Ht of Highlands Ranch v. Hollywood Tanning Systems

590 F.Supp.2d 677

HT OF HIGHLANDS RANCH, INC., et al., Plaintiffs, v. HOLLYWOOD TANNING SYSTEMS, INC., et al., Defendants.

Civil No. 07-5718 (JBS).

United States District Court, D. New Jersey.

December 1, 2008.

COPYRIGHT MATERIAL OMITTED

John T. Doyle, Esq., Goldstein Valas, Annandale, NJ, and Rory A. Valas, Esq., Goldstein Valas, Boston, MA, for Plaintiffs HT of Highlands Ranch, Inc.; RMB Enterprise, Inc.; Grandsole, Inc.; and Markwood Enterprises, Inc.

Jonathan M. Korn, Esq., Blank Rome, LLP, Cherry Hill, NJ, for Defendants Hollywood Tanning Systems, Inc.; Ralph Venuto, Sr.; and Ralph Venuto, Jr.

David S. Sager, Esq., Day Pitney, LLP, Morristown, NJ, for Defendant HT Franchising, LLC.

David Hartman Colvin, Esq., Scott Lee Vernick, Esq., Fox Rothschild LLP, Philadelphia, PA, for Defendant Highline Capital Corporation.

OPINION

SIMANDLE, District Judge:

I. INTRODUCTION

In this action, Plaintiffs—four operators of Hollywood Tans franchises located in three states—allege that Defendants induced them into entering into unconscionable franchise agreements, defrauded them by sending them deceptive and inflated invoices, and violated the Racketeer Influenced and Corrupt Organizations Act ("RICO"). Plaintiffs have sued the entity with which they entered into their franchise agreements, Hollywood Tanning Systems, Inc. ("HTS"); two of its officers, Ralph Venuto, Sr., and Ralph Venuto, Jr. (the "Venutos"); the company to which HTS assigned its interest in the franchise contracts, HT Franchising, LLC ("HT Franchising"); and Highline Capital Corporation ("Highline"), which provided three of the Plaintiffs with equipment leasing and financing services in connection with the operation of their Hollywood Tans franchises.

Presently before the Court are three motions: (1) a motion to dismiss and compel arbitration filed by HTS and the Venutos (the "HTS Defendants") [Docket Item 26]; and Highline's motions (2) to dismiss and for a more definite statement [Docket Item 27] and (3) for sanctions pursuant to Rule 11, Fed. R. Civ. P [Docket Item 49]. For the reasons explained below, the Court will deny the HTS Defendants' motion to dismiss, grant in part and deny in part Highline's motion to dismiss and for a more definite statement, and deny Highline's motion for sanctions.

II. BACKGROUND

A. Facts

The facts of this dispute, taken from the Amended Complaint, Plaintiffs' RICO Case Statement, see, e.g., Bath Unlimited Inc. v. Ginarte, O'Dwyer, Winograd and Laracuente, No. 04-3919, 2005 WL 2406097, at *1 (D.N.J. Sept. 29, 2005), and certain undisputedly authentic documents attached to Defendants' motions, see Delaware Nation v. Pennsylvania, 446 F.3d 410, 413 n. 2 (3d Cir.2006), are as follows. Plaintiffs HT of Highlands Ranch, Inc. ("Highlands Ranch"), RMB Enterprise, Inc. ("RMB"), Grandsole, Inc. ("Grandsole"), and Markwood Enterprises, Inc. ("Markwood") are unaffiliated corporations located in three different states.¹ (Am. Compl. ¶¶ 13-16.) Each of the four Plaintiffs entered into a contract for the purchase of one or more Hollywood Tans franchises with HTS, a New Jersey corporation, between August 2003 and October 2005. (Id. at ¶¶ 17, 31, 66, 103, 124.) Each of these contracts contained an arbitration clause which provided:

All disputes, controversies or claims arising out of or relating to this Agreement shall be submitted for arbitration to a New Jersey office of the American Arbitration Association on demand of either party. Such arbitration proceeding shall be conducted in New Jersey, and shall be heard by one arbitrator in accordance with the then[-]current Commercial Arbitration Rules of the American Arbitration Association. All matters within the scope of the Federal Arbitration Act (9 U.S.C. Sec. 1 et seq.) shall be governed by it.

(HTS Defs.' Br. Exs. A-D, section 17.L.) According to the Amended Complaint, prior to the commencement of this action, Defendant HTS assigned its rights and obligations under the franchising agreements to Defendant HT Franchising. (Am. Compl. ¶ 18.)

