Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—11th Cir.: Court repeatedly rejects attempts to ‘circumvent’ lack of evidence in franchise investment misappropriation suit, (Jan 2, 2025)

By Justin Marcus Smith, J.D.

Foreign investors who complained they were defrauded failed to make their case against the franchisor after having apparently pursued the escrowees into bankruptcy protection.

The federal district court for the Middle District of Florida did not err in granting summary judgment to a restaurant franchisor and its president who were apparently bystanders to a franchising escrow fraud allegedly perpetrated by non-parties, affirmed the United States Court of Appeals for the Eleventh Circuit. The Eleventh Circuit repeatedly criticized the efforts of the plaintiff-appellants, who had sought to invest in franchises to improve their immigration status, to “circumvent” district court findings in raising new arguments on appeal. The court affirmed summary judgment on all nine counts of the foreign investors’ complaint (Jia v. Boardwalk Fresh Burgers & Fries, Inc., No. 21-13086 (11th Cir. Dec. 31, 2024)).

Background. Plaintiff-appellants Chunhong Jia, and others, who were citizens and residents of the People's Republic of China, sought to lawfully obtain permanent resident status in the United States under the EB-5 Immigrant Investor Program (EB-5 Program). Per the EB-5 Program, they each attempted to invest $500,000 in Boardwalk Fries Opportunities, L.P. (BFO) for the operation ten new Boardwalk Fresh franchises. However, non-parties to the instant matter allegedly misappropriated their collective $3.5 million investment. According to the Eleventh Circuit, the plaintiffs’ initial legal actions against those non-parties failed when several sought bankruptcy protection.

The plaintiffs later resorted to suing the would-be franchisor, defendant Boardwalk Fresh Burgers & Fries, Inc. (BFBF), and its president, defendant David DiFerdinando (collectively, the BFBF defendants). However, that initial federal action against the BFBF defendants, in the federal district court of the Southern District of Ohio, failed for lack of personal jurisdiction.

The plaintiffs then re-filed against the BFBF defendants in the federal district court for the Middle District of Florida. However, that district court granted summary judgment on all fifteen of the plaintiffs’ claims, a decision that also mooted the BFBF defendants’ third-party complaint against certain of the alleged misappropriators of escrowed funds, specifically, Wang and New City Advisors, LLC (NCA).

The plaintiffs then appealed summary judgment on only nine of their fifteen claims against the BFBF defendants, specifically: 1) fraud; 2) negligent misrepresentation; 3) federal securities law violations; 4) breach of contract; 5) breach of fiduciary duty; 6) constructive fraud; 7) negligence; 8) gross negligence; and, 9) unjust enrichment or quantum meruit.

Applying de novo review, the United States Court of Appeals for the Eleventh Circuit affirmed the Middle District of Florida’s summary judgment decisions on each of the plaintiffs’ nine claims.

Fraud. The court found the district court did not err in finding that the plaintiff-appellants failed to present evidence that they relied on a certain DiFerdinando affidavit. The appellants’ fraud claim turned on whether the affidavit contained a false promise that the BFBF defendants would contribute $3 million to BFO with the intent to lure the appellants into making their investment. However, the court said the record was clear that none of the appellants communicated directly with DiFerdinando before investing in BFO. The district court also found the appellants failed to provide evidence that they had even read or reviewed the DiFerdinando affidavit before investing their money with BFO. The appellants also conceded that the BFBF defendants never directly provided the affidavit. Instead, the appellants argued that NCA provided the affidavit via Wang.

The court construed that the appellants were attempting to circumvent the lack of evidence below by only arguing now, on appeal, more precisely that NCA and Wang acted as a dual agent for BFO and the BFBF defendants. The court found this argument ignored Wang’s testimony that NCA did not represent the BFBF defendants, and there was no evidence of such relationship. The court said it declined to consider this new argument raised for the first time on appeal.

The court said the appellants’ next argument, that other solicitation documents placed them on notice that DiFerdinando allegedly promised to contribute $3 million to the project, was equally unpersuasive. The other documents only obligated the general partner, BWF MGMT, to make a $3 million capital contribution. This meant the appellants’ case still turned on whether they had read the DiFerdinando affidavit before investing, but they all agreed they had not done so. The court accordingly affirmed summary judgment for the BFBF defendants on the fraud claim.

Securities violations. Likewise, reliance was an essential element of the appellants’ Securities Exchange Act § 10(b) claim, but the court had already found that the appellants failed to present any evidence of reliance on the DiFerdinando affidavit. The court therefore held the district court did not err here, either, and it accordingly affirmed summary judgment for the BFBF defendants.

