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BIXBY'S FOOD SYSTEMS, INC. v. MCKAY
March 27, 2002
BIXBY'S FOOD SYSTEMS, INC. PLAINTIFF,
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.
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
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.
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.)
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.
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