Cmty. Bank of Greater Peoria, 690 F. Supp. 716, 722 (N.D.Ill. 1988) (Rules 8 and 9(b) must be read together). And, thus, the plaintiff need not plead evidentiary details. Heastie, 690 F. Supp. at 722. However, the requirement reading Rule 8 together with Rule 9(b) certainly does not mean that Rule 8 trumps the particularity requirement of Rule 9(b).
B. 12(b)(6)
Defendants also claim that Plaintiff's Complaint must be dismissed under Federal Rule of Civil Procedure 12(b)(6). Under Rule 12(b)(6), a complaint may be dismissed for failure to state a claim upon which relief can be granted. Fed.R.Civ.P. 12(b)(6). A motion to dismiss tests the sufficiency of the complaint, not the merits of the suit. See Gibson v. City of Chicago, 910 F.2d 1510, 1520 (7th Cir. 1990).
Rule 8(a)(2) requires "a short and plain statement of the claim showing that the pleader is entitled to relief," that will "give the defendant fair notice of what the plaintiff's claim is and the grounds upon which it rests." Leatherman v. Tarrant County Narcotics Intelligence Coordination Unit, 507 U.S. 163, 168 (1993) (citation and quotations omitted). When considering a motion to dismiss, the complaint's allegations are accepted as true and viewed in the light most favorable to the plaintiff. See Hentosh v. Herman M. Finch Univ. of Health Sciences/The Chicago Med. Sch., 167 F.3d 1170, 1173 (7th Cir. 1999).
The court must review the plaintiff's statement of the claim to determine whether the plaintiff has set forth facts supporting a cause of action that would entitle them to relief. Conley v. Gibson, 355 U.S. 41, 45-46 (1957); Beam v. IPCO Corp., 838 F.2d 242, 244 (7th Cir. 1988). However, the court is not required to accept legal conclusions, inferences, or allegations unwarranted by the facts as presented in the pleadings. Mid-Am. Reg'l Bargaining Ass'n v. Will County Carpenters Dist. Council, 675 F.2d 881, 883 (7th Cir. 1982). The accepted standard for determining the sufficiency of the complaint does not permit dismissal "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley, 355 U.S. at 45-46. This is a technical determination not based upon the veracity of the facts alleged. The court cannot dismiss a complaint merely because it doubts that the plaintiff can prove the facts it alleges. Neitzke v. Williams, 490 U.S. 319, 327 (1989). Thus, a defendant's motion to dismiss can only be granted if the plaintiff has failed to allege sufficient facts to entitle the plaintiff to relief if the facts alleged are taken as true. "[I]f the plaintiff . . . pleads facts, and the facts show that he is entitled to no relief, the complaint should be dismissed. There would be no point in allowing such a lawsuit to go any further; its doom is foretold." Am. Nurses' Ass'n v. Illinois, 783 F.2d 716, 727 (7th Cir. 1986). With these general principles in mind, the court now looks at the counts of the complaint that the Defendants contend are defective.
III. Count I — Breach of Contract
Defendants contend that the breach of contract claim should be dismissed for two reasons. First, they argue that Plaintiffs have failed to state a claim upon which relief can be granted because they have not alleged a breach of the refusal agreement. Second, the Defendants contend that because BAB Holdings and BAB Systems were not parties to the Refusal Agreement, the Count must be dismissed as to them.
With respect to the first contention, Defendants argue that the Refusal Agreement merely protects "the holder from competition from a company store or another franchise in the territory; it does not by its terms give any right to initiate development of additional franchised stores absent such unwanted competition."
