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JTH Tax Inc. v. Aime

United States District Court, E.D. Virginia, Norfolk Division

February 14, 2017

JTH TAX, INC. d/b/a LIBERTY TAX SERVICE, et al., Plaintiffs,
GREGORY AIME, et al., Defendants.

          OPINION & ORDER

          Henry Coke Morgan, Jr. Senior United Slates District Judge.

         This matter is before the Court following a bench trial held January 11, 2017 through January 13, 2017 between Plaintiffs JTH Tax, Inc. d/b/a Liberty Tax Service and SiempreTax, LLC ("Plaintiff[1]") and Defendants Gregory Aime, Wolf Ventures, Inc. d/b/a Wolf Enterprises, Aime Consulting, LLC and Aime Consulting, Inc. ("Defendants"). After the trial, the Court SET ASIDE the Temporary Restraining Order, DENIED Plaintiffs Claims, [2] and GRANTED IN PART Defendants' Counterclaims.[3] The Court entered Judgment in favor of Defendants and against Plaintiffs JTH Tax, Inc. d/b/a Liberty Tax Service and SiempreTax, LLC, jointly and severally, in the amount of $2, 736, 896.17. These findings of fact and conclusions of law explain the Court's reasoning.


         A. Franchise Agreements, the PSA, and the EFIN Extension

         Plaintiff is a tax preparation company. Defendants have been franchisees of Liberty Tax and SiempreTax locations since about 2011. As of 2016, Defendants operated nine (9) franchise locations (hereinafter "Business") and a centralized processing center. Defendant Gregory Aime owns Defendant Wolf Ventures, Inc. d/b/a Wolf Enterprises and manages the company as an entity through which he operated the Franchises. In about January 2016, Plaintiff learned that the Internal Revenue Service ("IRS") revoked the Electronic Filing Identification Number ("EFIN") for Defendants' Franchises as a consequence of Defendants' activities. Defendants were required to maintain a valid EFIN under their franchise agreements with Plaintiff. Plaintiff could have terminated the franchise agreements under the terms of the contract, but instead executed a Purchase and Sale Agreement ("PSA") with Defendants[4] on January 21, 2016. Under the PSA, Plaintiff purchased Defendants' Franchises and gave Defendants until May 8, 2016 to obtain a valid EFIN and buy back the Business. As a result of the PSA, Plaintiff operated these franchises as company stores as of the closing date, January 21, 2016.

         The PSA terminated all of the franchise agreements between the Parties, except for the agreements' post-termination obligations. Notably, the post-termination obligations included a covenant not to compete with Plaintiff and instructed Defendants to: remove all of Plaintiffs marks from the Business; pay all debts owed to Plaintiff; deliver all customer and company information, files, and tax returns to Plaintiff; and transfer all telephone numbers to Plaintiff.[5] The post-termination obligations also instructed Defendants to assign the leases associated with the franchises to Plaintiff, upon Plaintiffs request and the lessors' consent.

         In the PSA, Plaintiff is listed as the "Purchaser" and Defendants are listed as the "Seller." The PSA defines the term "Business" as Defendants' nine (9) Franchises. The PSA provides that Purchaser agrees to buy all of the "tangible and intangible assets of the Business" for $1, 107, 580.36. Doc. 6, Ex. L ¶ 1. At the time the PSA was executed, Defendants owed Plaintiff $1, 075, 893. The PSA states that "[a]t Purchaser's request, Seller shall seek the Lessor's consent to the assignment of all office real estate leases connected with the operation of the Business to Purchaser or its assignees." Id., Ex. L ¶ 6(g). In the PSA, the Parties agree that "[a]ll expenses and liabilities arising out of or related to the Business, which arise from the moment of Closing and thereafter shall be the responsibility of the Purchaser." Id., Ex. L ¶ 2. Further, the PSA provides that "if Seller buys back the Business..., Purchaser agrees to pay to Seller the Adjusted Net Profits ... from the operation of the Business from the date of Closing through resale of the Business back to Seller." Id., Ex. L ¶ 4.

         To effectuate a buyback of the Business, the PSA instructs that Seller must provide Purchaser with written proof of a valid EFIN from the IRS by May 8, 2016, execute a separate purchase and sale agreement between the parties, and comply with Purchaser's standard sales and approval process. Id., Ex. L ¶ 4. Seller would necessarily have to execute a new franchise agreement with Plaintiff for each of the nine (9) franchise locations. Notably, a new franchise agreement with Plaintiff carries a usable term of five (5) years.

         Prior to January 21, Mr. Aime employed Sergio Jean-Louis and Marie Fletcher in running his franchise business. Specifically, Mr. Jean-Louis helped Mr. Aime manage the Business as the Chief Operating Officer of Wolf Ventures, Inc. Mr. Aime hired Ms. Fletcher as an independent contractor to assist in setting up a processing center. The processing center served to review and verity that all tax filings created by the Business complied with governing laws and regulations before filing with the IRS.

         On January 21, 2016, a representative of Plaintiff emailed Mr. Aime that Plaintiff "will not be putting your utilities and leases in our name at this time. We will however be paying those bills." PI. Ex. 41. As such, Defendants did not begin to assign the leases associated with the franchises to Plaintiff at that time. At some point, Plaintiff began to entertain the prospect of selling the Business to Mr. Jean-Louis, rather than proceeding with Mr. Aime's buyback opportunity, as provided for in the PSA. Notably, Mr. Jean-Louis filed a franchise application with Plaintiff on January 21, 2016, which is the same day as the PSA was signed. On January 22, 2016, representatives of Plaintiff called Mr. Jean-Louis and informed him that he was no longer employed by Wolf Ventures, Inc., but would be employed by Plaintiff as a District Manager. As District Manager, Mr. Jean-Louis was instructed to supervise the Business as Plaintiffs company stores with Mr. Aime's former staff. Plaintiffs representatives also informed Mr. Jean-Louis during that call that Mr. Aime was banned from entering the Business.

