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Cornelis v. B&J Smith Associates LLC

United States District Court, Ninth Circuit

December 20, 2013

Terrance Cornelis, et al., Plaintiffs,
v.
B&J Smith Associates LLC, et al., Defendants.

ORDER

BRIDGET S. BADE, Magistrate Judge.

Plaintiffs Terrance and Yvonne Cornelis (Plaintiffs) have filed a motion for leave to amend pleadings and are seeking permission to file a second amended complaint. (Doc. 26.) Defendants B&J Smith Associates, Limited Partnership, B&J Smith Investments, Inc., an Arizona Corporation, Barry M. Smith, Julia P. Smith, and Lynette B. Walbom (Defendants) have moved to dismiss the amended complaint. (Doc. 19.) Both motions are fully briefed. As discussed below, the Court grants Plaintiffs' motion to amend, in part, and denies it in part. The Court also denies Defendants' motion to dismiss as moot.

I. Background

On April 1, 2013, Plaintiffs filed their original complaint alleging violations of the Federal Trade Commission Act, common law fraud, violations of the Small Business Franchise Act, fraud in violation of the Arizona Consumer Fraud Act, a violation of the Uniform Fraudulent Transfer Act, and asserting a claim for "Declaratory Judgment." (Doc. 1.) On May 15, 2013, Defendants filed a motion to dismiss for failure to state a claim. The Court denied that motion as moot based on Plaintiffs filing of an amended complaint. (Docs. 10, 15, 18.) In their amended complaint, Plaintiffs alleged breach of written contract for debt, common law fraud, violations of the Arizona Consumer Fraud Act, and asserted a claim for "Declaratory Judgment." (Doc. 15.) In their pending motion, Defendants move to dismiss the amended complaint for failure to state a claim and for failure to plead fraud with specificity. (Doc. 19.) Plaintiffs oppose the motion. (Doc. 21.)

After Defendants filed their motion to dismiss, Plaintiffs filed a motion for leave to file a second amended complaint to assert breach of contract, a violation of the Uniform Fraudulent Transfer Act, and Declaratory Judgment. (Doc. 26 at 4-15.)[1] Defendants oppose Plaintiffs' motion and argue that amendment would be futile because the proposed second amended complaint fails to state a claim upon which relief can be granted, fails to plead fraud with particularity, and because Plaintiffs' claims are time barred. (Doc. 27.)

Plaintiffs' allegations in the proposed second amended compliant arise from a restaurant franchise agreement (the Franchise Agreement) that they entered into with Eatza Pizza, Inc. on October 24, 2006. (Doc. 26 at 5; Doc. 24, attachment 1.)[2] Plaintiffs assert that Eatza Pizza made misrepresentations in the October 2006 franchise circular offering, including claims that Eatza Pizza (1) had developed a successful business plan, (2) had developed a distinctive restaurant design and food items, and (3) that its "restaurant system featured the highest standards of management training, supervision, [and] merchandising." (Doc. 26 at 9-10.) The franchise circular offering allegedly induced Plaintiffs to pay $55, 000.00 in franchise fees, lease business space, and prepare to open an Eatza Pizza restaurant. ( Id. ) Plaintiffs allegedly invested a total of $1, 100, 000.00. ( Id. at 10.)

Plaintiffs assert that, pursuant to an asset purchase agreement dated March 2007, (Asset Purchase Agreement), Eatza Pizza transferred its assets and rights to future royalties from franchises to International Franchise Associates, Inc. (IFA). ( Id. at 6-7.) Plaintiffs further allege that IFA filed for bankruptcy on August 4, 2008 and, thus, "IFA was an undercapitalized shell corporation formed to avoid its or Eatza Pizza's contractual obligations." ( Id. at 8.)

Plaintiffs allege that Eatza Pizza, and "subsequently IFA, " did not provide them with training, support, or a viable business plan to help them develop a profitable restaurant and committed "other acts of bad faith." ( Id. at 10.) Plaintiffs allege that because of Eatza Pizza's failure to comply with its franchisor obligations, they were forced to cease operating their Eatza Pizza restaurant. Plaintiffs allege that they were not aware of the Asset Purchase Agreement until "[s]ometime [in] June 2008, " when another Eatza Pizza franchise owner sent them a copy of that agreement. ( Id. at 8.)

Plaintiffs also allege that B&J Smith Associates and B&J Investments "wholly owned" Eatza Pizza. ( Id. ) They further allege that Lynette Walbom, Barry M. Smith, and Julia P. Smith were the principal officers of B&J Smith Associates and B&J Smith Investments, and that Walbom and Barry Smith "were in complete and daily control of the direction and operation of Eatza Pizza, Inc." ( Id. at 5. 11.) Plaintiffs invoke this Court's diversity jurisdiction pursuant to 28 U.S.C. ยง 1332.

II. Standards for Amending Pleadings

Federal Rule of Civil Procedure 15 provides that "[a] party may amend its pleading once as a matter of course." Fed.R.Civ.P. 15(a)(1)(A)-(B) (setting forth conditions for amending as a matter of course). Because Plaintiffs have already filed an amended complaint, and Defendants oppose further amendment, leave of court is required for Plaintiffs to file a second amended complaint. See Fed.R.Civ.P. 15(a)(2). The district court should "freely give leave [to amend] when justice so requires." Fed.R.Civ.P. 15(a)(2). However, the court may deny leave to amend if the amendment would be futile. Foman v. Davis, 371 U.S. 178, 182 (1962).

Additionally, the court is obligated to "ensure that pro se litigants do not unwittingly fall victim to procedural requirements." Waters v. Young, 100 F.3d 1437, 1441 (9th Cir. 1996). A court should apply less stringent pleading standards to pro se plaintiffs, such that inartful pleadings are still considered by the court. Haines v. Kerner, 404 U.S. 519, 520-21 (1972); Weilburg v. Shapiro, 488 F.3d 1202, 1205 (9th Cir. 2007) ("Pro se complaints are to be construed liberally and may be dismissed for failure to state a claim only where it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.'") (citations omitted)).

III. Plaintiffs' Proposed Second Amended Complaint

A. Count One - Breach of Contract

In count one of the proposed second amended complaint, Plaintiffs assert a claim for breach of contract. (Doc. 26 at 8.) Plaintiffs allege that B&J Smith Investments, through its general partner B&J Smith Associates, "while in total ownership and control of Eatza Pizza, Inc., " omitted material facts from the October 11, 2006 franchise offering circular including the seller's intention to sell certain assets, changes in litigation, changes in locations owned, changes in franchisees, and changes in the seller's financial position. ( Id. at 12.) Plaintiffs further allege that Barry Smith, Lynette Walbom, and B&J Smith Investments, "through their subsidiaries, " misrepresented material facts in the "March 28, 2005 through October 11, 2006 franchise offering circular" including the cost of opening and developing an Eatza Pizza restaurant, first-year operating costs, and advertising expenses. ( Id. ) Plaintiffs further allege that B&J Smith ...


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