The opinion of the court was delivered by: Lindsay, Magistrate Judge:
The plaintiffs, Vincent J. Ammirato, Gary J. Kulik, Kenneth H. Salbu, Robert J. Murphy and Louis Vengilio, commenced this action against the defendant, Duraclean International, Inc. ("Duraclean International") on November 7, 2007, alleging that Duraclean International breached its contract with the plaintiffs and violated General Business Law § 349 and 18 U.S.C. § 1961, et seq. ("RICO"), when it failed to repay their loans. By order dated February 10, 2010, the court granted the defendant's motion for summary judgment with respect to the plaintiffs' claims under the General Business Law and RICO and denied the motion with respect to the breach of contract claim. Beginning on August 16, 2010, an eight day bench trial was held, which concluded September 24, 2010. Having considered all of the evidence and testimony presented, the court makes the following findings of fact and conclusions of law pursuant to Fed. R. Civ. P. 52(a).
A. The Relationship between Duraclean International and Steven Diaz
The defendant Duraclean International is an Illinois corporation with its principal place of business in Arlington Heights, Illinois.*fn1 Duraclean International is in the business of providing cleaning and care services for carpets, rugs, and upholstery through franchised dealers. Pursuant to its franchise agreements, Duraclean International lends support to its franchises by, among other things, sending its representatives to assist in the opening of franchises, to assist in presentations to new clients, to prepare for trade and mall shows, or to help to set up databases. Tr. at 1224-25.*fn2 Duraclean International also negotiates contracts to make services and goods available to its franchises. Tr. at 1281-82. For example, Duraclean International has a contract with the yellow pages so that franchises can advertise at lower rates. Tr. at 1281. Duraclean International also has a national equipment rental and labor contract that allows franchises to obtain equipment and labor at the lowest possible rate. Tr. at 1281-82. Duraclean International does not have a national advertising program for its franchises. Tr. at 1293. Vincent Caffarello is the current president and a fifty percent owner of Duraclean International. Tr. at 5. Wilbur Gage is the executive vice-president and also owns fifty percent of the company. Tr. at 131.
In the late 1980s, Steven Diaz ("Diaz"), who is not a party to this action, became a partner of a Duraclean franchise located in Medford, New York. Tr. at 15, 905. The franchise was known as Duraclean Fabric Specialist by J & S, Inc. d/b/a Duraclean Specialists ("Duraclean Specialists"). Tr. at 15, 906. A few years later, Diaz bought out his partner's interest in the Medford franchise and also purchased several additional franchises on Long Island. Tr. at 15, 905-06, 909.
Duraclean Specialists, as with every Duraclean franchise, had a designated a primary marketing area ("PMA") where it could perform carpet and upholstery cleaning and restoration. Tr. at 905-06. A PMA was a delineated geographic area where a franchise could operate. Tr. at 7. The PMA was designed to confine the areas in which marketing and business development took place to avoid conflicts with other franchises. Tr. at 7-8. PMAs were, however, written on a non-exclusive basis so franchises could develop business outside their PMA in areas where no other franchises were located or where they were referred business by existing clients. Tr. at 42-43, 1322-23. The PMA of Diaz's franchises included the Port Jefferson area to Wading River, Pseudocode, Stony brook, Smithson-St. James and the Hampton, Tr. at 909-11.
From 2000 to 2006, the Diaz franchises operated under an Ownership Agreement dated December 28, 2000, which was renewed September 20, 2005. Tr. at 922. Pursuant to the Agreement, Duraclean International received approximately two percent of the revenues earned by the Diaz franchises. Tr. at 34, 934.The royalty paid to Duraclean International was based on a declining formula, meaning as revenues increased, the percentage paid to Duraclean International decreased. Tr. at 34.
In early 2000, Caffarello, Duraclean International's president, suspected that Diaz was under-reporting his revenues and not accurately paying royalties to the company so he flew to New York to interview Diaz. Tr. at 27-30, 150. Caffarello never determined whether Diaz was, in fact, under-reporting his revenues. Tr. at 30. In either case, from 2000 to 2004, Diaz's franchises experienced explosive growth, becoming the top grossing franchises in the Duraclean system. Tr. at 31.
