United States District Court, Southern District of New York
November 18, 1991
ZARO LICENSING, INC., ETC., AND ZARO FRANCHISE REALTY CORPORATION, ETC., PLAINTIFFS,
CINMAR, INC., STEVEN CHIAPPA, XIMENA CHIAPPA, JOHN HOGAN, MARGARET HOGAN, PETER M. GANDOLFO, GARDEN STATE BAKE SHOPPES, INC., ROY KNOFLA AND NANCY J. KNOFLA, DEFENDANTS AND/OR THIRD-PARTY PLAINTIFFS, V. ZARO BAKE SHOPPES, INC., STUART ZARO, PHILLIP ZARO, ANDREW ZARO, JOSEPH ZARO, ALBERT FIRSTMAN, SEYMOUR I. FRIEDMAN, HAROLD L. KESTENBAUM, RICHARD M. GLAZER AND GLAZER LUSTIG & GLAZER, ADDITIONAL DEFENDANTS.
The opinion of the court was delivered by: Sweet, District Judge.
Zaro Bake Shops, Inc. ("Bake Shops"), Zaro Licensing, Inc.
("Licensing"), Zaro Franchise Realty Corp. ("Realty"), Phillip
Zaro, Stuart Zaro, Andrew Zaro, Joseph Zaro, Albert Firstman
and Seymour I. Friedman ("Friedman; collectively "Zaro") and
additional defendants Harold Kestenbaum ("Kestenbaum"),
Richard M. Glazer ("Glazer") and Glazer Lustig & Glazer (the
"Glazer Firm"; all collectively the "Movants") have moved
under Rules 8, 9(b), 12(b)(6) and 56 of the Federal Rules of
Civil Procedure to dismiss the counterclaims and third-party
claims of Cinmar, Inc. ("Cinmar"), Steven Chiappa, Ximena
Chiappa, John Hogan, Margaret Hogan, Peter M.
Gandolfo, Garden State Bake Shops, Inc. ("Garden State"), Roy
Knofla and Nancy J. Knofla (collectively "Franchisees"). The
motions are granted in part and denied in part as set forth
On November 6, 1989, Licensing and Realty brought an action
in the United States District Court for the District of New
Jersey seeking, among other things, monetary damages for
Cinmar's failures to meet certain of its obligations under a
franchise agreement and a related sublease Cinmar had signed
with Licensing and Realtor, including the failure since
January 1989 to pay contractually required licensing fees and
billings for certain baked goods delivered to Cinmar.
During the pendency of the New Jersey action, the
Franchisees filed an action in this Court against Zaro,
mirroring in the complaint the defenses and counterclaims
alleged in the New Jersey action. After the denial of certain
preliminary relief, the New Jersey action was transferred to
this Court. For purposes of these motions, the New York action
is deemed to have been consolidated with the transferred New
Cinmar, its officers and directors, Garden State and its
officers and directors, and the Knoflas filed their first
answer and counterclaims on September 17, 1990. The Zaros
moved to dismiss the counterclaims. Instead of opposing the
motion, the Franchisees redrafted the answer and counterclaims
and filed a First Consolidated Amended and Supplemental
Answer, Affirmative Defenses, Counterclaims and Third-Party
Complaints ("Counterclaims") on December 21, 1990. These
counterclaims are the subject of the instant motions and were
heard initially on April 19, 1991. Thereafter a settlement was
reached with certain of the parties, and the motions were in
effect withdrawn to permit further settlement discussions. On
August 6, 1991, the motions were renewed upon the original
papers and considered submitted as of that date.
Cinmar is presently in reorganization proceedings pursuant
to 11 U.S.C. Chapter 11 in the District of New Jersey, and
this action is, accordingly, stated as against Cinmar as a
matter of law pursuant to 11 U.S.C. § 362. On March 19, 1991, a
settlement with respect to Cinmar was reported to the
Bankruptcy Court, and all claims by and against Cinmar, the
Chiappas and the Hogans in this action have been withdrawn.
Bake Shops, Licensing and Realty are corporations organized
under the laws of the State of New York. At times past,
Licensing granted franchises to individuals and entities to
own and operate retail bakery franchises under the Zaro
trademark. Realty has been in the business of leasing
properties to Zaro franchisees so that they each may operate,
on such premises, a bakery under the Zaro trademark.
