Schwartzco Enterprises LLC v. TMH Management, LLC
60 F. Supp. 3d 331
E.D.N.Y2014Background
- Plaintiffs (Schwartzco, TMH Roslyn, and Arnie Schwartz) invested >$2 million after defendants (TMH entities and individual principals including Brown) solicited franchise and area-development rights for The Meat House in NY; Plaintiffs allege misrepresentations in financial projections and deficient franchise disclosures.
- Brown is a non‑signatory to the Operating Agreement but was a managing member/officer of franchisor and related entities and is alleged to have participated in providing and presenting the challenged financial information.
- Plaintiffs sued asserting fraud, fraudulent inducement, negligent misrepresentation, breach of fiduciary duty, aiding/abetting, civil conspiracy, breach of duty of care, gross negligence, NY Franchise Sales Act (NYFSA) violations, NY GBL §349, NH Consumer Protection Act, and breach of covenant of good faith and fair dealing. Many corporate defendants defaulted; Brown moved to dismiss under Rule 9(b).
- Plaintiffs sought leave to amend to add a 74‑page proposed amended complaint; Court considered futility under Rule 12(b)(6)/9(b) given Brown had opportunity to respond and is non‑defaulting.
- Court applied Twombly/Iqbal standards and Rule 9(b) heightened pleading rules to fraud‑based claims; considered group pleading doctrine limits and special‑relationship standards for negligent misrepresentation.
- Rulings: Court dismissed fraud/fraudulent inducement, breach of fiduciary duty, aiding and abetting fiduciary breach, civil conspiracy grounded in fraud, duty‑of‑care/contract‑rooted torts where Brown was non‑signatory, gross negligence, NY GBL §349, NHCPA, and breach of implied covenant claims; granted leave to amend (and denied Brown’s dismissal) only as to negligent misrepresentation and NYFSA claims against Brown.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Sufficiency of fraud/fraudulent inducement pleadings under Fed. R. Civ. P. 9(b) | Plaintiffs allege numerous false financial statements, emails, presentations and identify Brown among actors who provided data and presentations; seek to rely on group allegations and "information and belief" where details are within defendants' control | Brown argued plaintiffs failed to plead fraud with particularity under Rule 9(b) and that amendment would be prejudicial/futile | Dismissed fraud/fraudulent inducement claims as insufficiently particular under Rule 9(b); leave to replead denied (repeated failure to cure) |
| Negligent misrepresentation (New York) and applicability of Rule 9(b) | Plaintiffs claim special relationship, reasonable reliance on defendants' expertise and that Brown supplied/caused misleading financial information | Brown challenged sufficiency and applicability of heightened pleading | Allowed negligent misrepresentation claim to survive; court applied Rule 9(b) but found plaintiffs pled the special‑relationship factors and reliance adequately |
| Breach of fiduciary duty / aiding and abetting / duty of care where Brown is non‑signatory | Plaintiffs assert Brown owed fiduciary/duty‑of‑care obligations pursuant to Operating Agreement and breached them via misleading statements and management conduct | Brown argued he is non‑signatory, no fiduciary duty arises from contract, and claims sound in fraud requiring 9(b) | Dismissed fiduciary, aiding/abetting fiduciary breach, and duty‑of‑care claims against Brown as futile because no basis for fiduciary duty by a non‑signatory and allegations otherwise sounded in fraud |
| NY Franchise Sales Act (NYFSA) violations (Sections 683, 687, and relief under §691) | Plaintiffs allege failure to provide/register adequate Franchise Disclosure Documents and made false/misleading representations; invoke control‑person liability under §691 | Brown relied on Rule 9(b) attack and general challenge | NYFSA claims against Brown survived; court found plaintiffs stated claims under §§ 683 and 687 and adequately sought rescission/attorney fees under §691 |
| NY GBL §349 consumer‑oriented deception claim | Plaintiffs argued defendants' conduct affected other franchisees and consumers and thus was consumer‑oriented | Brown argued the transactions were private investment/franchise offers, not consumer transactions; urged dismissal | Dismissed §349 claim as not plausibly consumer‑oriented and resembling a private investment dispute |
| NH Consumer Protection Act claim | Plaintiffs alleged deceptive franchise solicitation and false representations similar to fraud claims | Brown argued the claim is pleadable only under Rule 9(b) and does not fall within NHCPA enumerated categories | Dismissed NHCPA claim: did not fit the enumerated statutory categories and was inadequately pleaded against Brown |
Key Cases Cited
- Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (establishes plausibility pleading standard under Rule 12(b)(6))
- Ashcroft v. Iqbal, 556 U.S. 662 (clarifies Twombly and limits conclusory allegations)
- Lucente v. Int’l Bus. Machs. Corp., 310 F.3d 243 (2d Cir.) (amendment futile standard and pleading requirements)
- Rombach v. Chang, 355 F.3d 164 (2d Cir.) (Rule 9(b) particularity for fraud: who, what, when, where, why)
- Aetna Cas. & Sur. Co. v. Aniero Concrete Co., 404 F.3d 566 (2d Cir.) (negligent misrepresentation in NY must meet Rule 9(b) specificity)
- Pelman ex rel. Pelman v. McDonald’s Corp., 396 F.3d 508 (2d Cir.) (GBL §349 is broader than common‑law fraud and governed by Rule 8(a))