JTH Tax LLC v. Irving

654 F.Supp.3d 501

JTH TAX LLC d/b/a Liberty Tax Service, et al., Plaintiffs, v. Michael IRVING, et al., Defendants.

Civil Action No. RDB-21-3000

United States District Court, D. Maryland

Signed February 1, 2023

Jonathan Anthony Barnes, Patrick K. Burns, Gordon Rees Scully Mansukhani LLP, Alexandria, VA, for Plaintiffs.

Steven K. Fedder, Fedder & Janofsky LLC, Baltimore, MD, for Defendants.

MEMORANDUM OPINION

Richard D. Bennett, United States District Judge

Plaintiffs JTH Tax LLC d/b/a Liberty Tax Service ("Liberty Tax") and Siempretax+ LLC ("Siempre") are franchisors of income tax preparation centers. (ECF No. 1.) In facilitating the development of franchises, the Plaintiffs extend certain loans by promissory notes to potential franchisees and investors. Id. Defendant Michael Irving operated some eleven Liberty Tax franchises in Maryland until late 2017 when he opened Blue Mountain Financial Inc. d/b/a Blue Mountain Financial or Sis Tax ("Blue Mountain"). Plaintiffs bring this case against Irving and Blue Mountain for alleged violations of non-compete clauses and to collect payment on a series of promissory notes. Id.

The parties have filed Cross-Motions for Partial Summary Judgment with respect to Count Four of the Complaint. (ECF Nos. 23, 24.) Count Four consists of claims against Defendant Michael Irving as a guarantor of seven promissory notes. (ECF No. 1 at 20.)¹ The Defendants contend that these claims are barred by Maryland's three-year statute of limitations. (ECF No. 23.) For the reasons that follow, Defendants' Motion shall be GRANTED. The statute of limitations is procedural, and Maryland law mandates that there is a three-year period of limitations for contractual claims. Plaintiffs argue that these promissory notes were under seal and a twelve-year statute of limitations apply. (ECF No. 24.) Secondarily, the Plaintiffs argue that these are negotiable instruments with a six-year statute of limitations. Id. Neither of these claims are with merit. Accordingly, the promissory notes are treated as contracts with a three-year recovery period, which has since passed, thereby precluding Plaintiffs' claim in Count Four. Accordingly, Plaintiffs' corresponding Cross-Motion for Partial Summary Judgment (ECF No. 24) is DENIED.

BACKGROUND

The following undisputed facts relate to Plaintiffs' claim against Defendant Irving for Breach of Promissory Notes as alleged in Count Four of the Complaint. (ECF No. 1 at 20.) As franchisors of income tax preparation service centers in the United States, Plaintiffs often provide loans to prospective franchisee owners to aid in the opening and running of tax preparation franchises. (ECF No. 24 at 2.) Beginning in 2011, Defendant Irving entered into franchise agreements with Plaintiffs and eventually operated eleven franchise territories in Maryland. Id. To purchase and operate certain of those franchises, Irving executed a series of promissory notes held by Plaintiffs. (ECF No. 23-1 at 2.) Irving ceased operations of his franchises in December 2017, and formed Blue Mountain Financial on December 18, 2017. (ECF No. 23-1 at 3.)

At issue in Count Four, Defendant has failed to pay the amounts set forth in seven promissory notes that were executed in connection with his franchises. (ECF No. 24 at 2.) The date of execution, date for repayment, and amount owed are as follows:

Note

Date Executed

Date Due

Principal Amount

1 (ECF No. 1-14)2

April 28, 2015

Payment plan; five payments of $162,458.40 plus interest due on February 28 for the years 2016, 2017, 2018, 2019, 2020

$812,292.00

2 (ECF No. 1-15)3

December 27, 2016

February 27, 2017

$285,730.00

3 (ECF No. 1-16)4

March 2, 2017

March 2, 2017

$51,026.00

4 (ECF No. 1-17)5

March 16, 2017

March 16, 2017

$25,385.00

5 (ECF No. 1-18)6

March 30, 2017

March 30, 2017

$36,073.00

6 (ECF No. 1-19)7

April 12, 2017

April 12, 2017

$18,665.008

7 (ECF No. 1-20)9

August 25, 2017

February 27, 2018

$195,541.00

[Editor's Note: The preceding image contains the, reference for footnotes ², ³, ⁴, ⁵, ⁶, ⁷, ⁸, ⁹].