In the process of establishing its business, Licensing
submitted a proposed franchise offering prospectus to the New
York State Department of Law on October 5, 1983.
Following revisions, the prospectus was duly accepted and
registered by the Department of Law on October 31, 1983. On
July 31, 1984, amendments to the prospectus were mailed to the
Department of Law and on August 13, 1984, the Department of
Law acknowledged that these amendments had been filed, thus
constituting a duly registered First Amended prospectus. On
February 21, 1985, Licensing mailed proposed amendments to the
previously filed and registered prospectus a second time. By
a letter dated March 25, 1985, the Department of Law wrote to
Kestenbaum, Licensing's attorney, and noted twenty-one changes
that had to be made before the amendments could be
incorporated into the filed prospectus. The amendments were
resubmitted on June 6, 1985.
By a letter to Kestenbaum dated June 19, 1985, the
Department of Law noted four final changes that still had to
be made to Licensing's draft amendments before these
amendments could be incorporated into the franchise offering
prospectus on file. If these changes were not made, the
"franchise registration" was to be considered abandoned in two
weeks, on or about July 4, 1985. No hearing was ever held, in
accordance with 13 N.Y.C.R.R. § 201.1 et seq.
On June 13, 1985, the Knoflas executed a franchisee
agreement with Licensing and a related sublease agreement. On
June 26, 1985, Cinmar signed a franchise agreement with
Licensing and an agreement with Realty to lease space from
Realty at which to operate its Zaro's franchise. In April
1986, Gandolfo also executed integrated franchise and lease
Over the course of the relationship between the parties,
disputes developed over the licensing fees, the billings for
goods sold and delivered, and other matters, culminating in
Fourteen causes of action are set out in the Counterclaims
arising out of over 150 paragraphs of alleged "specific
events." Each claim for relief incorporates these allegations
According to the Franchisees (Franchisees' Memo in Opp.
14-15), the Counterclaims allege:
(a) an intentional scheme to defraud
Franchisees by the sale of economically
unfeasible franchises through undercapitalized
corporate entities, false offering statements and
false and misleading advertising materials;
(b) material misrepresentations and
misrepresentations by omissions in the sale of
franchises to Franchisees;
(c) violations of statutory and regulatory
duties to disclose pending applications to amend
the franchise offering prospectus, and to escrow
funds and offer a right of rescission after the
abandonment of the offering plan;
(d) breaches of contract by failing to provide
Franchisees with an economically viable franchise
system and necessary and adequate training; by
requiring the purchasing of Zaro's products at
inflated and commercially unreasonable and
unconscionable prices, and the purchasing of
spoiled, adulterated and impure products; by
failing to deliver Zaro's products on an orderly
and timely basis; by discriminating in favor of
other franchisees; and, in general, by failing to
deal with the Franchisees in good faith;
(e) violation of statutory duties and standards
of fair dealing imposed under the New York
General Business Law, the New Jersey Consumer
Fraud and Franchise Practices Acts, and the
Connecticut Unfair Trade Practices and Franchise
(f) RICO violations.
The Franchisees also have asserted claims for equitable
relief, including the imposition of a constructive trust,
disgorgement, reformation of any agreements between the
parties and recoupment.
Franchisees allege in their first four counterclaims that
the Movants committed multiple violations of the Racketeer
Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961 et
seq. ("RICO"). Because the Franchisees have failed to plead the
predicate acts upon which these alleged violations are premised
with sufficient particularity, the RICO counterclaims are
dismissed pursuant to Rule 9(b) of the Federal Rules of Civil
To state a cause of action under RICO, the Franchisees must
(1) that the defendant (2) through the commission
of two or more acts (3) constituting a "pattern"
(4) of "racketeering activity" (5) directly or
indirectly invests in, or maintains an interest
in, or participates in (6) an "enterprise" (7)
the activities of which affect interstate
Moss v. Morgan Stanley, Inc., 719 F.2d 5, 17 (2d Cir. 1983),
cert. denied, 465 U.S. 1025, 104 S.Ct. 1280, 79 L.Ed.2d 684
(1984). It also is well-settled that where the predicate crimes
of a RICO claim sound in fraud, as here, the pleading of those
predicate acts must satisfy the particularity requirement of
Rule 9(b), Fed.R.Civ.P. 9(b). See Morin v. Trupin, 711 F. Supp. 97,
111 (S.D.N.Y. 1989); Gregoris Motors v. Nissan Motor Corp.,
630 F. Supp. 902, 912-13
(E.D.N.Y. 1986). In fact, "all of the concerns that dictate
that fraud be pleaded with particularity exist with even
greater urgency in civil RICO actions." Plount v. American Home
Assurance Co., 668 F. Supp. 204, 206 (S.D.N.Y. 1987). Moreover,
allegations of mail and wire fraud must specify the use of the
mails and wires with particularity. Frota v. Prudential-Bache
Securities, Inc., 639 F. Supp. 1186, 1192 (S.D.N.Y. 1986).
