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CAPITAL NATL. BANK OF NEW YORK v. MCDONALD'S CORP.

January 8, 1986

CAPITAL NATIONAL BANK OF NEW YORK and CAPITAL NATIONAL BANK OF NEW YORK AS ASSIGNEE AND SUCCESSOR-IN-INTEREST TO JUAN MIRANDA AND JIM RESTAURANT CORP., INC., Plaintiff, against MCDONALD'S CORPORATION and MCDONALD'S BUSINESS FACILITIES CORPORATION, INC., Defendants


The opinion of the court was delivered by: GOETTEL

G O E T T E L, D.J.:

Before the Court are the motions of defendants McDonald's Corporation and McDonald's Business Facilities Corporation, Inc. (collectively "McDonald's") to dismiss the amended complaint pursuant to Fed. R. Civ. P. 12(b)(6), or, in the alternative, for summary judgment under Fed. R. Civ. P. 56, and for sanctions, including reasonable attorney's fees, under Rules 11 and 37(c) of the Federal Rules of Civil Procedure. For the reasons stated below, the defendants' motions are granted in part and denied in part.

 I. BACKGROUND

 In 1978, Juan Miranda, the assignor of the plaintiff, Capital National Bank ("Capital"), applied for a McDonald's fast food franchise and submitted the requisite information on employment and financial status. Based on that information, in July 1980, McDonald's awarded Miranda a "business facilities lease" franchise for a restaurant located in a minority neighborhood in Philadelphia. A business facilities lease franchise requires a smaller initial investment than a conventional franchise because McDonald's purchases and owns the furniture, fixtures, and equipment. In November 1981, Miranda and McDonald's entered into a second business facilities lease franchise agreement for another store in Philadelphia.

 For each franchise, Miranda received and assented to three documents: a franchise letter agreement, an operator's lease, and a license agreement. According to the documents, McDonald's could terminate the franchise upon Miranda's failure (1) to pay monthly rent and service fees, (2) to pay his suppliers, (3) to pay taxes, or (4) to submit monthly financial reports. The documents also expressly prohibited the assignment of any interest in the franchises without McDonald's consent.

 At approximately the same time Miranda received each franchise, he applied for and obtained secured loans in the amount of $115,000 from Capital to cover his initial costs. Capital executed Uniform Commercial Code ("UCC") financing statements in connection with these loans. McDonald's knowledge of and acquiescence in these financing arrangements is disputed by the parties.

 On October 10, 1983, McDonald's notified Miranda that it was terminating his franchise. The parties dispute the reasons for the termination. McDonald's asserts that, by early 1983, Miranda had begun to fall behind in his payments to suppliers and to McDonald's, that he had not filed withholding tax returns since January 1982, and that he owed various taxing authorities in excess of $180,000. Miranda, on the other hand, submits that some of his financial problems, if they in fact existed, were due to McDonald's own conduct. He also states that he had worked out a payment schedule with his suppliers under which he remained current through the time of termination, and that he had filed timely monthly statements, obtained a deferral of payments to Capital and to McDonald's, and arranged a tax payment agreement with the tax authorities. Miranda asserts that the termination was unwarranted in light of these financial arrangements. He also asserts that he was given no opportunity to consult with his attorney before the termination, and that he was denied the use of the Ombudsman Procedure, a method by which franchisees may air their grievances. After the termination, Miranda filed for bankruptcy.

 On November 16, 1983, Capital notified McDonald's that it had a perfected security interest in Miranda's business. In October 1984, Capital commenced this action, as Miranda's assignee and successor-in-interest, and on its own behalf, seeking over two million dollars in damages based on three claims: (1) the wrongful termination of Miranda's franchises, (2) the conversion of Capital's collateral, and (3) the "willful and wrongful violation of the applicable laws, rules, and statutes." Complaint P 18. On December 3, 1984, McDonald's moved for a more definite statement of the pleadings.

 On January 30, 1985, Capital provided McDonald's with a more definite statement in the form of a proposed amended complaint that sought more than $100 million in damages. It contained the following 11 claims: (1) the same wrongful termination claim; (2) the same conversion claim; (3) a claim for alleged refusal to permit Miranda to utilize McDonald's Ombudsman procedure; (4) a claim that the Notice of Termination violated the Illinois Franchise Disclosure Act by not giving Miranda the opportunity to cure defaults; (5) a claim for violations of the thirteenth amendment and 42 U.S.C. § 1981 on the ground that McDonald's engaged in racial discrimination in granting, implementing, and terminating franchises; (6) a claim that McDonald's violated the thirteenth amendment and 42 U.S.C. § 1982 by terminating Miranda's franchise for discriminatory reasons; (7) a claim that McDonald's practice of racial discrimination violated the price discrimination provision, section 704.2, of the Illinois Franchise Disclosure Act, Ill. Rev. Stat. ch. 121-1/2, § 704.2 (1981); (8) a claim that McDonald's engaged in a racially discriminatory refusal to deal with Miranda, and through a restrictive covenant in the franchise agreement prohibited Miranda from engaging in any other food or restaurant business, thereby violating the antitrust laws; (9) a claim that McDonald's violated the Sherman Act by confining Miranda's franchises to minority neighborhoods; (10) a claim that McDonald's attempted to monopolize the hamburger business for white persons by only granting franchises in white neighborhoods to whites; and (11) a claim for tortious breach of contract.

 On February 12, 1985, McDonald's filed a supplemental memorandum pursuant to Fed. R. Civ. P. 11, notifying both the Court and Capital of its intention to seek sanctions on the grounds that Capital had no basis in law or fact to assert its civil rights or antitrust claims. Later in February 1985, the Court granted McDonald's motion for a more definite statement and granted the plaintiff leave to file an amended complaint in lieu of such a statement. On April 29, 1985, Capital filed an amended complaint, identical to the proposed amended complaint. It is this complaint that McDonald's now seeks to dismiss in its entirety. McDonald's contends that all of the claims that Capital asserts as Miranda's assignee must be dismissed because Miranda did not, and could not, assign the claims to Capital. McDonald's also argues that all of Capital's claims brought on its own behalf must be dismissed because Capital has no standing to bring those claims.

 II. DISCUSSION.

 A. Capital's Suit as Assignee of Miranda

 Capital asserts its claims pursuant to a "General Loan and Security Agreement" (the "security agreement") that Miranda executed as collateral for the loans he obtained from Capital. Capital contends that the security agreement assigns it the right to pursue those claims. McDonald's contends that, under New York law, Miranda could not assign any such rights. It also argues that the franchise agreement prohibited any such assignment.

 As noted above, Miranda signed three different franchise agreements when he obtained each franchise. By their terms, all three appear to prohibit any type of assignment. The franchise letter agreement, P 8, provided that "no other ... corporation [besides the franchisee] shall acquire any interest, whether direct or indirect, hereunder ... without McDonald's prior written consent." Defendant's Notice of Motion, Exhibits F & G. The operator's lease, P 4.06, similarly provided that the "[l]essee shall not ... assign, convey, mortgage, pledge, or encumber this lease or any interest hereunder ... without ... obtaining Lessor's prior written consent." Defendant's Notice of Motion, Exhibits H & I. Finally, P 15 of ...


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