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ADM ASSOCS. v. GREASE 'N GO

October 12, 1995

ADM ASSOCIATES, INC., JAMES KELLY, MICHAEL LaBIANCA, JOHN R. DOYLE, and JOHN W. DOYLE, Plaintiffs, against GREASE 'N GO, INC., LAWRENCE MEIGS, NORMAN K. LEWIS, EDWARD R. RASMUSSEN, and RICHARD LINDSTROM, Defendants. ADM ASSOCIATES, INC., JAMES KELLY, MICHAEL LaBIANCA, JOHN R. DOYLE, and JOHN W. DOYLE, Plaintiffs, -against- GREASE 'N GO INTERNATIONAL, INC., a/k/a CHANNEL ONE, INC., and GREASE 'N GO ATLANTIC, INC., Defendants.


The opinion of the court was delivered by: TRAGER

 TRAGER, District Judge:

 In these two actions, which were consolidated on February 27, 1991, defendant Grease 'N Go Atlantic, Inc. ("GNGATL") has moved for summary judgment pursuant to Rule 56 of the Federal Rules of Civil procedure. For the reasons set forth below, defendant's motion is granted.

 Background1

 Grease 'N Go, Inc. ("GNG") was a business which operated a nationwide set of franchises that performed ten minute oil changes. On January 29, 1988, plaintiff, ADM Associates, Inc. ("ADM"), entered into a license agreement with GNG to operate a Grease 'N Go franchise at a possible site in Nassau or Suffolk Counties. Def's. Mem. Supp. at Exh. 4, p. 1. ADM paid a $ 25,000 franchise fee for the franchise. Id. at 4. The basic license agreement required GNG, as franchisor, to provide a formal training program to franchisees, familiarize them with the GNG system, give them advice and assistance with regard to location, promotions, marketing, layout, equipment, construction and operation of the franchise, provide franchisees with a licensed logo, and bring suit against any unauthorized use of the GNG logo or licensed concepts of GNG. Id. at 9. ADM was required to get written approval from GNG with regard to the location, building, machines, and uniforms to be used. Id. at 8. ADM was also required to have completed construction of its franchise and be open for business within one year, with a provision for construction delays. Id. at 8. There was, however, a three page addendum to ADM's license agreement which contained an option for a "Turnkey Building Lease Program" (or "Turnkey Option"). *fn2" Id. at 36. This addendum required GNG to construct or acquire a building to be used as a Grease 'N Go lube center and offer it to ADM for lease. Id. at 36. The addendum states that ADM would have the option to enter into a "Turnkey Building Lease Program," only by written acceptance within 30 days after a lease proposal is made to them. Id. at 36. The Turnkey Option required franchisees to have a minimum of $ 25,000 in reserve capital after the franchise opened. Id. at 36. The addendum also states that all proposed sites would be reviewed by GNG and their affiliated investors and would be approved only if the site met income producing potential based on demographic requirements. Id. at 36. It is undisputed that GNG never complied with the Turnkey Option.

 On January 11, 1988, plaintiffs John R. Doyle and John W. Doyle had entered into a similar license agreement with GNG for a fee of $ 25,000. Id. at Exh. 6, p. 1-4. This agreement authorized the Doyles to operate a Grease 'N Go franchise in Suffolk County and also had an addendum which contained the same Turnkey Option as ADM's agreement. Id. at 36. It is undisputed that GNG never performed the Turnkey Option in the Doyle agreement.

 On December 1, 1987, James Kelly and Michael LaBianca ("K&L") also had entered into a license agreement with GNG which authorized K&L to open a Grease 'N Go in Suffolk County, and possibly Florida should the parties later agree. Id. at Exh. 5. K&L's license agreement did not contain the first three pages of the addendum referring to the Turnkey Option as did ADM's and the Doyles' license agreements. However, the K&L agreement did contain a sheet describing the Turnkey Building Lease Program, as did ADM's and the Doyles' license agreements. This sheet states that GNG would assist franchisees in locating "build-to-suit" developers and investors for a "Turn Key" operation. Id. at 37. The sheet states that GNG would assist franchisees with site qualification, negotiation and review of all lease documents. Id. at 36. The sheet goes on to state that the out of pocket investment expense would be approximately $ 50,000- $ 65,000 and that qualified applicants may be able to lease equipment from a third-party leasing company. Id. Nevertheless, K&L alleged that GNG was obligated to provide the Turnkey Option because of a handwritten provision in their basic license agreement. *fn3" Pl's. Mem. Opp'n at 3.

