Lowery v. Iftiu (In re Iftiu)

608 B.R. 677

IN RE: Eno IFTIU, Debtor.

Torono Lowery and Niles Froyo, LLC, Plaintiffs,

v.Eno Iftiu, Defendant.

Case No. 17-53013

Adv. Pro. No. 18-05024

United States Bankruptcy Court, N.D. Ohio, Western Division.

Signed September 30, 2019

Peter G. Tsarnas, Gertz & Rosen, Ltd., Akron, OH, for Plaintiffs.

Michael J. Moran, Gibson & Moran, Cuyahoga Falls, OH, for Defendant.

MEMORANDUM OF DECISION AND ORDER

John P. Gustafson, United States Bankruptcy Judge

This Adversary Proceeding is before the court on Plaintiffs Torono Lowery and Niles Froyo, LLC's¹ ("Plaintiffs") Complaint against Defendant-Debtor Eno Iftiu ("Defendant-Debtor"). In their Complaint, Plaintiffs² sought a finding that Defendant-Debtor owes them in excess of $200,000.00 as a debt related to a transfer of a frozen yogurt business that allegedly violated the Ohio Business Opportunity Purchasers Protection Act ("OBOPPA" or the "Act"), and a determination that said $200,000.00 debt is nondischargeable under 11 U.S.C. §§ 523(a)(2)(A), (a)(4), and (a)(6).³ This proceeding is now before the court for decision after a trial was held on March 6 and 7, 2019.⁴ Per the court's request, both Plaintiffs and Defendant-Debtor filed post-trial briefs. [Doc. #30; Case No. 18-05023, Doc. #24].⁵

This Adversary Proceeding was transferred to this Western Division court on December 3, 2018 from its Eastern Division counterpart. [Doc. #18]. The court has jurisdiction over this proceeding pursuant to 28 U.S.C. §§ 1334, 157(a), and General Order 2012-7 of the United States District Court for the Northern District of Ohio. Proceedings to determine the dischargeability of debts are core proceedings that bankruptcy courts may hear and decide. 28 U.S.C. § 157(b)(1) and (b)(2)(I). With regard to Plaintiffs' OBOPPA claim, the parties orally consented to this court's jurisdiction over the claims in this case at the trial held on March 6 and 7, 2019.

This Memorandum of Decision constitutes the court's findings of fact and conclusions of law pursuant to Federal Rule of Civil Procedure 52, made applicable to this adversary proceeding by Federal Rule of Bankruptcy Procedure 7052. Regardless of whether specifically referred to in this Memorandum of Decision, the court has examined all the submitted materials, weighed the credibility of witnesses, considered all of the admitted evidence,⁶ and reviewed the entire record in the case. Based upon that review, and for the reasons discussed below, the court will decline to decide Plaintiffs' OBOPPA claim and will dismiss it without prejudice because it raises novel issues of Ohio franchise law that are best resolved by Ohio courts.⁷ See , 28 U.S.C. §§ 1334(c)(1). However, the court finds that any debt owed to Plaintiffs by Defendant-Debtor⁸ arising out of the disputed Niles frozen yogurt store transaction is nondischargeable under 11 U.S.C. § 523(a)(2)(A) because Defendant-Debtor made numerous fraudulent misrepresentations and omissions incident to that transaction.

FINDINGS OF FACT

Heather Lowery, the wife of Plaintiff Torono Lowery, first began discussing a frozen yogurt business deal with Defendant-Debtor Eno Iftiu at a family birthday party in July of 2015. Defendant-Debtor, an individual with experience running frozen yogurt stores under the trade name "#Froyo," is married to Heather Lowery's cousin, Brandi Iftiu. Despite having no previous experience with running a business, Plaintiff Torono Lowery and Heather Lowery expressed an interest in purchasing a frozen yogurt store from Defendant-Debtor, who represented that he could get Plaintiffs a good deal because of his business relationship with the owner of various Menchies frozen yogurt stores. Defendant-Debtor represented that he was purchasing Menchies frozen yogurt stores from Stark Enterprises and could sell one of those stores to Heather Lowery and her husband. Two Menchies locations, one in Niles, Ohio and one in Boardman, Ohio, were the focus of the discussion between Defendant-Debtor and Heather Lowery.

Later in July of 2015, the Lowerys and Defendant-Debtor discussed the details of their potential deal while meeting at various restaurants around Cleveland and Youngstown. Defendant-Debtor reiterated that he was in the process of purchasing various Menchies stores and rebranding them as #Froyo stores, one of which Plaintiffs and Heather Lowery could buy from Defendant-Debtor and operate under the #Froyo tradename. Defendant-Debtor represented that the Niles frozen yogurt location was particularly profitable, that he had seen "the numbers" for the Niles location, and that it performed similarly to his #Froyo stores located in the Columbus, Ohio area.

