Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—M.D. Fla.: 7-Eleven franchisees must return nearly $5M erroneously-credited by franchisor, (Sep 8, 2014)

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

Franchisees whose credit card transactions with customers were erroneously credited to their own account for more than a year were obligated to pay back nearly $5 million they had withdrawn or transferred, the federal district court in Orlando, Florida has ruled. The franchisor established through competent evidence that it had mistakenly transferred the credits to the franchisees’ account and that the franchisees had exercised dominion over those funds and refused to return the money. Thus, the franchisor was entitled to summary judgment on its unjust enrichment and conversion claims (7-Eleven, Inc. v. George, September 4, 2014, Antoon, J.)

Jane George entered into a franchise agreement with 7-Eleven for the operation of a convenience store franchise in Daytona Beach, Florida. With the franchisor’s consent, George assigned the agreement to Sarah’s Big Tree Gas & Go, LLC (SGG). In the agreement, 7-Eleven agreed to establish an open account for SGG, and SGG agreed to pay 7-Eleven any unpaid balance in that open account upon termination of the agreement. 7-Eleven was to credit the open account any amounts it owed to SSG and to debit from the open account all purchases, operating expenses, and amounts SGG owed 7-Eleven from the operation of the franchise. 7-Eleven could make deposits and withdrawals from this account, but could not otherwise access the account or observe its balance or activity.

Each day, SGG completed a cash report and electronically transmitted it to 7-Eleven. The day’s credit card transactions were indicated on the case report. Thinking that credit card transactions were being paid to 7-Eleven, rather than to SGG, and that it was supposed to be processing and paying the amount of daily credit card transactions to SGG, 7-Eleven regularly deposited the amount of each day’s credit card transactions into SGG’s account.

More than a year later, 7-Eleven realized, through the implementation of new software, that credit card purchases were being paid directly to SGG and not to 7-Eleven. In other words, there was no obligation for 7-Eleven to pay the credit card amounts to SGG, which had been receiving double payment for each credit card transaction for more than a year. By the time 7-Eleven had discovered the error, it had deposited $4,954,614 into SGG’s account. The franchisor attempted to reverse those deposits in order to rectify the error, but SGG’s account did not contain sufficient funds.

Shortly after realizing the mistake, 7-Eleven attempted to reach George and asked that she and her husband, Anthony Bailey, meet with franchisor personnel. George did not respond. When the franchisor’s personnel attempted to meet with George, she refused to speak to them. 7-Eleven repeatedly called George and left messages and sent a letter, but she did not respond. Finally, 7-Eleven sent a formal notice of default under the agreement and filed a lawsuit.

Investigation revealed that as 7-Eleven was making erroneous deposits to SSG’s account, money was being withdrawn or transferred. During 2008, more than $2.5 million was withdrawn or transferred. Meanwhile, Bailey and the couple’s limited liability companies were making substantial purchases, such as a $550,000 home in Ormond Beach, Florida and a $63,000 Mercedes Benz automobile. One of the companies paid more than $1 million for a vacant lot. In depositions, George and Bailey maintained that they had asked 7-Eleven at the start of the franchise term why the deposits were being made into the SGG account and had been assured that the money was theirs. Once they didn’t get an answer regarding the deposits, they were happy with the way it was. George testified that she did not intend to return the money until 7-Eleven proved that there had been a mistake.

In January 2010, the state’s attorney in Volusia County, Florida filed a criminal complaint against George and Bailey, charging them with grand theft, money laundering, and structuring transactions to evade reporting or registration requirements. They pleaded no contest, were sentenced to prison terms, and were ordered to pay restitution of $4,954,614 to 7-Eleven.

The civil case—which was stayed during the criminal proceedings—was set for trial. The parties filed a notice of settlement, but the case was later reopened when George refused to sign a stipulated judgment. 7-Eleven then filed a renewed motion for summary judgment.

Claims against George and Bailey. 7-Eleven correctly argued that the criminal convictions for grand theft established the civil claims of unjust enrichment and conversion against George and Bailey. Florida law holds that a defendant convicted of a criminal offense giving rise to a civil action may not deny the essential allegations of that offense. In this case, George and Bailey were convicted of grand theft, which consists of knowingly obtaining or using or endeavoring to obtain the property of another with intent to deprive the other of a right to the property. The elements of unjust enrichment are: (1) the plaintiff conferred a benefit on the defendant, (2) the defendant voluntarily accepts and retains the benefit, and (3) the circumstances would make it inequitable for the defendant to retain the benefit without paying value to the plaintiff. A conversion claim is based on a positive, overt act or acts of dominion or authority over the money or property inconsistent with, and adverse to, the rights of the true owner.

"Because the elements of unjust enrichment and conversion are subsumed by the elements of grand theft, the convictions of George and Bailey for grand theft estop them from challenging 7-Eleven’s unjust enrichment and conversion claims," the court ruled.

The record evidence in this case established that 7-Eleven was entitled to summary judgment on its civil conspiracy claim. George and Bailey plainly acted in concert to retain and conceal the money that 7-Eleven had mistakenly deposited in the SGG account, according to the court.

Claims against limited liability companies. The court further entered summary judgment in favor of 7-Eleven on its claims for unjust enrichment, conversion, and civil conspiracy against the defendant limited liability companies. While the companies were not charged with in the criminal case, the guilt of George and Bailey, who owned and controlled the companies, was evidence of liability of the companies as well.

Constructive trust. 7-Eleven’s request for the imposition of a lien and a constructive trust over the property and proceeds of the defendants’ conversion was granted by the court. Thus, a constructive trust was imposed over the $298,507 in proceeds from the sale of real property in Ormond Beach, Florida.

Since George and Bailey were already subject to an order of restitution in the criminal case for $4,954,614, the net judgment against them would be for the amount of prejudgment interest. The judgment against the limited liability companies was for both the principal amount and the prejudgment interest, the court found.

The case is No. 6:08-cv-2091-Orl-28GJK.

Attorneys: Christian C. Burden (Quarles & Brady, LLP) and Matthew E. Yarbrough (The Yarbrough Law Group) for 7-Eleven, Inc.

Companies: 7-Eleven, Inc.; Sarah's Big Tree Gas & Go, LLC; Sarah G.'s Holdings, LLC; Big Park Holdings, LLC; Big Tree Daytona Properties, LLC; Clyde Morris Bigtree Holdings, LLC

Cases: FranchisingDistribution FloridaNews