Defendants argument boils down to a claim that the contract does not mean what the Plaintiffs claim it does. In their complaint, the Plaintiffs contend that "On September 10, 1997, Creative Goods entered into a right of first refusal agreement ("Refusal Agreement") with MFM allowing Creative Foods the right of first refusal to open stores in Marion County and the eight surrounding counties." (Compl. ¶ 10.) Plaintiffs claim that they were not allowed to open new stores in Plainfield because another company already had the exclusive right to open stores in Marion County and most surrounding counties. Then in paragraph fourteen, Plaintiffs claim that "Defendants breached the Refusal Agreement by failing, among other things, to provide the right of first refusal to the Ammons for the nine county area contained in the Refusal Agreement." At this stage of the proceedings, this is sufficient.
As discussed above, a motion to dismiss tests the sufficiency of the complaint, not the merits of the suit. Although the court is not required to accept legal conclusions, inferences, or allegations unwarranted by the facts as presented in the pleadings, a perusal of the Refusal Agreement (which is attached to the complaint) makes clear that the Plaintiffs' reading of the agreement is not totally implausible, especially if they are allowed to supplement the agreement with parol evidence. Specifically, the agreement appears to provide the Plaintiffs with the right of refusal for new stores in the area, but apparently at the same time, another company had been given the exclusive right to open stores in the same area. If Plaintiffs can establish these facts at trial, they could prevail on their claims. The trial court is not to weigh facts in a 12(b)(6) proceeding. Rather, the plaintiff survives a motion to dismiss if he has alleged sufficient facts to entitle the plaintiff to relief if the facts alleged are taken as true. In this case, the Plaintiffs have done so.
Defendants, Holdings and Systems, also claim that the breach of contract claim should be dismissed as to them because they were not parties to the refusal agreement. In their response, Plaintiffs claim that "Holdings and Systems were a part of and parties to the RR Agreement due to their alter ego relationship." (Resp. at 7.) Although it is not that explicitly spelled out in the complaint, Plaintiffs did contend that they started negotiations with MFM, but that sometime during negotiations, MFM was purchased by Holdings, at which time Plaintiffs negotiated with it. This information if accepted as true could be used to show "piercing the corporate veil" or another way in which all three Defendants may be liable to Plaintiffs. Accepting Plaintiffs' facts as true, they are sufficient to withstand the motion to dismiss.
In fact, the Franchise Agreement makes mention of the fact that MFM is a wholly owned subsidiary of Holdings. (Franchise Agreement ¶ 8.)
IV. Count II — Fraud
Defendants also contend that Count II should be dismissed. In this argument they raise three different issues: (1) the count should be dismissed under 12(b)(6) because it fails to allege a false representation of past or existing fact and any reliance was not reasonable, (2) the court should dismiss under 9(b) because Plaintiffs did not plead the facts of the fraud count with particularity, and (3) the court should eliminate the request for treble damages because it is unsupported by statutes or case law.
The first claim is similar to that addressed in III., above. At this stage of the proceedings, the Plaintiffs merely have to allege something that would put Defendants on notice of the fraud claim and which if proven true could constitute a valid claim. In this case, Plaintiffs specifically contend that "Defendants misrepresented to the Plaintiffs that they would have the right of first refusal in a nine county area." (Compl. ¶ 19.) This appears to be a claim of a future action which cannot be the subject of a claim of fraud. However, Plaintiffs also claim that Defendants failed to tell them of their existing agreement with another franchisee. (Compl. ¶ 12.) Omissions can be the basis of a claim of fraud. See Stromberger v. 3M Co., 990 F.2d 974, 976 (7th Cir. 1993). Plaintiffs' claims of Defendants' omission combined with allegations of misrepresentations during negotiations are sufficient to withstand the motion to dismiss.