 Defendant GNGATL is owned by James Wallace Reid. In or about April 1986, R.S.Q. Associates, Inc. ("RSQ"), a Virginia based company founded by Reid, purchased from GNG one Grease 'N Go franchise for $ 25,000 which RSQ opened at its own expense. Reid Aff. at P 4. At the same time, RSQ also paid a deposit of $ 48,000 for eight additional franchises. Id. at P 4. After April 1986, RSQ proceeded to construct and open by June 1989 three more GNG oil change centers, and, subsequently, constructed and opened another three. Id. at P 4. None of the license agreements that RSQ had signed with GNG from 1986-1988 contained a Turnkey Option. GNGATL Exh. 20.

 In October 1987, Richard Lindstrom, president of GNG, asked Reid to make an "emergency loan" to GNG in the amount of $ 42,000. Id. at P 5. Reid gave GNG a personal loan and was issued a promissory note and obtained a security agreement from GNG dated October 6, 1987. *fn4" Id. at P 5. Reid made additional loans to GNG from October 1987 to January 1988 totaling $ 45,000, and these loans were similarly secured. Id. at P 6. Later, an amended security agreement was issued granting Reid a primary security interest in franchise fees that were payable from his company, RSQ, to GNG. Id. at P 7. Reid was also granted a second security interest entitling him to franchise fees and royalty fees that were payable to GNG from other franchises in Virginia and Maryland in the event that the primary security agreement was insufficient. Id. at P 7. Subsequently, GNG defaulted on payment of the notes. Id. at P 8. In July of 1988, GNG agreed to pay Reid $ 19,000 by way of royalty fees that were owed by RSQ to GNG; at that time GNG also issued Reid a new promissory note for $ 74,091.70, dated July 13, 1988, consolidating and replacing the five previous notes. Id. at P 8. The note was made payable on demand and contained a security agreement. Id. at P 9. *fn5" GNG later defaulted on payment of this note too, and Reid exercised his security interest and collected partial payment out of RSQ's royalty fee obligation that was to be paid to GNG; but there was still an unpaid balance of $ 31,832.49 as of June 1989. Id. at P 9.

 Earlier, in or about September or October 1987, Reid and Lindstrom also agreed that Reid would purchase 5,000 shares of GNG stock for $ 10,000 and Reid would become a Director of GNG; in return Reid was to use his "best efforts" to obtain financing for GNG. Id. at P 10. In or about February 1988, the October 1987 agreement was abandoned because GNG refused to comply with the terms of the agreement when it failed to provide Reid with audited financial statements and future operational budgets of GNG. Id. at P 11. Reid informed Lindstrom that he wanted to return the shares of GNG stock and that he wanted a refund of the purchase price; Lindstrom did not accept that "offer." Id. at P 11. Reid contends that at one point he "assumed" that he was a Director of GNG and did make statements to that effect, but after he had a "falling out" with Lindstrom, he did not consent to become a Director of GNG. Id. at P 12. In his affidavit, Reid states that he did not receive any notices that called a directors' meeting; he never attended a directors' meeting; he never received any reports or minutes of any directors' meetings (except for the minutes of a February 1, 1988 meeting that Lindstrom sent to Reid upon his request); he never attended any GNG stockholders meetings; he never received any notices for a GNG stockholders meeting; and he was never "officially" notified that he was elected as a Director of GNG. Id. at PP 12-15. *fn6" Reid also contends that the minutes of the February 1, 1988, meeting were only sent to him because GNG had increased its shares of outstanding stock from 25,000 to 50,000, and Reid, still holding 5,000 shares of GNG stock, wanted documentation citing the reasons for the additional shares of stock being issued. Id. at P 14. Reid's inquiry was made only after he had been informed by GNG's management that they were selling GNG to a company named Auto Spa, Inc. ("ASI") and that Reid needed to sell his shares of GNG stock to ASI; however, the sale of GNG to ASI was never completed. Id. at P 14. Reid contends that from February 1988 to May 1989, his only contacts with Lindstrom were when he attempted to obtain repayment of his loans and when he was contacted to sell his shares of stock to ASI. Other than for those purposes, Reid claims he had no conversations or knowledge of how GNG conducted its business affairs during that time. Id. at P 15.

 On May 2, 1989, Reid received a notice that a GNG stock holders meeting was going to be held on May 8, 1989, wherein a vote would be conducted for the sale of GNG to Channel One, Inc. ("CHO"). Id. at P 16. Reid as a shareholder, creditor and franchisee of GNG, was interested in the possible sale of GNG, so he retained counsel to get more information about the proposed sale to protect his interests. Id. at PP 16-17.

