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Midas International Corporation and Midas Realty Corporation v. Craig Chesley and Chesleyco

June 26, 2012

MIDAS INTERNATIONAL CORPORATION AND MIDAS REALTY CORPORATION, PLAINTIFFS/COUNTER-DEFENDANTS,
v.
CRAIG CHESLEY AND CHESLEYCO, INC.,
DEFENDANTS/COUNTER-PLAINTIFFS,
v.
MIDAS PROPERTIES, INC., ADDITIONAL COUNTER-DEFENDANT.



The opinion of the court was delivered by: Amy J. St. Eve, District Court Judge:

MEMORANDUM OPINION AND ORDER

Plaintiffs Midas International Corporation ("Midas International") and Midas Realty Corporation ("Midas Realty") filed a Complaint against Defendants Craig Chesley and ChesleyCo, Inc. ("ChesleyCo" and collectively with Craig Chesley, "Chesley"), alleging claims for breach of contract and various claims under the Lanham Act, including trademark infringement, unfair competition, and trademark dilution, arising out of their former franchise relationship. Midas International and Midas Realty have also moved for a preliminary injunction. Chesley has answered the Complaint and has also filed Verified Counterclaims against Midas International, Midas Realty, and Midas Properties, Inc. ("Midas Properties" and collectively with Midas International and Midas Realty, "Midas") for breach of contract, conversion, and treble damages under New York law. Midas now moves to dismiss a portion of Chesley's counterclaims. For the reasons set forth below, the Court denies Midas's motion, but stays Chesley's bad faith contract termination counterclaim.

BACKGROUND

Chesley asserts the following counterclaims against Midas: (1) multiple breaches of contract based on Midas's failure to supply competitive product pricing, the "lack of support" from Midas, and Midas's bad faith contract terminations; (2) conversion; and (3) treble damages under Section 853 of the New York Real Property and Proceedings Law ("RPAPL"). Chesley asserts all three of its breach of contract allegations, which are based on different theories, under one counterclaim for "multiple breaches of contract." (R. 44, Countercl. at 35.) Midas moves to dismiss the RPAPL claim and the portion of the breach of contract claim that Chesley bases on Midas's alleged bad faith contract terminations. In support of its claims, Chesley alleges the following facts, which the Court accepts as true for purposes of Midas's motion. See AnchorBank, FSB v. Hofer, 649 F.3d 610, 614 (7th Cir. 2011).

I. Allegations Regarding Chesley's Breach of Contract Counterclaim

Midas International, Midas Realty, and Midas Properties are Delaware corporations that have their principal places of business in Itasca, Illinois. (Countercl. ¶¶ 1-2; R. 44, Answer ¶¶ 3-4.) ChesleyCo, a Midas franchisee, is a New York corporation with its principal place of business in New York. (Answer ¶¶ 4-5.) Craig Chesley is the President of ChesleyCo. (Id. ¶ 5.) Chesley and Midas were parties to a total of ten franchise agreements (the "Franchise Agreements") regarding Chesley's operation of ten different "Midas Shops." (Countercl. ¶ 4.)

Midas terminated each of the Franchise Agreements on various dates between November 7, 2011 and February 21, 2012. (Id.)

Pursuant to the Franchise Agreements, Midas has substantial control over its franchisees' wholesale purchases of automotive parts and accessories. (Id. ¶ 7.) Midas also has substantial discretion to set the prices for the automotive parts and accessories that it sells to franchisees and to approve or disapprove of other potential suppliers of such parts. (Id. ¶¶ 8-9.) When Chesley entered into the Franchise Agreements, it expected that Midas would allow it to purchase automotive parts and accessories at prices that would be low enough to give it a competitive advantage in the retail marketplace. (Id. ¶ 11.) Chesley based its expectation in part on a "historical bargain" that Midas made with its United States and Canadian franchisees in or around 1980. (Id.) In particular, Midas persuaded its franchisees to accept a royalty of 10%, which is high by industry standards. (Id. ¶¶ 11-13.) In exchange, Midas agreed to provide lower pricing for automotive parts and accessories so as to give Midas franchisees a competitive edge in the marketplace, even after paying the higher royalties. (Id. ¶ 11.) Midas informed Chesley of this "historical bargain when it became a Midas franchisee, and Chesley acquired his Midas franchisees in reliance on it." (Id. ¶¶ 12-13.)

In recent years, Midas "exited the business of" supplying its franchisees with automotive parts and accessories and abandoned its previous commitment to provide its franchisees with favorable wholesale pricing on parts and accessories. (Id. ¶¶ 14-15.) Midas, however, maintained a 10% royalty. (Id. ¶ 15.) Additionally, Midas restricted the pool of suppliers from whom a franchisee could purchase parts and accessories, and it rejected Chesley's demands to approve new suppliers. (Id.) Midas also failed to support Chesley's Midas Shops with advertising, promotions, and other programs and support. (Id. ¶ 18.)

