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HT of Highlands Ranch, Inc. v. Hollywood Tanning Systems

December 1, 2008

HT OF HIGHLANDS RANCH, INC., ET AL., PLAINTIFFS,
v.
HOLLYWOOD TANNING SYSTEMS, INC., ET AL., DEFENDANTS.



The opinion of the court was delivered by: Simandle, District Judge

HON. JEROME B. SIMANDLE

OPINION

I. INTRODUCTION

In this action, Plaintiffs -- four operators of Hollywood Tans franchises located in three states -- allege that Defendants induced them into entering into unconscionable franchise agreements, defrauded them by sending them deceptive and inflated invoices, and violated the Racketeer Influenced and Corrupt Organizations Act ("RICO"). Plaintiffs have sued the entity with which they entered into their franchise agreements, Hollywood Tanning Systems, Inc. ("HTS"); two of its officers, Ralph Venuto, Sr., and Ralph Venuto, Jr. (the "Venutos"); the company to which HTS assigned its interest in the franchise contracts, HT Franchising, LLC ("HT Franchising"); and Highline Capital Corporation ("Highline"), which provided three of the Plaintiffs with equipment leasing and financing services in connection with the operation of their Hollywood Tans franchises. Presently before the Court are three motions: (1) a motion to dismiss and compel arbitration filed by HTS and the Venutos (the "HTS Defendants") [Docket Item 26]; and Highline's motions (2) to dismiss and for a more definite statement [Docket Item 27] and (3) for sanctions pursuant to Rule 11, Fed. R. Civ. P [Docket Item 49]. For the reasons explained below, the Court will deny the HTS Defendants' motion to dismiss, grant in part and deny in part Highline's motion to dismiss and for a more definite statement, and deny Highline's motion for sanctions.

II. BACKGROUND

A. Facts

The facts of this dispute, taken from the Amended Complaint, Plaintiffs' RICO Case Statement, see, e.g., Bath Unlimited, Inc. v. Ginarte, O'Dwyer, Winograd and Laracuente, No. 04-3919, 2005 WL 2406097, at *1 (D.N.J. Sept. 29, 2005), and certain undisputedly authentic documents attached to Defendants' motions, see Delaware Nation v. Pennsylvania, 446 F.3d 410, 413 n.2 (3d Cir. 2006), are as follows. Plaintiffs HT of Highlands Ranch, Inc. ("Highlands Ranch"), RMB Enterprise, Inc. ("RMB"), Grandsole, Inc. ("Grandsole"), and Markwood Enterprises, Inc. ("Markwood") are unaffiliated corporations located in three different states.*fn1 (Am. Compl. ¶¶ 13-16.) Each of the four Plaintiffs entered into a contract for the purchase of one or more Hollywood Tans franchises with HTS, a New Jersey corporation, between August 2003 and October 2005. (Id. at ¶¶ 17, 31, 66, 103, 124.) Each of these contracts contained an arbitration clause which provided:

All disputes, controversies or claims arising out of or relating to this Agreement shall be submitted for arbitration to a New Jersey office of the American Arbitration Association on demand of either party. Such arbitration proceeding shall be conducted in New Jersey, and shall be heard by one arbitrator in accordance with the then[-]current Commercial Arbitration Rules of the American Arbitration Association. All matters within the scope of the Federal Arbitration Act (9 U.S.C. Sec. 1 et seq.) shall be governed by it. (HTS Defs.' Br. Exs. A-D, section 17.L.) According to the Amended Complaint, prior to the commencement of this action, Defendant HTS assigned its rights and obligations under the franchising agreements to Defendant HT Franchising. (Am. Compl. ¶ 18.)

Plaintiffs' Amended Complaint and RICO Case Statement allege that the Defendants participated in two racketeering enterprises that defrauded Plaintiffs: (1) "[t]he Hollywood Tans Enterprise[,] . . . composed of HTS, its agents, officers, and employees;" and (2) "[t]he Highline Leasing Enterprise[,] . . . an association-in-fact composed of Highline, its agents, officers, and employees, and HTS, its agents, officers, and employees." (RICO Case Statement at 4.) With regard to the HTS enterprise, the details of which are not essential to the resolution of the motions presently under consideration, Plaintiffs allege that in their dealings with representatives from Highlands Ranch, RMB, Grandsole, and Markwood, the HTS Defendants knowingly made false and misleading statements about the profitability of Hollywood Tans franchises, the quality of Hollywood Tans equipment, and the franchisees' startup costs in order to induce Plaintiffs into entering into business relationships with HTS. (RICO Case Statement at 6, 8, 12, 13.)