Contract breach. The court did not find any error in the district court’s summary judgment for the BFBF defendants on the breach of contract claim. Here, the appellants conceded that the BFBF defendants were not parties to the BFO limited partnership agreement (LPA), but the appellants nevertheless contended that the BFBF defendants could still be liable for breach of contract, either through direct conduct with the parties who allegedly misappropriated, or by piercing the corporate veil.

As to the direct conduct theory, the court found the appellants only raised it below with respect to their breach of fiduciary duty claim, not with respect to the breach of contract claim. The court accordingly declined to apply it to the breach of contract claim for the first time on appeal.

As to veil-piercing, the court found the appellants needed to pierce the veils of two entities, Boardwalk Fries, LLC and BWF MGMT, in order to hold the BFBF defendants individually liable for alleged BWF MGMT breaches of its duties as a general partner of BFO. However, the court said the district court “correctly noted” that the appellants did not identify any evidence in the vast record below. The district court also noted that the fraud claims were resolved in the BFBF defendants’ favor, the Eleventh Circuit affirmed that disposition, and other arguments were not raised earlier.

The appellants did not satisfy the first prong for veil piercing, i.e., that the legal entity in question did not have a separate existence. As such, the court held the district court did not err in finding that the appellants failed to meet their burden of proof to pierce the veils of BWF MGMT or Boardwalk Fries, LLC. Without corresponding BFBF defendant individual liability for the alleged contract breaches, the district court did not err in granting summary judgment to the BFBF defendants on the breach of contract claim.

Fiduciary breach. The court held the district court properly granted summary judgment for the BFBF defendants on the breach of fiduciary duty and constructive fraud claims. The court noted the appellants were correct that Boardwalk Fries, LLC had not actually been formed as a legal entity when it signed the BFO LPA on behalf of BWF MGMT. However, that did not justify the “giant leap” to the “unsubstantiated” legal conclusion that DiFerdinando signed the LPA in his personal capacity or as an agent, officer, or employee of Boardwalk Fresh.

The court agreed with the district court finding that the appellants did not show evidence that either BFBF defendant was a general partner of BFO. Nor did they show any legal authority to conclude that either BFBF defendant should be held liable for BWF MGMT conduct. Rather, the appellants attempted “to ignore or brush aside” the fact that BWF MGMT “sat between” the BFBF defendants and BFO. In the attempt to pierce two corporate veils, the appellants stated they already had a judgment against BWF MGMT for breach of contract. However, that judgment was by default; the BFBF defendants were not parties to that lawsuit; and, the appellants failed to provide authority for why the BFBF defendants should be held individually liable for BWF MGMT conduct. The appellants admitted below that they had never spoken to the BFBF defendants; therefore, it was not clear that they had any relationship, much less a special one. The court concluded again that the appellants were attempting to “circumvent the district court’s findings” by raising new arguments on appeal. The court declined to consider them.

Negligence. The court affirmed the district court properly granted summary judgment in the BFBF defendants’ favor on the negligence and gross negligence claims. Again, there was no evidence that the BFBF defendants’ were BFO general partners, hence the BFBF defendants could not have breached any duty. The appellants also failed to present evidence that the BFBF defendants signed a management agreement in their individual capacities; nor that either prepared, approved, of disseminated the business plan to the appellants; nor that they had any obligation or even authority to monitor the use of BFO capital. Last, the appellants failed to present any evidence of what tortious acts DiFerdinando allegedly committed as president of Boardwalk Fries, LLC, yet another argument raised for the first time on appeal. The court held the district court did not err in finding that the appellants’ negligence claim failed as a matter of law.

Unjust enrichment. Last, the court affirmed summary judgment for the BFBF defendants on the unjust enrichment claim. The appellants did not point to any evidence tracing their investment out of the BFO bank account into any other entity or individual account. There was no evidence even of a transfer from the BFO account into the Jardin Hill account. That meant a critical link was missing. There could be no reasonable inference that the appellants’ escrowed funds were the source of $330,000 transferred from Jardin Hill to the Boardwalk Fresh account. That assertion was “pure speculation.” Even if DiFerdinando arguably could have been aware of it, the appellants failed to clearly and convincingly show this, and they offered no other theories to show conferral of a benefit on the BFBF defendants. Without any conferral of benefit, the district court did not err in granting summary judgment for the BFBF defendants.

The Case is No. 21-13086.

Judge: Sands, W.

Attorneys: Christopher D. Cathey (Taylor English Duma, LLP) for Chunhong Jia. Daniel Jay Gerber (Rumberger Kirk & Caldwell, PA) for Boardwalk Fresh Burgers & Fries, Inc.

Companies: Boardwalk Fresh Burgers & Fries, Inc.

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