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Bans Pasta, LLC v. Mirko Franchising, LLC

United States District Court, W.D. Virginia, Roanoke Division

February 12, 2014

BANS PASTA, LLC, Plaintiff,
v.
MIRKO FRANCHISING, LLC, MIRKO DI GIACOMANTONIO, and ARCHIE B. CRENSHAW, Defendants.

MEMORANDUM OPINION

JAMES C. TURK, Senior District Judge.

Pending before the Court is Defendants' Motion to Dismiss the Amended Complaint, ECF No. 13, which seeks dismissal of Plaintiff's Complaint in its entirety. Plaintiff has filed a response in opposition, ECF No. 22, and Defendants have filed a reply, ECF No. 23. On January 31, 2014, the Court heard oral argument on the motion and it is now ripe for disposition. For the reasons set forth below, the motion to dismiss is GRANTED IN PART and DENIED IN PART.

I. BACKGROUND

A. Factual Background

Accepting the well-pled facts in the Amended Complaint as true, as this Court must when ruling on a motion to dismiss, see Giarratano v. Johnson , 521 F.3d 298, 302 (4th Cir. 2008), the facts of the case are as follows:

Defendant Mirko Franchising, LLC, ("Mirko") is a Georgia limited liability corporation that sells Italian restaurant franchises. Defendant Mirko Di Giacomantonio ("Giacomantonio") is a manager and the Chief Executive Officer of Mirko, and Defendant Archie B. Crenshaw ("Crenshaw") is a manager of Mirko. Plaintiff Bans Pasta, LLC, ("Bans Pasta") is a Virginia limited liability company formed for the purpose of purchasing and operating a Mirko franchise in Roanoke, Virginia. Randy Sowden ("Sowden") and Michael Boggins ("Boggins") are principals of Bans Pasta. This action involves a franchisor/franchisee dispute between the Defendants and Bans Pasta. ECF No. 11, Amended Compl., ¶¶ 1-7.

Between December 2009 and September 2011, Sowden and Boggins discussed with Giacomantonio and Crenshaw the possibility of purchasing a Mirko restaurant franchise. Sowden and Boggins, not having any previous experience in the restaurant industry, relied heavily on the representations made by Giacomantonio and Crenshaw regarding the financial viability of the Mirko franchises. During these discussions, Giacomantonio and Crenshaw made several material misrepresentations to Sowden and Boggins that were designed to induce Sowden and Boggins to purchase a Mirko franchise, both oral and written. ECF No. 11, ¶ 19.

The written misrepresentations were made in three specific documents, all of which contained information about the financial viability of Mirko franchises. First, on December 5, 2010, Giacomantonio sent Sowden an Excel spreadsheet containing a pro forma which consisted of financial assumptions for Sowden and Boggins to use as a basis for making financial projections regarding the viability of a Mirko franchise. Giacomantonio represented that the pro forma accurately reflected the average performance of a franchise. This and various oral misrepresentations were made during a December 2010 meeting in Atlanta, when Giacomantonio and Crenshaw inaccurately conveyed the strength of existing Mirko franchises to Sowden and Boggins in an attempt to persuade the two to purchase a franchise. ECF No. 11, ¶ 21-22.

Second, on February 21, 2011, Crenshaw provided Boggins a copy of the 2010 year-end financial statements from a Mirko franchise located in Athens, Georgia operated by franchisee David Weeks ("Weeks"). Sowden and Boggins expressed concern to Crenshaw about the veracity of the Weeks financial statements based upon certain unusual line items and accounting practices included in them. In response, Crenshaw reported that Weeks had included expenses in the statements designed to reduce the franchise's income tax obligations. Crenshaw assured Sowden and Boggins that the true value of the franchise was higher than depicted in Weeks' calculations. Crenshaw also provided Sowden and Boggins with the third document referenced in the Amended Complaint-Crenshaw's own written summary of Weeks' financial information. According to Plaintiff, this document inflated the franchise's net profit and misrepresented figures related to the franchise's gross revenue, food costs, and labor costs. Although Sowden and Boggins initially remained skeptical about the reliability of Crenshaw's financial statements, Crenshaw eventually convinced them that his figures were a true and accurate representation of the financial viability of a Mirko franchise. ECF No. 11, ¶¶ 24-27.

