United States District Court, D. Maryland
L. Hollander United States District Judge
Memorandum Opinion resolves a motion for leave to file a
second amended counterclaim, submitted by defendants Wonder
World Learning, LLC (“Wonder World” or
“WWL”) and Sumanth Nandagopal and Supriya
Sumanth, who are husband and wife.
November 16, 2017, plaintiff Kiddie Academy Domestic
Franchising, LLC (“Kiddie” or “Kiddie
Academy”) sued its former franchisee, Wonder World, and
the franchisee's principals, the Sumanths, alleging
trademark and copyright infringement, breach of contract, and
breach of guaranty, and seeking declaratory judgment. ECF 1
(the “Complaint”). Plaintiff, a franchisor of
early childhood learning centers, alleges that defendants,
who opened a Kiddie franchise in Cedar Park, Texas in August
2015, defaulted on their financial obligations and have
refused to return copyrighted materials. Id.
response to Kiddie Academy's lawsuit, defendants filed
counterclaims against Kiddie and brought third-party claims
against nine of Kiddie's officers. ECF 22
(“Counterclaim”). Counterclaimants contend that
Kiddie Academy falsely represented the costs of constructing
and operating the franchise and their business prospects,
which induced defendants to enter a franchisor-franchisee
relationship and to construct a Kiddie childhood center.
moved to dismiss the Counterclaim. But, Judge Marvin Garbis,
to whom the case was then assigned, denied the motion and
permitted defendants to amend. ECF 24.
7, 2018, defendants filed a “First Amended Counterclaim
And First Amended Third-Party Complaint” against Kiddie
and the same nine Kiddie officers. ECF 25 (sometimes called
“FAC”). The First Amended Counterclaim contains
ten counts lodged under Maryland and federal law, including
fraud (Counts One through Three); negligent misrepresentation
(Count Four); defamation (Count Five); detrimental reliance
(Count Six); and the federal Racketeer Influenced and Corrupt
Organizations Act (“RICO”), 18 U.S.C.
§§ 1971, et seq. (Counts Seven through
plaintiff moved to dismiss. ECF 27. In a Memorandum Opinion
(ECF 33) and Order (ECF 34) dated March 31, 2018, I dismissed
the third-party defendants from the suit and dismissed the
counts asserted in the FAC, with the exception of Count Four.
pending is defendants' “Motion to Allow Filing Of
Second Amended Counterclaim And Second Amended Third Party
Complaint, ” filed on June 8, 2019. ECF 40. It is
supported by a memorandum of law (ECF 40-1) (collectively,
the “Motion” or “Motion to Amend”)
and five exhibits. ECF 40-3 to ECF 40-7. The proposed
“Second Amended Counterclaim and Second Amended
Third-Party Complaint” is docketed at ECF 40-2
(sometimes referred to as “SAC”). In particular,
defendants seek to reinstate all but one of the third-party
defendants. Counterclaimants also seek to revive the fraud
claims lodged in Counts One, Two, and Three of the FAC, and
to amend the allegations contained in Count Four.
Id. at 2. And, they seek to increase the amount of
damages pleaded in the SAC.
opposes the Motion to Amend on the basis that the proposed
amendments are “futile.” ECF 41 at 4.
Counterclaimants have replied. ECF 42.
hearing is necessary to resolve the Motion. See
Local Rule 105(6). For the reasons that follow, I shall grant
the Motion to Amend in part and deny it in part.
noted, Kiddie Academy initiated the instant suit on November
16, 2017. ECF 1. According to Kiddie, defendants entered into
a Franchise Agreement with Kiddie on March 14, 2014, pursuant
to which WWL agreed to open and operate a Kiddie franchise
for an early childhood learning center in Cedar Park, Texas.
