FKB’s Rachel Aghassi and Corey M. Cohen successfully obtained a voluntary dismissal from the bankruptcy trustee in an adversary proceeding to a Chapter 7 bankruptcy petition at the close of discovery and after seeking leave to move for summary judgment pursuant to Fed. R. Bankr. R. § 7056 in the in the United States Bankruptcy Court, Southern District of New York.

In this 2011 adversary proceeding, Plaintiffs asserted claims for fraud and breach of fiduciary duty which arise from FKB’s client’s representation of them in procuring commercial space for a Cold Stone Creamery franchise.  Plaintiffs alleged that there was a conflict of interest due to simultaneous representation of co-Defendant, Cold Stone Creamery, Inc. and the Plaintiffs in connection with securing a primary lease (which Cold Stone subsequently sublet to the Plaintiffs) to open a Cold Stone franchise store.  Plaintiffs also claim that FKB’s client should have also provided advice regarding the viability of Cold Stone franchises.

Long before retaining FKB’s client, Plaintiffs contacted Cold Stone Creamery in April 2004 regarding opening a franchise and entered into a franchise agreement with Cold Stone with the assistance of a non-party attorney.  This agreement required Plaintiffs to sublease any franchise premises from Cold Stone, Cold Stone’s approval of master lease terms, and other terms which Plaintiffs later claimed that FKB’s client should have somehow later overturned.  Over a year after executing the franchise agreement, FKB’s client was retained by Plaintiffs in late 2005 solely to negotiate the master lease for a potential franchise location pursuant to the franchise agreement Plaintiffs had already entered into.  After Plaintiffs opened the franchise, the franchise failed less than a year later.  Notably, none of Plaintiffs’ allegations in the adversary proceeding result from the negotiation of the master lease, the work FKB’s client actually performed on Plaintiffs’ behalf. 

After the close of discovery and depositions, FKB filed a request with the Court seeking permission to file a motion for summary judgment pursuant to Fed. R. Bankr. R. § 7056 and explaining the seemingly frivolous nature of Plaintiffs’ claims against FKB’s client.  In the letter, FKB argued that summary judgment dismissal is appropriate because Plaintiffs cannot prove essential elements of their two causes of action, fraud or breach of fiduciary duty and that Plaintiffs are unable to prove any causally related damages. 

Specifically, FKB argued that Plaintiffs cannot prove their claims for fraud or breach of fiduciary duty because they failed to obtain factual support during discovery to support the essential elements of the claims. Plaintiffs cannot prove their fraud claim because Plaintiffs cannot establish that FKB’s client was even aware of the viability of Cold Stone franchises, especially where, as here, FKB’s clients are real estate attorneys retained solely to negotiate a master lease.  Plaintiffs executed all franchise agreements with Cold Stone prior to retaining FKB’s client, who was not involved in negotiating the terms of the agreements. Even more so, during their depositions Plaintiffs admitted that the franchise closed for reasons unrelated to FKB’s client’s actions, specifically Plaintiffs asserted that the franchise closed because of Cold Stone’s refusal to remit rent paid by Plaintiffs to the landlord.  Therefore, alleged damages relating to costs associated with opening and running the Cold Stone franchise, and costs related to Plaintiffs’ bankruptcies are unrecoverable. Similarly, Plaintiffs admitted that their claimed damages based on franchise fees (paid before retaining FKB’s client), would have been forfeited whether the franchise was opened or not, so therefore regardless of whether FKB’s client had provided advice as to the viability of a Cold Stone franchise when they were retained, after the franchise agreement was already signed and the franchise fees paid, the Plaintiffs would have been unable to recover the franchise fees. Accordingly, FKB argued that there is no evidentiary basis, or logical basis, to attribute any of Plaintiffs’ claimed damages to any of the actions of FKB’s client.

As a result of extensive discovery, the testimony obtained from Plaintiffs’ depositions and the arguments made in our correspondence to the court seeking leave to file a summary judgment motion, the bankruptcy trustee finally agreed to sign a stipulation of dismissal with prejudice rather than oppose FKB’s proposed motion.  This stipulation was then filed United States Bankruptcy Judge Robert D. Drain further “so ordered” the stipulation, thus officially ending this litigation.

If you have any questions about this decision, or the defense of attorneys in general, please contact Rachel Aghassi or Corey M. Cohen.