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BIXBY'S FOOD SYS. v. MCKAY

November 21, 1997

BIXBY'S FOOD SYSTEMS, INC., Plaintiff,
v.
JAN and PHILLIP McKAY, Defendants. JAN and PHILLIP McKAY, Counterplaintiffs, vs. BIXBY'S FOOD SYSTEMS, INC., KEN MIYAMOTO, MIKE STOPULOS, MARY FRAN STOPULOS, ALLEN FREED, LEE STAAK, and JEFF SCHUETT, Counterdefendants.



The opinion of the court was delivered by: BOBRICK

 Before the court are the motions of counterdefendants Bixby's Food Systems, Inc. ("Bixby"), Ken Miyamoto, and Mary Fran Stopulos (collectively, "Bixby counterdefendants"), and Mike Stopulos to dismiss certain counts of the Counterclaim of Jan and Phillip McKay.

 This case stems from a franchise agreement between Bixby and the McKays. Bixby is a franchisor of bagel restaurants that operate under the name "Bixby's Bagel Company." On March 25, 1995, Bixby entered into a franchise agreement with Jan and Phillip McKay ("the McKays"). Essentially, Bixby exchanged its expertise, research, and resources for royalty payments from the McKays. According to Bixby, however, the McKays never made payments, and Bixby terminated the agreement on June 6, 1996. Thereafter, again according to Bixby, the McKays continued to operate their restaurant using the "Bixby" name. Bixby filed suit against the McKays for violation of the franchise agreement and misappropriation of Bixby's trade dress and trademark. In response, the McKays filed an eight-count counterclaim, alleging violations of the franchise laws of Illinois, Minnesota, and Iowa, the Illinois Consumer Fraud and Deceptive Business Practices Act ("Fraud Act"), and the Racketeer Influenced and Corrupt Organizations Act ("RICO"). They also bring common law claims of fraud, breach of contract, and breach of fiduciary responsibility. In addition to Bixby, they name Ken Miyamoto, the president and co-owner of Bixby, Alan Freed, the vice president of Bixby's operations and marketing, Mary Fran Stopulos, vice president and co-owner of Bixby, and Mike Stopulos, co-founder of Bixby's predecessor in interest.

 The counterdefendants have proceeded in a somewhat awkward fashion. They move to dismiss certain claims against certain counterdefendants, filing four separate motions to dismiss supported by three different memoranda. *fn1" They alternate between advancing separate arguments, adopting the arguments of co-counterdefendants, or echoing the arguments of co-counterdefendants. In the final analysis, it would appear that the claims at issue here are:

 
Count I: under Illinois' Franchise Disclosure Act against Mike and Mary Fran Stopulos and Freed;
 
Count II: under Minnesota's Franchise Act against Mike and Mary Fran Stopulos and Freed;
 
Count III: under Iowa's Franchise Act against all counterdefendants;
 
Count IV: under Illinois' Fraud Act against all counterdefendants;
 
Count V: common law fraud against Mike Stopulos and Freed;
 
Count VI: breach of fiduciary duty against all counterdefendants;
 
Count VIII: under RICO against Miyamoto and Freed.

 We will address the sufficiency of each of these claims in the context of counterdefendants' arguments for dismissal.

 I. COUNTERPLAINTIFFS' ALLEGATIONS

 The McKays became aware of Bixby franchises through a friend, Daniel Burich, who happened to have a development agreement with Bixby for central Illinois. The McKays arranged to meet with Miyamoto and he gave them a Franchise Offering Circular ("FOC") dated September 6, 1994 ("FOC # 1"). The FOC # 1 included investment, sales, and earning information, and Miyamoto told the McKays that the figures were conservative, and that some stores were bringing in $ 1 million in revenues annually. Miyamoto also said he would buy the McKays' franchise back if they were unsatisfied. By November of 1994, the McKays were persuaded and wrote Bixby a check for $ 15,000. Miyamoto sent them a development agreement for their signatures. It gave the McKays one year in which to purchase a franchise in the Kane County area. They executed and returned the agreement by mail on December 15, 1994.

 The McKays, along with Mike Stopulos and Miyamoto, found a 2000-square-foot location in Geneva. Although Miyamoto had recommended a 1600- to 2400-square-foot space as appropriate, he urged the McKays to lease an additional space, bringing the size to over 3000 square feet. He represented to the McKays that with such a space, revenues would be over $ 1 million annually. Mike Stopulos assured the McKays as well.

 On April 11, 1995, Bixby hosted a reception for existing and prospective franchisees, including the McKays, in Bettendorf, Iowa. The McKays were given a second Franchise Offering Circular dated March 31, 1995 ("FOC # 2"). At that time, Miyamoto indicated that Bixby had 340 signed, pre-paid development agreements, when in fact it had approximately ten. On April 18, 1995, Miyamoto was in Illinois for a grand opening, and stopped to see Phil McKay in Elgin. He persuaded Phil McKay to sign a Franchise Agreement and tender a check for $ 17,500. He then proceeded to Bloomington, where Jan McKay signed the agreement as well. Later, Miyamoto backdated the signatures to March 24 and 31, 1995.

 On May 8, 1995, based on the recommendations of Miyamoto and Mike Stopulos, the McKays executed a lease for 3000 square feet at the Geneva location. At about the same time, Bixby distributed a newsletter claiming, again, the 340 signees and indicating they were worth $ 68 million in revenue.

 Between January and October, 1995, the McKays paid $ 325,000 to Bixby in franchise and development fees. They began construction at the Geneva location, and learned that the initial cost of purchase and construction grossly exceeded the figures in FOC # 1 and FOC # 2, which were $ 143,000-$ 198,000 and $ 235,000-$ 319,000. The McKay's costs exceeded $ 400,000. Myamoto and other Bixby representatives assured the McKays that sales would cover their costs. The McKay's sales, however, fell short of the figures touted in FOC # 1 and FOC # 2. As a result, they were unable to pay creditors and feasibly continue operation of their restaurant. Bixby terminated the franchise agreement with the McKays on June 10, 1996, due to the McKays' inability to pay royalty fees. There after, the parties agreed to submit to mediation but, during its pendency, Bixby initiated this lawsuit.

 The McKays bring three franchise act claims, one each under the applicable statute of Illinois, Minnesota, and Iowa. The parties agree that the Iowa claim is inapplicable here and should be dismissed. (Counterplaintiffs' Response to Partial Motions to Dismiss ("Cpl.Rsp."), at 6). The remaining two claims are based on alleged misrepresentations in the FOCs. The McKays also bring a claim under the Illinois Fraud Act, which is based on the FOCs the McKays received and a further FOC distributed in May of 1996. These alleged misrepresentations also provide the basis for a common law fraud count. Further, the McKays claim that the counterdefendants' conduct amounted to a breach of fiduciary duty they owed the McKays. Finally, the McKays characterize ...


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