The alleged activities of the second of these enterprises -- the so-called Highline Leasing Enterprise -- are of greater relevance to the motions presently under consideration. Three of the Plaintiffs -- Highlands Ranch, RMB, and Markwood -- entered into written agreements with Defendant Highline after purchasing their Hollywood Tans franchises, under which Highline agreed to lease tanning salon equipment to each Plaintiff.*fn2 (Am. Compl. ¶¶ 44, 73, 153.) According to the Amended Complaint, over the course of a four-year period,

Defendants submitted or caused to be submitted to Plaintiffs, via facsimile over interstate telephone wires and by first-class U.S. mail, agreements and invoices. The invoices were faxed and/or mailed to Plaintiffs routinely and systematically. Said Defendants knowingly and intentionally mailed, faxed, or caused to be mailed or faxed these fraudulent invoices, with the intent to induce Plaintiffs to make inflated payments to Highline Capital and Defendants. Plaintiffs reasonably relied on the fraudulent invoices and submitted documents to their detriment and paid or were defrauded by the artificially inflated invoices sent to them. (Id. at ¶ 45.) The Amended Complaint alleges that Highline perpetrated this fraud by "manipulat[ing] the financing arrangements and fraudulently charg[ing] [Plaintiffs] for equipment [they] never received." (Id. at ¶¶ 48, 153.)

Plaintiffs' RICO Case Statement, filed after Highline filed its motion to dismiss, fleshes out these somewhat skeletal allegations.*fn3 According to the RICO Case Statement, through an arrangement between HTS and Highline, the three Plaintiffs who obtained financing for tanning salon equipment through Highline were provided misleading and intentionally vague leasing agreements and invoices by facsimile and United States mail, which enabled Highline (1) to lease substandard and used equipment to Plaintiffs while charging the leasees for new equipment, and (2) to bill Plaintiffs for equipment that they never ordered or received. (RICO Case Statement at 7, 10, 16.) Specifically, according to Plaintiffs' allegations, these agreements each contained only a Delivery and Acceptance Certificate and an Equipment Schedule. Conspicuously, on each of the three Plaintiff/Highline customers['] schedules, the actual portion devoted to the description of the given equipment in question[] each stated only "See Exhibit A Attached hereto and made a part hereof" but for which none of the Plaintiffs received the exhibit. (Id. at 16.) In other words, Plaintiffs claim that Highline deliberately omitted information in the lease agreements and invoices that was necessary for the Plaintiff-leasees to ascertain the precise products for which they were being billed. (Id.)

By concealing such information, Plaintiffs allege, Highline was able to bill Plaintiffs for equipment they never received and for new equipment when they had, in fact, received used equipment. (Id. at 7, 10, 16.) As Plaintiffs allege, "Defendants knowingly and intentionally mailed, faxed, or caused to be mailed or faxed [] fraudulent invoices, with the intent to induce Plaintiffs to make inflated payments to Highline and HTS." (Id. at 16.) While Plaintiffs allege that they received a very large number of such allegedly fraudulent invoices from Highline because the above-described practice was "the regular way of operating [of] the Corporate Defendants," (id. at 15), they have identified multiple specific instances which they claim are reflective of Highline's allegedly fraudulent billing practices. In particular, Plaintiff Highlands Ranch alleges that it received invoices from Highline charging it for equipment it never received on March 1, 2006, July 1, 2006, and August 1, 2006.

(Id. at 7.) Additionally, Plaintiff RMB alleges that it received an invoice from Highline charging it for equipment it did not receive, and inflating the prices for some equipment it did receive, in April 2006. (Id. at 10; Am. Compl. ¶ 158.)

