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Kiddie Academy Domestic Franchising, LLC v. Wonder World Learning, LLC

United States District Court, D. Maryland

November 15, 2019

WONDER WORLD LEARNING, LLC, et al., Defendants


          Ellen L. Hollander United States District Judge

         This 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.[1]

         On 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.

         In 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.

         Plaintiff 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.[2]

         On May 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 Ten).

         Again, 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.

         Now 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”).[3] 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.

         Plaintiff opposes the Motion to Amend on the basis that the proposed amendments are “futile.” ECF 41 at 4. Counterclaimants have replied. ECF 42.

         No 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.

         I. Procedural Background[4]

         As 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 Guaranty).

         Defendants 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.

         As 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 obligations.

         Defendants 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.

         On May 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.

         The FAC 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.

         Kiddie 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.

         By 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.

         On the 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.

         With 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.

         I also 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. Id.

         However, 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.”

         Thus, “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.” Id.

         The 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.

         On June 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.[5] 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 Four.

         Further, 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”).

         Defendants 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 they, id.,

“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.

         According 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.

         Further, 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 questionable.” Id.

         With respect to Count Three, defendants now aver that a special relationship existed between defendants and Kiddie Academy. Id. ¶ 81. Specifically, they assert, id.:

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.

         Besides 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 at 3.

         The 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 ECF 40-4).

         Additional facts are included in the Discussion.

         II. Legal Standards

         A. Rule 15

         Rule 15 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).

         There 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 426).

         “Perhaps 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.

         In 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.

         Furthermore, 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).”).

         But, 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)).

         In 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.” ...

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