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Rowen Petroleum Properties, LLC v. Hollywood Tanning Systems

March 12, 2010

ROWEN PETROLEUM PROPERTIES, LLC, PLAINTIFF,
v.
HOLLYWOOD TANNING SYSTEMS, INC., HOLLYWOOD TANS, LLC, HT SYSTEMS, LLC, TAN HOLDINGS, LLC, RALPH VENTO, SR., RALPH VENTO, JR., DAVID N. RAHN, INDIVIDUAL DEFENDANTS 1 THROUGH 10, DEFENDANTS.



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

OPINION

This case concerns the lease of space in a mall by a Hollywood Tans franchise, and the mall owner's claims of fraud and breach of contract against various Hollywood Tans-related entities and individuals. Previously, the Court dismissed plaintiff's claims against Hollywood Tans, LLC, but denied the other defendants' motions to dismiss. The Court also directed the parties to undertake jurisdictional discovery to establish the Court's subject matter jurisdiction over plaintiff's claims against defendants Tan Holdings, LLC and HT Systems, LLC, and ordered plaintiff to amend the complaint accordingly.*fn1

Currently before the Court is plaintiff's motion to file a fourth amended complaint, Tan Holdings, LLC's opposition to plaintiff's motion and corresponding cross-motion to dismiss plaintiff's claims, as well as its motion for sanctions against plaintiff and his counsel. Plaintiff has opposed Tan Holdings' motions, and has cross-moved for sanctions. Defendants Hollywood Tanning Systems, Inc. and the individual defendants have joined in on Tan Holdings' motions.

For the reasons expressed below, plaintiff's motion for leave to amend will be granted, and all other motions will be denied.

BACKGROUND & DISCUSSION

As recounted in the Court's April 20, 2009 Opinion, plaintiff's Third Amended Complaint describes the following background facts: On June 26, 2005, defendant Hollywood Tanning Systems, Inc. ("HTS") leased space in a mall in Pittsburgh to operate a Hollywood Tans tanning salon. The lease was for ten years and was entered between Falls Creek Development and HTS. In February 2006, plaintiff Rowen Properties ("Rowen")*fn2 purchased the shopping mall from Falls Creek Development. As a result, Rowen became the landlord of HTS. On or about May 31, 2007, HTS sold all or a portion of its assets to defendant Tan Holdings pursuant to an asset purchase agreement ("APA"). In that same month, HTS contacted Rowen for approval of an assignment of their lease to Tan Holdings. According to the terms of the lease, HTS was permitted to assign the lease to another tenant "whose net worth is equal to or exceeds" that of HTS. To that end, Rowen received a document titled "Tan Holdings, LLC (formerly Hollywood Tanning Systems, Inc.) Projected Opening Balance Sheet," dated May 31, 2007, which represented that Tan Holdings had substantial net assets. Rowen reviewed this document, as well as a "Form of Assignment and Assumption Agreement," which was between HTS and Tan Holdings and had the effect of HTS assigning to Tan Holdings all of HTS's rights under the lease, and Tan Holdings agreeing to assume and be bound to perform the obligations of the tenant under the lease. Based on these documents, Rowen approved the assignment of the lease as between HTS and Tan Holdings. On May 14, 2007, Rowen received the Assignment of Lease and a form "Acknowledgement, Agreement and Consent" for his signature. According to Rowen, he signed these documents based on the parties' prior conversations and prior documents he reviewed.

Rowen came to discover, however, that the Assignment of Lease did not indicate an assignment between HTS and Tan Holdings, but rather between HTS and defendant HT Systems. Rowen admits that he did not read the Assignment before signing the Acknowledgment because all previous discussions and documents concerned Tan Holdings, and not HT Systems. Rowen was never provided financial information regarding HT Systems, and the defendants never informed him of the change. Rowen also claims that he would have never approved HT Systems as an assignee of the lease because HT Systems was essentially a shell company, was undercapitalized, and lacked the financial resources to assume and discharge its obligations under the lease. Based on this conduct, Rowen claims that he was fraudulently induced into approving the assignment, and that it also constituted a fraudulent conveyance.*fn3

Based on the above-pleaded facts, the defendants had previously moved to dismiss plaintiff's fraud claims, arguing, inter alia, that even taking as true plaintiff's claims that a bait and switch occurred with regard to the substitution of HT Systems for Tan Holdings in the lease assignment, plaintiff is a savvy businessman who should have read the two page document prior to signing the Acknowledgment. If he had read the assignment, he would have seen that HT Systems was named, rather than Tan Holdings. Thus, defendants argued that plaintiff could not claim he reasonably relied*fn4 on the representations of defendants with regard to the identity of the assignee of the lease such that it absolved plaintiff's duty to have read the contract before he signed it.

