MST Mgmt., LLC v. Chi. Doughnut Franchise Co.

584 F.Supp.3d 923

MST MANAGEMENT, LLC, et al., Plaintiffs

v.CHICAGO DOUGHNUT FRANCHISE COMPANY, LLC, et al., Defendants

Case No. 2:21-cv-00360-JAD-DJA

United States District Court, D. Nevada.

Signed February 9, 2022

Rory T. Kay, McDonald Carano Wilson LLP, Tara U. Teegarden, c/o Lewis Brisbois Bisgaard & Smith, Las Vegas, NV, Zach Mayer, Pro Hac Vice, Jason C. McKenney, Pro Hac Vice, Mavish Bana, Pro Hac Vice, Mayer LLP, Dallas, TX, Kimberly Adrian Kerns, Pro Hac Vice, Mayer LLP, Dallas, CO, Laura R. Jacobsen, Ormat, Reno, NV, for Plaintiffs MST Mangagement LLC, Skyelee, LLC.

Zach Mayer, Pro Hac Vice, Jason C. McKenney, Pro Hac Vice, Mavish Bana, Pro Hac Vice, Mayer LLP, Dallas, TX, Kimberly Adrian Kerns, Pro Hac Vice, Mayer LLP, Dallas, CO, Laura R. Jacobsen, Ormat, Reno, NV, Rory T. Kay, McDonald Carano Wilson LLP, Las Vegas, NV, for Plaintiff Lyon & Greybear Lending, LLC.

Cabrach John Connor, Pro Hac Vice, Connor Kudlac Lee PLLC, Austin, TX, for Defendant Chicago Doughnut Franchise Company, LLC.

Gregory A. Miles, Royal & Miles LLP, Henderson, NV, Gregory L. Wilde, Wilde & Associates, LLC, Las Vegas, NV, Jennifer Tatum Lee, Pro Hac Vice, Cabrach John Connor, Pro Hac Vice, John Shumaker, Pro Hac Vice, Connor Kudlac Lee PLLC, Austin, TX, for Defendant Diversified Franchise Group, Inc.

Gregory A. Miles, Royal & Miles LLP, Henderson, NV, Jennifer Tatum Lee, Pro Hac Vice, Cabrach John Connor, Pro Hac Vice, John Shumaker, Pro Hac Vice, Connor Kudlac Lee PLLC, Austin, TX, L. Joe Coppedge, Michael R. Mushkin, Mushkin & Coppedge, Las Vegas, NV, for Defendants Brian Pappas, Jeffrey Pappas, Jacqueline Ball.

Gregory A. Miles, Royal & Miles LLP, Henderson, NV, Jennifer Tatum Lee, Pro Hac Vice, Cabrach John Connor, Pro Hac Vice, John Shumaker, Pro Hac Vice, Connor Kudlac Lee PLLC, Austin, TX, for Defendants Mark Publicover, Montiedell Maple, Bryan Morelle, Marc Freeman, Ric McKown, Steven Moulton.

Montiedell Maple, Henderson, NV, Pro Se.

Bryan Morelle, Las Vegas, NV, Pro Se.

Marc Freeman, Fairfield, IA, Pro Se.

Ric McKown, Colorado Springs, CO, Pro Se.

Order Granting in Part and Denying in Part Motion to Dismiss; Denying Motion for Judgment on the Pleadings; Denying Joinder to Motion to Dismiss

[ECF Nos. 29, 34, 40]

Jennifer A. Dorsey, United States District Judge A group of mini-doughnut-shop franchisees brings this proposed class action alleging that they were victims of a fraud and racketeering scheme that misled dozens of working-class and small-business owners to invest in a failed business. Six defendants, joined by others, move to dismiss the claims against them, contending that none rises to the level of a plausible claim for relief. Because I find that the franchisee-plaintiffs have stated some plausible claims against some defendants, but others are half-baked or just fall flat, I grant in part the motion to dismiss and deny both joinders.

Discussion¹

The four named plaintiffs—The Dapper Doughnut franchisees from Garden City, Idaho (TDD Garden City); Dallas, Texas (TDD Dallas); San Antonio, Texas (TDD San Antonio); and Reno, Nevada (TDD Reno)² —sue nine individuals and two companies under the federal Racketeer Influenced Corrupt Organizations (RICO) Act, the Sherman Antitrust Act, the Nevada Deceptive Trade Practices Act (DTPA), and state common law. They theorize that the defendants used false promises and misleading financial information to induce them into The Dapper Doughnut franchises and continued to defraud them in order to keep their investments.³ Six of the individual defendants—Mark Publicover, Montiedell Maple, Bryan Morelle, Marc Freeman, Ric McKown, and Steven Moulton—move to dismiss all claims against them.⁴

They contend that plaintiffs have not alleged fraud with particularity under Federal Rule of Civil Procedure (FRCP) 9(b) ; that the only Nevada-resident plaintiff, TDD Reno, released all its claims against them; and that the out-of-state plaintiffs cannot bring state-law claims against out-of-state defendants.⁵ I find that the plaintiffs have met their pleading burden for their RICO and DTPA claims but that TDD Reno released its claims and the DTPA cannot apply to out-of-state defendants’ alleged out-of-state wrongdoings against out-of-state plaintiffs. I thus grant in part and deny in part the motion to dismiss.