Midas's failure to supply automotive parts and accessories at competitive prices, combined with its failure to provide adequate advertising for Chesley's Midas Shops, has destroyed the value of Midas's franchises and weakened Chesley's financial condition such that it was not able to comply with its financial obligations under the Franchise Agreements. (Id. ¶¶ 21-22.) Midas knew about Chesley's cash flow problems and allowed it to pay royalties to Midas over the course of every month. (Id. ¶ 25.) When Midas thereafter learned that Chesley intended to sell four of its Midas Shops to one of Midas's competitors, Monro, Midas terminated all ten Franchise Agreements. (Id. ¶¶ 23, 27.)

II. Allegations Regarding Chesley's Conversion and RPAPL Claims

Chesley was the tenant, and Midas the landlord, for a property located at 1942 Empire Boulevard, Webster, New York (the "Webster Property") and a property located at 795 East Ridge Road, Rochester, New York (the "East Ridge Property"). (Id. ¶¶ 32-33.) Chesley operated Midas Shops on the Webster and East Ridge Properties, including installing trade fixtures and signs and maintaining supplies there. (Id. ¶¶ 34-35.)

On January 16, 2012, Midas terminated the Franchise Agreements for the Midas franchises that Chesley operated at the Webster and East Ridge Properties. (Id. ¶¶ 4, 32-36.) Midas Properties sent ChesleyCo a notice on February 21, 2012, declaring that it had terminated the lease for the East Ridge Property, effective immediately, and that ChesleyCo had abandoned the premises. (Id. ¶ 37.) Similarly, on March 1, 2012, Midas Properties sent ChesleyCo a notice declaring that it had terminated the lease for the Webster Property and that ChesleyCo had abandoned the premises. (Id. ¶ 38.) On or about February 27, 2012, before Chesley could remove all of its equipment, signs, and supplies from the East Ridge and Webster Properties, and without any notice or warning, Midas or its agents changed the locks to those properties, preventing Chesley from removing its equipment, signs, and lubricants. (Id. ¶ 39.) Midas knew that Chesley had not removed those materials from the properties. (Id. ¶ 40.) Chesley thereafter repeatedly requested Midas to allow it to remove its materials, but Midas has refused to respond. (Id. ¶ 41.)

LEGAL STANDARD

"A motion under Rule 12(b)(6) challenges the sufficiency of the complaint to state a claim upon which relief may be granted." Hallinan v. Fraternal Order of Police of Chicago Lodge No. 7, 570 F.3d 811, 820 (7th Cir. 2009). "The issue is not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims." AnchorBank, 649 F.3d at 614 (internal quotation and citation omitted). Pursuant to Rule 8(a)(2), a complaint must include "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2). The complaint must "give the defendant fair notice of what the claim is and the grounds upon which it rests." Bell Atl. v. Twombly, 550 U.S. 544, 555, 127 S. Ct. 1955, 167 L. Ed. 2d 929 (2007) (quoting Conley v. Gibson, 355 U.S. 41, 47, 78 S. Ct. 99, 2 L. Ed. 2d 80 (1957)).

"In evaluating the sufficiency of the complaint, [courts] view it in the light most favorable to the plaintiff, taking as true all well-pleaded factual allegations and making all possible inferences from the allegations in the plaintiff's favor." AnchorBank, 649 F.3d at 614. "To survive a motion to dismiss, the complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face . . . . A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Independent Trust Corp. v. Stewart Info. Servs. Corp., 665 F.3d 930, 934-35 (7th Cir. 2012) (citing Ashcroft v. Iqbal, 556 U.S. 662, 129 S. Ct. 1937, 1949, 173 L. Ed. 2d 868 (2009) (internal quotation marks omitted)). "The complaint 'must actually suggest that the plaintiff has a right to relief, by providing allegations that raise a right to relief above the speculative level.'" Id. at 935 (citing Windy City Metal Fabricators & Supply, Inc. v. CIT Tech. Fin. Servs., 536 F.3d 663, 668 (7th Cir. 2008) (emphasis in original)). "[A] plaintiff's claim need not be probable, only plausible: 'a well-pleaded complaint may proceed even if it strikes a savvy judge that actual proof of those facts is improbable, and that a recovery is very remote and unlikely.'" Id. (citing Twombly, 550 U.S. at 556 (internal quotation omitted)). "To meet this plausibility standard, the complaint must supply 'enough fact[s] to raise a reasonable expectation that discovery will reveal evidence' supporting the plaintiff's allegations." Id. (citing Twombly, 550 U.S. at 556). "The required level of factual specificity rises with the complexity of the claim." McCauley v. City of Chicago, 671 F.3d 611, 616-17 (7th Cir. 2011) (citing Swanson v. Citibank, N.A., 614 F.3d 400, 405 (7th Cir. 2010)).

ANALYSIS

I. Breach of Contract: Bad Faith ...


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