Plaintiffs' Amended Complaint and RICO Case Statement allege that the Defendants participated in two racketeering enterprises that defrauded Plaintiffs: (1) "[t]he Hollywood Tans Enterprise[,] ... composed of HTS, its agents, officers, and employees;" and (2) "[t]he Highline Leasing Enterprise[,] ... an association-in-fact composed of Highline, its agents, officers, and employees, and HTS, its agents, officers, and employees." (RICO Case Statement at 4.) With regard to the HTS enterprise, the details of which are not essential to the resolution of the motions presently under consideration, Plaintiffs allege that in their dealings with representatives from Highlands Ranch, RMB, Grandsole, and Markwood, the HTS Defendants knowingly made false and misleading statements about the profitability of Hollywood Tans franchises, the quality of Hollywood Tans equipment, and the franchisees' startup costs in order to induce Plaintiffs into entering into business relationships with HTS. (RICO Case Statement at 6, 8, 12, 13.)

The alleged activities of the second of these enterprises—the so-called Highline Leasing Enterprise—are of greater relevance to the motions presently under consideration. Three of the Plaintiffs— Highlands Ranch, RMB, and Markwood—entered into written agreements with Defendant Highline after purchasing their Hollywood Tans franchises, under which Highline agreed to lease tanning salon equipment to each Plaintiff.² (Am Compl. ¶¶ 44, 73, 153.) According to the Amended Complaint, over the course of a four-year period,

Defendants submitted or caused to be submitted to Plaintiffs, via facsimile over interstate telephone wires and by first-class U.S. mail, agreements and invoices. The invoices were faxed and/or mailed to Plaintiffs routinely and systematically. Said Defendants knowingly and intentionally mailed, faxed, or caused to be mailed or faxed these fraudulent invoices, with the intent to induce Plaintiffs to make inflated payments to Highline Capital and Defendants. Plaintiffs reasonably relied on the fraudulent invoices and submitted documents to their detriment and paid or were defrauded by the artificially inflated invoices sent to them.

(Id. at ¶ 45.) The Amended Complaint alleges that Highline perpetrated this fraud by "manipulat[ing] the financing arrangements and fraudulently charg[ing] [Plaintiffs] for equipment [they] never received." (Id. at ¶¶ 48, 153.)

Plaintiffs' RICO Case Statement, filed after Highline filed its motion to dismiss, fleshes out these somewhat skeletal allegations.³ According to the RICO Case Statement, through an arrangement between HTS and Highline, the three Plaintiffs who obtained financing for tanning salon equipment through Highline were provided misleading and intentionally vague leasing agreements and invoices by facsimile and United States mail, which enabled Highline (1) to lease substandard and used equipment to Plaintiffs while charging the leasees for new equipment, and (2) to bill Plaintiffs for equipment that they never ordered or received. (RICO Case Statement at 7, 10, 16.) Specifically, according to Plaintiffs' allegations, these agreements

each contained only a Delivery and Acceptance Certificate and an Equipment Schedule. Conspicuously, on each of the three Plaintiff/Highline customers['] schedules, the actual portion devoted to the description of the given equipment in question[] each stated only "See Exhibit A Attached hereto and made a part hereof" but for which none of the Plaintiffs received the exhibit.

(Id. at 16.) In other words, Plaintiffs claim that Highline deliberately omitted information in the lease agreements and invoices that was necessary for the Plaintiff-leasees to ascertain the precise products for which they were being billed. (Id.)

By concealing such information, Plaintiffs allege, Highline was able to bill Plaintiffs for equipment they never received and for new equipment when they had, in fact, received used equipment. (Id. at 7, 10, 16.) As Plaintiffs allege, "Defendants knowingly and intentionally mailed, faxed, or caused to be mailed or faxed [] fraudulent invoices, with the intent to induce Plaintiffs to make inflated payments to Highline and HTS." (Id. at 16.) While Plaintiffs allege that they received a very large number of such allegedly fraudulent invoices from Highline because the above-described practice was "the regular way of operating [of] the Corporate Defendants," (id. at 15), they have identified multiple specific instances which they claim are reflective of Highline's allegedly fraudulent billing practices. In particular, Plaintiff Highlands Ranch alleges that it received invoices from Highline charging it for equipment it never received on March 1, 2006, July 1, 2006, and August 1, 2006. (Id. at 7.) Additionally, Plaintiff RMB alleges that it received an invoice from Highline charging it for equipment it did not receive, and inflating the prices for some equipment it did receive, in April 2006. (Id. at 10; Am. Compl. ¶ 158.)

In furtherance of this scheme to overcharge the Highline leasees, Plaintiffs allege, Highline and HTS interfered with Plaintiffs' capacity to contact Highline directly, which reinforced Defendants' ability to overcharge Plaintiffs by inhibiting them from accessing from Highline documentation pertaining to their financial obligations. According to Plaintiffs, the leasees were precluded from contacting Highline regarding the allegedly fraudulent invoices altogether. (RICO Case Statement at 7.) With regard to Plaintiff Highlands Ranch, for example, Plaintiffs allege that "all efforts to obtain ... documentation directly from Highline, or communicate [with Highline] in any way, were met with angry responses, including statements from HTS that it would handle the financing and that [Highlands Ranch] could not communicate with Highline ... [or] review the full loan documentation." (Id.) According to Plaint...