Rule 9(b) provides that "[i]n all averments of fraud or
mistake, the circumstances constituting fraud or mistake shall
be stated with particularity. Malice, intent, knowledge, and
other condition of mind of a person may be averred generally."
Fed.R.Civ.P. 9(b). Allegations of fraud must therefore specify
the fraudulent statement, the time, place, speaker and content
of the alleged misrepresentations, Luce v. Edelstein,
802 F.2d 49, 54 (2d Cir. 1986); Conan Properties, Inc. v. Mattel, Inc.,
619 F. Supp. 1167, 1172 (S.D.N.Y. 1985), and factual
circumstances giving rise to a strong inference that the
defendant had the requisite fraudulent intent, Ouaknine v.
MacFarlane, 897 F.2d 75, 80 (2d Cir. 1990); Stern v. Leucadia
National Corp., 844 F.2d 997, 1004 (2d Cir.), cert. denied,
488 U.S. 852, 109 S.Ct. 137, 102 L.Ed.2d 109 (1988). Specifically
the complaint must allege "(1) specific facts; (2) sources that
support the alleged specific facts; and (3) a basis from which
an inference of fraud may fairly be drawn." Crystal v.
Foy, 562 F. Supp. 422, 425 (S.D.N.Y. 1983).
"Racketeering activity" is defined by 18 U.S.C. § 1961(1) as
"any act or threat involving . . . extortion . . . which is
chargeable under State law and punishable by imprisonment for
more than one year; any act which is indictable under any of
the following provisions of title 18, United States Code: . . .
section 1341 (relating to mail fraud), . . . section 1343
(relating to wire fraud), . . . section 1503 (relating to
obstruction of justice), . . . [or] any offense involving fraud
connected with a case under title 11. . . ." For their to be a
"pattern of racketeering activity," their must be at least two
racketeering acts that constitute continuing criminal activity.
18 U.S.C. § 1961(5); H.J. Inc. v. Northwestern Bell Tel. Co.,
492 U.S. 229, 109 S.Ct. 2893, 106 L.Ed.2d 195 (1989).
The Franchisees allege that:
[t]he predicate acts complained of in the
Counterclaims and Third-Party Complaint alleged
herein constitute "racketeering activity" as that
term is defined in, and for purposes of,
18 U.S.C. § 1961(1), in that the predicate acts
include multiple acts indictable under 18 U.S.C. § 1341
and § 1343, relating to mail and wire fraud,
one or more acts of extortion chargeable under
State law and punishable by imprisonment for more
than one year, multiple acts indictable under
18 U.S.C. § 1503, relating to endeavors to obstruct
the due administration of justice, and one or more
acts constituting an offense involving fraud
connected with a case under Title 11 of the United
States Code, to wit, violation of 18 U.S.C. § 152
as alleged herein.
The racketeering activity described above, and
in greater detail elsewhere in the Counterclaims
and Third-Party Complaint alleged herein,
constitutes a "pattern of racketeering activity"
as the term is defined in, and for purposes of,
18 U.S.C. § 1961(5), because the racketeering
predicates (i) are more than two in number; (ii)
are "related" in that they were all carried out
within ten (10) years immediately preceding the
commencement of the action and had common goals, a
similarity of method and the same or similar
results, participants and victims, and (iii)
amount to, or pose a threat of, continued criminal
activity in that, among other things, they were not
isolated or sporadic and were all committed in the
regular course of the ongoing Franchising
Counterclaims ¶¶ 177-78. Presumably, the reference to the acts
"alleged herein" not only intends to include any relevant
activity generally described in ¶¶ 65-174, but any matter
alleged anywhere in the Counterclaims.
