Sizzling Black Rock Steak House Franchising, Inc. v. Harold L. Kestenbaum, PC

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SIZZLING BLACK ROCK STEAK HOUSE FRANCHISING, INC., a Michigan corporation, Plaintiff, v. HAROLD L. KESTENBAUM, PC, a New York professional corporation, and HAROLD L. KESTENBAUM, an individual, Defendants.

No. 21-cv-11621

United States District Court, E.D. Michigan, Southern Division

May 26, 2023

OPINION AND ORDER DENYING PLAINTIFF'S MOTION TO STRIKE DEFENDANTS' EIGHTH AFFIRMATIVE DEFENSE PURSUANT TO FED. R. CIV. P. 12(f) (ECF NO. 40)

Paul D. Borman United States District Judge

Plaintiff Sizzling Black Rock Steak House Franchising, Inc. brings this lawsuit against its former counsel, Defendants Harold Kestenbaum and Harold L. Kestenbaum P.C., alleging claims for professional negligence and negligent misrepresentation.^[1] Now before the Court is Plaintiff's Motion to Strike Defendants' Eighth Affirmative Defense Pursuant to Fed.R.Civ.P. 12(f) (ECF No. 40.) The motion has been fully briefed. The Court does not believe that oral argument will aid in its disposition of the appeal; therefore, it is dispensing with oral argument pursuant to Eastern District of Michigan Local Rule 7.1(f)(2).

For the reasons that follow, Plaintiff's motion is denied.

I. FACTUAL AND PROCEDURAL BACKGROUND

A. Relevant Facts

This statement of facts is taken from the Court's December 17 2021, Opinion and Order on Defendants' motion to dismiss for lack of personal jurisdiction pursuant to Fed.R.Civ.P. 12(b)(2).

1. Black Rock engages Defendants Kestenbaum and HLK P.C.

Plaintiff Sizzling Black Rock Steak House Franchising, Inc. (Black Rock) is a Michigan corporation that franchises restaurants and licenses what it calls a “Restaurant Concept.” (ECF No. 7, First Amended Complaint (FAC), ¶¶ 1-3, PageID.123). Specifically, Black Rock owns, operates and franchises restaurants and licenses the Restaurant Concept to area representatives for use in establishing restaurants in specific geographic areas pursuant to area representative agreements. (Id. ¶ 3, PageID.123.)

In 2013, Black Rock won first place in a contest called “America's Next Top Restaurant Franchise” (the Contest). (ECF No. 6-2, Declaration of Harold Kestenbaum (Kestenbaum Decl.) ¶ 9, PageID.82.) The prize included free “initial legal services” from Defendant Harold Kestenbaum, who, at the time, ran a firm called Harold L. Kestenbaum, P.C. (HLK P.C.) based in Melville, New York. (Id. ¶¶ 4, 7, PageID.81-82.) Kestenbaum's legal practice focuses on franchise law and he is licensed to practice in New York and New Jersey. (Id. ¶ 3, PageID.81-82) (FAC ¶ 5, PageID.123.) Kestenbaum was involved in the Contest through an acquaintance, Paul Samson, president of a Contest sponsor called Franchise Edge based in Florida. (Kestenbaum Decl., ¶¶ 6-7, PageID.82). Kestenbaum states that he understood that, after he provided initial legal services at no cost to the Contest winner, that the company would hire Kestenbaum on a monthly retainer. (Id. ¶ 8, PageID.82.)

In 2014, Kestenbaum began providing free legal services to the Contest winner, Plaintiff Black Rock - preparing Black Rock's franchise disclosure document and other initial documents over a four to six week period. (Kestenbaum Decl. ¶ 10, PageID.82.) During this time period, Kestenbaum worked with the Contest sponsor, Samson and his partner, Scott Anderson, and had no direct contact with Black Rock or its principals. (Id. ¶ 11, PageID.83.)

Black Rock subsequently retained Kestenbaum as its legal counsel for all franchise matters, with a monthly retainer of $1,500 for legal services plus reimbursement of any costs Kestenbaum incurred on Black Rock's behalf. (FAC ¶¶ 16-17, PageID.124.) This monthly retainer increased to $2,000 per month beginning in August 2018. (Id. ¶ 18, PageID.125.)

2. Kestenbaum prepares the First ARA for Black Rock

Starting in 2015, Black Rock sought to enter into area representative agreements (ARAs), which would grant area representatives the exclusive right to open and operate, or to assist other franchisees in opening and operating Black Rock Bar & Grill Restaurants in accord with the Restaurant Concept in a specific geographic area. (FAC ¶ 19, PageID.125.) According to Kestenbaum, these ARAs were not limited to Michigan, but also included geographic regions in Florida, Alabama, Georgia, Louisiana, Illinois, Maryland, and Texas. (Kestenbaum Decl. ¶ 13, PageID.83.) Each ARA requires that the area representative develop a certain number of restaurants in accord with deadlines set forth in the ARA's development schedule. (FAC ¶ 20, PageID.125.) In addition, according to Black Rock, a “key, material and necessary provision of each ARA” is that an area representative's failure to comply with the ARA's development schedule would result in termination of the ARA and termination of the area representative's right to any future royalties. (Id. ¶ 22, PageID.125-26.)

