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BIXBY'S FOOD SYSTEMS, INC. v. MCKAY

March 27, 2002

BIXBY'S FOOD SYSTEMS, INC. PLAINTIFF,
V.
JAN AND PHILLIP MCKAY, DEFENDANTS. JAN AND PHILLIP MCKAY, COUNTERPLAINTIFFS, V. 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: Nolan, United States Magistrate Judge

    MEMORANDUM OPINION AND ORDER

This is an action originally brought by Bixby's Food Systems, Inc. ("Bixby's") against Defendants Jan and Phillip McKay ("McKays") under the Lanham Act. This matter is before the Court on Counterplaintiffs McKays' Motion for Summary Judgment against Counterdefendant Ken Miyamoto on their counterclaims under the Illinois Franchise Disclosure Act (Count I), the Minnesota Franchise Act (Count II), the Illinois Consumer Fraud and Deceptive Business Practices Act (Count IV), and of common law fraud (Count V). The parties have consented to the jurisdiction of the United States Magistrate Judge pursuant to 28 U.S.C. § 636 (c). For the reasons below, the Counterplaintiffs' motion is GRANTED in part and DENIED in part.

I. PROCEDURAL HISTORY

This case began as a claim for trademark infringement brought by Bixby's against the McKays for their alleged violation of a franchise agreement. The McKays brought counterclaims against Bixby's and four individuals associated with Bixby's, alleging various state law claims and claims under the Racketeer Influenced and Corrupt Organizations Act.

Ken Miyamoto, appearing pro se,*fn1 is the only remaining counterdefendant. The claims pending against him are under the Illinois Franchise Disclosure Act (Count I); the Minnesota Franchise Act (Count II); and the Illinois Consumer Fraud and Deceptive Business Practices Act (Count IV); and for common law fraud (Count V). Presently before the Court is the McKays' motion for summary judgment on all counts against Miyamoto.

II. UNCONTESTED FACTS

The following uncontested facts are relevant to the claims and arguments made in the present motion.*fn2 Bixby's was a franchisor of bagel restaurants. (St. Facts ¶ 1.) Counterdefendant Ken Miyamoto was Bixby's President and a Director of the company. At some point in the fall of 1994, the McKays became interested in investing in a business and eventually decided upon opening a restaurant franchise. (Id. ¶¶ 6-7.) Before that time, Phillip McKay had a dental practice, and Jan McKay worked for Ameritech. (Id. ¶ 6.)

The McKays became acquainted with the Bixby's franchise through a friend who had signed a development agreement*fn3 to open Bixby's franchises. (Id. ¶ 3-5.) Through the friend, the McKays met Miyamoto on October 19, 1994. (Id. ¶ 7-8.) That day, the McKays received a Franchise Offering Circular with an effective date of September 6, 1994 ("FOC No. 1"). (Id. ¶ 9.) FOC No. 1 stated that "[t]he initial investment for a franchise, inclusive of initial franchise fee, is expected to be between $143,000 and $198,000." (Counterpl.'s Ex. A-1 at 1.) The projected annual earnings of a franchise were expected to be $139,450 and based upon projected annual sales of $625,000 and a number of other assumptions, including that the space leased would be between 1,400 and 2,200 square feet. (Id. at IL29-IL32.)

The McKays and Miyamoto continued to have discussions after their initial meeting, and Miyamoto repeated to the McKays the investment and annual earnings figures reflected in FOC No. 1. (St. Facts ¶ 12.) Miyamoto further stated to the McKays that FOC No. 1's figures were conservative, that "existing bagel stores were doing annual sales in excess of $1,000,000.00, and that Bixby's franchises would exceed these revenue figures." (Id.)

At some point in November or December 1994, the McKays tendered to Miyamoto a check dated December 16, 1994 in the amount of $15,000, for the purpose of securing a development agreement. On December 15, 1994, the McKays executed a development agreement, which gave them the right to purchase a Bixby's franchise in Kane County, Crystal Lake, Algonquin, and Lake in the Hills, Illinois. (Id. ¶ 15-16.) After signing the development agreement, the McKays, along with representatives of Bixby's including Miyamoto, began investigating several locations where they could open up their Bixby's franchise.

Eventually the McKays looked at a 2,000 square foot space for lease in Geneva, Illinois, which is located in Kane County. (Id. ¶ 17-18.) Miyamoto indicated to the McKays that they "might be interested" in leasing an additional adjacent space, which would equal a total of more than 3,000 square feet. (Id. ¶ 19.) The McKays were not comfortable with leasing the larger space, and their real estate broker "expressed serious concerns" about it. Miyamoto, however, "insisted on leasing the two spaces," "urged the McKays to lease the larger space," and "assured the McKays that leasing the larger space was in their best interests and that the site would bring in annual revenues in excess of $1,000,000.00." (Id. ¶¶ 20-21.) No other Bixby's restaurant nationwide was as large as 3,000 square feet. (Id. ¶ 21.)