Section 1341 defines mail fraud and provides:
Whoever, having devised or intending to devise
any scheme or artifice to defraud, or for
obtaining money or property by means of false or
fraudulent pretenses, representation or promises
. . . places in any post office or authorized
depository for mail matter . . . shall be fined.
Section 1343 defines wire fraud in an essentially similar
The Franchisees seem to allege the following uses of the
mail and wires as RICO predicate acts:
(a) the mailing to the Secretary of State of the
various prospecti, advertising materials, and
financial statements, id. ¶¶ 65, 70, 74, 79, 80,
85, 89, 93, 103, 121;
(b) the sending of the Friedman affidavit by
telefax and mail, id. ¶¶ 149, 151;
(c) Kestenbaum's letters sent by mail and telefax
relating to document discovery requests,
id. ¶¶ 155, 157;
(d) various letters sent by the Zaros and the
Franchisors demanding payment of contractually
required fees and threatening termination of
the franchises for various defaults,
id. ¶¶ 143, 159, 171; and
(e) letters sent regarding the transferability of
the Gandolfo franchise, id. ¶¶ 160, 161.
None of these alleged predicate acts of fraud is pled with the
particularity required by Rule 9(b).
For example, most of the allegations concerning
communications with the Secretary of State simply quote a
section of a document and then allege that the statement was
false. See, e.g., id. ¶ 67. The others are blanket allegations
of wrongdoing, with no pleading of what the exact nature of the
fraud was nor of any acts from which scienter can be inferred.
This is compounded by the failure to properly plead under the
mail and wire fraud statutes that the individual acts of fraud
were undertaken as part of any "scheme or artifice to commit
fraud." See United States v. Starr, 816 F.2d 94, 98 (2d Cir.
1987); United States v. Reid, 533 F.2d 1255, 1261 (D.C. Cir.
1976); United States v. Knutson, 180 F. Supp. 741, 742 (D.Ind.
In Atlantic Gypsum Co. v. Lloyds International Corp.,
753 F. Supp. 505 (S.D.N.Y. 1990), plaintiffs alleged, in pleadings
similar to the allegations here, that the defendant loan
institutions engaged in a scheme to advance substantial funds
to plaintiffs and then force them to default on the loans, thus
gaining control of their assets. The court found that
"plaintiffs' view of the facts defie[d] economic reason and
therefore d[id] not yield a reasonable inference of fraudulent
intent." Id. at 514.
Instead, the court found that at best the allegations
centered around a business dispute involving a breach of
contract. That the plaintiffs embellished this breach by
setting forth the contents of various documents,
correspondence, telefaxes, telephone calls and meetings
between the parties did not support the existence of a RICO
scheme, requiring dismissal. Id. at 512; see also A. Burton
White, M.D., P.C. v. Beer, 679 F. Supp. 207, 211 (E.D.N Y
1988). Indeed, the court noted that most of the alleged RICO
communications were motivated by the defendants' desire to have
their loans repaid, "a desire neither surprising nor sinister."
Atlantic Gypsum, 753 F. Supp. at 512.
As in Atlantic Gypsum, Franchisees allege here that the
franchises were sold to them not because the Zaros desired to
make money from successful franchising operations, but so that
they could profit from the initial fees and whatever royalties
were collected before the franchisees (whose stores bore the
Zaro family name and hence reputation) collapsed in failure.
Charges that certain Movants agreed to "aid and abet" each
other in the "scheme" require a pleading with particular
facts, facts which Franchisees have not provided. Absent
particularity as to each participant's assent to the alleged
"scheme" or "conspiracy," Franchisees' allegations of mail or
wire fraud cannot be sustained. Atlantic Gypsum, 753 F. Supp. at
513; Beauford v. Helmsley, 740 F. Supp. 201, 213 (S.D.N Y
Franchisees also allege as predicate acts that the
"conspirators and aiders and abettors,"
Counterclaims ¶ 175, obstructed justice through fraudulent acts
in violation of 18 U.S.C. § 1503 and 18 U.S.C. § 152. Assuming
that by this the Franchisees mean the submission of an
allegedly false declaration by Friedman to the court, the
raising of various defenses during discovery, or the efforts of
Zaro to modify the automatic stay on Cinmar's bankruptcy
proceeding, the Franchisees have failed to supply with
sufficient particularity facts giving notice of what is
fraudulent about each of these events. See, e.g., Metheany v.
