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Cold Stone Creamery v. Lenora Foods

Don't believe financial performance representations made by the franchisor. And don't believe representations made by franchisees, either.

Cold Stone Creamery v. Lenora Foods (3 June 2009) is an 11th Circuit case affirming an appeal after a jury awarded $800,000 to the franchisor.

  • Cecil and Jacquette Rolle borrowed money from Cold Stone Creamery, and signed a Promissory Note.
  • The franchise did not do well, and Rolle defaulted on the Note.
  • Cold Stone sued, and obtained summary judgment on the issue of liability.
  • A jury awarded Cold Stone $800K, and in addition Cold Stone has submitted a bill for an attorney fee award of over $392K.

Rolle alleged with respect to earnings claims that:

  1. Two existing Cold Stone franchisees had made statements to Rolle as to the prospects for success as a Cold Stone franchisee.
  2. Those two franchisees were acting as agents of Cold Stone.
  3. Cold Stone gave written materials providing detailed financial information, including average gross revenues.

The court held:

  1. "The [franchise] agreement clearly states that the Cold Stone franchisees did not have the authority to make representations on Cold Stone's behalf about profit margins.
  2. "That agreement... notes that '[a]ctual results vary from unit to unit, and we cannot estimate the results for any particular Franchise...[i]f you rely upon the [provided]figures, you must accept the risk of not doing as well."

The court concluded:

Under these circumstances, it is not likely that a consumer acting reasonably would have been decieved by the alleged statements made by the two Cold Stone franchisees.

Cold Stone had seized the Rolle collateral, and

The Rolles argue that because Cold Stone did not provide them with notice of the sale of the collateral at issue, there is a rebuttable presumption that the collateral seized satisfies the full value of the debt owed, and that the [trial] court should have instructed the jury about that presumption

The 11th Circut responded:

We disagree. The presumption is rebuttable, and the [trial] court properly found that it was rebutted by proof that the note covered more than just the collateral at issue; that the Rolles had removed a significant amount of equipment from one of the stores before it could be recovered by Cold Stone; and that the equipment had depreciated in value over time...

[The franchisees] contend that Cold Stone disposed of the collateral in a commercially unreasonable manner, and for that reason the collateral should be presumed equal to the total amount of the debt owed. That presumption.. is also rebuttable.

Because Cold Stone proved that the 'fair market value of the collateral was less than the debt,' it was entitled 'to recover a deficiency judgment in an amount equal to the total debt minus the fair market value of the collateral as ultimately determined.'

There are several lessons for franchisees in the Rolle case:

  • Even where a franchisor gives specific dollar numbers, the provision of those numbers is cabined by a disclaimer and some courts may find that (unless the numbers are false) the disclaimer protects the franchisor against any claim of misrepresentation (this is why attorney Rupert Barkoff notes that provision of financial data in the Offering Circular is actually a smart thing for the franchisor to do).
  • Current franchisees may not be honest about the profitability of the franchise system. They may or may not be acting in cahoots with the franchisor, but prospective purchasers should not assume they are being given truthful information.
  • In most cases, a purchaser must show detrimental reliance on a misleading practice. In this case, the zees were unable to show detrimental reliance (required under the Florida Franchise Act) and although detrimental reliance is not required under the Florida Deceptive & Unfair Trade Practices Act, the court felt that prospective purchasers should know to take the word of existing franchisees with a grain of salt.
  • The Rolles took some equipment out of the store, which no doubt factored into the court's lack of sympathy.
  • Nevertheless, franchisees should remember that they are paying retail top dollar for equipment which depreciates rapidly.
  • Much equipment can only be used in another outlet of the same franchise system, since it is specially designed and/or constitutes protected intellectual property (trade dress).
  • Unless the franchise system is large, the market for used equipment is negligible.
  • Generally the franchisor is going to know if a franchisee is purchasing used equipment, and no franchisee with common sense is going to purchase used equipment from a departing franchisee who is persona non grata.
  • The value of the collateral may end up being worth what the franchisor decides it is worth, and the franchisor has a pecuniary interest in ensuring that value is as low as possible.
  • Because of the potential for a "deficiency judgment" : (1) a franchisee can lose everything, (2) the franchisor can re-use the equipment in another location, and (3) the franchisee will still be paying the franchisor.
  • If the natural person in control of the franchised outlet is personally liable (as normally the case), the franchisee can loose their personal home and be forced into bankruptcy.
AttachmentSize
Coldstone Rolle Complaint & Injunctive Relief.pdf280.32 KB
Coldstone Rolle Answer & Affirm Defenses.pdf439.58 KB
Coldstone Rolle Zor Reply to Answer & Affirm Def.pdf867.27 KB
Coldstone Rolle Jury Verdict Form.pdf19.65 KB
Coldstone Rolle $392,017.25 attorney fee.pdf116.8 KB
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