Id. ¶ 7; ECF 1-1 (Franchise Agreement). As part
of the Franchise Agreement, the Sumanths executed a Personal
Guaranty, making them personally liable for WWL's
obligations. ECF 1, ¶ 7; ECF 1-1 at 63-64 (Personal
allegedly defaulted on payments owed to Kiddie under the
Franchise Agreement. As a result, Kiddie terminated its
relationship with defendants on November 14, 2017. ECF 1,
¶ 16; ECF 1-3 (Termination Notice). Nevertheless,
defendants have allegedly retained Kiddie curricular
materials and have continued to use its trademarks, copyright
materials, and trade dress. ECF 1, ¶¶ 24-25.
noted, the Complaint lodges claims for trademark and
copyright infringement and breach of the Franchise Agreement
and Personal Guaranty. Plaintiff also seeks declaratory
relief with respect to the defendants' contractual
answered the suit and filed the Counterclaim on March 26,
2018. ECF 22. They lodged claims under Maryland and federal
law against Kiddie Academy and nine Kiddie Academy officers.
Plaintiff moved to dismiss the Counterclaim on April 16,
2018. ECF 23. By Order of April 27, 2018, Judge Garbis
directed defendants to amend the Counterclaim. ECF 24.
7, 2018, defendants filed the FAC (ECF 25) against Kiddie
Academy and nine Kiddie officers: Greg Helwig, Kiddie's
President and Chief Executive Officer; Lene Steelman,
Kiddie's Controller/Vice President (“VP”) of
Accounting; Joshua Frick, Kiddie's VP of Real Estate;
David Gould, Kiddie's former Development Manager; Susan
Wise, the Chief Financial Officer and Chief Operating
Officer; Kevin Murphy, the VP of Operations; Chris Commarota,
the VP of Construction; Anthony F. Malizia, former
Construction Manager; and William Huggins, Franchise Business
Consultant. Id. ¶¶ 6-15.
contains ten counts. Count One asserts a claim of
“(Intentional Misrepresentation) Fraud or Deceit”
against Kiddie, Helwig, Steelman, Frick, Gould, Wise, and
Murphy. Id. ¶¶ 62-67. Count Two sets forth
a claim of “(Fraud in the Inducement)” against
Kiddie, Helwig, Steelman, Frick, Gould, Wise, and Murphy.
Id. ¶¶ 68-70. Count Three asserts a claim
of “(Intentional Misrepresentation) (Concealment or
Non-Disclosure)” against Kiddie, Helwig, Steelman,
Frick, Gould, Wise, and Murphy. Id. ¶¶
71-81. In Count Four, counterclaimants assert
“Negligent Misrepresentation” against Kiddie,
Helwig, Steelman, Frick, Gould, Wise, and Murphy.
Id. ¶¶ 82-88. Count Five, lodged against
Kiddie, Commarota, Malizia, and Huggins, asserts
“(Defamation Per Se of a Private Individual) Supriya
Sumanth.” Id. ¶¶ 89-92. Count Six
contains a claim of “Detrimental Reliance, ”
filed against Kiddie, Helwig, Steelman, Frick, Gould, Wise,
and Murphy. Id. ¶¶ 93-96. Counts Seven,
Eight, and Nine allege RICO violations under 18 U.S.C.
§§ 1961 et seq., against Kiddie, Helwig,
Steelman, Frick, Gould, Wise, and Murphy, based on mail fraud
and wire fraud. Id. ¶¶ 97-114. In Count
Ten, also under RICO, counterclaimants allege that Kiddie,
Helwig, Steelman, Frick, Gould, Wise, and Murphy conspired to
violate 18 U.S.C. § 1962(c), in violation of 18 U.S.C.
§ 1962(d). Id. ¶¶ 115-20.
moved to dismiss the FAC. ECF 27. The motion was supported by
a memorandum of law (ECF 21-1) and one exhibit. See
ECF 27-2 (the Franchise Agreement). Plaintiff argued that the
statute of limitations had run on defendants'
counterclaims. ECF 27-1 at 13-19. And, Kiddie argued that the
FAC failed to state plausible claims. As relevant here,
plaintiff contended that the fraud claims lodged in Counts
One and Two failed because they did not satisfy the
heightened pleading requirements of Fed.R.Civ.P. 9(b).