United States, 390 F.2d 559 (9th Cir.), cert. denied,
393 U.S. 824, 89 S.Ct. 81, 21 L.Ed.2d 94 (1968).
Franchisees add claims of extortion in their attempt to
plead predicate acts. This seems to be an allegation that Zaro
threatened to terminate their franchises if licensing fees
were not paid. The threat to do that which one is
contractually permitted to do is not extortion and cannot
possibly fall within any imaginable criminal definition of
extortion. Gregoris Motors, 630 F. Supp. at 913.*fn1
The Franchisees have therefore failed to plead the required
predicate acts with sufficient particularity. For this reason
alone, the Counterclaims are dismissed. However, to avoid
further filings that fail to comply, additional infirmities in
the RICO pleadings are noted below.
The Franchisees assert violations of 18 U.S.C. § 1962(a) and
(b). These sections of RICO seek to prevent criminals from
investing in or taking over and maintaining previously
legitimate businesses. See United States v. Turkette,
452 U.S. 576, 584, 101 S.Ct. 2524, 2529, 69 L.Ed.2d 246 (1981).
With regard to the § 1962(a) claim, a violation of this
section is not established by showing participation in the
alleged pattern of racketeering activity, or the derivation of
income from that pattern, but is established instead by showing
the use or investment of that income in acquiring, establishing
or operating an enterprise. Ouaknine, 897 F.2d at 82.
Franchisees' complaint fails to meet this standard.
Franchisees merely allege that "income" was invested to fund
a RICO enterprise. In fact, Franchisees admit that they:
have not as yet ascertained the portion of the
income derived . . . through a [pattern of
racketeering activity] . . . which has been used
or invested . . . to fund the operation of the
Counterclaims ¶ 179. Also, as in Ouaknine, Franchisees also
allege that they were injured by the predicate acts, not by the
use or investment of the income in some enterprise. Finally,
allegations that illicit income was used or invested in an
enterprise, without explaining how such use or investment
caused the injuries alleged, fail to state a claim under §
1962(a). Ouaknine, 897 F.2d at 83; Williamson v. Simon &
Schuster, 735 F. Supp. 565
, 568 (S.D.N.Y. 1990); Azurite Corp.
v. Amster & Co., 730 F. Supp. 571
, 579 (S.D.N.Y. 1990).
Franchisees' conclusory allegations that they "have been
injured in their business and property by the reason of the
violation of 18 U.S.C. § 1962(a) . . .," do not meet this
standard. Counterclaims ¶ 180.
Franchisees likewise fail to state any facts suggesting that
Movants acquired or maintained the purported RICO enterprise
through a pattern of racketeering activity, potentially
defeating a § 1962(b) claim. See United States v. Biasucci,
786 F.2d 504, 516 (2d Cir.) (noting that while 1962(c) prohibits
the conducting of a RICO enterprise, a claim under 1962(b) must
focus on the acquisition or maintenance of the enterprise),
cert. denied, 479 U.S. 827, 107 S.Ct. 104, 93 L.Ed.2d 54
Finally, the Franchisees' broad claim that movants
"knowingly committed or agreed to commit two or more RICO
predicate acts . . .," in violation of 18 U.S.C. § 1962(d) is
insufficient. Counterclaims ¶ 188. The Franchisees need to
"`show that the defendants understood the
scope of the enterprise and knowingly agreed to further its
affairs through the commission of various offenses'" to state
a § 1962(d) claim. Morin v. Trupin, 747 F. Supp. 1051, 1067
(S.D.N.Y. 1990) (quoting Seville Industrial Machinery Corp. v.
Southmost Machinery Corp., 567 F. Supp. 1146, 1154 (D.N.J.
1983)). Franchisees have failed to plead any overt act nor the
assent by any Movant to the conspiracy. Instead, they have only
alleged that a RICO conspiracy "was formed at, or as a direct
result of" a meeting alleged to have occurred sometime in early
1983. Bare allegations that individuals were interested in
creating a franchise program fail to establish the particulars
of a RICO conspiracy. Id.; see also Stern v. Leucadia Nat'l
Corp., 644 F. Supp. 1108, 1112 (S.D.N.Y. 1986), aff'd in part,
844 F.2d 997 (2d Cir.), cert. denied, 488 U.S. 852, 109 S.Ct.
137, 102 L.Ed.2d 109 (1988).
General reallegation of numerous earlier paragraphs with the
intention of making out RICO, state fraud, breach of contract,
and other various state claims is not sufficient or proper.