At the first meeting, Defendant-Debtor informed the Lowerys that he was unsure how much it would cost Plaintiffs to purchase the Niles location from him. At a meeting at a Niles area Panera Bread later in July of 2015, Defendant-Debtor provided Plaintiffs with "the numbers" for the Niles location that he had obtained from Stark Enterprises. [Pl. Ex. 18]. Defendant-Debtor presented that document, a summary of the 2014 sales figures and 2015 sales projections for the Niles Menchies location, as an estimate of what Plaintiffs could earn if they were to purchase the Niles location and operate it under the #Froyo tradename. Plaintiffs regarded the provided projections as part of an exciting prospect, and elected to pursue the business opportunity with Defendant-Debtor. Defendant-Debtor also represented that when he rebranded his Columbus stores from Menchies to #Froyo, he did not have a problem and that, were Plaintiffs to purchase and operate the Niles location similarly, they would not have a problem with the brand switching either. At no point were Plaintiffs advised by Defendant-Debtor of the risks associated with a branding change.

At a meeting in a Brecksville, Ohio Bob Evans restaurant in August of 2015, the parties discussed how much Plaintiffs would pay to purchase the Niles location from Defendant-Debtor. Defendant-Debtor informed Plaintiffs that he was currently in negotiations with Stark Enterprises regarding his bulk deal purchase of Menchies locations, that another party was interested in the Niles location, and that Plaintiffs would have to pay a purchase price of $135,000.00. Heather Lowery testified that Defendant-Debtor represented to Plaintiffs that he would not be making any money from his transaction with Plaintiffs because Plaintiffs were family, and that Plaintiffs needed to act quickly if they wanted to take advantage of the deal. While Plaintiffs considered Defendant-Debtor a member of their family, Defendant-Debtor testified at trial that he regarded the Niles location transaction as little more than a transaction between unrelated parties.

During a meeting in mid-August of 2015 at which Plaintiffs were introduced to Defendant-Debtor's attorney, Ashraf Abbas ("Mr. Abbas"), Plaintiffs and Defendant-Debtor came to an agreement and moved forward on the Niles yogurt store transaction with the understanding that Mr. Abbas would assist with the creation of a limited liability company for Plaintiffs in order to effectuate the deal.

On August 27, 2015, Plaintiffs and Defendant-Debtor, through their respective LLCs,⁹ executed the following documents ("Documents") to effectuate Plaintiffs' purchase of the Niles frozen yogurt store from Defendant-Debtor: 1) a Purchase Agreement ("Purchase Agreement") outlining Plaintiffs payment of $135,000.00 in exchange for the Niles frozen yogurt store, including the equipment, fixtures, furnishings, and the right to occupy the Niles store's premises [Pl. Ex. 5]; 2) a cognovit Promissory Note ("Promissory Note") detailing Plaintiffs' responsibility to make monthly payments to Defendant-Debtor totaling $55,000.00, the balance of the purchase price that remained after Plaintiffs made an initial down payment of $80,000.00 [Pl. Ex. 6]; and 3) a Joint Venture Agreement stating that, in exchange for Plaintiffs' payment of $80,000.00, Plaintiffs' promise to reimburse Defendant-Debtor's legal fees arising out of the joint venture, and promise to pay monthly royalties as a percentage of the Niles store's gross sales, Plaintiffs would obtain from Defendant-Debtor the right to operate the Niles frozen yogurt business under the #Froyo tradename. [Pl. Ex. 7].

As of August 27, 2015, Defendant-Debtor Eno Iftiu had not yet purchased the assets he was selling. The transfer from the Stark Enterprises-owned LLC, Yogurt Treats Niles, LLC, did not occur until September 19, 2015. [Pl. Exs. 14, 15]. Moreover, there is no evidence that Defendant-Debtor Eno Iftiu ever transferred the assets from his name to his entity, EVI Holdings, LLC, that purportedly transferred the Niles frozen yogurt store's assets to Plaintiffs.

The Joint Venture Agreement contained an integration clause, stating that "[t]his Agreement constitutes the entire understanding of the Parties,...." [Pl. Ex. 7, p. 6]. Notably, Defendant-Debtor never provided Plaintiffs with any disclosures regarding his financial condition, the financial condition of EVI Holdings, LLC, or the financial condition of his other frozen yogurt locations. At trial, Defendant-Debtor revealed that, as of August 27, 2015, most of his prior frozen yogurt stores had closed¹⁰ and that, by the time Plaintiffs closed the Niles #Froyo location, it was the last remaining frozen yogurt operation with which Defendant-Debtor had been involved.

Plaintiffs believed that they were entering into a franchise relationship with Defendant-Debtor, and knew that he had been advertising franchise opportunities via his hashtagfroyo.com website. [Pl. Ex. 13]. Further, at one of the meetings of the parties, Defendant-Debtor presented Plaintiffs with a document that detailed various franchise fee arrangements in the frozen yogurt industry, and at the bottom, it stated "Our Franchise Fee...6% After 6 months-1 Year," and "Will not start taking out fee until YOU are taking out money." [Pl. Ex. 18.2]. In...