Id. at 19-22. According to plaintiff, Count
Three's fraudulent concealment claim also warranted
dismissal because defendants failed plausibly to allege the
“special relationship required in order to impose a
duty on Kiddie Academy to disclose material facts to
them.” Id. at 22. Likewise, plaintiff moved to
dismiss the negligent misrepresentation claim raised in Count
Four, asserting that it was “based on alleged
projections or withholding of information, not affirmative
statements.” Id. at 23. Defendants opposed the
motion to dismiss (ECF 30), and Kiddie replied. ECF 31.
Memorandum Opinion (ECF 33) and Order (ECF 34) of March 31,
2019, I granted in part and denied in part Kiddie's
motion to dismiss. As a preliminary matter, I dismissed the
claims against the third-party defendants because defendants
had failed to effect service, as required by Fed.R.Civ.P.
4(m). ECF 33 at 3-4. Thus, I “consider[ed] the [motion
to dismiss] only with regard to the Amended Counterclaim
filed by the defendants.” Id.
face of the submission, I was unable to conclude that
defendants' claims were barred by limitations.
Id. at 24-28. Therefore, I proceeded to examine
plaintiff's contention that the FAC failed to state
claims under Fed.R.Civ.P. 12(b)(6) and Fed.R.Civ.P. 9(b).
With the exception of Count Four, I dismissed the counts
lodged in the FAC. ECF 33 at 59.
respect to Counts One and Two, I observed: “Critically,
defendants fail to provide any facts to support the
assertions that Kiddie deliberately made statements with the
intent to deceive or for the purpose of defrauding the
counterclaimants. Id. at 33. Equally problematic,
defendants rooted their fraud claims in “repeated false
assurances and predictions, ” which “are not
actionable for fraud, unless defendants plead with sufficient
particularity that such statements were knowingly false or
‘made with reckless indifference' to their truth
and ‘made for the purpose of defrauding' them,
” something defendants “ha[d] not done.”
Id. at 35. Because defendants failed plausibly to
allege that Kiddie Academy intended to deceive them, I
granted the motion to dismiss with respect to Count One and
Count Two. Id.
dismissed Count Three. I observed that in Maryland, to state
a claim of fraudulent concealment, the plaintiff must allege
that the defendant had a duty to disclose material facts,
which arises only “‘in certain relationships such
as a confidential or fiduciary relationship.'”
Id. at 36 (quoting Hogan v. Md. State Dental
Ass'n, 155 Md.App. 556, 566, 843 A.2d 902, 908
(2004)). However, I noted that the Franchise Agreement
“expressly provided that no fiduciary relationship
existed between Kiddie and the counterclaimants, ”
foreclosing defendants' contention that a special
relationship existed between them and Kiddie Academy. ECF 33
at 37. In addition, I pointed out that Count Three
“fails for the same reasons that the other fraud counts
fail, ” i.e., the paucity of allegations that
Kiddie Academy intended to deceive counterclaimants.
in a generous construction of the FAC, I denied the motion to
dismiss Count Four, which contained a claim for negligent
misrepresentation. I agreed with Kiddie Academy that
predictive or promissory statements cannot give rise to a
claim for negligent misrepresentation under Maryland law.
Id. at 39. But, I concluded that
“counterclaimant's allegations [we]re not entirely
limited to promises about future performance or
conduct.” Id. at 40. I stated, id.:
For example, they allege that at the training on April 20,
2015, Conley advised them that “the numbers provided to
the bank at Kiddie's direction barely met the minimum
lending guidelines for approval, and that it was imperative
that Defendants receive the support from Kiddie to reach the
given projections.” ECF 25, ¶ 54. But, when
defendants asked Murphy “to see Kiddie's historical
numbers, ” Murphy refused to “share this
historical information due to ‘proprietary
reasons.'” Id. ¶ 55. Conley allegedly
explained to the couple that “due to construction cost
overruns and an increase in SBA closing costs that the lender
had reduced the requested working capital budget.”
Id. Defendants contend, id.: “The
cost overruns, the increase in SBA closing costs and the
increased time to ramp up to break even were due to
Kiddie's intentional or negligent provision of
information to Defendants to present to the lender.”