 On June 16, 1989, GNGATL and Grease 'N Go International ("GNGINT"), previously known as CHO, sent out a joint letter to the eastern region franchisees announcing the GNGATL purchase of Grease 'N Go. Def's. Mem. Supp. at Exh. 14. This letter stated that GNGATL would be responsible to provide franchisees with all the services and materials as stated in their existing license agreements. Id. The letter also stated that all franchise royalties, advertising fund contributions and remaining franchise fee balances, if any existed, were payable to GNGATL. Id. On June 23, 1989, GNGATL sent a letter to franchisees in the eastern region announcing that it would assume all "future" rights and management responsibilities for the Grease 'N Go System. Id. at Exh. 15. The letter also explained that RSQ had already built and operated four Grease 'N Go centers, and that several more centers were slated for construction and would soon be open. Id. GNGATL also stated that it would assist any of its franchisees with any questions that they had about the Grease 'N Go system. Id.

 In its motion for summary judgment, GNGATL submitted an affidavit from Mr. Robert M. Goolrick, Vice President of GNGATL who negotiated the sale between GNGINT and GNGATL. Id. at Exh. 20. Goolrick states that GNGATL was told that the contracts it had purchased from GNGINT were all in "standard form" like the ones signed by RSQ with GNG, which, as noted, did not contain a Turnkey Option. Goolrick Aff. at P 4. Indeed, Goolrick states that GNGATL had no knowledge of any Turnkey Option until this suit was filed. Id. at P 4. Goolrick further states that because of "tensions" between Reid and GNG, GNGATL was given little opportunity to review the "actual" franchise contracts that GNGATL purchased, but, in any event, none of the agreements that were reviewed contained an option for a Turnkey Building Lease Program. Id. at P 5.

 In or about August 1989, GNGINT transferred back to GNG all the assets it had previously acquired from it in June 1989, except for the assets that had been sold to GNGATL. Def's. Mem. Supp. at 10. GNG filed for Chapter 11 protection under the Bankruptcy Code on September 26, 1989 and GNGINT did the same sometime thereafter. Id. at 10; Pl's. Mem. Opp'n at 1. As a result, plaintiffs' claims against GNG and GNGINT have been stayed pursuant to 11 U.S.C. ยง 362.

 Discussion

 In the complaint, plaintiffs' first three causes of action allege breach of contract because they were not provided facilities pursuant to the "Turnkey Building Lease Program." Plaintiffs allege as a fourth cause of action that they are entitled to rescission of their respective license agreements with GNG because they were executed illegally under New York State General Business Law. Plaintiffs allege in their fifth through seventh causes of action that GNG, GNGINT and GNGATL engaged in a series of fraudulent conveyances wherein they defrauded plaintiffs.

 Rule 56(c) of the Federal Rules of Civil Procedure provides that summary judgment shall be granted when there exists no "genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." The Court must consider whether a reasonable finder of fact could rationally find in favor of the party opposing summary judgment; if such a finding is not possible, a court may appropriately grant summary judgment. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251-52, 91 L. Ed. 2d 202, 106 S. Ct. 2505 (1986).

 The moving party bears the burden of proving that no genuine issue of material fact exists. Adickes v. S.H. Kress and Co., 398 U.S. 144, 156, 26 L. Ed. 2d 142, 90 S. Ct. 1598 (1970). The movant can meet this burden by showing that no evidence exists in support of the non-moving party's case. Celotex Corp. v. Catrett, 477 U.S. 317, 323-25, 91 L. Ed. 2d 265, 106 S. Ct. 2548 (1986). If this burden is met, the burden shifts to the nonmoving party to come forward with evidence of specific facts showing that there is a genuine issue of fact for trial. Anderson, supra, 477 U.S. at 256. The evidence asserted by the non-moving party cannot consist of "mere allegations or denials of the adverse party's pleading," but must set forth "specific facts showing that there is a genuine issue for trial." Fed. R. Civ. P. 56(e). This is especially so where the issue is one on which the non-moving party has the burden of proof. However, all of the evidence and the reasonable inferences drawn from the evidence must be "viewed in the light most favorable to the party opposing the motion." Adickes, supra, 398 U.S. at 158-59. If all the requirements of the summary judgment standard are met, the court should not hesitate to grant a summary judgment motion because its principal purpose "is to isolate and dispose of factually unsupported claims." Celotex, supra, 477 U.S. at 323-24.

 A. Breach of Contract Claims

 In the first three causes of action in the complaint, each of the plaintiffs claimed that GNGATL was liable for GNG's failure to perform under the Turnkey Option which they allege was specified in their license agreements with GNG. GNGATL claims that it only assumed liability for future obligations under the license agreement with GNGINT. *fn8" Def's. Mem. Supp. at 11. Moreover, GNGATL asserted that it was unaware of any Turnkey Options in the respective license agreements and if it had been aware of the options, it would ...


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