Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—D.N.J.: Franchisees fail to allege claims against lenders in connection with a purportedly fraudulent franchise offering, (May 4, 2026)

By Justin Marcus Smith, J.D.

The court emphasized the general presumption that the lending relationship is at arms-length, without a duty of care owed to the borrower, when preparing an appraisal of borrower collateral.

Consistent with New Jersey law, a bank and its assignees did not owe a duty of care to plaintiff-franchisees who borrowed to start a purportedly fraudulent water vending machine franchise, held the federal district court in Trenton, New Jersey. The alleged circumstances did not qualify as exceptional so as to make the borrower-lender relationship anything more involved than an arms-length transaction. There was no facial indication that the bank knew or had reason to know the borrower placed trust and confidence in the bank and relied on its counsel. Public statements by the bank that it had SBA lending expertise were unexceptional. The court accordingly dismissed the franchisees’ claims for negligent misrepresentation, breach of the implied covenant of good faith and fair dealing, and unjust enrichment (Rumson Wellness, LLC et al v. Fountainhead SBF LLC, No. 3:25-cv-11931-MAS-TJB (D.N.J. Apr. 28, 2026)).

Background. Franchisee Rumson Wellness said it entered into a purchase order agreement with franchisor Water Station Technology (WST) to buy water vending machines in connection with a WST franchise. To finance the franchise, two natural person plaintiffs said they invested $170,000 for 20 water vending machines. Plaintiff Rumson Wellness also allegedly applied for a Small Business Administration (SBA) loan through defendant-lender or loan-originator Fountainhead SBF LLC (Fountainhead).

Rumson Wellness and the natural person plaintiffs alleged that they later became aware that WST had been operating a Ponzi scheme since at least 2018. WST allegedly misrepresented water machine installations and profits to induce franchisees like the instant plaintiffs to buy worthless franchises. The plaintiffs alleged their investigation revealed there were no water vending machines and hence no equipment collateral for the loans.

The plaintiffs alleged they relied on lender Fountainhead’s fraud risk assessment during the loan’s underwriting process. They said Fountainhead was “uniquely positioned” to detect the fraud, but failed to verify, through site visits or otherwise, whether there were any actual WST water vending machine installations. The installations were supposed to have involved monitoring technology, and the plaintiffs said Fountainhead held itself out as having extensive SBA loan experience.

In early 2024, Fountainhead assigned the Loan to Community Bank & Trust – West Georgia (Community Bank), with Phoenix Lender Services, LLC (Phoenix) as servicing agent. At length, Community Bank and Phoenix demanded full repayment of the loan balance and were threatening to foreclose on the residence of one of the natural person plaintiffs. The plaintiffs eventually paid the loan in full. According to the plaintiffs, Community Bank and Phoenix had actual or constructive knowledge of “WST’s widespread fraud and the fraudulent nature of the underlying business venture funded by the Loan.” Altogether, Rumson Wellness paid about $1.4 million for the loan.

The plaintiffs filed a judicial complaint against defendants Fountainhead, Community Bank, and Phoenix, and they quickly amended it in July, 2025, asserting four causes of action: (1) negligent misrepresentation; (2) breach of the implied covenant of good faith and fair dealing; (3) unjust enrichment; and (4) declaratory judgment. The plaintiffs did not name WST as a defendant. The defendants moved to dismiss the amended complaint in its entirety.

Negligent misrepresentation. The court held the allegations did not support a plausible inference that the borrowers’ relationship with the defendants engendered any sort of special circumstance perfecting reliance on the loan underwriting process.

The defendants argued the amended complaint failed to state a negligent misrepresentation claim because (1) as lenders, they did not owe borrowers a duty of care; (2) the SBA standard operating procedures (SOPs) do not provide a private right of action, and the defendants complied with the SOPs in any event; (3) the economic loss doctrine barred the plaintiffs’ negligent misrepresentation claim; and (4) the claim should be dismissed against Community Bank because it was a holder in due course entitled to protection under the Uniform Commercial Code (UCC).

As to whether the defendants owed the plaintiffs a duty of care, the court found New Jersey law to be clear. Lenders do not owe a duty of care to borrowers, even if the borrower is a consumer. There is a general presumption the relationship is at arms-length without a duty of care owed to the borrower when preparing an appraisal of borrower collateral.

The plaintiffs argued their allegations implicated special liability circumstances for the bank, under the holding of United Jersey Bank v. Kensey, 704 A.2d 38, 45 (N.l Super. Ct. App. Div. 1997), where a bank knows or has reason to know the borrower is placing trust and confidence in the bank and relying on its counsel. The plaintiffs referred to representations on the Fountainhead website purportedly touting its expert SBA lending experience.

The bank disagreed that the Fountainhead website advertising amounted to the level of special circumstances needed to impose a duty of care. Kensey provided examples of self-interest conflict, but here, the plaintiffs did not allege that Fountainhead had actual knowledge of any fraud or that the defendants even gave the plaintiffs any advice, never mind that they caused any reliance. The amended complaint alleged only failure to detect fraud in the course of “due diligence” in the loan underwriting process. In contrast, the court appeared to question why the franchisees could not have discovered the fraud on their own in the course of their own due diligence. The court noted there were also no allegations that the defendants made any representation that they would discover fraud or that WST was not committing fraud.

In sum, the court dismissed the negligent misrepresentation claim because the plaintiffs failed to plead that the lenders owed any duty to the plaintiffs.

Implied covenant. The court also held the plaintiffs failed to allege that the defendants breached the implied covenant of good faith and fair dealing that is inherent in any contract under New Jersey law. The plaintiffs failed to allege any bad motive or intent by the defendants.

The defendants argued for dismissal of the implied covenant claim because (1) there was no corresponding contractual provision for it; (2) the “necessary due diligence” was all pre-contract; (3) the plaintiffs failed to allege facts showing improper motive; and (4) Community Bank and Phoenix were entitled to enforce the loan as the benefit of their bargain.

The plaintiffs argued in opposition that they alleged several post-closing actions that went to the “spirit and purpose” of the agreement. However, the court found their allegations about failure to verify equipment collateral, failure to conduct site visits, and enforcement of the loan after the discovery of the alleged WST fraud were “threadbare recitals and mere conclusory statements” insufficient to state a claim.

The complaint only made it clear that WST frustrated the purpose of the loan, but WST was not a party defendant in this action. The court said it could not infer from any alleged facts that the defendants acted in bad faith with the objective of preventing the plaintiffs from receiving the benefit of a fully funded WST franchise. The court accordingly dismissed the breach of implied covenant of good faith and fair dealing claim for failure to state a claim.

Unjust enrichment. The court also dismissed the unjust enrichment claim. Although the plaintiffs alleged the defendants receive a benefit from the plaintiffs, the plaintiffs failed to allege that they did not receive an expected remuneration from the defendants. The only remuneration was the completed funding of the loan. Anything else was up to WST.

Declaratory relief. Because the court dismissed each of the substantive claims, it also dismissed the declaratory judgment form of requested relief.

The Case is No. 3:25-cv-11931-MAS-TJB.

Judge: Shipp, M.

Attorneys: Brittany R. Naimoli (The Chilla Business Counsel, LLC) for Rumson Wellness, LLC. Kerri E. Chewning (Archer & Greiner P.C.) for Fountainhead SBF LLC.

Companies: Rumson Wellness, LLC; Fountainhead SBF LLC

Cases: FranchisingDistribution NewJerseyNews