Gregoris Motors, 630 F. Supp. at 913. "RICO is a specialized
statute requiring a particular configuration of elements. These
elements cannot be incorporated loosely from a previous
narration, but must be tightly particularized and connected in
a complaint." Id. Parroting statutory language while generally
referring the reader back to the previous 100 paragraphs in a
complaint is inadequate. Franchisees' four RICO counterclaims
therefore are dismissed.
II. Common Law Fraud
In the Sixth Counterclaim, the Franchisees allege that "[b]y
reason of the conduct set forth herein," that is, paragraphs
65 to 174, "Plaintiffs and Additional Defendants have engaged
in a practice and course of conduct that has operated as a
fraud." Counterclaims ¶ 195. Here too an attempt will be made
to discern those occurrences of which the Franchisees complain.
To plead a claim for fraud, the Franchisees must allege in
the body of the complaint:
(a) an express representation of a material fact;
(b) that this representation was false;
(c) that the representation was made with the
intent to defraud;
(d) that Franchisees reasonably relied upon this
(e) that Franchisees suffered damages as a
See Katara v. D.E. Jones Commodities, Inc., 835 F.2d 966
970-71 (2d Cir. 1987).
Rule 9(b)'s particularity requirement, which prohibits
reliance upon "`unsubstantiated conclusory allegations,'"
applies to common law fraud as well. Juster v. Rothschild,
Unterberg, Towbin Gruntel & Co., 554 F. Supp. 331, 332 (S.D.N Y
1983) (quoting Vetter v. Shearson, Hayden, Stone, Inc.,
481 F. Supp. 64, 65 (S.D.N.Y. 1979)); accord Di Vittorio v. Equidyne
Extractive Industries, Inc., 822 F.2d 1242, 1243 (2d Cir.
1987). There are several policy reasons for this, including
[t]he irreparable damage to reputations and
goodwill, which inevitably results from charges
of fraud, and the threat of baseless strike suits
are ample reasons for careful judicial review of
claims alleging fraud.
Plount, 668 F. Supp. at 205-06; Somerville v. Major Exploration,
Inc., 576 F. Supp. 902, 909 (S.D.N.Y. 1983). Rule 9(b) also is
designed to insure that all defendants to a fraud action are
apprised of the particular wrongful conduct with which they are
charged. Jacobson v. Peat, Marwick, Mitchell & Co., 445 F. Supp. 518,
522 n. 7 (S.D.N.Y. 1977); see also Airlines Reporting
Corp. v. Aero Voyagers, Inc., 721 F. Supp. 579, 582 (S.D.N Y
To satisfy Rule 9(b), the Franchisees must allege the
circumstances constituting the alleged fraud, including such
matters as the time, place and contents of the false
representation, as well as the identity of the persons making
the misrepresentation and what was obtained or given up. The
Counterclaims also must provide some factual basis for the
See, e.g., Airlines Reporting Corp. v. Aero Voyagers, Inc.,
721 F. Supp. 579, 582 (S.D.N.Y. 1989) (mere recitation of the
essential elements of fraud will not satisfy Rule 9(b)); Hunter
v. H.D. Lee Co., 563 F. Supp. 1006, 1012 (N.D.N.Y. 1983) ("A
pleading that simply avers the technical elements of fraud does
not have sufficient informational content to satisfy [Rule
Here, the Franchisees first seem to allege that because
final changes were never made in the 1985 second amended
prospectus and the proposed second amended prospectus was
never filed with the Department of Law, the Franchisees were
defrauded into purchasing an "unregistered" franchise. As part
of this fraud, they seem to plead that on or about May 3,
1985, Stuart Zaro and Firstman met one or more times with
Hogan and Chiappa and represented that the Zaros franchise
program was "valuable" and worthwhile and that they
"misrepresented the true state of affairs concerning the
Zaro's franchise `system.'" Counterclaims ¶ 106. During another
meeting alleged to have occurred sometime in the month of May
1985, Firstman once again "misrepresented the true state of
affairs concerning the Zaro's franchise `system,'" this time to
the Knoflas. Id. ¶ 114. Franchisees also plead that on July 2,
1985, Joel and Jeff Knolfas, who are not parties to this action
and whose status is not explained, met with Friedman, who
continued "the charade that Licensing was a bona fide
franchisor." Id. ¶ 138. Finally, Franchisees allege that
sometime between September and November 1986 Gandolfo met with
Albert Firstman and Joseph Zaro and both allegedly
misrepresented to Gandolfo "that Zaro's had a franchise
`program.'" Id. ¶ 140.
