A federal court in North Carolina granted Liberty Tax Service’s motion for summary judgment and denied the cross-motion of its franchisee, entering judgment for Liberty on claims for breach of franchise agreements and default under promissory notes. JTH Tax LLC v. CMB Tax Serv., LLC, 2026 WL 172620 (E.D.N.C. Jan. 22, 2026).
Over the course of two decades, Liberty entered into nine different franchise agreements with CMB Tax Service, LLC and Jeffery and Cindy Serbus, all of which required the Liberty Tax franchises to comply with all federal, state and local laws. In 2021, Liberty terminated the agreements after discovering evidence that customer refunds had been diverted through altered tax returns and after receiving whistleblower reports that employees without active Preparer Tax Identification Numbers (PTINs) had prepared returns using other employees’ PTIN credentials. Liberty took over the locations as company stores and sued CMB and the Serbuses for breach of contract and to recover amounts owed on two operating-expense promissory notes.
The court agreed that CMB and the Serbuses breached the franchise agreements by failing to comply with state and local law. The record confirmed that fraudulent returns had been filed from their stores bearing Jeffery Serbus’s Electronic Filing Identification Number (EFIN), and an electronic return originator remained responsible for returns originated by the firm even when a supervised employee submitted the return. Although CMB argued that a “hack” of Liberty’s software caused the fraud, the court found no evidence of a system-wide breach and noted that the record showed the refund-diversion problem was confined to the Serbus locations. Although CMB argued that disputes over the precise contours or credibility of the PTIN-sharing allegations precluded summary judgment, the court found these disputes immaterial because the credential-sharing practices nonetheless enabled the submission of fraudulent returns and theft of refunds.
Based on these violations of law, the court concluded that Liberty was authorized to terminate the agreements without notice because of material legal violations or acts harmful to the brand, and this right did not conflict with a separate provision of the agreement that would have allowed Liberty to provide an opportunity to cure under these circumstances. Finally, although the defendants asserted a recoupment defense aimed primarily at reducing the amounts they owed under promissory notes, the court held that any alleged breach of the franchise agreement by Liberty could not be used to offset the loan obligations because the promissory notes arose from separate transactions. The court therefore granted judgment in favor of Liberty and awarded Liberty damages and reasonable attorneys’ fees.
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