Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—5th Cir.: Franchisees establish jurisdiction over franchisor, principals for fraudulent transfer claim, (Sep 18, 2014)

By John W. Arden, J.D., LL.M.

Franchisees of Texas vending machine routes, claiming that their franchisor and its Massachusetts principals committed fraud and breached their franchise agreement, established a prima facie case of personal jurisdiction with regard to their fraudulent asset transfer claim, according to the U.S. Court of Appeals in New Orleans. Dismissal of the claims by the federal district court in Dallas for lack of personal jurisdiction was overturned, and the case was remanded (Dontos v. Vendomation NZ Limited, September 16, 2014, Per Curiam)

John Halpern and George Parkman Denny were allegedly part-owners and board members of All Seasons, a vending services company. All Seasons formed 24Seven USA Franchising Limited, a Delaware corporation, in order to engage in a franchising model. Massachusetts residents Halpern and Denny were listed as principals in 24Seven’s Uniform Franchise Offering Circular provided to Jordan and Jennifer Dontos, prior to their entering a franchise agreement. After being told that three specific routes in Texas generated a weekly gross of almost $7,000, Jordan and Jennifer Dontos paid $175,000 for the rights to service the routes. They quit their jobs, moved from Seattle to Carrolton, Texas, and borrowed over $300,000 to pay additional franchise fees. The couple later claimed that 24Seven never tendered access to the routes promised and instead tried to get them to accept less profitable ones.

The Dontoses alleged that Halpern and Denny formed another corporation (Bacon Whitney, LLC) for the purpose of transferring the majority of assets, with the remainder placed in a trust for All Seasons. The franchisees claimed that two officials of Bacon Whitney informed them of the transfer, assured them that Bacon Whitney was financially sound, and promised that they would be accepted as franchisees of the new company. However, they were never accepted as franchisees of Bacon Whitney.

Jordan and Jennifer Dontos filed suit in Texas state court, alleging fraud, breach of the franchise agreement, and interference with contractual and business relationships. 24Seven, its affiliate VTL, Bacon Whitney, and the Bacon Whitney representatives were named as defendants. The franchisees were awarded a $6 million judgment against VTL and Bacon Whitney. Vendomation, which had acquired the franchisor rights, settled the dispute for a lump sum payment of $500,000, but the franchisees never received the money.

The franchisees filed another complaint in the federal district court in Dallas against Halpern, Denny, and the Vendomation defendants, asserting state law claims of fraudulent asset transfer, fraud, negligent misrepresentation, civil conspiracy, and aiding and abetting. The defendants filed a motion to dismiss, alleging lack of personal jurisdiction and failure to plead fraud with particularity. The district court granted the motion on the personal jurisdiction ground and denied the franchisees’ motion for jurisdictional discovery. The franchisees appealed. The Fifth Circuit reversed and remanded, concluding that the franchisees had established a prima facie case of specific personal jurisdiction over Halpern, Denny, and the Vendomation defendants with regard to the fraudulent asset transfer claim.

Fraudulent asset transfer. The franchisees charged the defendants with violating the Texas Uniform Fraudulent Transfer Act (TUFTA) as subsequent transferees in order to prevent satisfaction of the Texas state court judgment. To establish a claim under this statute, plaintiffs had to show that (1) they are “creditors” against “debtors”; (2) the debtors transferred assets shortly before or after the claim arose; and (3) the debtors made the transfer with the intent to hinder, delay, or defraud the franchisees. A tortious act committed outside of the forum state that has consequences within the forum will establish minimum contacts if the tortious conduct is purposefully or expressly aimed at the forum state.

Minimum contacts. The district court found that the franchisees failed to establish that any of the defendants had sufficient minimum contacts relating to the TUFTA claim. The record called into question whether the fraudulent transfer claim even involved the Vendomation defendants, according to the district court, because the fraudulent transfer began in January 2009, before Vendomation even existed. However, the district court did not address the Vendomation defendants’ alleged participation in the fraudulent transfer as subsequent transferees. By disregarding the factual allegations of subsequent transfers, the district court failed to accept as true the uncontroverted allegations in the complaint and resolve factual conflicts in favor of the franchisees.

With regard to Halpren and Denny, the district court reasoned that the franchisees failed to establish personal jurisdiction because they failed to provide any evidence of the individuals’ contacts with Texas. The appeals court held that the franchisees were not required to put forth any evidence of such contacts, but only to demonstrate a prima facie case. Moreover, the district court disregarded the franchisees’ allegations that Denny and Halpren were knowing, subsequent transferees of a fraudulent asset transfer. Viewing the record in the light most favorable to the franchisees, the Fifth Circuit concluded that the franchisees established a prima facie case that Halpren and Denny—as well as the Vendomation defendants—were subject to suit in Texas district court on the TUFTA claims.

Due process. The defendants failed to make a compelling case that the exercise of jurisdiction would offend traditional notions of fair play and substantial justice. Texas had a significant interest in protecting its citizens from fraud, and the franchisees had a sufficient interest in securing relief. The defendants—who benefitted from receipt of the franchise agreements in Texas—could reasonably expect to be haled into a Texas court.

The case is No. 12-10986.

Attorneys: Gary E. Smith (Gary E. Smith, PC) for Jordan Dontos, and Crave, LLC. David A. Lavenburg (Kroll McNamara Evans & Delehanty, LLP) for Vendomation NZ Ltd., Vendomation, LLC, and Vendomation Securities Ltd.

Companies: Crave, LLC; Vendomation NZ Ltd.; Vendomation, LLC; Vendomation Securities Ltd.

Cases: FranchisingDistribution LouisianaNews MississippiNews TexasNews