Searching over 5,500,000 cases.


searching
Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

Rescuecom Corp v. Jonathan Chumley; and Osi Consulting

March 28, 2011

RESCUECOM CORP., PLAINTIFF/COUNTER-DEFENDANT,
v.
JONATHAN CHUMLEY; AND OSI CONSULTING, LLC, DEFENDANTS/COUNTER-CLAIMANTS,



The opinion of the court was delivered by: Hon. Glenn T. Suddaby, United States District Judge

MEMORANDUM-DECISION and ORDER

Currently before the Court in this breach-of-contract action, filed by Rescuecom Corporation ("Plaintiff") against Jonathan Chumley ("Defendant Chumley") and OSI Consulting, LLC ("Defendant OSI"), are the following four motions: (1) Plaintiff's motion for summary judgment (Dkt. No. 70); (2) Defendants' motion to strike the reply affidavit of Plaintiff's attorney (Dkt. No. 91); (3) Plaintiff's motion to strike Defendants' Answer and enter judgment of default against Defendants (Dkt. No. 120); and (4) Defendant Chumley's motion to permit him to represent himself pro se and to set aside the Clerk's Entry of Default against him (Dkt. Nos. 126-127). For the reasons set forth below, Plaintiff's motion for summary judgment is granted in part and denied in part, and decision is reserved on that motion in part; Defendants' motion to strike the reply affidavit of Plaintiff's attorney is denied as moot; Plaintiff's motion to strike Defendants' Answer and enter default judgment against Defendants is granted in part and denied in part; and Defendant Chumley's motion to permit him to represent himself pro se and to set aside the Clerk's Entry of Default against him is granted.

TABLE OF CONTENTS

I. RELEVANT BACKGROUND...............................................................................................4

A. Plaintiff's Claims.........................................................................................................4

B. Defendants' Counterclaims........................................................................................6

C. Plaintiff's Motion for Remand...................................................................................7

D. Undisputed Material Facts on Plaintiff's Motion for Summary Judgment..........8

1. Facts About Rescuecom.................................................................................8

2. Facts About Defendants.................................................................................9

3. Defendants' Problems with Their Rescuecom Account............................10

4. Notice of Default Pursuant to Franchise Agreement and Subsequent Termination of Defendants' Franchise..................................11

5. Stipulated-Damages Provision in Franchise Agreement ......... .12

6. Credits Owed to Defendants........................................................................13

E. Arguments on Plaintiff's Motion for Summary Judgment...................................13

II. RELEVANT LEGAL STANDARDS .................................................................................16

A. Legal Standard Governing Motions for Summary Judgment..............................16

B. Legal Standards Governing Plaintiff's Claims .....................................................17

III. ANALYSIS.............................................................................................................................17

A. Plaintiff's Breach-of-Contract Claim......................................................................17

1. Whether Defendants Defaulted Under the Franchise Agreement...........18

2. Whether the Stipulated Damages Provision Is Enforceable.....................20

B. Attorney's Fees..........................................................................................................25

C. Defendants' Counterclaims......................................................................................26

1. Fraud-Related Counterclaims.....................................................................27

2. Counterclaims for Negligent Misrepresentation and Breach of Fiduciary Duty.............................................................................30

3. Counterclaim for Quantum Meruit............................................................31

4. Counterclaim for Breach of Contract.........................................................32

5. Counterclaims for Conversion....................................................................34

6. Counterclaims for Unjust Enrichment and Quantum Meruit.................35

7. Counterclaim for Violation of N.Y. Gen. Bus. Law § 687.........................36

8. Defendants' Counterclaim for Violation of Louisiana Statute 51:122..............................................................................38

D. Defendants' Motion to Strike Plaintiff's Reply......................................................38

E. Plaintiff's Motion for Default Judgment and Defendant Chumley's Motion to Set Aside the Entry of Default Against Him........................................39