In 2004, Caffarello determined to sell his 50% interest in Duraclean International. Tr. at 1237. Caffarello offered to sell his interest in the company to his partner William Gage pursuant to their buy/sell agreement, but Gage declined. Tr. at 21. After Gage declined the offer, Diaz offered to purchase Caffarello's shares. Tr. at 21, 952, 1237. On June 30, 2004, Diaz entered into an agreement to purchase Caffarello's shares for $600,000 and executed a note made payable to Caffarello for virtually the entire sum minus a deposit. Tr. at 22-23,69. Diaz become a fifty percent owner of Duraclean International and was made a member of its board of directors.*fn3 Tr. at 22-23. Caffarello, however, remained the president and treasurer. Tr. at 34. Diaz was never given a position as an officer.Tr. at 1241.
Despite his newly acquired ownership interest in Duraclean International, Diaz's franchise remained in dire straights and, in 2006, Duraclean International terminated Diaz's Duraclean Specialists' franchise agreement. Tr. at 33, 1253,1310. Diaz also defaulted on the note given to Caffarello. Tr. at 69-70. Diaz made one payment on the note in January 2005 and defaulted on his July 2005 payment. Tr. at 69-70. In December 2005, Diaz was sent a cure letter which demanded payment of the $525,000 balance. Tr. at 70. When he failed to cure the default, Caffarello took back his stock and was reinstated as a director. Tr. at 5, 20-21, 26.
B. The National Marketing Program
In or around 2003, Diaz started a marketing program for his Duraclean Specialist franchise, which he called the "National Team." Tr. at 956-957. The objective was to pursue large-loss clients. Tr. at 956-957. Diaz envisioned this program as an opportunity to expand his franchise's business by servicing national accounts. Tr. at 956-57. To achieve this goal, he hired John Kelly as his "national director." Tr. at 440, 957. Kelly had been employed by a well known restoration company and apparently had contacts with Fortune 500 companies. Tr. at 956-57. Kelly testified that there was no actual "National Team," inasmuch as he was the team. Tr. at 443. The term "National Team" was simply a marketing tool. Tr. at 443. Kelly believed that any franchise in the system could have developed a similar marketing tool. Tr. at 443.
After hiring Kelly, Diaz contacted Caffarello to discuss his "National
Team." Tr. at 960. Caffarello testified that, at the time, one other
franchise was also trying to target large loss clients, like hotel
chains, in order to increase profitability. Tr. at 38-41. Diaz's
"National Team" concept was consistent with Duraclean International's
business model that permitted different franchises to be pulled
together to perform large jobs anywhere in the United States. Tr. at
134, 167-168, 809. Moreover, targeting national clients was not
considered a violation of the PMA as a national customer was not
within any one franchise's PMA. Tr. at 44. Diaz frequently consulted
Caffarello regarding the "National Team" and considered Caffarello
part of the team. Tr. at 962-67. Diaz sought Caffarello's presence at
meetings with potential national customers believing that Caffarello's
position at Duraclean International would lend credibility to
Duraclean Specialists and make Duraclean Specialist seem less "mom and
pop." Tr. at 968-71. However, as Kelly explained, in actuality, he and
Clay Burt, Duraclean Specialists's marketing director, were the only
two people who developed and managed the "national team," Kelly never
ran the national team for Duraclean International while he was
employed by Duraclean Specialist, and Duraclean International never
lent financial support to the national marketing
program being pursued by Diaz. Tr. at 168, 443, 480.*fn4
Kelly testified that while he was employed by Diaz, at most,
he spoke to Caffarello four times a year. Tr. at 478.
In order to obtain large national accounts, Kelly marketed Duraclean Specialists outside the PMA for the Diaz' franchises. Tr. at 43-44. Kelly indicated that if he obtained a job from a Fortune 500 company to do work on a national scale, he knew he could contact other independent Duraclean franchises to see if they would enter a joint venture with Duraclean Specialist to perform the work. Tr. at 450-51. To the extent Kelly sought Caffarello's assistance, it was to lend his support in securing the assistance of other franchises. Tr. at 453. In addition, Kelly acknowledged that depending on the client, Caffarello's presence at customer meetings could be helpful in securing the job because it conveyed the idea that the Duraclean Specialist had the backing of Duraclean International and the other franchises in the Duraclean system. Tr. at 453-55. Caffarello viewed his participation at client meetings as consistent with his responsibilities as president of Duraclean International, which included assisting franchises on the growth of their business. Tr. at 1222-24.
