Franchisor 101: Court Holds Joint Liability is Fashionable

Lewitt Hackman

A California federal district court held that judgment entered against individual owners of a franchisor entity, KEP Fortune, LLC, finding them jointly and severally liable with the franchisor entity, was not erroneous or a violation of due process rights.

The franchise agreement was for a Klein Epstein & Parker clothing store in Las Vegas. After the parties’ relationship soured, the franchisee sent a notice that it was rescinding the franchise agreement. The franchisee then filed suit against KEP and its principals, Jeroen and Miray Bik, seeking confirmation of the rescission notice, damages, and other relief. After discovery, the parties cross-moved for summary judgment.

The court granted partial summary judgment in favor of the former franchisee on claims for violations of the California Franchise Investment Law (CFIL) and held the Biks jointly and severally liable with KEP. The former franchisee moved for entry of default judgment on its remaining claims against KEP.

At the proof hearing, the former franchisee dismissed the unjust enrichment claim against the Biks and elected to pursue rescission only against KEP, contingent on the Biks remaining jointly and severally liable with KEP. With no unresolved claims remaining against the Biks, the court excused the Biks and the court completed the proof hearing without them. At conclusion of the hearing, the court entered default judgment against KEP for over $1 million in rescission damages and $49,000 in punitive damages. The Biks were held jointly and severally liable with KEP.

The Biks moved to amend the judgment arguing that the court erroneously entered default judgment against them in violation of their due process rights after “barring” them from the proof hearing.

The court found the Biks misconstrued the court’s order granting default judgment as well as the court’s final judgment. The court clarified that it granted partial summary judgment against KEP for CFIL violations, and by extension, the court held the Biks were statutorily jointly and severally liable with KEP for KEP’s CFIL violations. The Biks did not challenge that outcome at the time.

The court stated that rescission was a CFIL remedy, not an independent cause of action. Because the Biks were jointly and severally liable to the same extent as KEP, the Biks were also jointly and severally liable for damages flowing from rescission of the franchise agreement, including punitive damages. Consequently, the judgment against them was not erroneous.

The court also held the judgment did not violate the Biks’ due process rights. The court did not bar them from the proof hearing. Rather, the court had announced that the former franchisee abandoned its remaining claims against them and only excused the Biks, who left at their discretion.

The court concluded the Biks’ assertion that they were unaware of the personal consequences of KEP’s default, as owners and controllers of KEP, was not credible.

The individual owners of a franchisor may be jointly and severally liable along with the franchisor for CFIL violations. Franchise counsel is essential for strategizing possible ways to mitigate a franchisor’s liability, including potential individual liability for a franchisor’s officers and directors named in a dispute.

Full Tilt Boogie, LLC v. KEP Fortune, LLC, 2:19-cv-09090-ODW (KESx) (C.D. Cal. Oct. 3, 2023)

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Lewitt Hackman | Attorney Advertising

Written by:

Lewitt Hackman

Lewitt Hackman on:

Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide
- hide