Kraze Burger, Inc. v. Kraze Int'l

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KRAZE BURGER, INC., Plaintiff, v. KRAZE INTERNATIONAL, INC., el al., Defendants.

Civil Action No. 1:19cv0717 (CMH/JFA)

United States District Court, E.D. Virginia, Alexandria Division

May 19, 2023

PROPOSED FINDINGS OF FACT AND RECOMMENDATIONS

John F. Anderson United States Magistrate Judge

This matter is before the court on a motion for default judgment filed by plaintiff Kraze Burger, Inc. (“plaintiff') against defendant II Seon Noh (“defendant”) pursuant to Federal Rule of Civil Procedure 55(b)(2).^[1] (Docket no. 23). Pursuant to 28 U.S.C § 636(b)(1)(C). the undersigned magistrate judge is filing with the court his proposed findings of fact and recommendations, a copy of which will be provided to all interested parties.

Procedural Background

On June 4, 2019, plaintiff filed a complaint against defendant and Kraze International. (Docket no. 1) (“Compl.”). Following multiple extensions on the deadline to serve defendant (Docket nos. 9, 12, 14), plaintiff filed an affidavit on May 10, 2021 that indicates defendant was served on November 18, 2020 through the Central Authority for Korea under the Hague Convention on the Service Abroad of Judicial and Extra-judicial Documents in Civil or Commercial Matters (“Hague Service Convention”), T.I.A.S. No. 6638 20 U.S.T. 361 (1965) (Docket no. 15). In accordance with Federal Rule of Civil Procedure 12(a), defendant's responsive pleading was due on December 9, 2020. Defendant failed to file a timely responsive pleading.

On August 26, 2022, District Judge O'Grady ordered plaintiff to immediately obtain a default against defendant.^[2] (Docket no. 16). Plaintiff requested an entry of default against defendant on September 23, 2022. (Docket no. 18). The Clerk of Court entered default against defendant on September 30, 2022.^[3] (Docket no. 21). On February 23, 2023, District Judge Hilton ordered plaintiff to file a motion for default judgment and accompanying memorandum in support, notice a hearing on the motion for Friday, March 31 2023, and mail copies of the notice, motion, and memorandum to defendant. (Docket no. 22). On March 24,2023, plaintiff filed a motion for default judgment against defendant, a memorandum in support, and a notice of hearing for Friday, March 31,2023. (Docket nos. 23-25). Plaintiff certified that the notice of hearing was mailed to defendant (Docket no. 25 at 2), but plaintiff did not certify that the motion or memorandum was mailed to defendant. Plaintiff also did not provide the Roseboro notice required by Local Civil Rule 7(K).

On March 31, 2023, this motion was called in open court, and plaintiffs counsel appeared, but no one appeared on behalf of defendant. At the hearing, the undersigned noted deficiencies in the complaint and memorandum in support of the motion for default judgment and ordered plaintiff to file a supplemental memorandum addressing the issues. (Docket no. 26). Plaintiff filed a memorandum of points and authorities in further support of the motion for default judgment (“supplemental memorandum”) on April 21, 2023. (Docket no. 27). As one of the exhibits to the supplemental memorandum, plaintiff included an answer from defendant dated April 11, 2023. (Docket no. 27-2). The answer does not otherwise appear on the docket as having been filed by defendant, and it argues that this court lacks subject matter and personal jurisdiction. Id.

Factual Background

Master Franchise Agreement

The following facts are established by the complaint, memorandum in support of the motion for default judgment, and supplemental memorandum, and the accompanying exhibits to each. (Compl.; Docket nos. 1-1-1-4; 24-24-4; 27-27-4). Plaintiff is a Virginia corporation that owns and operates retail hamburger restaurants in the Washington, DC metropolitan area, including Virginia. (Compl. ¶¶ 2, 8). Kraze International is a foreign corporation of the Republic of Korea (“South Korea”) that was registered to do business in Virginia in August 2011. (Compl. ¶¶ 3, 9). Kraze International allowed its corporate status in Virginia to be revoked and terminated on or about December 31, 2012. (Compl. ¶¶ 3, 9). Defendant, who resides in South Korea, was the President and a director of Kraze International during all times relevant to this action. (Compl. ¶¶ 3, 10).^[4]