         On January 26, 2016, Mr. Aime and Ms. Fletcher met with John Hewitt, President and CEO of Plaintiff, in Virginia Beach. At that meeting, Mr. Aime told Mr. Hewitt that he likely could not obtain a valid EFIN by the PSA's May 8, 2016 deadline. Mr. Hewitt informed Ms. Fletcher that, as of January 26, 2016, she would work for Plaintiff as a District Manager. As District Manager, Ms. Fletcher was tasked with overseeing certain stores, including the franchises that make up the Business.

         On February 5, 2016, the IRS notified Mr. Jean-Louis that his EFIN application was approved. Mr. Jean-Louis subsequently informed Plaintiffs corporate office that he had received a valid EFIN. On March 3, 2016, a representative of Plaintiff emailed Mr. Jean-Louis about the potential purchase of the Business. To purchase the Business, Plaintiff required that Mr. Jean-Louis agree to numerous terms, including that he "understand[s] that Liberty is not committing to any future approval of any participation by Mr. Aime in the operation or ownership of the offices, regardless of his future EFIN status." Def. Ex. 16. Additionally, Mr. Jean-Louis had to complete a franchise application and a background check, the Business had to pass an audit, and Mr. Hewitt had to approve the transfer of the Business from Plaintiff to Mr. Jean-Louis. Mr. Jean-Louis subsequently agreed to Plaintiffs terms, passed a background check, and submitted an additional franchise application.[6] All of the franchises that comprise the Business passed Plaintiffs audit.

         On April 8, 2016, Ms. Fletcher met with Mr. Hewitt in Florida to interview for a position at Plaintiffs corporate headquarters. During this meeting, Ms. Fletcher asked Mr. Hewitt whether he would go forward with selling the Business to Mr. Jean-Louis. After informing Ms. Fletcher that Plaintiff would not move forward with Mr. Jean-Louis, Mr. Hewitt asked Ms. Fletcher about Mr. Aime's progress toward obtaining a valid EFIN. Ms. Fletcher told Mr. Hewitt that Mr. Aime would likely receive a valid EFIN by the end of 2016. In response, Mr. Hewitt agreed to extend the EFIN deadline in the PSA from May 8, 2016 to December 31, 2016. Mr. Hewitt instructed Ms. Fletcher to communicate this EFIN extension to Mr. Aime. On the following day, April 9, 2016, Ms. Fletcher called Mr. Aime to notify him of the EFIN deadline extension. At trial, Defendants introduced Mr. Hewitt's calendar and emails from his executive assistant that confirmed the meeting between Mr. Hewitt and Ms. Fletcher on April 8, 2016. On April 20, 2016, Mr. Aime thanked Mr. Hewitt in an email for "graciously allowing me to extend my PSA agreement until December. What steps should I take to move forward with extending the PSA[?]" Doc. 109, Ex. A. On April 28, 2016, Mr. Aime sent an additional email to Mr. Hewitt in which Mr. Aime asked "[W]ould you like to switch leases over and handle a buyout or will you extend my PSA agreement and work things out with the buyback?" PI. Ex. 9. Mr. Hewitt did not respond to either of Mr. Aime's emails. On May 2, 2016, Plaintiff promoted Ms. Fletcher to Director of Company Stores.

         At some point after the PSA was executed, Plaintiff requested that Defendants assign the leases for the franchises that comprise the Business to Plaintiff. Defendants offered Plaintiff a form assignment for franchise leases, but the Parties were unable to agree on the specific language and provisions to be included in the assignment. On June 17, 2016, Mr. Aime changed the entry passcode to his centralized processing center. On July 1, 2016, Ms. Fletcher met with Mr. Hewitt to discuss the operation of the Business. Shortly thereafter, on July 5, 2016, Plaintiff terminated Ms. Fletcher. On September 15, 2016, the IRS issued Mr. Aime and Wolf Enterprises a new valid EFIN. On September 20, 2016, Mr. Aime notified Plaintiff and this Court of the new valid EFIN.

         B. Expenses

         In managing the Business as company stores for Plaintiff, Mr. Jean-Louis paid for utilities and other operating expenses with Wolf Ventures, Inc.'s credit card, which Mr. Aime paid off. Mr. Jean-Louis submitted associated expense reports for such costs, some incurred pre-PSA and others incurred post-PSA, and these expense reports were approved by John Ducom, Director of Company Stores for Plaintiff. Despite approving such expenses, Plaintiff did not reimburse Defendants.[7] Additionally, while Plaintiff operated the Business as company stores after executing the PSA and retained revenues generated from such operations, Plaintiff stopped making rent and certain utility payments for many of the franchises on March 29, 2016.[8] Mr. Aime, on behalf of Defendants, paid these rent and utility bills. Notably, Mr. Aime paid considerable rent, utilities, and other operating expenses for the Business without reimbursement after the PSA closing, through the May 8, 2016 EFIN deadline, and beyond. At trial, during rebuttal, Plaintiff called Bradford Tibbs, Director of Internal Audits for Plaintiff, to rebut Defendants' contention that Defendants paid certain rent and expenses. The Court, however, found such rebuttal evidence unpersuasive.

         II. ...

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