1. Clerk's Entry of Default Against Defendant Chumley.............................40

2. Motion for Default Judgment Against Defendant OSI.............................42

I. RELEVANT BACKGROUND

A. Plaintiff's Claims

On or about June 8, 2007, Plaintiff filed this breach-of-contract action against Defendants in Supreme Court for Onondaga County. (Dkt. No. 1, Attach. 2 [Plf.'s Compl.].) On or about July 3, 2007, Defendants removed this action to this Court. (Dkt. No. 1, Attach. 1 [Defs.' Notice of Removal].) Generally, liberally construed, Plaintiff's Complaint alleges as follows. (See generally Dkt. No. 1, Attach. 2.)

Plaintiff is a computer services franchisor, offering and selling franchised computer services businesses nationwide. Plaintiff's franchisees offer computer services, including computer consulting, repair, and Internet services to business and residential customers.

On January 25, 2006, Plaintiff entered into a franchise agreement with Defendant Chumley, which authorized him to operate one of Plaintiff's franchises under the terms and conditions of the Rescuecom Corporation Franchise Agreement ("the Franchise Agreement"). The Franchise Agreement executed between the parties provides, among other things, as follows:

(1) it is governed by the laws of the State of New York; (2) either the franchisor or the franchisee may terminate the Franchise Agreement for cause "upon any grounds available by law, following written advanced notice to the other party and thirty days opportunity to cure"; (3) in the event of termination by Plaintiff based on the franchisee's default, the franchisee is responsible for paying all sums owed, reasonable attorney's fees, and stipulated damages in the amount of 18% of the projected Total Sales and 50% of the projected Gross Product Profit that Defendant Chumley would have earned each month, multiplied by the number of months remaining on the term of the Franchise Agreement period; and (4) the franchisee may not compete with Plaintiff for a period of two years after the expiration or termination of the Franchise Agreement. The term of the Franchise Agreement was five years, with an agreed upon termination date of January 25, 2011.

On September 19, 2006, Plaintiff forwarded a notice of default under the Franchise Agreement to Defendant Chumley. Plaintiff notified Defendant Chumley that his defaults were based on his failure to pay (1) amounts owed to Tech Data, a third party supplier with which Plaintiff has an account, (2) royalties, (3) handheld-device fees, and (4) fees owed for local advertising. The total amount owed by Defendant Chumley based on these defaults was $16,653.80.

On October 25, 2006, Plaintiff forwarded a notice of termination of the Franchise Agreement to Defendant Chumley. On the date of termination, Defendant Chumley owed Plaintiff $6,793.84; and 50 months remained on the franchise period. The monthly average royalties on Defendant Chumley's total sales for services was $893.73, and the monthly average royalties on Defendant Chumley's Gross Product Profit was $205.77. Based on these figures, the stipulated damage amount owed by Defendant Chumley is $54,975.00. In addition, Defendant Chumley took payments from Plaintiff's customers for prepaid services in at least the sum of $2,665.00, which Plaintiff must now perform.

Based on these allegations, Plaintiff seeks damages for Defendant Chumley's alleged breach of contract in the total amount of $125,433.84, plus interest from the date of termination, costs and disbursements, including attorney's fees. Plaintiff also seeks an injunction, enjoining Defendant Chumley from (1) soliciting or doing business with any customers for whom he or Defendant OSI previously performed services, or sold product while he operated the franchise,

(2) diverting or attempting to divert business or customers of the franchised business to any competitor, and (3) identifying himself as a franchisee or former franchisee of Plaintiff.

Familiarity with the remaining factual allegations supporting Plaintiff's claims of breach of contract is assumed in this Decision and Order, which is intended primarily for the review of the parties. (Id.)