Not only are these allegations faulty for failing to specify
the particular dates at issue, they are deficient with respect
to scienter. The complaint must state facts giving rise to a
strong inference of fraudulent intent, not conclusions.
Ouaknine, 897 F.2d at 81; Paper Corp. of the United States v.
Schoeller Technical Papers, Inc., 742 F. Supp. 808 (S.D.N Y
1990). The Second Circuit has noted that "[c]learly, an
inference that the defendants knew their statements to be false
cannot be based on allegations which are themselves
speculative." Wexner v. First Manhattan Co., 902 F.2d 169, 173
(2d Cir. 1990). Such is the case here, therefore the factual
allegations that attempt to establish an inference that
individual defendants knew that the statements were false have
been pled inadequately.
Additionally, Franchisees fail to plead how or what damages
were sustained by them as a specific result of any
representations regarding the registration of the franchise.
They have failed to state Licensing's registration status, and
how any representations as to this status caused Franchisees
to suffer damage. "Allegations that but for the fraudulent
statements and omission, the plaintiffs would not have
invested in the transaction in which they lost money are not
sufficient." Northwestern National Insurance Co. of Milwaukee,
Wisconsin v. Alberts, 741 F. Supp. 424, 433 (S.D.N.Y. 1990)
(quoting In re Gas Reclamation, Inc. Securities Litigation,
733 F. Supp. 713, 721 (S.D.N.Y. 1990)).
Next, Franchisees allege that they were "provided" with
franchise agreements that were false and fraudulent in that:
(a) the proposed franchise agreement referred to
the first amended offering prospectus as the
currently effective prospectus;
(b) the date of the most recent amendment of the
prospectus was left blank in violation of New
(c) Franchisees were not provided with the
proposed second amended offering prospectus or
with documents which the Attorney General
suggested be included with that proposed
(d) Franchisees were not advised of certain
rights they might have had under the New York
Franchise Sales Act.
Counterclaims ¶ 66. These allegations fail to plead scienter,
reliance, damages, or causation with specific particularity.
Franchisees also allege that by filing a lawsuit in the
United States District Court for New Jersey for damages Zaro
committed an act of fraud. Id. ¶¶ 144-52, 155-58. In connection
with that lawsuit, they allege that an affidavit submitted by
Friedman was fraudulent, id. ¶¶ 149-53, and that Kestenbaum,
"in collusion" with Proskauer, Rose, Goetz and Mendelsohn,
fraudulently asserted discovery objections, id. ¶¶ 155-58.
Similar claims are asserted with respect to Zaro's actions in
the Bankruptcy proceeding and New Jersey Landlord/Tenant Court.
These allegations again fail to plead reliance, damages or
causation with the required particularity. Moreover, if true,
they might give rise to a claim for discovery or Rule 11
sanctions but in no fashion constitute the basis for a fraud
Finally, Franchisees appear to allege that they were
defrauded by mailings which demanded required payments and
threatened termination under the franchise agreements,
id. ¶¶ 159, 171, that baked products purchased by Franchisees
were not of a particular quality, id. ¶ 167, and that
unsatisfactory architectural plans were prepared for the
Gandolfo and Cinmar franchises, id. ¶¶ 172-73. These are
primarily contract claims, and, as above, fail to state the
necessary particulars to establish fraud.
For the reasons set forth above, the Counterclaims fail to
state a claim of common law fraud with the particularity
required by Rule 9(b). Fed.R.Civ.P. 9(b). The Sixth Count of
the Counterclaim therefore is dismissed.
III. Breach of Contract
In the Fifth, Seventh and Fourteenth Counterclaims, the
Franchisees allege that if there was an agreement among the
parties, then it was breached by the Movants and the
Franchisees are entitled to some form of relief. As presently
constituted, these claims do not meet Rule 8's pleading
requirements. Fed.R.Civ.P. 8. The Rule requires the
Franchisees to set forth a "short and plain statement of the
case." However, such a pleading must, at a minimum, allege the
terms of the contract, each element of the alleged breach and
the resultant damages in a plain and simple fashion. See
generally, 5 Charles Wright & Arthur Miller, Federal Practice
and Procedure § 1235 (1990).