In furtherance of this scheme to overcharge the Highline leasees, Plaintiffs allege, Highline and HTS interfered with Plaintiffs' capacity to contact Highline directly, which reinforced Defendants' ability to overcharge Plaintiffs by inhibiting them from accessing from Highline documentation pertaining to their financial obligations. According to Plaintiffs, the leasees were precluded from contacting Highline regarding the allegedly fraudulent invoices altogether. (RICO Case Statement at 7.) With regard to Plaintiff Highlands Ranch, for example, Plaintiffs allege that "all efforts to obtain . . . documentation directly from Highline, or communicate [with Highline] in any way, were met with angry responses, including statements from HTS that it would handle the financing and that [Highlands Ranch] could not communicate with Highline . . . [or] review the full loan documentation." (Id.) According to Plaintiffs, the Defendants employed such efforts to keep Highline at a distance from Plaintiffs in order to facilitate the fraudulent billing scheme described above. (Id.)

B. Procedural History

Plaintiffs filed their Complaint [Docket Item 1] in this action on November 29, 2007, and filed an Amended Complaint [Docket Item 3] on January 29, 2008.*fn4 The Complaint asserts claims of fraud (Count I); "declaration - unconscionable franchise agreements" (Count II); intentional misrepresentation (Count III); negligent misrepresentation (Count IV); breach of contract (Count V); breach of covenant of good faith and fair dealing (Count VI); fraudulent concealment (Count VII); violation of the Maryland Franchise Act, Md. Code Ann. § 14-227 (Count VIII); violation of the Colorado Deceptive Trade Practices Act, C.R.S. 6-1-105 (Count IX); violation of the Ohio Business Opportunity Plans Act, Ohio R.C. § 1334 (Count X); violation of RICO, 18 U.S.C. § 1962(c) (Count XI); conspiracy to violate RICO (Count XII); and unjust enrichment (Count XIII). Shortly after Plaintiffs filed their Amended Complaint, Defendant HT Franchising filed a Counterclaim against Plaintiffs Grandsole and Markwood [Docket Item 19] and filed a motion seeking preliminary injunctive relief to enjoin Grandsole and Markwood from using the Hollywood Tans trademark, which this Court granted in an Order dated May 22, 2008 [Docket Item 67].*fn5

During the pendency of the parties' preliminary injunction motion practice, the HTS Defendants and Highline filed the motions presently under consideration, to the merits of which the Court now turns.

III. DISCUSSION

A. Standard of Review

On a Rule 12(b)(6) motion to dismiss for failure to state a claim upon which relief may be granted, the Court must "'accept all factual allegations as true, construe the complaint in the light most favorable to the plaintiff, and determine whether, under any reasonable reading of the complaint, the plaintiff may be entitled to relief.'" Phillips v. County of Allegheny, 515 F.3d 224, 231 (3d Cir. 2008) (quoting Pinker v. Roche Holdings Ltd., 292 F.3d 361, 374 n.7 (3d Cir. 2002)).

While Rule 12(b)(6) does not permit dismissal of a well-pleaded complaint simply because "it strikes a savvy judge that actual proof of those facts is improbable," the "[f]actual allegations must be enough to raise a right to relief above the speculative level."

Phillips, 515 F.3d at 234. "To survive a motion to dismiss, a civil plaintiff must allege facts that 'raise a right to relief above the speculative level on the assumption that the allegations in the complaint are true (even if doubtful in fact).'" Victaulic Co. v. Tieman, 499 F.3d 227, 234 (3d Cir. 2007) (quoting Bell Atl. Corp. v. Twombly, --- U.S. ----, 127 S.Ct. 1955, 1965 (2007)).

"While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff's obligation to provide the 'grounds' of his 'entitle[ment] to relief' requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Twombly, --- U.S. ----, 127 S.Ct. at 1964-65 (quoting Papasan v. Allain, 478 U.S. 265, 286 (1986)).

"[S]tating . . . a claim requires a complaint with enough factual matter (taken as true) to suggest" the required element. [Twombly, 127 S.Ct. at 1965 n.3.] This "does not impose a probability requirement at the pleading stage," but instead "simply calls for enough facts to raise a reasonable ...


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