B. Defendants' Counterclaims

On December 12, 2008, Defendants filed an Amended Answer, which asserts twelve counterclaims. (Dkt. No. 54.) More specifically, Defendants assert as counterclaims the following: (1) fraudulent inducement based on Plaintiff allegedly engaging in a pattern of conduct, which was intended to and did misrepresent the facts of the franchise opportunities, thereby fraudulently inducing Defendants to enter into the Franchise Agreement and expend money, time and labor on the franchise and business that was developed based on it; (2) intentional misrepresentation based on Plaintiff (a) permitting Defendants to provide services to a national client, Amptek, whom Plaintiff knew would not pay Defendants for services performed because of a credit owed for work not done by Plaintiff, and (b) compelling Defendants to use inadequate communications equipment and charge card and vendor billing, charging fees for services not rendered, and charging account fees that resulted in overdraft charges; (3) rescission based on the aforementioned conduct by Plaintiff; (4) fraud based on the aforementioned conduct by Plaintiff; (5) negligent misrepresentation based on the aforementioned conduct by Plaintiff; (6) quantum meruit based on the aforementioned conduct by Plaintiff; (7) breach of contract based on (a) Plaintiff engaging in the aforementioned conduct, (b) Plaintiff failing to pay Defendants for certain monies collected from customers, and (c) David Milman, Plaintiff's CEO, backdating his signature on the Franchise Agreement; (8) breach of fiduciary duty based on the aforementioned conduct by Plaintiff, and the fact that the parties were in unequal bargaining positions when the Franchise Agreement was executed; (9) conversion based on Plaintiff (a) billing Amptek for work not actually done, collecting royalties on this work, and then collecting royalties from Defendants for services they performed for Amptek, but for which they were not paid, and (b) failing to remit monies from credit card payments made by Defendants' customers for services rendered by Defendants; (10) unjust enrichment and quantum meruit based on Plaintiff taking money from clients whom Defendants serviced and not paying Defendants; (11) violation of N.Y. Gen. Bus. Law § 687 based on Plaintiff's false statements and material misrepresentations in its Franchise Agreements and other documents and communications regarding the management and operation of the Rescuecom Franchise; and (12) violation of Louisiana Statute 51:122 based on the unreasonable restrictions in the non-compete clause in the Franchise Agreement. (Id.)

Familiarity with the remaining factual allegations supporting Defendants' counterclaims is assumed in this Decision and Order, which is intended primarily for the review of the parties. (Id.)

C. Plaintiff's Motion for Remand

On July 13, 2007, Plaintiff requested that the Court hold a pre-motion conference to assist the parties in resolving their disagreement over whether the matter should be remanded to state court. (Dkt. No. 6.) Plaintiff argued that remand was appropriate because the amount in controversy--both as alleged in its Complaint and as established by extrinsic evidence outside the four corners of that Complaint--did not exceed $75,000. (Id.) On July 18, 2007, that conference was held, and it was decided that the parties would brief the issue, by letter, of whether remand was appropriate in this case. (See Docket Minute Entry for 7/18/07.)

In its letter-brief, Plaintiff conceded that the amount in controversy in this case is $64,433.84, excluding reasonable attorney's fees. (Dkt. No. 13.) Based on this concession, Plaintiff argued that the amount in controversy did not exceed $75,000. (Id.) In adopting the thorough Report-Recommendation issued by United States Magistrate Judge George H. Lowe, the United States District Judge then assigned to the case, Frederick J. Scullin, Jr., concluded that an award of attorney's fees should be included in the total amount of damages alleged for jurisdictional purposes, under the circumstances. (Dkt. No. 31.) District Judge Scullin further concluded that, based on the applicable language in the Franchise Agreement, the fees amount to 25% of $64,433.84, or $16,108.46. (Id.) As a result, District Judge Scullin concluded that the Court possessed jurisdiction over this action. (Id.)

D. Undisputed Material Facts on Plaintiff's Motion for Summary Judgment

The following is a general summary of material facts that are undisputed by the parties. (Compare Dkt. No. 70, Attach. 2 [Plf.'s Rule 7.1 Statement] with ...


Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.