In April 2011, Sowden and Boggins met with Giacomantonio in one of his Buckhead, Georgia restaurants to discuss some concerns Sowden and Boggins still had about opening a franchise. During this meeting, Giacomantonio reviewed the pro forma spreadsheet in detail with Sowden and Boggins, and Sowden and Boggins explained to Giacomantonio that, in order for the Mirko franchise to be financially beneficial to them, it would need to generate a net annual profit of $100, 000.[1] Giacomantonio then assured Sowden and Boggins that their franchise would net a profit of $100, 000 and likely exceed their financial expectations due to the size of Bans Pasta's identified restaurant location. ECF No. 11, ¶¶ 28-29.

In reliance on Giacomantonio and Crenshaw's representations about the financial strength of Mirko franchises, Bans Pasta executed a Franchise Agreement on September 10, 2011, for the operation of a Mirko franchise in Roanoke. ECF No. 11, ¶ 31. The restaurant opened in its location at the Towers Shopping Center on or about October 8, 2012. ECF No. 11, ¶ 33.

At some point after the restaurant opened, Sowden received the sales figures of additional Mirko restaurant locations from Mirko's controller, Patricia Young ("Young"). As they reviewed these figures, Sowden and Boggins "started to question" whether the representations made by Giacomantonio and Crenshaw regarding the financial viability of Mirko franchises were accurate since "the other stores did not appear to perform near the levels that had been represented to them." ECF No. 11, ¶ 33. Sowden and Boggins continued to receive weekly sales figures from Young through April 2013, which "served to further confirm" that the other restaurants were not performing as Defendants had represented.

On March 14, 2013, Jeff Davis ("Davis"), Mirko's head Executive Chef, visited Bans Pasta's restaurant to deliver a new menu and a spreadsheet outlining changes to the pricing and cost schedule. Davis told Sowden and Boggins at that time that Mirko's original pricing, as reflected in the pro formas that were previously provided to them, "did not take into account the level and existence of several essential operating costs." He also admitted that Giacomantonio and Crenshaw knew that the representations they had made to Sowden and Boggins regarding the financial strength of Mirko franchises were false. Davis concluded the meeting by stating that "the current Mirko model is broken-we know it is broken." ECF No. 11, ¶ 35. As a result of this meeting, Bans' principals "obtained confirmation for the very first time that Giacomantonio and Crenshaw had provided false and misleading representations" to induce them to purchase a franchise. Id.

According to the Amended Complaint, after the meeting with Davis, Bans Pasta "promptly notified Defendants of their unlawful conduct in an attempt to void and/or rescind the franchise relationship." ECF No. 11, ¶ 36. "Instead of agreeing that the Franchise Agreement should be deemed void and the parties restored to their pre-contractual position, " Defendants demanded strict compliance with the Franchise Agreement and threatened litigation against Bans Pasta and its principals. Bans Pasta claims that it "did not receive any benefits by virtue of its execution of the Franchise Agreement with Mirko and, instead, lost hundreds of thousands of dollars as a result of such franchise relationship." ECF No. 11, ¶ 36 n.8.

The Amended Complaint further alleges that:

On August 2, 2013, and in light of Mirko's prior refusal to agree to void and/or rescind the Franchise Agreement, Bans had no choice but to initiate this litigation to seek formal relief from this Court. Bans notified Defendants that it had no choice but to cease all operations as a Mirko Pasta franchisee in order to mitigate its damages as a result of Defendants' wrongful conduct. Defendants subsequently retaliated against Bans and advised Bans that Mirko was cancelling and/or terminating the Franchise Agreement in light of Bans' closure of its Mirko Pasta restaurant and demanded that Bans promptly pay to it hundreds of thousands of dollars.

ECF No. 11, ¶ 37.

Bans filed suit on August 2, 2013. See ECF No. 1. Its Amended Complaint includes a claim under the Virginia Retail Franchising Act, Va. Code Ann. 13.1-557 et seq., common law tort claims, and a negligence per se claim, and also seeks rescission of the contract as a remedy. It does not seek relief for any breach of the contract. Rather, all of Plaintiff's claims derive from its allegations that Defendants' misrepresentations violated state and federal laws and/or induced Plaintiff to enter into the Franchise Agreement.

