SBFO Operator No. 3, LLC v. Onex Corp.

663 F.Supp.3d 990

SBFO OPERATOR NO. 3, LLC, et al., Plaintiffs, v. ONEX CORPORATION, et al., Defendants.

Case No. 4:19-CV-03271-JAR

United States District Court, E.D. Missouri, Eastern Division

Signed March 23, 2023

J. Toji Calabro, Calabro Law Office, Kansas City, MO, for Plaintiffs.

James F. Bennett, Arsenio L. Mims, James G. Martin, Dowd Bennett LLP, St. Louis, MO, Michael Courtney Keats, Pro Hac Vice, Peter L. Simmons, Pro Hac Vice, Rebecca L. Martin, Pro Hac Vice, Fried and Frank, New York, NY, for Defendants.

MEMORANDUM AND ORDER

JOHN A. ROSS, UNITED STATES DISTRICT JUDGE

This matter is before the Court on Defendants' motion for summary judgment in this action arising from a failed business investment. (Doc. 84). Plaintiffs operated ten Save-A-Lot grocery stores as independent licensees from 2015 to 2018. Defendants acquired Save-A-Lot from its parent company in 2016. In their complaint, Plaintiffs allege that Save-A-Lot and Defendants conspired to induce Plaintiffs to invest millions into a sinking-ship business based on false representations and inaccurate projections, and that they skimmed Plaintiffs' profits by inflating wholesale prices. In support of the present motion for summary judgment, Defendants centrally contend that Plaintiffs conducted their own due diligence and executed numerous anti-reliance releases precluding their claims here, and further that Save-A-Lot's representations cannot be imputed to Defendants, who also lost their entire investment. For the reasons set forth below, the Court concludes that Defendants' motion for summary judgment is meritorious and should be granted.

I. BACKGROUND

Plaintiffs' Transactions with Save-A-Lot

Plaintiffs are direct and indirect subsidiaries of Honor Capital, LLC, a private equity fund and holding company formed by military veterans as a vehicle for entrepreneurship and community investment.¹ Mr. James Allen, Jr. is the President, Chief Executive Officer, and General Counsel of Honor Capital. He possesses a law degree and 35 years' experience in law, real estate development, and investment banking. His son, Jamie Allen, holds a master's degree in finance and serves as Honor Capital's Chief Financial Officer. Honor Capital's operating agreement describes its members as sophisticated investors with the financial ability to bear the economic risk of participation in the company. (Ex. 3; Doc. 95-3 at p. 10, § 3.3(c)).

Moran Foods, LLC, doing business as Save-A-Lot (SAL), is a discount grocery chain headquartered in St. Louis, Missouri. SAL operates "corporate" grocery stores (i.e., managed within its own corporate structure) and also licenses its brand to independent operators. SAL solicits licensees through its website, which describes SAL as a leader in the "hard discount" market, with a "proven business model" and over 40 consecutive years of growth. Licensees follow SAL's retail standards and purchase most of their inventory from SAL for resale to consumers. SAL supports licensee stores through real estate acquisition assistance, store design and planning, training, advertising, accounting, and logistics.

In 2014, Honor Capital identified SAL's licensee retail model as an opportunity to create veteran-owned businesses in low-income communities and undertook efforts to open stores in "food deserts" in several states. The Plaintiff entities were formed for that purpose, with an organizational structure designed to maximize tax credits for investment in underserved communities. Honor Capital performed due diligence into SAL with the assistance of reputed legal counsel, accountants, banking and finance experts, and other experienced business consultants. Their board of advisors included two CEOs, an economics professor, and an investment banking analyst. Certain members of Honor Capital attended multiple "Discovery Days" to learn more about SAL licensee operations. In addition to the general sessions where various SAL representatives explain the retail and advertising programs (Ex. 156, Doc. 108-16), Honor Capital's team arranged for a private meeting with SAL's Vice-President of Licensed Development and "asked him all kinds of questions," which he answered, except for store-specific financial information. (Ex. 1 at p. 92; Doc. 95-1 at p. 55). SAL also provided data reflecting its overall growth in 5-year increments.