In or around 2003, Kelly secured a job for Duraclean Specialist with the New York State Construction Authority in connection with a school being built by a contractor named Skanska. Tr. at 824. Michael Rogers, Vice-President of Waste Recycling Solutions, had to approve Duraclean Specialist for work as a sub-contractor. Tr. at 828. Because the job required Skanska to make a sizable outlay of money, Duraclean Specialist's bid documents had to address its ability to pay in a timely fashion. Tr. at 825-30. Diaz testified that in bidding on the Skanska job, he submitted a "qual pack" that contained Duraclean Specialist's and Duraclean International's financials along with a Duraclean International certificate of insurance that he had obtained from the company. Tr. at 977-80. After reviewing the financials, a Dun & Bradstreet report, and after speaking to Diaz and Kelly, Rogers believed that he was dealing with a company that had "outlets" throughout the country. Tr. at 829. In fact, Caffarello testified that he had no involvement in the procurement of the Skanska job, and had first became aware that Diaz had used his companies' financials when he was deposed in connection with this case. Tr. at 127-28, 1308.
In 2004, Kelly landed a job with the Disney hotels. Tr. at 48. At the time, there were no other Duraclean franchises in the Disney area. Tr. at 44. In late 2005, through his Disney contact, Kelly was able to secure a job with Proctor & Gamble to clean-up a site in Louisiana that had been damaged by Hurricane Katrina. Tr. at 45-49. After Duraclean Specialists procured the Proctor and Gamble job, Kelly had Diaz contact Caffarello to enlist his assistance. Tr. at 47, 462. At some point, Caffarello helped to organize the manpower needed to complete the job, specifically contacting franchises in Colorado Springs, Columbia, South Carolina, Louisiana and Illinois, who ultimately sent people down to Louisiana to assist on the job. Tr. at 48-49, 1263-1264. Although Duraclean International always offered its franchises leased equipment at discount prices, additional equipment was not need on the Proctor & Gamble job. Tr. at 48, 80-81.
During the same time period, Caffarello also accompanied Diaz and Kelly to a meeting with the risk management team for Caesar's in Las Vegas. Tr. at 84. At the time, Harrah's was purchasing Caesar's and had casinos located around the country, some in hurricane or flood bound areas. Tr. at 86. Caffarello testified that his reason for attending the meeting was that he wanted to find out what would be needed in the different areas of the country so that he could disseminate the information to other franchises. Tr. at 86, 1279. At the meeting, Caffarello identified himself as the president of Duraclean International, Diaz identified himself as the president of the Duraclean Specialist franchise, and Kelly identified himself as the national accounts director of Duraclean Specialists. Tr. at 86-87. Diaz never got the Caesar's job.
Finally, in 2005, Kelly secured two jobs for Diaz's franchise, specifically, to do work for the Dunes condos in South Florida and Turner Construction in Miami. Tr. at 87-90. In obtaining the jobs, a national sales team approach was used to create the impression that the franchise or other local franchises could respond to the accounts. Tr. at 89-90. Caffarello also helped with respect to the Turner deal, at the request of Kelly, by contacting a franchise in West Palm Beach and Illinois to see if they were interested in participating. Tr. at 1267-68.
Diaz testified that neither he nor Caffarello ever concealed the fact the he was a franchise when he was promoting his national team. Tr. at 972. Once these "national jobs" were procured, Diaz, on behalf of Duraclean Specialists, handled the invoicing, received payment, and paid subcontractors. Tr. at 89-90, 457, 1011-12. With the exception of two invoices that were sent directly from Duraclean International for work that Duraclean International specifically performed on the Turner and Proctor & Gamble jobs, all of the documentation reflected that the work was done solely by Duraclean Specialists. Tr. at 90. Diaz further testified that the money he received at Duraclean Specialists for both local and "national team" jobs were commingled in the Duraclean Specialists bank accounts.*fn5 Tr. at 1027-28.
C. The Plaintiffs and their Relationship with Diaz
The plaintiffs, Vincent Ammirato ("Ammirato"), Gary J. Kulik ("Kulik"), Kenneth H. Salbu ("Salbu"), Robert J. Murphy ("Murphy") and Louis Vengilio ("Vengilio") are all residents of Suffolk County, New York. Ammirato, Kulik, Salbu, and Murphy are teachers in the district where Diaz resides. Vengilio is one of Diaz's neighbors. In and around 2005, the plaintiffs made loans to Diaz totaling approximately $750,000.*fn6
Louis Vengilio has been Diaz's neighbor since 1997. Tr. at 198. The Vengilio and Diaz families became very close shortly after Diaz moved to Mount Sinai. Tr. at 198. The families vacationed together and attended each others holiday and birthday celebrations.Tr. at 198-200. Diaz paid for Vengilio's vacation to New Orleans and trip to Las Vegas. Tr. at 202. Vengilio believed that Diaz was a true friend who would never ...