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Fern Street Investments, LLC v. K&F Restaurant Partners, LLC

United States District Court, N.D. Alabama, Southern Division

March 9, 2015

FERN STREET INVESTMENTS, LLC and FERN STREET CHACE LANDING, LLC Plaintiff,
v.
K&F RESTAURANT PARTNERS, LLC Defendant.

MEMORANDUM OPINION AND ORDER

MADELINE HUGHES HAIKALA, District Judge.

Plaintiffs, Fern Street Investment, LLC ("FSI") and Fern Street Chace Landing, LLC ("FSC") each owned a restaurant franchise in the Birmingham-Hoover, Alabama metropolitan market. The restaurants closed in 2013. The defendant, K&F Restaurant Partners, LLC, was the franchisor for the restaurants. (Doc. 1). In this lawsuit, FSI and FSC contend that K&F violated its franchise agreements with them. FSI and FSC allege that K&F withheld pertinent financial information and failed to perform other obligations on which the franchisees' successful operation of the restaurants depended.[1] (Doc. 1). FSI and FSC asserts claims against K&F for: breach of contract; fraudulent suppression and/or misrepresentation; and negligence. (Doc. 1, ¶¶ 21-35).

K&F has moved to dismiss this action pursuant to Rules 8, 9, and 12(b)(6) of the Federal Rules of Civil Procedure. (Doc. 10). K&F argues that neither FSI nor FSC has met the pleading requirements of Rules 8 and 9. (Docs. 10 and 16). Therefore, K&F asks the Court to dismiss the complaint under Rule 12(b)(6) for failure to state a claim. (Docs. 10 and 16). FSI and FSC respond that K&F has neither acknowledged nor addressed the factual allegations in the complaint, allegations that satisfy Rules 8 and 9. (Doc. 15). For the reasons discussed below, the Court denies K&F's motion to dismiss.

I. STANDARD OF REVIEW

A complaint must contain "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed.R.Civ.P. 8(a)(2). A Rule 12(b)(6) motion to dismiss tests the sufficiency of a complaint against the legal standard of Rule 8. In a complaint, a plaintiff must describe the factual basis for his claims, but Rule 8 generally does not require "detailed factual allegations." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (quoting Conley v. Gibson, 355 U.S. 41, 47 (1957)). It does, however, "demand[] more than an unadorned, the-defendant-unlawfully-harmed-me accusation." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). Pleadings that contain nothing more than "a formulaic recitation of the elements of a cause of action" do not meet Rule 8 standards nor do pleadings based upon mere "labels or conclusions" or "naked assertions" without supporting factual allegations. Twombly, 550 U.S. at 555, 557.

"To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.'" Iqbal, 556 U.S. at 678. "Thus, the pleading standard set forth in Federal Rule of Civil Procedure 8 evaluates the plausibility of the facts alleged, and the notice stemming from a complaint's allegations." Keene v. Prine, 477 Fed.Appx. 575, 583 (11th Cir. 2012) (citing Evans v. McClain of Ga., Inc., 131 F.3d 957, 964 n.2 (11th Cir. 1997)), and Hamilton v. Allen-Bradley Co., 244 F.3d 819, 823-24 (11th Cir. 2001)).

Rule 9 provides a heightened pleading requirement for fraud claims. "In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person's mind may be alleged generally." Fed.R.Civ.P. 9(b). A description of "the circumstances constituting fraud" should include information regarding the nature of the alleged misstatement or omission, "the time and place" of the statement, the identity of the person who provided or omitted material information, and the way in which the plaintiff relied on the misstatement or omission. FindWhat Investor Grp. v. FindWhat.com, 658 F.3d 1282, 1296 (11th Cir. 2011).

II. PROCEDURAL AND FACTUAL BACKGROUND

FSI and FSC each owned an Izzo's Illegal Burrito restaurant franchise in the Birmingham-area. (Doc. 1, ¶ 11). To make the two Izzo's restaurants successful, FSI and FSC "hir[ed] experienced store managers; properly staffed each location; invest[ed] significant amounts of personal capital; adher[ed] to all contractual obligations set forth in the Franchise Agreements; and stay[ed] current on all payments owed to Defendant." (Doc. 1, ¶ 13). FSI and FSC allege that "[d]espite these efforts, [they] consistently sustained losses until [they] were forced to cease operations in August of 2013 and October 2013, respectively." (Doc. 1, ¶ 13).

In June 2010, K&F provided a franchise disclosure document to FSI. The document "summarized certain provisions of the Izzo's franchise agreement and offered the opportunity to operate an Izzo's franchise."[2] (Doc. 1, ¶ 10). FSI and FSC also relied upon K&F's verbal and written representations when FSI and FSC decided to "mov[e] forward with [the] investment and tak[e] the necessary action to fund the investment." (Doc. 1, ¶ 14, ¶ 16). Specifically, FSI and FSC:

relied on representations regarding initial start-up investment and capital contributions that [d]efendant deemed necessary to operate the franchise. According to a budget furnished by [d]efendant, the initial start up costs and capital contributions required was undervalued by nearly twenty percent (20%). In addition, [d]efendant profoundly underestimated the working capital necessary to operate the franchise for the first six (6) months after opening.

(Doc. 1, ¶ 14). FSI and FSC state that the franchise disclosure document "conveyed a perceived soundness of the Izzo's business model (Izzo's System')."[3] (Doc. 1, ¶ 17). However, according to FSI and FSC, K&F did not, in fact, have "a workable business model and intentionally misrepresented this fact to [p]laintiffs, which induced [p]laintiffs to enter into the Franchise Agreements and suffer significant damages." (Doc. 1, ¶ 18). Before FSI and FSC became franchisees of Izzo's, K&F had two other franchisees in Louisiana. (Doc. 1, ¶ 18). K&F "has since purchased one of these franchises and discontinued the sale of franchises all together." (Doc. 1, ¶ 18).

FSI and FSC allege that K&F's failure to adhere to its obligations under the franchise disclosure document and the franchise agreements caused them (FSI and FSC) to sustain losses, which ultimately forced them to close the two restaurants. FSI and FSC claim that K&F violated the franchise disclosure document and franchise agreements in the following ways:

[K&F] (a) provided no demographic information related to either restaurant location; (b) required [p]laintiffs to purchase overpriced equipment and signage; (c) required [p]laintiffs to use an out-of-state marketing firm which was inexperienced and incapable of providing a proper marketing plan for the Birmingham-Hoover Metropolitan market; (d) failed to use or apply the two percent (2%) advertising fee in [p]laintiffs' Market Area or otherwise use for [p]laintiffs' benefit; (e) required [p]laintiffs to use its Aloha Point of Sales system, which improperly collected Louisiana state sales tax from customers instead of Alabama state sales tax causing [p]laintiffs to incur significant damages as Louisiana tax is lower; (f) required [p]laintiffs to purchase supplies and products which were overpriced and at a higher rate than other Izzo's locations owned by [d]efendant; (e) [sic] unreasonably withheld approval in allowing [p]laintiff to use local vendors for certain like-kind and quality products which would have no effect on the quality of [p]laintiff's products ...

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