“taking the facts in the light most favorable to
counterclaimants, I [was] satisfied that
counterclaimants' allegations [we]re sufficient to state
a plausible claim of negligent misrepresentation.”
Court issued a Scheduling Order, pursuant to Local Rule
103.9, on May 10, 2019. ECF 39. The Order set a deadline of
June 10, 2019, for joining additional parties and amending
pleadings. Id. at 1.
8, 2019, defendants filed the instant Motion to Amend. ECF
40. Defendants seek to reinstate eight of the nine
third-party defendants. Id. at 1-2. According to the
counterclaimants, their failure to serve the third-party
defendants “was due to [their] decision to await the
ruling on the motion to dismiss . . . before trying to serve
the third-party defendants, having chosen first to follow the
procedures in Federal Rule of Civil Procedure 4(d).”
Id. at 1. They maintain that “[t]he claims
against the third-party defendants still survive on the
merits[.]” Id. at 2. And, as noted, they seek
to reinstate Counts One, Two, and Three, and to amend Count
defendants seek to amplify many of the factual allegations in
the SAC. See ECF 40-1, ¶ 14 (adding that
defendants lacked experience operating childcare centers, but
“Kiddie's marketing department stated that owner
operators of its franchises did not need any training or
experience”); id. ¶ 33 (alleging that
defendants would not have signed the Franchise Agreement,
relocated to Texas, or built the center “if they had
known . . . false information was provided as to expenses,
income, enrollment and lack of local marketing by
Kiddie”); id. ¶ 36 (adding that
“Kiddie deliberately misrepresented the facts to
Defendants in order to get them to buy their Kiddie Academy
franchise and ultimately obtain financing to construct and
operate their Kiddie Academy childcare center”);
id. ¶ 42 (alleging that “Kiddie's
Site Analysis was not accurate” because it
“failed to accurately consider the competition and the
necessary demographic data including income levels of the
residents of the area”); id. ¶ 44
(“Defendants would not have paid the second installment
of their franchise fees on March 14, 2014 if they had known
about the fallacies in Kiddie's Site Analysis.”);
id. ¶ 46 (alleging that Kiddie
“knew” defendants' loan application to Evolve
Bank “was not realistic”); id. ¶ 47
(pleading that defendants invested in their franchise based
on “deliberate misstatements of material facts and
omission of material facts”).
contend that the SAC is not merely a new gloss on old facts.
The SAC also contains six new paragraphs of factual
allegations. Id. ¶¶ 21-27. Defendants
allege that Steelman “provided false proformas
[sic]” to the Sumanths on May 9, 2011. Id.
¶ 21. According to defendants, Kiddie and Steelman knew
the pro formas were “deliberately false” because
“overestimated tuition revenue and underestimated
expenses significantly, improperly called for the state
minimum number of teachers when she and Kiddie knew that more
teachers were needed to operate the Kiddie Academy child care
centers than was required by the State of Texas, they did not
include credit card processing expenses which can run over 3%
when Kiddie encourages its franchisees to take credit and
debit card payment, they did not include the costs of a
splash pad needed in Texas to compete in the market due to
the hot weather, they did not include the costs of required
child sized toilets suitable for preschool age children and
underestimated design and architect costs which they knew
were higher than listed on the proformas thereby ultimately
leading to cost overruns running over $250, 000 to $500, 000
for most new centers, and, they overestimated initial
enrollments which Kiddie knew were much higher than
historical averages for new Kiddie Academy childcare centers.
to defendants, Lisa Conley, Kiddie's former Finance
Manager, told Steelman and Wise that defendants' pro
formas were not realistic, and they allegedly
“laughed.” Id. ¶ 22. Steelman
allegedly sent defendants revised pro formas on June 19,
2013, but these were “not realistic, ” and were
“missing key cost elements.” Id. ¶
24. The pro formas also “greatly overestimated the
expected enrollment which Kiddie knew would be lower based on
its records of historical averages for new centers.”
Id. Defendants allege that Kiddie
“encouraged” the Sumanths to construct a new
building to serve as their childcare center, knowing that the
debt incurred to finance the construction would prevent their
franchise from turning a profit. Id. ¶ 25.
defendants allege that when Evolve Bank rejected their loan
application, Kiddie sent the Sumanths an email
“blam[ing] the bank[.]” Id. ¶ 27.