In the Court's April 20, 2009 Opinion, defendants' argument was rejected, because the Court could not conclude as a matter of law that plaintiff failed to state a claim for reasonable reliance. In making that decision, the Court recognized,

[J]ust before signing the Assignment of Lease, which was prepared by defendants, plaintiff read various documents which stated that Tan Holdings was to be the assignee of HTS's lease. Prior to signing the Assignment of Lease, plaintiff received a document titled "Tan Holdings, LLC (formerly Hollywood Tanning Systems, Inc.) Projected Opening Balance Sheet," which represented that Tan Holdings had substantial net assets. Plaintiff also received and reviewed "Form of Assignment and Assumption Agreement," which was between HTS and Tan Holdings and had the effect of HTS assigning to Tan Holdings all of HTS's rights under the lease, and Tan Holdings agreeing to assume and be bound to perform the obligations of the tenant under the lease. Plaintiff claims that when he received the Assignment of Lease from defendants, he was never informed that Tan Holdings was no longer the assignee. Further, plaintiff claims that he never received any financial or other information regarding HT Systems that would have alerted him that any entity other than Tan Holdings was going to assume the lease. Even though plaintiff could have discovered that HT Systems was listed as the assignee rather than Tan Holdings by simply reading the Assignment of Lease defendants sent him, taking as true plaintiff's assertions in his complaint, nothing in the parties' prior communications would have alerted plaintiff that Tan Holdings was not the entity listed on the Assignment as prepared by defendants. . . . Whether it was reasonable for plaintiff to rely on the prior writings and representations and not read the Assignment of Lease before signing the Acknowledgment is a determination that cannot be made at the motion to dismiss stage. At this stage, plaintiff has pleaded enough factual matter to suggest the required elements of a fraud claim. . . .

(April 20, 2009 Op. at 11-14.)

Since the issuance of that Opinion, email communications between plaintiff and HTS's CEO, David Rahn, surfaced. Those emails concern HTS's sale to Tan Holdings, and the assignment of HTS's lease with plaintiff. One email chain reveals that on May 4, 2007, Rahn emailed plaintiff, "We are requesting your consent to the execution of an assignment in substantially the form attached (the 'Assignment') from Hollywood Tanning Systems, Inc. ('Assignor') to HT Systems, LLC ('Acquiror') or an affiliate of Acquiror ('Assignee')." (Pl. Mot. to Amend, Ex. F.) Based on this email, as well as others provided as exhibits to Tan Holdings' briefs in support of its current motions, counsel for Tan Holdings wrote a "Rule 11" letter to plaintiff's counsel requesting plaintiff to dismiss his fraud claims. Tan Holdings's counsel contended that because it had become clear that plaintiff's claim that he was never informed that HT Systems was the actual assignee of the lease is false, plaintiff cannot maintain that defendants made any material representations, and, accordingly, plaintiff cannot maintain that he reasonably relied upon any misrepresentation. Because he cannot prove at least two elements of his fraud claims, Tan Holdings contends that continuing to advance such claims is violative of Rule 11.*fn5

Plaintiff declined to withdraw his fraud claims, and filed his instant motion for leave to file another amended complaint. Plaintiff's proposed fourth*fn6 amended complaint recognizes, and attaches a copy of, the May 4, 2007 email. Plaintiff now claims that despite this particular email, throughout the subsequent email and telephone conversations, "[a]t no time . . . did defendant Rahn or any of the other defendants . . . specifically call to Mr. Rowen's attention the fact that HT Systems had been substituted for Tan Holdings as the proposed assignee of the Lease and that HT Systems was not the same entity as Tan Holdings." (Pl. Proposed Fourth Amend. Compl. ¶ 49.) Further, as he has claimed in his prior complaints, plaintiff contends, "Nor did defendant Rahn or any of the other defendants provide plaintiff with any financial information pertaining to HT Systems, as they had done with respect to Tan Holdings in accordance with the requirements of the Lease." (Id.) Overall, plaintiff contends that he did not notice the name change of the assignee, "in part because the names of the business entities and their affiliates had names which were similar and easily confused, . . . but primarily because of the tactics of the defendants which were intended to mislead plaintiff." (Id. ¶ 50.) As he claimed in his prior complaints, plaintiff restates in his proposed amended complaint that he would have never approved HT Systems as an assignee of the lease because HT Systems was essentially a shell company, was undercapitalized, and lacked the financial resources to assume and discharge its obligations under the lease.*fn7 Plaintiff claims that defendants knew this, and that is why they pulled a "bait and switch."

In opposing plaintiff's motion to amend, Tan Holdings, joined by the other defendants, argues that plaintiff's proposed amendments are futile. Defendants argue, as they did in their Rule 11 letter to plaintiff, that the Court denied their previous motions to dismiss because plaintiff made claims, which had to be taken as true, that he was never informed that HT Systems was to be substituted for Tan Holdings on the lease assignment. Now that it is clear that this claim is untrue, defendants argue that plaintiff should not be permitted to amend his ...


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