The three other individual defendants—Brian Pappas, Jeffrey Pappas, and Jaqueline Ball—filed a joinder (Pappas-Ball joinder) to that motion to dismiss.⁶ But because these defendants answered the complaint prior to their attempted joinder,⁷ I treat their filing as a motion for judgment on the pleadings.⁸ Their briefing offers no substantive argument for such relief, so I deny it. Company-defendant Diversified Franchise Group, LLC (DFG) separately filed a joinder.⁹ But DFG has since filed for Chapter 11 bankruptcy protection.¹⁰ The automatic-stay provision of the bankruptcy code prohibits the "commencement or continuation" of a judicial proceeding against the bankrupt.¹¹ Under Ninth Circuit precedent, a dismissal—even one in favor of the bankrupt—is an impermissible continuation in violation of the stay if it "requires the court to consider other issues presented by or related to the underlying case. In other words, thinking about the issues violates the stay."¹² Because evaluating the merits of DFG's joinder to the six individual defendants’ motion to dismiss would require me to consider the plaintiffs’ allegations against DFG and whether they state a plausible claim for relief, I deny the joinder without prejudice.

I. The six individual defendants’ motion to dismiss

Defendants Publicover, Maple, Morelle, Freeman, McKown, and Moulton move to dismiss all claims against them. Federal pleading standards require plaintiffs to plead enough factual detail to "state a claim to relief that is plausible on its face."¹³ This demands that the complaint be filled with "more than an unadorned, the-defendant-unlawfully-harmed-me accusation";¹⁴ plaintiffs must make direct or inferential factual allegations about "all the material elements necessary to sustain recovery under some viable legal theory."¹⁵ The court must accept as true all well-pled factual allegations in the complaint, recognizing that legal conclusions are not entitled to the assumption of truth, and resolve all factual disputes in the plaintiff's favor.¹⁶ A complaint that fails to meet this standard must be dismissed.¹⁷

A. TDD Reno's release of claims

The six individual defendants seek to dismiss TDD Reno's claims because it signed a release—which the moving defendants attach as an exhibit to their motion to dismiss¹⁸ —of all claims relating to its franchise.¹⁹ The plaintiffs mention the release in their complaint, but they discount it as "illegal and inoperative" because it was in furtherance of defendants’ allegedly illegal and fraudulent acts.²⁰ This circular reasoning is unavailing. As the individual defendants note in their motion, the text of the release is comprehensive: TDD Reno promised to forgo "any and all claims, ... of any kind whatsoever, whether ... foreseen or unforeseen, ... which [TDD Reno] ever had, now has[,] or may have in the future, against [the defendants] for, on or by reason of any matter ...."²¹ The plaintiffs offer no response,²² and nothing in the record contradicts the release's text or shows that it was procured in any improper manner. So I enforce the release and dismiss TDD Reno's claims with prejudice.

B. Federal RICO claim

The Supreme Court has held that the RICO Act "is to be read broadly."²³ To allege a viable claim under the statute, plaintiffs must establish that the defendants participated directly or indirectly in (1) an enterprise's (2) conduct (3) that amounts to a pattern of (4) racketeering activity, (5) resulting in injury.²⁴ "Racketeering activity is any [predicate] act indictable under several provisions of Title 18 of the United States Code."²⁵ As relevant to this case, racketeering activity includes the predicate acts of mail fraud and wire fraud.²⁶ A pattern of racketeering activity requires at least two predicate acts and "continuity plus relationship" between them.²⁷

A mail-fraud violation requires plaintiffs to show that the defendant (1) "devised a scheme or artifice to defraud"; (2) "used the mails in furtherance of the scheme"; and (3) "did so with the specific intent to deceive or defraud."²⁸ Similarly, a wire-fraud violation requires a showing of (1) "the formation of a scheme or artifice to defraud"; (2) "use of the United States wires or causing a use of the United States wires in furtherance of the scheme"; and (3) "specific intent to deceive or defraud."²⁹ "Mail and wire fraud can be premised on either a non-disclosure or an affirmative misrepresentation."³⁰ But "[a]bsent an independent duty, such as a fiduciary duty or an explicit statutory duty, failure to disclose cannot be the basis of a RICO fraudulent scheme."³¹ To be "in furtherance" of a fraudulent scheme, the use of the mails or wires need not be "an essential part of the scheme" or "occur concurrently with the fraudulent acts."³² They need only be "made for the purpose of executing the scheme," so the furtherance element is satisfied if the scheme is "in some way dependent upon" the mailings or wires.³³

A RICO claim predicated on fraud must meet the heightened pleading standard of FRCP 9(b), which "requires that, when fraud is alleged, ‘a party must state with particularity the circumstances constituting fraud.’ "³⁴ Those circumstances must include the " ‘who, what, when where, and how’ of the misconduct charged."³⁵ But "[m]alice, intent, knowledge, and other conditions of a person's mind may be alleged generally."³⁶ Although "allegations of fraud based on information and belief usually do not satisfy" FRCP 9(b) ’s particularity requirement, "the rule may be relaxed as to matters within the opposing party's knowledge."³⁷ This is especially pertinent in cases of "corporate fraud, [in which] plaintiffs will not have...