Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—N.D. Ind.: Claims against DirectBuy successor company dismissed, (Sep 9, 2024)

By George Basharis, J.D.

Ruling shields new owners from liability for alleged misconduct by previous management.

The federal district court in Hammond, Indiana dismissed all claims against the successor company to DirectBuy, finding that Texas law shields the new owners from liability for alleged misconduct by the previous management. The decision granted a motion to dismiss filed by CSC Generation, Inc. and related entities (collectively “New DirectBuy”) against counterclaims brought by former DirectBuy franchisees (Buy Direct, LLC v. Directbuy, Inc., No. 2:15-cv-00344-JVB-AZ (N.D. Ind. Sept. 6, 2024)).

Background. The litigation originated from a long-running dispute between DirectBuy, Inc. (“Old DirectBuy”) and Buy Direct, LLC, a Texas-based franchise owned by Tom and Elona Pope. The Popes filed counterclaims against Old DirectBuy in 2015, alleging breach of contract, promissory estoppel, intentional infliction of emotional distress, and defamation.

Old DirectBuy operated as a franchisor of a nationwide network of members-only consumer buying centers. The company’s franchisees sold memberships to consumers, granting them access to purchase products directly from manufacturers at wholesale prices. These products spanned various categories including home furnishings, home improvement, entertainment, outdoor items, flooring, and accessories. When members selected merchandise, they placed orders and paid in full upfront. The ordered items were then shipped either directly to the member’s residence, a local club location, or another Old DirectBuy receiving facility.

In 2016, Old DirectBuy filed for bankruptcy. Many of its assets were subsequently purchased by CSC Generation, Inc., which later changed its name to DirectBuy Home Improvement, Inc. The Popes sought to amend their counterclaims to include the new owners under a theory of successor liability.

Key issues. The court’s ruling pivoted on two critical questions that shaped the outcome of the case. First, the court had to determine which state’s laws should govern the various claims brought by the plaintiffs. This choice-of-law analysis was crucial, as different states have varying standards for successor liability. Second, once the applicable state law was established, the court needed to assess whether the new owners could be held liable as successors for the alleged misconduct of the previous company. These intertwined issues formed the crux of the dispute and ultimately guided the court’s decision-making process.

Choice of law analysis. The court conducted a detailed choice-of-law analysis for each claim, ultimately concluding that Texas law should apply in all instances. This determination was crucial, as Texas has stricter rules limiting successor liability compared to some other states.

For the contract-related claims, the court found that while the original franchise agreement specified Indiana law would apply, this provision was not binding on New DirectBuy since they did not assume that specific contract. Instead, the court applied Indiana’s “most intimate contacts” test, finding that Texas had the strongest connections to the disputes.

For the tort claims (intentional infliction of emotional distress and defamation), the court applied the rule that the law of the place where the tort occurred should govern unless that place has little connection to the legal action. Since the alleged incidents took place in Texas and the plaintiffs resided there, Texas law was deemed appropriate.

Successor liability under Texas law. Having determined that Texas law applied, the court then examined the issue of successor liability. The court cited Texas Business Organizations Code Sec. 10.254, which states that a company acquiring assets “may not be held responsible or liable for a liability or obligation of the transferring domestic entity that is not expressly assumed by the person.”

The court found no evidence that New DirectBuy had expressly assumed liability for any of the claims brought by the Popes or Buy Direct, LLC. Additionally, no statute was identified that would confer such liability. As a result, the court ruled that New DirectBuy could not be held liable as a successor for any of the alleged misconduct by Old DirectBuy. Based on this analysis, the court granted New DirectBuy’s motion to dismiss all counterclaims with prejudice, meaning the Popes and Buy Direct, LLC cannot refile these claims against New DirectBuy.

The Case is No. 2:15-cv-00344-JVB-AZ.

Judge: Bokkelen, J.

Attorneys: Paula E. Neff (Emerson Neff LLP) for Buy Direct, LLC, Tom Pope and Elona Pope. F. Joseph Jaskowiak (Hoeppner Wagner & Evans LLP) for DirectBuy, Inc.

Companies: Buy Direct, LLC; DirectBuy, Inc.

Cases: FranchisingDistribution IndianaNews