Mealey's (August 2, 2016, 9:49 AM EDT) -- CHICAGO — An Illinois federal judge on July 29 denied defendants’ motion to dismiss claims that they breached an area development (AD) agreement for restaurant franchises because the alleged breach may have violated federal and state laws and adversely affected the reputation and goodwill of Tilted Kilt Franchise Operating LLC (Tilted Kilt Franchise Operating LLC v. 1220 LLC, et al., No. 15-cv-10377, N.D. Ill., Eastern Div.; 2016 U.S. Dist. LEXIS 99250).
(Opinion available. Document #98-160809-024Z.)
U.S. Judge Joan B. Gottschall of the Northern District of Illinois also granted the defendants’ motion to consolidate their counterclaim with a duplicative action they filed in the same court and, accordingly, granted Tilted Kilt’s motion to deny the counterclaim.
Tilted Kilt filed a two-count complaint against 1220 LLC, Robert Baroud, Emil Baroud, Anthony Baroud and Peter Baroud, seeking declaratory judgment that it was entitled to terminate an AD agreement without giving 1220 and the Barouds an opportunity to cure.
Developer Agreement
Tilted Kilt contends that 1220 and the Barouds breached their AD agreement 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 is a franchisor of a nationwide chain of restaurants bearing the same name. Defendant 1220 is an Illinois limited liability company owned in equal parts by the four Baroud brothers. In 2007, 1220 became a Tilted Kilt area developer and was granted development rights for a territory comprising parts of certain counties in Illinois, Wisconsin and Indiana for 25 years.
As an area developer, 1220 is responsible for soliciting and referring to Tilted Kilt prospective franchisees, performing site acquisition services for restaurants within its territory and providing opening and ongoing operational support for Tilted Kilt franchises within its territory. The Barouds each personally guaranteed all of 1220’s obligations.
The defendants 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.”
Breach Alleged
Tilted Kilt alleges that 1220 repeatedly breached these provisions of the agreement from July 2009 until December 2012 by making misleading financial performance representations to prospective franchisees Chris Gochis and Michael Roscioli in connection with the offer or sale of a franchise.
Specifically, Tilted Kilt alleges that 1220 told Gochis and Roscioli that “franchised Tilted Kilt restaurants generated average annual revenues of $2.5 million,” “annual gross sales at the Tilted Kilt restaurant in Woodridge, Illinois were $3.5 million” and “a franchised Tilted Kilt restaurant in Gurnee Mills [Ill.] 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.”
Tilted Kilt argues that each of these statements made to Roscioli and Gochis was false and misleading when made and not contained in Tilted Kilt’s then-current franchise disclosure document. It says the statements not only violated the AD agreement with Tilted Kilt but also violated federal and state laws and adversely affected the reputation and goodwill of Tilted Kilt.
Tilted Kilt also alleges that 1220 breached the AD agreement and violated state and federal laws by preparing a misleading projection of revenue and expenses for a Tilted Kilt restaurant that was not contained in Tilted Kilt’s then-current franchise disclosure document and delivering it to Roscioli and Gochis.
Significant Losses
Based upon these representations by 1220, Roscioli and Gochis entered into agreements to establish franchised Tilted Kilt restaurants in Kenosha, Wis., in November 2009, followed by Vernon Hills, Ill., and Gurnee, Ill. The Tilted Kilt in Kenosha did not open until March 25, 2013, and never performed financially at the levels that 1220 projected and instead sustained significant losses.
Tilted Kilt says it first learned of these allegedly misleading financial representations when an attorney for Roscioli and Gochis demanded 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.
In a Jan. 13 motion to dismiss, 1220 argued that Tilted Kilt’s complaint should be dismissed pursuant to Federal Rule of Civil Procedure 12(b)(1) for lack of subject matter jurisdiction because Tilted Kilt failed to plead any monetary damages or injury.
Alternatively, 1220 argued that Tilted Kilt’s declaratory judgment action is improper and should be brought as a breach of contract claim and that the relief sought by Tilted Kilt is improper according to the AD agreement and the Illinois Franchise Disclosure Act. Both require notice of termination and an opportunity to cure before a franchise can be terminated.