Irving's final payment on Note 1 was made on April 26, 2017, and the entire principal amount plus interest remains outstanding.¹⁰ (ECF No. 24 at 4.) Irving's final payment on Note 2 was made on November 30, 2017, and the entire principal amount plus interest remains outstanding.¹¹ Id. Irving's final payment on Note 3 was made on August 31, 2017, and the entire principal amount plus interest remains 'outstanding.¹² Id. Irving's final payment on Note 4 was made on August 31, 2017, and the entire principal amount plus interest remains outstanding.¹³ Id. at 5. Irving's final payment on Note 5 was made on August 31, 2017, and the entire principal amount plus interest remains outstanding.¹⁴ Id. Irving did not make a payment on Note 6, and the entire principal amount plus interest remains outstanding. (ECF No. 24 at 6.) Irving did not make a payment on Note 7, and the entire principal amount plus interest remains outstanding. Id.

All seven promissory notes include similar language; Notes 2 through 7 contain identical language in their entirety, save for the principal amount owed and the due date. (ECF No. 1, Exs. 14-20.) The promissory notes all include the same language concerning the interest rate: "interest at the rate of twelve percent (12%) per annum on the unpaid balance computed from the date funds are initially disbursed." Id. After stating the amount due, each note references "Liberty's Automatic Payment Transfer program", which is a payment scheme that seemingly applies certain money that Irving's franchises receive toward the amount due on the note(s). Id. That provision explains that Liberty will automatically deduct money and apply that money first toward interest and then toward the principal amount owed. Id.

The notes also include language explaining the purpose for payment (franchise business), that the maker of the note is to submit monthly financial information to Liberty, that the person liable on the note waives certain tax exemptions and agrees that Liberty may take certain delineated actions concerning payment or liability under the note, and explains the terms surrounding default. Id.

Notes 2-7 include transferability language, stating:

This Note may be assigned, transferred or negotiated by the noteholder to any person at any time without notice to or the consent of the Maker. The Maker may not assign or transfer this Note or any of its rights hereunder without the prior written consent of the noteholder. This Note shall inure to the benefit of and be binding upon the parties hereto and their permitted assigns.

(ECF No. 1 Exs. 15-20.) Note 1 similarly alludes to transferability and states that the terms and conditions of the note "shall be binding upon the heirs, personal representative, successors and assigns of each Obligor and shall inure to the benefit of Liberty, Liberty's successors and assigns." (ECF No. 1, Ex. 14.) All seven notes state that the note in its entirety "constitutes the entire understanding of the parties and supersedes all prior negotiations, commitments, representations, and undertakings of the parties with respect to the subject matter hereof." (ECF No. 1, Exs. 14-20.) Finally, all notes include a provision which states that the contents therein shall be construed and enforced according to Virginia state law. Id. Each of the notes was signed by Mike Irving under the Maker for Mirving Tax Services LLC after the clause "WITNESS the following signature(s) and seal(s)." Id.

Plaintiffs filed suit in this Court on November 22, 2021, bringing eight counts against Defendants Irving and Blue Mountain for damages sustained based on the Defendants alleged violations of franchise agreements and Irving's failure to pay the amount owed on the above-mentioned promissory notes. (ECF No. 1.) Defendants filed a Motion for Partial Summary Judgment (ECF No. 23) on Count Four which concerns Plaintiffs' allegation that Irving failed remit payment on the promissory notes. Defendants argue that the notes are neither under seal nor negotiable instruments under Virginia law, and are therefore considered standard contracts that are subject to Maryland's three-year statute of limitations. (ECF No. 23.) Plaintiffs argue that the promissory notes are considered negotiable instruments under both Virginia and Maryland Law, and are therefore subject to a six-year statute of limitations. (ECF No. 24.) Plaintiffs alternatively argue that the notes were all under seal and are subject to the even longer twelve-year statute of limitations. Id.

STANDARD OF REVIEW

Rule 56 of the Federal Rules of Civil Procedure provides that a court "shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c). A material fact is one that "might affect the outcome of the suit under the governing law." Libertarian Party of Va. v. Judd, 718 F.3d 308, 313 (4th Cir. 2013) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986)). A genuine issue over a material fact exists "if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson, 477 U.S. at 248, 106 S.Ct. 2505. When considering a motion for summary judgment, a judge's function is limited to determining whether sufficient evidence exists on a claimed factual dispute to warrant submission of the matter for resolution at trial. Id. at 249, 106 S.Ct. 2505. Trial courts in the Fourth Circuit have an "affirmative obligation . . . to prevent factually unsupported claims and defenses from proceeding to trial." Bouchat v. Balt. Ravens Football Club, Inc., 346 F.3d 514, 526 (4th Cir. 2003) (quoting Drewitt v. Pratt, 999 F.2d 774, 778-79 (4th Cir. 1993)).

In undertaking this inquiry, this Court must consider the facts and all reasonable inferences in the light most favorable to the nonmoving...