Black Rock explains that, in the franchise industry, royalties which continue to be owed to an area representative based on continuing revenue from Restaurants opened during the term of an ARA, after that ARA is terminated, are commonly known as “Evergreen Royalties.” (Id. ¶ 21, PageID.125.) Black Rock did not want any ARAs prepared for it to include such Evergreen Royalties. (Id. ¶ 22, PageID.125-26.)

In 2015, Kestenbaum, as attorney for Black Rock, prepared an ARA (“the First ARA”) between Black Rock and BR Restaurants Holding Company, LLC (BR Restaurants), a company managed by Robert Gries. (FAC ¶¶ 23-24, PageID.126.) This First ARA included a development schedule and provided that BR Restaurants would forfeit royalties if it failed to satisfy the schedule, i.e., the First ARA did not include a provision for Evergreen Royalties. (Id. ¶¶ 26-27, PageID.126.) The First ARA was executed by the parties on May 18, 2015. (Id. ¶ 28, PageID.126.)

3. Kestenbaum prepares the Second ARA for Black Rock

In June 2017, Kestenbaum prepared a second ARA (“the Second ARA”) for Black Rock, this time between Black Rock and Black Rock Midwest LLC (BRM LLC). (FAC ¶ 29, PageID.126-27.) The Second ARA included a development schedule requiring BRM LLC to open a certain number of Restaurants within “a defined geographic area”^[2] but, unlike the First ARA, this Second ARA did not include a clause requiring BRM LLC to forfeit royalties if it failed to comply with the development schedule. Instead, the Second ARA included a provision for Evergreen Royalties. (Id. ¶¶ 31-32, PageID.127.) Black Rock alleges that it executed the Second ARA on June 21, 2017, only after Kestenbaum assured Black Rock that the Second ARA did not include a provision for Evergreen Royalties. (Id. ¶¶ 33-34, PageID.127-28.)

4. Kestenbaum prepares the Third ARA for Black Rock

In June 2018, Kestenbaum prepared a third ARA (“the Third ARA”) as counsel for Black Rock, this time between Black Rock and BR Holdings II, LLC (BRH II). (FAC ¶ 35, PageID.128.) Robert Gries, the managing partner of BR Restaurants (signatory to the First ARA), is also the managing partner of BRH II, and the geographic region at issue in this ARA included Florida, Alabama, Georgia, Louisiana, and Texas. (Id. ¶¶ 36-37, PageID.128.) This Third ARA, executed on June 21, 2018, again included a development schedule but, contrary to Kestenbaum's express assurances to the contrary, and like the Second ARA, this Third ARA included a provision for Evergreen Royalties. (Id. ¶¶ 37-38, PageID.128.)

In 2020, Black Rock determined that BRH II was not meeting the requirements in the development schedule, and Kestenbaum negotiated a termination of the Third ARA, on behalf of Black Rock. (FAC ¶¶ 40-41, PageID.129.) The negotiated termination agreement, executed on June 19, 2020, included a mutual release which resulted in the discharge of any Evergreen Royalties that would have been due to BRH II under the Third ARA. (Id. ¶¶ 43-44, PageID.129.)

5. HLK P.C. merges with Spadea Lignana

On May 1, 2019, Kestenbaum's firm merged with former-defendant Spadea Lignana, LLC (Spadea). (FAC ¶ 12, PageID.124.) (ECF No. 10-2, HLK Letter, PageID.190 (“[W]e are excited to announce that effective May 1, 2019 the merger of the law office of Harold L Kestenbaum, PC with the law firm of Spadea Lignana, LLC.”).) According to Defendants, Kestenbaum's firm became a contractor for Spadea Lignana on that date. (Kestenbaum Decl. ¶ 18, PageID.84) (ECF No. 6-3, Declaration of Josh Lignana (Lignana Decl.) ¶ 6, PageID.88.) Spadea has two members - Thomas Spadea, a citizen of Pennsylvania, and Josh Lignana, a citizen of New Jersey - and has offices in Pennsylvania and New York only. (Lignana Decl. ¶¶ 3-4, PageID.87.)

6. Kestenbaum and Spadea prepare the Fourth ARA for Black Rock

In July 2020, Kestenbaum, now with Spadea Lignana and still representing Black Rock, prepared a fourth ARA (“the Fourth ARA”), between Black Rock and Third Bite of the Apple LLC (Third Bite). (FAC ¶ 46, PageID.129-30.) The Fourth ARA required Third Bite to open a certain number of restaurants in Florida pursuant to the ARA's development schedule. (Id. ¶ 47, PageID.130.) Black Rock alleges that it executed the agreement on July 9, 2020, in reliance on Kestenbaum's assurance to Black Rock that the Fourth ARA did not provide for Evergreen Royalties. (Id. ¶ 48, PageID.130.)

7. Termination of the Second ARA

In late 2020, Black Rock began to consider terminating the Second ARA with BRM LLC because BRM LLC was not meeting the Second ARA's development schedule, having opened only four Restaurants when it was required to open ten. (FAC ¶¶ 49-50, PageID.130.) On December 20, 2020, after reviewing the Second ARA, Jacob Schifko, a Black Rock representative, send an email to Kestenbaum expressing his concern that the Second ARA included a provision for Evergreen Royalties, even though Black Rock...