With respect to Defendants' claim that Plaintiffs' reliance was not reasonable, Plaintiffs contended in their complaint that they "relied upon Defendants' misrepresentations and were induced to invest in the MFM franchises. . . ." (Compl. ¶ 21.) Defendants rely on two cases in which courts have held that reliance on oral representations when the written contract contains an integration clause or clause disclaiming any oral representations is unreasonable as a matter of law. See Hardee's of Maumelle, Arkansas, Inc. v. Hardee's Food Sys., Inc., 31 F.3d 573 (7th Cir. 1994); Puller Mortgage Assocs., Inc. v. Keegan, 829 F. Supp. 1507, 1521 (S.D.Ind. 1993). However, these cases occurred in the trial context. At the 12(b) stage of the proceedings, the plaintiff's facts are accepted as true and in this case, Plaintiffs' allegations that Defendants made misrepresentations and that they relied on Defendants' misrepresentations are enough.
Addressing Defendants' contention that the Plaintiffs have not satisfied 9(b), the Seventh Circuit has interpreted this rule to require "the date and content of the statements or omissions that [the plaintiff] claimed to be fraudulent." Midwest Commerce Banking Co. v. Elkhart City Centre, 4 F.3d 521, 524 (7th Cir. 1993). In this case, Plaintiff alleged that Defendants "[d]uring negotiations in 1997" "misrepresented to Plaintiffs that they would have the right of first refusal in a nine county area in Indiana." (Compl. ¶ 19.) From Plaintiffs' complaint, the who, what, when, and where of the alleged fraud can be discerned: (1) who-MFM, Holdings, and Systems, (2) what-made misrepresentations during contract negotiations concerning Plaintiffs' ability to obtain additional franchises and about the Defendants other franchise agreements, (3) when — 1997, negotiations continued until August 15 when the Franchise Agreement was signed and the Refusal Agreement was signed on September 10, and (4) where — in the agreements and orally during negotiations. Although this is hardly a detailed description, it does give the Defendants fair notice of the claim so as to be able to prepare a defense, and thus satisfies the requirements of 9(b). Payton v. Rush-Presbyterian-St. Luke's Med. Ctr., 184 F.3d 623, 626-27 (7th Cir. 1999).
Defendants specifically challenge Plaintiffs' claims because they do not distinguish which Defendant said what. Although that detail would be helpful (and most surely the Plaintiffs will be forced to come up with more details as discovery progresses), the complaint fairly clearly accuses all three Defendants of fraud. (See Compl. ¶¶ 6-7 (discussing how Plaintiffs negotiated with both MFM and BAB Holdings for the purchase of the stores).) This is sufficient to satisfy 9(b).
As a final matter, Defendants challenge Plaintiffs' ability to receive treble damages. In their complaint, Plaintiffs seek "treble damages and attorney fees for Defendants' fraudulent conduct" pursuant to Indiana Code section 34-24-3-1. Indiana Code section 34-24-3-1 provides that, "If a person suffers a pecuniary loss as a result of a violation of IC 35-43, IC 35-42-3-3, IC 35-42-3-4, or IC 35-45-9, the person may bring a civil action against the person who caused the loss for" treble damages, costs, and attorney's fees. Indiana Code section 35-42-3-3 details the elements of criminal confinement, 35-42-3-4 describes interference with custody, 35-43 discusses offenses against property, and 35-45-9 addresses criminal gangs. Although 35-43-5-4 does contain the crime of fraud, the crime deals with defrauding creditors which is not what the Defendants here are alleged to have done. Even by the broadest reading of the complaint, the Plaintiffs do not assert anything that can be construed as a contention that the Defendants have committed any listed crime. Therefore, even assuming everything Plaintiffs allege is correct and drawing all inferences in their favor, there is no basis for assessing treble damages under Indiana Code section 34-24-3-1. Cf. Browning v. Walters, 616 N.E.2d 1040, 1046 n. 3 (Ind.Ct.App. 1993) ("Common law fraud is not a basis for recovery pursuant to Indiana Code § 34-4-30-1 [the predecessor of 34-24-3-1]."). The claim for treble damages is therefore dismissed.
V. Conclusion
For the foregoing reasons the Defendants' Motion to Dismiss is GRANTED with respect to the claim for treble damages and is DENIED in all other respects.
ALL OF WHICH IS ORDERED.