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Re: Villano et al v. Td Bank et al

August 29, 2012

RE: VILLANO ET AL
v.
TD BANK ET AL



The opinion of the court was delivered by: Freda L. Wolfson, U.S.D.J.

(609) 989-2182

CH AM BERS OF Clarkson S. Fisher Federal Building & FREDA L. WOLFSON U.S. Courthouse UNITED STATES DISTRICT JUDGE 402 East State Street Trenton, New Jersey 08608

LETTER MEMORANDUM AND ORDER

Dear Counsel:

Presently before the Court are motions by both Defendant TD Bank ("TD Bank") and Defendant NMTC, Inc., d/b/a Matco Tools ("Matco") and its parent Danaher Corporation ("Danaher") (collectively "Defendants"). First, TD Bank has filed a motion to dismiss Plaintiffs' Complaint for failure to state a claim pursuant to Fed. R. Civ. P. 12(b)(6), or alternatively to compel arbitration. Matco and Danaher have filed a motion to compel arbitration or alternatively to transfer the claims against them to the Northern District of Ohio. In addition, Matco and Danaher have filed a motion to dismiss Plaintiffs' claims pursuant to Rule 12(b)(6). Plaintiffs David B. Villano III ("Villano III" or "Son") and David B. Villano, Jr., the father of David B. Villano III, ("Villano Jr." or "Father") filed their three-count Verified Complaint on their own behalf and on behalf of a putative class. Until the putative class is certified, however, the action is one between the named plaintiffs and defendants. See Rolo v. City Investing Co. Liquidating Trust, 155 F.3d 644, 659 (3d Cir. 1998). Accordingly, the Verified Complaint must be evaluated as to the named plaintiffs only. Id. Plaintiffs' Complaint alleges as to all Defendants common law fraud and civil conspiracy (Count I); and as to Defendant TD Bank a violation of the New Jersey Consumer Fraud Act, N.J.S.A. § 56:8-1 et seq. ("NJCFA") (Count II); and a violation of the New York Deceptive Acts and Practices Act, N.Y. Gen. Bus. Law §§ 349 et seq. ("DPA") (Count III). Plaintiffs' claims arise from a loan that Villano III obtained from TD Bank in order to finance a Matco franchise. Matco sells specialty tools, mainly automotive tools. Specifically, Plaintiffs allege that Matco secretly supplied inflated income projections for Villano III's franchise to TD Bank, which TD Bank accepted, despite the fact that it knew or should have known that the loan to Villano III would likely never be repaid-even though it was, in reality, repaid in full, by Villano Jr., five years before this case was brought. Oral argument was held on August 28, 2012.

I. FACTUAL BACKGROUND

In June 2004, Villano III sought to purchase a Matco Tools franchise to be operated on Long Island, New York. Compl. ¶ 9. His father, Villano Jr., had been operating a Matco distributorship for many years already although he apparently did not acquire it directly from Matco. Since Villano III did not have sufficient capital to finance the purchase, Matco required him to obtain outside financing as a condition of signing the franchise agreement. Id. ¶ 10. Matco referred Villano III to TD Bank for the purpose of securing a Small Business Administration ("SBA") loan that would enable him to purchase the franchise. Id. Matco provided TD Bank with Villano III's business cash flow estimate and initial capital requirements, an analysis of a recapitalization of sources and use of funds, and a three-year annual income projection. Id. ¶ 10-12. The three-year projection was based on sales averages in the region where Villano III's franchise would be located. Compl. ¶ 12. Villano III and his father were never made aware of the existence of the three-year projection. Compl. ¶ 11. Despite never seeing this projection nor knowing of its existence, it is the cornerstone of Plaintiffs' fraud claim, in part because Plaintiffs allege that the distributorship agreement compelled the disclosure of this information.

On June 23, 2004, TD Bank approved a $103,000 SBA loan to Villano III. Compl. ¶ 11. As required by the loan agreement, the father, Villano Jr., signed a personal guaranty on July 23. Id. Plaintiffs were under the impression that TD Bank had considered only "legitimate financial material" in approving Villano III's loan. Compl. ¶ 19. Plaintiffs now allege that TD Bank's approval was principally based on the three-year projection supplied by Matco, Compl. ¶ 11, but that TD Bank was aware of the 'extraordinarily high failure rate' of SBA franchise loans. Compl. ¶ 17.

Plaintiffs allege that Matco instructed TD Bank not to disclose the projection to Villano III, as Matco cannot legally make representations regarding potential sales unless they are expressly set forth in the franchise offer to the prospective franchisee. Compl. ¶ 12. The franchise offer to Villano III expressly stated that Matco does not make any such representations. Id. Plaintiffs allege that TD Bank nevertheless knowingly participated in Matco's scheme, as it profits through loan origination fees and interest payments collected from SBA loans. Compl. ¶ 18.

In 2006, Villano III started having trouble making the loan payments, as his franchise was not performing as well as predicted by the three-year projection (which he admits he did not know about). Compl. ¶ 16. The Father paid off the $85,417.59 balance of the loan with his own savings. Id. This was significantly earlier than was required by the loan agreement. Villano III continued to operate his franchise for four more years. Then in 2010, Villano III closed his Matco franchise allegedly because of poor financial results. Id. Villano III has yet to fully repay his father for paying off the balance of the SBA loan. Id. While the Plaintiffs make a number of general claims for damages, including punitive damages and attorneys' fees, the only damage expressly identified is the loan itself.

The Distributorship Agreement ("Agreement") was signed by Villano III and Matco, as a subsidiary of Danaher. It contains an arbitration clause and a forum selection clause, both of which are relevant for this litigation. The arbitration clause is found in §12.1 of the Agreement and provides in relevant part:

Except as expressly provided in Section 12.5 of this Agreement, all breaches, claims, disputes and controversies ... between the Distributor, including its ... guarantors and Matco, including its ... agents ... and its parent, subsidiary or affiliated companies arising from or related to this Agreement, the offer or sale of the franchise ... [or] the relationship of Matco and Distributor, including any allegations of fraud ... will be determined exclusively by binding arbitration in accordance with the Rules and Regulations of the American Arbitration Association.

Agreement, § 12.1, Ex. A to Danaher Motion (emphasis added). This clause references section 12.5, which provides that the following disputes are not subject to arbitration: those involving trademarks, trade names, and patents; termination of the agreement by Matco; or enforcement of covenants not to compete contained in the agreement. No party argues that § 12.5 is implicated in this matter. The Agreement also contains a forum selection clause, which states as follows:

12.9 Venue and Jurisdiction. All Arbitration hearings must and will take place exclusively in Summit County, Ohio. All court hearings, mediation hearings or other hearings initiated by either party against the other party must and will be venued exclusively in Summit County, Ohio. Matco and the Distributor, and were applicable their ... personal guarantors, do hereby agree and submit to personal jurisdiction in the Summit County, Ohio in connection with any Arbitration hearings, court hearings or other hearings, including any lawsuit challenging the arbitration provisions of this Agreement ... and do hereby waive any rights to contest venue and jurisdiction in the Summit County, Ohio and any claims that venue and jurisdiction are invalid. ...

Notwithstanding this Article, any actions brought by either party to enforce the decision of the arbitrator may be venued in any court of competent jurisdiction.

Id. at ยง 12.9. As I stated before, the Plaintiffs have brought this action on behalf of themselves and a putative class. I note, however, that the Distributorship Agreement specifically excludes class actions ...


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