Rescuecom Corporation v. Chumley
5:07-cv-00690
N.D.N.Y.Mar 28, 2011Background
- Plaintiff Rescuecom sued Chumley and OSI for breach of a New York-governed Franchise Agreement entered January 25, 2006, with a five-year term ending January 25, 2011.
- Franchise terms include termination on cause with notice and cure, a stipulated damages provision (18% of projected Total Sales and 50% of projected Gross Product Profit for remaining term), and a two-year non-compete.
- Plaintiff claimed defendants defaulted by failing to pay royalties, handheld fees, local advertising, and related amounts; termination occurred October 25, 2006 with significant sums owed, including a stated damages figure of $54,975.00 under the stipulation.
- Defendants counterclaimed for fraud, negligent misrepresentation, rescission, quantum meruit, unjust enrichment, breach of fiduciary duty, conversion, and other theories, including a Louisiana non-compete claim; many counterclaims were tied to alleged misrepresentations and mismanagement by Rescuecom.
- Plaintiff moved for remand and later for summary judgment; the court addressed jurisdictional questions and ultimately proceeded under New York law to evaluate the breach and the enforceability of the stipulated damages.
- Procedural posture included a separate motion practice on default against Chumley and OSI, with Chumley subsequently permitted to proceed pro se, and default judgment entered against OSI due to its corporate status.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Did Defendants default under the Franchise Agreement? | Rescuecom contends Defendants failed to cure defaults and owe damages. | Defendants argue possible cure and factual disputes regarding amounts owed and cure rights. | Defendants default established; liability for actual damages awarded to Plaintiff. |
| Is the Stipulated Damages provision enforceable as liquidated damages? | The clause is a valid liquidated-damages provision that should be enforced. | The provision is an unenforceable penalty given unequal bargaining power and disproportionate amount. | Stipulated damages provision found unenforceable as a penalty under New York law; not enforceable as to the $54,975.08 amount. |
| Are Defendants’ fraud- and related counterclaims viable? | Counterclaims fail for lack of damages and lack of proof of fraud elements. | Plaintiff misrepresented systems and finances; damages and misrepresentation exist. | Fraud-related counterclaims dismissed; negligent misrepresentation and breach of fiduciary duty also dismissed; other counterclaims dismissed in whole or part. |
| Should the court set aside the Clerk's Entry of Default against Chumley and permit him to proceed pro se? | Default should stand and parties proceed with default-judgment process. | Chumley seeks relief from default and to proceed pro se. | Default set aside for Chumley; pro se representation granted; summary-judgment-related issues reserved. |
| Is default judgment properly entered against OSI? | Corporation repeatedly failed to appear through counsel; default should be entered. | OSI cannot appear pro se; issues unresolved due to lack of counsel. | Default judgment entered against OSI. |
Key Cases Cited
- JMD Holding Corp. v. Congress Fin. Corp., 4 N.Y.3d 373 (N.Y. 2005) (test for enforceability of liquidated damages: reasonableness and necessity)
- N.Y. City Transit Auth. v. Morris J. Eisen, P.C., 276 A.D.2d 78 (N.Y. App. Div. 1st Dept. 2000) (fraud elements and reliance in damage inquiry)
- Dunkin' Donuts, Inc. v. HWT Assoc., Inc., 181 A.D.2d 711 (N.Y. App. Div. 2d Dept. 1992) (elements of fraud and material misrepresentation; damages requirement)
- Newcourt Small Bus. Lending Corp. v. Grillers Casual Dining Group, Inc., 284 A.D.2d 681 (N.Y. App. Div. 3 Dept. 2001) (underlying contract validity affects quantum meruit recovery)
- Wilmington Trust Co. v. Aerovias de Mexico, S.A. de C.V., 893 F. Supp. 215 (S.D.N.Y. 1995) (liquidated damages assessment balancing anticipated harm and difficulty of proving actual damages)
- Clark v. Max Advisors, LLC, 235 F. Supp. 2d 130 (N.D.N.Y. 2002) (quantum meruit and contract interplay; impact of express contract on quasi-contract claims)