No particular provision of any agreement is set forth in
over 200 paragraphs. Additionally, Franchisees have failed to
plead that they themselves have complied with any contracts at
issue and that they have performed their obligations under
such contracts, a basic requirement. See 2A J. Moore, Moore's
Federal Practice ¶ 8-127 (1990); Gross v. Gross, 31 Misc.2d 934,
221 N.Y.S.2d 785, 787 (N.Y. Sup. Ct. 1961). These
counterclaims therefore are dismissed.
IV. New Jersey Franchise Practices Act
Franchisees' claim for violation of the New Jersey Franchise
Practices Act, N.J.S.A. § 56:10-1, et seq., is dismissed under
Rule 56. It is a defense to a claim brought under the act by a
franchisee that the franchisee has failed to comply
substantially with the requirements imposed by the franchisor.
Id. § 56:10-9. The Franchisees fail to allege that they are in
compliance with the franchise agreements nor do they offer any
facts establishing otherwise. The Franchisees are, however, in
breach of their agreement for failing to make royalty payments.
The Eleventh Counterclaim therefore must be dismissed.
The Tenth Counterclaim is an alleged violation of the New
Jersey Consumer Fraud Act. N.J.S.A. § 56:8-1 et seq. Since this
is a fraud remedy, it must meet Rule 9(b)'s particularity
requirement, which the claim fails to do. Moreover, New Jersey
courts require a showing of fraud that is unconscionable,
deliberate and knowing. See, e.g., De Simone v. Nationwide
Mutual Insurance Co., 149 N.J. Super. 376, 373 A.2d 1025 (N.J.
Super.Ct.Law Div. 1977). Nowhere in the Counterclaims do the
Franchisees present any facts in support of such an inference,
thus mandating dismissal of this claim.
V. New York Franchise Sales Act
The New York Franchise Sales Act prohibits the sale of a
franchise when the Department of Law does not have a copy of
a franchisor's offering prospectus on file. However, the
Franchise Sales Act contains a three-year statute of
limitations, New York General Business Law § 691(4).
Franchisees allege that they purchased their franchises from
June 1985 to April 1986. This is more than three years before a
complaint was first filed in this action in November 1989. The
Eighth Counterclaim therefore is dismissed pursuant to Rule 56,
The Franchisees assert that the Movants' violations of this
act have been continuous, and that their claims therefore are
timely. However, in Fantastic Enterprises, Inc. v. S.M.R.
Enterprises, Inc., 143 Misc.2d 124, 540 N.Y.S.2d 131 (N.Y. Sup.
Ct. 1988), the court specifically held that a claim under this
act is not tolled by a "continuing violation," but instead
begins to run the date the parties entered into the franchise
agreement. Id. at 129, 540 N.Y.S.2d 131. The Eighth
Counterclaim therefore is dismissed.
The Franchisees also have alleged a violation of § 349 of New
York's General Business Law. However, since they have failed to
provide a short, plain statement of this claim, it is dismissed
pursuant to Rule 8 of the Federal Rules of Civil Procedure.
VI. Connecticut Unfair Trade Practices Act
Similarly, under the Connecticut Unfair Trade Practices Act,
C.G.S.A. § 42-110 et seq., no cause of action can be maintained
if brought more than three years after the occurrence of the
violation. Fichera v. Mine Hill Corp., 207 Conn. 204,
541 A.2d 472 (1988). As pled, the sale of the Connecticut franchise to
the Knoflas occurred in June 1985, more than three years before
the filing of the first complaint in this series of actions in
November 1989. The Twelfth Counterclaim therefore is untimely
and is dismissed pursuant to Rule 56 of the Federal Rules of
The Franchisees also allege a violation of the Connecticut
Franchise Act. However, they have failed to provide a short
and plain statement of the grounds upon which this claim is
based. It therefore is dismissed pursuant to Rule 8 of the
Federal Rules of Civil Procedure.
The Franchisees' Counterclaims under the New York Franchise
Sales Act, the New Jersey Franchise Practices Act and the
Connecticut Unfair Trade Practices Act are dismissed under
Rule 56. The remaining federal RICO and state Counterclaims
are dismissed under Rules 8 and 9(b) of the Federal Rules of
Civil Procedure, with leave to replead granted.
It is so ordered.