B. Pertinent Documents

1. Provisions of the Franchise Agreement

The only documents attached to the Amended Complaint were the three documents containing the alleged written misrepresentations. Nonetheless, the Franchise Agreement itself is attached to Defendants' Motion to Dismiss and Plaintiff's counsel stated at the hearing that Plaintiff agreed the Court could consider the Franchise Agreement without converting the motion to dismiss into a summary judgment motion. Moreover, the Amended Complaint refers repeatedly to the Franchise Agreement and the Court concludes it may consider it because it is central to Plaintiffs claim. See Rosenblum v. Travelbyus.com Ltd. , 299 F.3d 657, 661 (7th Cir. 2002) ("[D]ocuments attached to a motion to dismiss are considered part of the pleadings if they are referred to in the plaintiffs complaint and are central to his claim"); Davis v. George Mason Univ. , 395 F.Supp.2d 331, 335 (E.D. Va. 2005), aff'd, 193 F.Appx. 248 (4th Cir. 2006) (a court's consideration of materials referenced in the complaint and attached only to a motion to dismiss does not require converting that motion to one for summary judgment). Accordingly, the Court will consider the Franchise Agreement in ruling on the motion.

The Agreement contains a number of provisions relevant to the parties' arguments or the Court's rulings herein, including a choice of law provision, a merger clause, and a general clause in which Plaintiff disclaims reliance on information outside the agreement. The Court sets forth the text of each below.

The choice of law provision states, "Except to the extent governed by the U.S. Trademark Act of 1946... this Agreement shall be governed by the laws of the State of Georgia, without giving effect to that state's conflict of law principles." Franchise Agreement, ECF No. 14, Exh. A, § XXIII(E).

The merger clause, titled "Modification, " provides:

This instrument contains the entire agreement between the parties relating to the rights herein granted and the obligations herein assumed and supersedes all prior oral and written understandings and agreements between the parties. Any oral representations or modifications concerning this Agreement shall be of no force or effect unless a subsequent modification in writing is assigned by the parties hereto.

Id. § XXIII(I).

The disclaimer clause includes certain representations made by Bans Pasta as the Franchise Owner, [2] to wit:

That he or she has conducted an independent investigation of the Franchisor's business and System and recognizes that the business venture contemplated by this agreement involves business risks and that its success will be largely dependent upon the ability of Franchise Owner as an independent business person. The Franchisor expressly disclaims the making of, and Franchise Owner acknowledges that it has not received any warranty or guarantee, express or implied, as to the potential volume, profits or success of the business contemplated by this Agreement.

Id. § XXX(A).

2. Other Documents Attached to the Motion to Dismiss

In addition to the Franchise Agreement, Defendants have also attached as exhibits to their motion to dismiss two letters from Plaintiff's counsel (dated March 20, 2013 and August 5, 2013) in which Bans Pasta's counsel discusses the status of its claims and its remedies against Defendants. See ECF Nos. 14-3 and 14-4. Defendants also attach a document titled, "Summary of Acknowledgments, " which was executed by Bans Pasta and its equity owners on September 10, 2011, the same date that Bans Pasta entered into the Franchise Agreement. That document includes statements that Mirko has not made any "representation, warranty or guaranty... as to the potential revenues, profits or services of the business venture to Franchisee." Summary of Acknowledgments, ECF No. 14-2, at 1. It also states that "Franchisee has not relied on any warranty or representation, expressed or implied, as to the potential success or projected income of the business" and that "Franchisee acknowledges and agrees that it has no knowledge of any representation made by Mirko Franchising, LLC or its representatives of any information that is contrary to the terms contained in the Franchise Agreement." Id. at 1-2.

Bans Pasta argues that this Court may not consider either the letters or the Summary of Acknowledgements when ruling on the pending motion to dismiss. In its Reply, Defendants dispute this, arguing that the Amended Complaint "indirectly refers" to the March 20, 2013 letter and also raises other grounds for why the letters should be considered. ECF No. 23 at 10 n.21. It is not clear to the Court whether the March 20, 2013 is, in fact, the "notice" to which Plaintiff is referring in the Amended Complaint. Moreover, Plaintiff emphasizes that the two attached letters were only two of a larger number of letters constituting a dialogue between the parties during that time-frame and points out that Defendants' responses to the two letters likewise "have a bearing on the rescission issue." ECF No. 22 at 15 n.7. In light of this background, and at this preliminary stage of the case, the Court concludes it would be improper to consider these additional materials.

As to the "Summary of Acknowledgements, " Bans Pasta correctly points out that the document is nowhere referenced in the Amended Complaint. Furthermore, although the document appears to have been signed and entered into by the parties on the same day as the Franchise Agreement and appears related to the Franchise Agreement, Defendants have not alleged that the Franchise Agreement incorporates it by reference nor shown that the document is otherwise "central to [Plaintiff's] claim." Cf. Rosenblum ...


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