Counterclaim
In addition to the motion to dismiss, 1220 on Jan. 13 filed a four-count counterclaim against Tilted Kilt alleging breach of contract and a violation of the Illinois Franchise Disclosure Act and seeking injunctive and declaratory relief. Unsure if the counterclaim could stand on its own, 1220 on Jan. 19 filed an independent complaint alleging the same causes of action (1220 LLC v. Tilted Kilt Franchise Operating LLC, No. 16-cv-00744, N.D. Ill.) that was assigned to Judge John J. Tharp Jr. On Jan. 19, 1220 moved to have the two cases consolidated in front of Judge Tharp. Tilted Kilt moved to dismiss the counterclaim on Jan. 29.
Judge Gottschall first addressed the amount in controversy requirement.
“Tilted Kilt has alleged that Defendants’ conduct has exposed Tilted Kilt to substantial liabilities, including potential federal and state civil enforcement actions and criminal prosecution, civil actions for damages and rescission, as well as irreparable damage to Tilted Kilt’s business, reputation and goodwill,” Judge Gottschall wrote. “Because Defendants have not contested any material facts in Tilted Kilt’s complaint relating to the amount in controversy and because it is not ‘legally certain’ that recovery from Tilted Kilt’s perspective or the cost of complying with the judgment from Defendants’ perspective will be less that the jurisdictional floor, the court finds that the amount in controversy requirement has been satisfied.”
Judge Gottschall rejected 1220’s claim that Tilted Kilt failed to plead an “actual controversy” as is necessary to proceed under the declaratory judgment action, saying that Tilted Kilt has alleged that 1220 breached the AD agreement, causing Roscioli and Gochis’ attorney to demand a refund of fees and a release of their obligations under their franchise agreement with Tilted Kilt.
The judge said 1220’s claim that Tilted Kilt’s action should have been brought as a breach of contract action is also unavailing. Although Tilted Kilt alleges that 1220 breached the AD agreement, the remedy it seeks is a declaration that it can terminate the contract without giving 1220 any opportunity to cure, Judge Gottschall wrote.
Cure Requirement
Judge Gottschall said she is unaware of any authority, either in the Seventh Circuit or Illinois state court, that has addressed whether the Illinois Franchise Disclosure Act’s 30-day cure requirement may be obviated if the breach in question is “material” or “incurable.” The judge wrote that Titled Kilt has adequately alleged that an incurable breach, as is alleged here, obviates the need for an opportunity to cure in common law.
“The court need not decide, at this point, whether the breach alleged by Tilted Kilt was actually material or incurable,” the judge wrote in denying 1220’s motion to dismiss. “Additionally, Tilted Kilt pleads that it believes a crime has been committed that is injurious to its goodwill.
“Tilted Kilt has alleged that Defendants have not only violated the AD Agreement, but also the Illinois Franchise Disclosure Act, the Wisconsin Franchise Investment law, and the Federal Trade Commission’s Rule on Franchising by making unlawful financial performance representations to prospective Tilted Kilt Franchisees over a period of years. As a result, Tilted Kilt has alleged both that a crime has been committed and repeated violations of the law and of the AD Agreement, for which good case without the requirement of notice and opportunity to cure exists.”
Judge Gottschall granted 1220’s motion to consolidate its counterclaim with the case currently before Judge Tharp because that case is duplicative of the counterclaim 1220 filed in this case. Accordingly, Judge Gottschall granted Tilted Kilt’s motion to dismiss the counterclaim.
Counsel
Tilted Kilt is represented by Fredric Adam Cohen, Adrienne Lee Saltz, Marlen Cortez Morris and Scott C. Walton of Cheng Cohen. The Barouds and 1220 are represented by Carmen David Caruso, Kristen Marie Guralczyk, Shane Donovan Valenzi and Jackie Christine Condella of Carmen D. Caruso Law Firm. All are in Chicago.
(Additional documents available: Complaint. Document #98-160809-025C. Motion to consolidate. Document #98-160809-026M. 1220 motion to dismiss. Document #98-160809-027M. Tilted Kilt motion to dismiss. Document #98-160809-028M.)...