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PROTTER v. NATHAN'S FAMOUS SYS.

October 21, 1995

ERWIN PROTTER, FAST FOOD FRANCHISE, INC., FAST FOOD FRANCHISE OF BROADWAY, INC., and FAST FOOD FRANCHISE OF STEINWAY, INC., Plaintiffs,
v.
NATHAN'S FAMOUS SYSTEMS, INC., HOWARD M. LORBER, WAYNE NORBITZ, RAYMOND DIOGUARDI and CARL PALEY, Defendants.



The opinion of the court was delivered by: SPATT

 Spatt, District Judge:

 This case arises out of the sale of three Nathan's Famous restaurant franchises in the New York metropolitan area. Under the sale agreements the individual plaintiff, Erwin Protter ("Protter"), as president of the corporate plaintiffs, Fast Food Franchise, Inc. ("Fast Food"), Fast Food Franchise of Broadway, Inc. ("Broadway"), and Fast Food Franchise of Steinway, Inc. ("Steinway"), (the "corporate plaintiffs," collectively referred to with Protter as "Protter" or the "plaintiff") purchased three Nathan's Famous restaurant franchises from the defendant, Nathan's Famous Systems, Inc. The restaurants subsequently proved unprofitable and Protter filed this lawsuit seeking $ 13,088,359 in damages, claiming that he was induced to purchase the franchises as the result of a series of fraudulent misrepresentations made by the defendants, Howard M. Lorber ("Lorber"), Wayne Norbitz ("Norbitz"), Raymond Dioguardi ("Dioguardi") and Carl Paley ("Paley") (collectively the "individual defendants," with Nathan's, the "defendants" or "Nathan's") made in their capacities as officers on Nathan's behalf. The Complaint alleges causes of action based on the Racketeering Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961-68, the New York Franchise Sales Act ("NYFSA"), N.Y. Gen. Bus. L. §§ 680-95, the Federal Trade Communications Act ("FTCA") 15 U.S.C. § 57a, common law fraud and negligent misrepresentation. However, the plaintiff subsequently withdrew his negligent misrepresentation and FTCA claims. Accordingly, the only basis for federal jurisdiction is the RICO claims.

 Background

 The following facts are taken entirely from the Complaint. Erwin Protter is a New York resident domiciled in Queens, New York. Protter is the president of the three corporate plaintiffs which are all New York corporations with their principal offices in Queens, New York. Nathan's is a Delaware corporation with its principal office located in Westbury, New York. Defendant, Howard Lorber, is the Chairman of the Board of Directors and a Director of Nathan's; Wayne Norbitz is President, Director and Chief Operating Officer of Nathan's; Raymond Dioguardi is the Vice President and Chief Financial Officer; and Charles Paley is the Vice President of Franchise Development.

 Nathan's is the franchisor of Nathan's Famous restaurant chain which is primarily known for its hot dogs, french fried potatoes and other assorted fast foods. Some time after a public offering made by Nathan's in February 1993, which raised approximately $ 15 million, the plaintiff entered into negotiations with Nathan's for the purchase of three Nathan's franchises at the following locations: (1) 389 Avenue of the Americas, New York, New York; (2) 864 Broadway, New York, New York; and (3) 31-16 Steinway Street, Astoria, New York. On March 17, 1993, Protter entered into a franchise agreement on behalf of Fast Food to purchase the Nathan's franchise at 389 Avenue of the Americas. On November 16, 1993, Protter entered into a franchise agreement on behalf of Broadway to purchase the franchise at 864 Broadway. On February 28, 1994, Protter entered into a franchise agreement on behalf of Steinway to purchase the franchise at 31-16 Steinway Street. Protter executed a personal guarantee in connection with each of these purchases. According to Protter, the plaintiff purchased the three franchises as the result of material misrepresentations made by the defendants during the course of the negotiations.

 The Complaint alleges a variety of misrepresentations by the defendants. Specifically, Protter alleges that the defendants stated that they would act in a support capacity for the plaintiff, and that they would provide training and information, so that the plaintiff could maximize the benefits of his investments, even though he had little prior experience in the fast food industry. Further, Nathan's allegedly misrepresented that the franchises had a higher profit margin than most fast food establishments because of their limited menu and reduced labor costs. In addition, Nathan's allegedly represented that Protter could expect food costs to comprise twenty-four percent of sales, labor costs to comprise twenty-two percent of sales and an after tax return of twenty-five percent, even though the defendants knew these figures to be inaccurate.

 Protter further contends that the defendants misrepresented the franchisor's overall success. Specifically, Protter claims that in order to induce the sale, Nathan's explained that eight of its company owned stores were highly profitable, knowing that those stores were not representative of what the plaintiff could expect. For example, Nathan's failed to explain that in December 1992, sales for Coney Island Hot Dogs, Inc., a multiple unit franchisee operating in the northeast had a 24.7 percent decline in sales with individual stores experiencing declines as high as 46.5 percent. Moreover, sales continued to decline throughout 1993 culminating in a 12.9% decline in December 1993. Similar declines were experienced by the largest franchisee in Florida, Coney Island Hot Dogs of Florida which had a 26.5 percent decline in sales in December 1992 with individual stores losing as much as 30.7 percent, and declining sales throughout 1993 culminating with a 17.3 percent drop in December 1993.