On April 11, 1995, the McKay's attended a reception held by Bixby's for existing and prospective Bixby's franchisees. (Id. ¶ 22.) Miyamoto spoke at the meeting and stated that prospective franchisees had signed and paid for 340 development agreements; at the time, however, no more than fifteen development agreements had been executed and paid for. (Id. ¶ 24.) In May 1995, Miyamoto was quoted in a company newsletter as stating that Bixby's had 340 signed and paid-for development agreements, which represented "a $68 million vote of confidence." (Counterpl.'s Ex. A-7.)

At the April 11 meeting, the McKay's received a second Franchise Offering Circular, with an effective date of March 31, 1995 ("FOC No. 2"). (St. Facts ¶ 25.) One week later, on April 18, 1995, Miyamoto drove to, the McKays' home and gave them a franchise agreement for the proposed Geneva site. (Id. ¶¶ 26, 28.) Neither of the McKay's had reviewed FOC No. 2 before executing the franchise agreement. (Id. ¶ 27.) Both of the McKay's signed the agreement on April 18, 1995. (Id. ¶¶ 29-30.) Miyamoto backdated the franchise agreement in two separate locations to March 24, 1995 and March 31, 1995; after the McKay's questioned Miyamoto about the backdating, Miyamoto told them that it was only a "minor technical matter" and that it would save them money. (Id. ¶ 31-32.)

In May 1995, the McKay's executed a lease for the approximately 3,000 square foot space in Geneva, Illinois and proceeded with the build-out of the property. (Id. ¶ 35-38.) The McKays' initial investment including the purchase and build-out was in excess of $400,000, which is more than the estimated investment of between $143,000 and $198,000 in FOC No. 1 and the estimate of between $236,000 and $354,000 in FOC No. 2. (Id. ¶ 39.) The McKay's expressed their concerns about the discrepancies between their actual investment and the estimates contained in FOC No. 1, but Miyamoto assured them that FOC No. 1 was accurate, their costs were normal, and that their sales would cover their costs. (Id. ¶ 40-41.) At the time Miyamoto told the McKays that the figures in FOC No. 1 were accurate, he knew them to be false. (Id. ¶ 42.)

After opening their store, the McKay's continued to experience investment costs greater than those estimated in FOC No. 1. Their sales levels ranged from $25,000 to $30,000 per month. (Id. ¶ 47.) After operating for about eight months, Bixby's terminated the McKays' franchise agreement due to their inability to pay Bixby's franchise royalty fees. (Id. ¶ 49.)

III. DISCUSSION

A. Summary Judgment

Rule 56(c) of the federal Rules of Civil Procedure provides that summary judgment "shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). The movant has the burden of proving that there is no genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 330 (1986). "This burden has two distinct components: an initial burden of production, which shifts to the nonmoving party if satisfied by the moving party; and an ultimate burden of persuasion, which always remains on the moving party." Id.

In its motion, the McKay's have the burden of directing the Court "to the determinative issues and the available evidence that pertains to each." Selan v. Kiley, 969 F.2d 560, 564 (7th Cir. 1992). In a case like the present one, in which the movant will bear the burden of persuasion at trial, the movant "must support its motion with credible evidence — using any of the materials specified in Rule 56(c) — that would entitle it to a directed verdict if not controverted at trial." Celotex, 477 U.S. at 331.

In deciding on a motion for summary judgment, "[t]he evidence of the nonmovant is to be believed, and all justifiable inferences are to be drawn in his favor." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986). In response to "a properly supported motion for summary judgment," the nonmovant "must set forth specific facts showing that there is a genuine issue for trial." Id. at 250 (internal quotations omitted). The non-movant, however, "`must do more than simply show that there is some metaphysical doubt as to the material facts.'" Selan, 969 F.2d at 564 (quoting Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986)). A party may not avoid summary judgment merely by promising to produce admissible evidence at trial. See Rick v. Toyota Indus. Equip. Co., No. 93 C 1331, 1994 WL 484633, at *5 (N.D. Ill. Sept. 2, 1994).

Summary judgment may properly be granted on the basis of a party's default admissions, e.g., for failing to respond to requests to admit or to a Local Rule 56.1 statement. United States v. Kasoboski, 834 F.2d 1345, 1350 (7th Cir. 1987); Rick, 1994 WL 484633, at *5; Hill v. Human Rights Comm'n, 762 F. Supp. 196, 198 (N.D. Ill. 1991). However, a party's default admissions do not automatically result in summary judgment for his opponent. "To warrant summary judgment, the district court must make the further finding that given the undisputed facts, summary judgment is proper as a matter of law. . . . `Where the evidentiary matter in support of the motion [for summary judgment] does not establish the absence of a genuine issue, summary judgment must be denied even if no opposing evidentiary ...


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