In their view, “[t]he effect of this email was to
deceive Defendants into believing that they had good business
prospects, when Kiddie in fact knew that the loan, even using
‘the best' case numbers[, ] was highly
respect to Count Three, defendants now aver that a special
relationship existed between defendants and Kiddie Academy.
Id. ¶ 81. Specifically, they assert,
While no fiduciary relationship existed, a confidential
relationship arose between the parties by reason of the
knowing dependence of Defendants on Kiddie and third-party
defendants' claimed expertise and by their affirmative
representations that the Defendants could depend on them to
tell them everything they needed to know to design,
construct, open and operate their Kiddie Academy childcare
center and to make the representations made by Kiddie and
third-party defendants to Defendants described herein not
misleading. Kiddie and third-party defendants had influence
and superiority over Defendants by reason of their decades of
experience in operating childcare centers. Moreover,
Defendants' status as immigrants unfamiliar with American
culture and unfamiliar with franchising left them wholly
dependent on Kiddie and third-party defendants to disclose
all material facts to them.
amending the counterclaims, defendants seek to increase the
amount of damages alleged in the Second Amended Counterclaim
from $3 million to $4 million. Id. ¶¶ 70,
75, 87, 95. And, the Motion to Amend asks the Court to award
defendants attorney's fees and costs for the expenses
they will incur in serving the third-party defendants. ECF 40
Motion is supported by two exhibits: an affidavit from Conley
(ECF 40-3), and an email from Frick to Ms. Sumanth, dated
March 24, 2014. ECF 40-4. Both exhibits are referenced in the
proposed Second Amended Counterclaim. See ECF 40-1,
¶ 21 (citing ECF 40-3); id. ¶ 24 (citing
facts are included in the Discussion.
of the Federal Rules of Civil Procedure governs amendments to
pleadings. A complaint may be amended “once as a matter
of course” within twenty-one days of service of a
defendant's answer or Rule 12(b), (e), or (f) motion,
“whichever is earlier.” Fed.R.Civ.P. 15(a)(1)(b).
“In all other cases, a party may amend its pleading
only with the opposing party's written consent or the
court's leave.” Fed.R.Civ.P. 15(a)(2). Notably,
Rule 15(a)(2) states, in part: “The court should freely
give leave [to amend] when justice so requires.”
Id.; see also Foman v. Davis, 371
U.S. 178, 182 (1962); Simmons v. United Mortg. & Loan
Inv., LLC, 634 F.3d 754, 769 (4th Cir. 2011). Therefore,
Rule 15(a) confers “broad discretion” on the
district court “concerning motions to amend
pleadings.” Booth v. Maryland, 337 Fed.Appx.
301, 312 (4th Cir. 2009) (per curiam); see Laber v.
Harvey, 438 F.3d 404, 426-29 (4th Cir. 2006) (en banc).
are three circumstances when it is appropriate to deny leave
to amend: “(1) ‘the amendment would be
prejudicial to the opposing party;' (2) ‘there has
been bad faith on the part of the moving party;' or (3)
‘the amendment would have been futile.'”
Scott v. Family Dollar Stores, Inc., 733 F.3d 105,
121 (4th Cir. 2013) (quoting Laber, 438 F.3d at
the most important factor listed by the [Supreme] Court for
denying leave to amend is that the opposing party will be
prejudiced if the movant is permitted to alter a
pleading.” 6C. Wright & A. Miller, Federal Practice
And Procedure § 1487 (3d ed.) (citing Zenith Radio
Corp. v. Hazeltine Research, Inc., 401 U.S. 321 (1971);
United States v. Hougham, 364 U.S. 310 (1960)). The
burden of showing prejudice falls on “the party
opposing amendment.” Atl. Bulk Carrier Corp. v.
Milan Exp. Co., 3:10-cv-103, 2010 WL 2929612, at *4
(E.D. Va. July 23, 2010). “[I]f the court is persuaded
that no prejudice will accrue, the amendment should be
allowed.” Wright & Miller, § 1487.