 Protter also asserts that Nathan's misrepresented its intentions with respect to how the $ 15 million raised in its public offering was to be used. The plaintiff alleges that he was told that money was to be used to improve the franchisor's infrastructure and open nineteen more company owned restaurants. Since that time however, there has been no effort made to implement these plans.

 The plaintiff further asserts that he was told that Nathan's would approve all site locations and menus to maximize use of space and customer preferences. Protter contends that these approvals falsely implied that the plaintiff could expect their sales to reach the national average. Moreover, with respect to the store located at 389 Avenue of the Americas, the defendants never informed the plaintiffs of the failure of a company owned store located across the street ten years earlier.

 In addition to the material misrepresentations and omissions stated above, the plaintiff also alleges numerous other omissions of material facts by the defendants to induce the sales of the franchises. Among these alleged omissions are the defendants' failure to disclose significant hidden costs associated with running the franchises and the severity of sales declines that other stores were experiencing over the last several years; that other franchises had found themselves in a variety of financial difficulties at the time the plaintiff entered into the franchise agreements; that prior to entering the franchise agreements the defendants failed to admit that they were parties to lawsuits; and that the defendants received kickbacks from third parties, presumably for referring the plaintiff to these third parties for services rendered while operating the franchises.

 The plaintiff claims, that as a result of these misrepresentations they have incurred over $ 1.8 million dollars in damages including franchise fees, construction and equipment expenses, legal expenses, and rental expenses as a result of delays in opening the restaurants. Protter also claims that, based on the promised twenty-five percent return, he has lost $ 1 million in profits and stands to lose another $ 10 million. As a result, the plaintiff seeks $ 13,088,359 in monetary damages.

 Discussion

 On a motion to dismiss for failure to state a claim, "the court should not dismiss the complaint pursuant to Rule 12(b)(6) unless it appears 'beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief'". Goldman v. Belden, 754 F.2d 1059, 1065 (2d Cir. 1985) (quoting Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957)); see also IUE AFL-CIO Pension Fund v. Herrmann, 9 F.3d 1049, 1052-53 (2d Cir. 1993). The Second Circuit stated that in deciding a Rule 12(b)(6) motion a Court may consider "only the facts alleged in the pleadings, documents attached as exhibits or incorporated by reference in the pleadings and matters of which judicial notice may be taken". Samuels v. Air Transport Local 504, 992 F.2d 12, 15 (2d Cir. 1993); also see Rent Stabilization Ass'n of the City of New York v. Dinkins, 5 F.3d 591, 593-94 (2d Cir. 1993) (citing Samuels, 992 F.2d at 15).

 It is not the Court's function to weigh the evidence that might be presented at a trial, the Court must merely determine whether the complaint itself is legally sufficient, see Goldman, 754 F.2d at 1067, and in doing so, it is well settled that the court must accept the allegations of the complaint as true, see LaBounty v. Adler, 933 F.2d 121, 123 (2d Cir. 1991); Procter & Gamble Co. v. Big Apple Indus. Bldgs, Inc., 879 F.2d 10, 14 (2d Cir. 1989), cert. denied, 493 U.S. 1022, 107 L. Ed. 2d 743, 110 S. Ct. 723 (1990), and construe all reasonable inferences in favor of the plaintiff. See Scheuer v. Rhodes, 416 U.S. 232, 236, 40 L. Ed. 2d 90, 94 S. Ct. 1683 (1974); Bankers Trust Co. v. Rhoades, 859 F.2d 1096, 1099 (2d Cir. 1988), cert. denied, 490 U.S. 1007, 104 L. Ed. 2d 158, 109 S. Ct. 1642 (1989).

 In addition to the foregoing standard governing Rule 12(b)(6) motions, the Court must be mindful of the relevant rules of pleading. In general, a plaintiff need only provide "a short and plain statement of the claim showing that the pleader is entitled to relief," Fed. R. Civ. P. 8(a)(2), and that "all pleadings shall be so construed as to do substantial justice". Fed. R. Civ. P. 8(f). However, because the two RICO claims at issue are based on allegations of mail fraud, the more stringent requirements of Rule 9(b) apply, requiring that "all averments of fraud . . . shall be stated with particularity." Fed. R. Civ. P. 9(b).

 The Plaintiff's RICO Claim

 (i) The RICO allegations and the fraud allegations

 Allegations of the predicate act of mail fraud, must pass muster under Fed. R. Civ. P. 9(b), which requires that:

 
In all averments of fraud . . ., the circumstances constituting fraud . . . shall be stated with particularity. Malice, intent, knowledge, and other condition of ...

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