At least eight of the ten Plaintiff entities signed SAL's standard Receipt, Waiver, and Disclaimer Agreement pursuant to which, for purposes of preliminary discussions, SAL agreed to provide prospective licensees with confidential and proprietary information regarding its business operations and finances in exchange for the recipient's assumption of all risk and waiver of all claims against SAL. (Ex. 105; Doc. 100). This agreement states, in sum, that:

• the prospective licensee is a sophisticated investor and will conduct its own independent investigation and risk assessment with respect to SAL's program and any store location;

• the materials provided do not constitute guarantees, warranties, or representations as to actual sales, expenses, results, or success of any store;

• the prospective licensee will not rely on any representation or warranty, whether express or implied, in connection with the materials; and

• the prospective licensee waives, releases, and forever discharges SAL, its affiliates, their successors, officers and directors from all past, present, or future claims by the prospective licensee or any other party in connection with the materials.

Among the informational documents provided to Plaintiffs were numerous Save-A-Lot Multiple Analytical Regression Tool (SMART) reports containing location-specific market data, such as consumer demographics and area competitors, and average weekly sales projections. The reports do not contain any other store-specific projections such as overhead, cost of goods sold, profit and loss forecasts, or revenue by product type. In order to obtain a SMART report, a potential licensee must sign a Waiver and Release (Ex. 33; Doc. 96-4) stating that:

• the report is based on publicly available data and historic performance of SAL stores generally;

• the report is only a guide and not a substitute for independent due diligence;

• SAL does not make any representation regarding the accuracy or sufficiency of the report;

• the recipient will make its own investigation, analysis, risk assessment, conclusions, and decisions; and

• the recipient waives and releases all claims and assumes all risks arising out of actual results or the recipient's use of or reliance on the report.

Honor Capital signed at least 16 SMART waivers for potential SAL locations. Honor Capital also prepared its own multi-year pro forma financial projections containing greater detail with respect to sales and gross profits by product type, fixed and variable expenses, payroll, and cash flow. (Ex. 10, Doc. 95-10 at p. 42; Ex. 24, Doc. 95-16 at p. 5; Ex. 26, Doc. 95-18 at p. 3; Ex. 27, Doc. 95-19 at p. 4; Ex. 28, Doc. 95-20 at p. 5; Ex. 29, Doc. 96 at pp. 26-27; Ex. 31; Doc. 96-2 at p. 15). In his deposition, Mr. Allen stated that Plaintiffs relied on the SMART reports, but he also acknowledged that SMART reports did not guarantee average weekly sales, and internally Plaintiffs used more conservative estimates in presentations to lenders.² (Ex. 131, Doc. 107-1 at pp. 9, 13).

Honor Capital opened its first store in May 2015. In connection with the opening of each new store, Plaintiffs' representatives executed several standard SAL form documents. Pursuant to a License and Supply Agreement (LSA), SAL sells, and the licensee purchases, inventory at "bona fide wholesale prices on such terms as may be established by [SAL] from time to time." (Ex. 48; Doc. 98-1). Paragraph 13.C of the LSA, titled Independent Relationship, provides that:

• the agreement shall not be construed to create a franchise relationship;

• SAL does not make any representations or warranties as to the success of the business; and

• the licensee has made an independent investigation regarding the potential success of the business, has evaluated the risks, and has not relied on any representations or warranties by SAL.

Pursuant to a Fixed Income Operating Expense Reimbursement Agreement (FOERA) integrated as an addendum to the LSA, SAL assists licensees with start-up costs by providing a credit toward inventory purchases, payable over two years, subject to the licensee's compliance with SAL operating standards and purchasing quotas. (Ex. 87; Doc. 90-20). To determine the amount of reimbursement credit for a particular store, the parties generate a cash flow break-even report containing five gross sales scenarios with varying levels of SAL financial assistance. This report accompanies an Incentive Election Form by which a licensee agrees to a certain reimbursement amount and purchase quota. For example, for the Winfield location, Plaintiff SBFO5 stood to receive $445,000 in inventory purchase credits over two years, provided it purchased 69.4% of its inventory from SAL. (Ex. 85; Doc. 90-18). The election form and accompanying report contain disclaimers indicating that:

• the reports are models only, reflecting possible results based on arbitrary sales levels and expense assumptions;

• the reports are prepared from information provided by the operator to evaluate the business opportunity, and SAL makes no representations with respect to actual results, which are subject to numerous internal and external factors; and

• the signatory, on behalf of any entity in which he is a principal, partner, manager, investor, or owner, releases and holds harmless SAL, its parent and affiliated companies, and its officers and directors from any claims or liabilities based on the reports and models or the failure of the store to achieve similar results.

Similarly, pursuant to the FOERA, the retailer acknowledges that there is no guaranty of success and releases SAL, its parent and affiliated companies,...