Newport News Holdings Corp. v. Virtual City Vision,
Inc., 650 F.3d 423, 439 (4th Cir. 2011), the Court said:
“‘Whether an amendment is prejudicial will often
be determined by the nature of the amendment and its timing .
. . [T]he further the case progressed before judgment was
entered, the more likely it is that the amendment will
prejudice the defendant . . . .'” (quoting
Laber, 438 F.3d at 427) (alteration in
Laber). To be sure, “prejudice can result
where a proposed amendment raises a new legal theory that
would require the gathering and analysis of facts not already
considered by the opposing party, but that basis for a
finding of prejudice essentially applies where the amendment
is offered shortly before or during trial.” Johnson
v. Oroweat Foods Co., 785 F.2d 503, 510 (4th Cir. 1986).
In contrast, “[a]n amendment is not prejudicial . . .
if it merely adds an additional theory of recovery to the
facts already pled and is offered before any discovery has
occurred.” Laber, 438 F.3d at 427 (emphasis
added). Therefore, the court must examine the facts of each
case “to determine if the threat of prejudice is
sufficient to justify denying leave to amend.” Wright
& Miller, § 1487.
a proposed amendment must not be futile. See Foman,
371 U.S. at 182; see also U.S. ex rel. Carson v. Manor
Care, Inc., 851 F.3d 293, 305 n.6 (4th Cir. 2017).
According to the Fourth Circuit, a proposed amendment should
be denied as futile “when the proposed amendment is
clearly insufficient or frivolous on its face.”
Johnson, 785 F.2d at 510; see also Wright
& Miller § 1487 (“[A] proposed amendment that
clearly is frivolous, advancing a claim or defense that is
legally insufficient on its face,  or that fails to include
allegations to cure defects in the original pleading, 
should be denied.”). A motion to amend may also be
futile where the proposed amendment “could not
withstand a motion to dismiss.” Perkins v. United
States, 55 F.3d 910, 917 (4th Cir. 1995); see also
Devil's Advocate, LLC v. Zurich Am. Ins. Co., 666 F.
App'x. 256, 267 (4th Cir. 2016) (per curiam) (affirming
district court's denial of leave to amend on the basis of
futility, because the amended complaint would not survive a
motion to dismiss under Rule 12(b)(6)); U.S. ex rel.
Wilson v. Kellogg Brown & Root, Inc., 525 F.3d 370,
376 (4th Cir. 2008) (“[A] district court may deny leave
if amending the complaint would be futile-that is, ‘if
the proposed amended complaint fails to satisfy the
requirements of the federal rules.'” (citation
omitted)); Frank K. McDermott, Ltd v. Moretz, 898
F.2d 418, 420-21 (4th Cir. 1990) (“There is no error in
disallowing an amendment when the claim sought to be pleaded
by amendment plainly would be subject to a motion to dismiss
under Fed.R.Civ.P. 12(b)(6).”).
the review for futility “is not equivalent to an
evaluation of the underlying merits of the case. To the
contrary, ‘[u]nless a proposed amendment may clearly be
seen to be futile because of substantive or procedural
considerations, . . . conjecture about the merits of the
litigation should not enter into the decision whether to
allow amendment.'” Next Generation Grp., LLC v.
Sylvan Learning Ctrs., LLC, CCB-11-0986, 2012 WL 37397,
at *3 (D. Md. Jan. 5, 2012) (quoting Davis v. Piper
Aircraft Corp., 615 F.2d 606, 613 (4th Cir. 1980)).
addition, a district court may deny a motion to amend for
reasons “‘such as undue delay . . . [or] repeated
failure to cure deficiencies by amendments previously
allowed[.]'” Booth, 337 Fed.Appx. at 312
(quoting Foman, 371 U.S. at 182). However,
“[d]elay alone is an insufficient reason to deny leave
to amend.” Edwards v. City of Goldsboro, 178
F.3d 231, 242 (4th Cir. 1999). “Rather, the delay must
be accompanied by prejudice, bad faith, or futility.”