On or about September 7, 2010, plaintiff and Kraze International entered into a master franchise agreement (“MFA”) for plaintiff to become the master franchisee in the United States for the Kraze Burger chain, while Kraze International was to act as the master franchisor. (Compl. ¶ 11). Kraze International represented itself to plaintiff as an experienced franchisor in South Korea with the expertise, organizational ability, and franchising experience necessary to assist plaintiff in establishing a franchise operation in the United States. (Compl. ¶ 16). Plaintiff relied on the representations made by Kraze International, which included that Kraze International would make periodic revisions to manuals to promote the Kraze Burger Operational System and that Kraze International would be actively involved in overseeing ongoing U.S. operations to assist in the development of a successful restaurant franchise system. (Compl. ¶ 18). '

Under the MFA, Kraze International agreed to provide plaintiff various forms of support to enable plaintiff to undertake successful franchising operations in the eastern half of the continental United States. (Compl. ¶ 13). Kraze International was obligated to provide plaintiff support and assistance, which included ongoing training, product information, recipes, operations material, design assistance, operations and training manuals, field consultants, franchisee setup schedules and related materials, advisory assistance, marketing and promotions assistance, and research and development of new products and services. (Compl. ¶ 14). Kraze International was also obligated to provide plaintiff with ongoing assistance regarding necessary products, services, and techniques, all of which were critical to conduct franchising operations in the United States and to promote the success and viability of franchise units. (Compl. ¶ 15). In return, plaintiff was obligated under the MFA to conduct operations in the United States in accordance with the Kraze Burger manuals and procedures. (Compl. ¶ 17). Plaintiff paid Kraze International a sum of $150,000 under the MFA. (Compl. ¶ 19). The parties agreed that Virginia law would apply to the MFA, and the parties exclusively elected to be subject to the jurisdiction of Virginia courts, including this court and the Circuit Court of Fairfax County, Virginia. (Compl. ¶ 12).

Failure to Perform Under MFA

Plaintiff alleges Kraze International failed to provide plaintiff a workable functioning franchise system of operating hamburger franchise restaurants in the United States, and it failed to support and assist plaintiff with setting up and operating a franchise organization. (Compl. ¶ 20). When the first Kraze Burger restaurant was opened in the United States in or about December 2011, Kraze International had no active presence in the United States to assist plaintiff with this opening. (Compl. ¶ 21). Kraze International refused to send plaintiff Kraze Burger recipes for its sauces, financial information regarding profit and losses of the South Korean franchisees, the profit margins on its products, sample food and labor costs, equipment lists, sample agreements or contracts with suppliers and franchisees, human resource materials, food inventory lists, or any other essential ingredients to assist in the establishment of an operational retail food franchise system. (Compl. ¶ 24). Kraze International also repeatedly declined requests from plaintiff for assistance in establishing a United States franchise system of operations. (Compl. ¶ 22).

Plaintiff claims it invested millions of dollars into its United States restaurant units and operations, in compliance with its obligations under the MFA, and otherwise used its best efforts to establish a successful Kraze Burger franchise operation in the United States. (Compl. ¶ 23). In 2013, Kraze International completely ceased any support of the operations in the United States with plaintiff. (Compl. ¶ 25). Plaintiff alleges that the failure of Kraze International to support plaintiff in its establishment of a franchise system in the United States was a breach of Kraze International's obligations to plaintiff under the MFA. (Compl. ¶ 28). As a result of these breaches by Kraze International, Kraze Burger failed as a burger restaurant franchise in the United States, which caused plaintiff to close its restaurant units and lose funds invested into its franchise operations. Id.

Lawsuit and Bankruptcy Proceedings

On December 2, 2014, plaintiff initiated a lawsuit against Kraze International in Fairfax County Circuit Court for breach of contract. (Compl. ¶ 30). Kraze International filed a counterclaim in the action, and the matter was scheduled for trial on August 15, 2016. (Compl. ¶ 31). On or about March 14, 2016, Kraze International filed for bankruptcy protection in the Seoul Central District Court in Seoul South Korea. (Compl. ¶ 32).

On June 20, 2016, Kraze International filed a voluntary petition for recognition of foreign bankruptcy under Chapter 15 of the United States Bankruptcy Code in the United States Bankruptcy Court for Eastern District of Virginia (“Bankruptcy Court”). (Compl. ¶ 33; Docket no. 1-1); see In re Kraze Int'l Inc., Case no. 16-12143-BFK (Bankr E.D. Va.) [hereinafter “Bankruptcy Proceeding”]. Defendant signed the petition as the authorized representative of Kraze International and completed a Form 202 that designated defendant as an individual with authority to act on behalf of...