Callen v. ILKB LLC

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF NEW YORK

---------------------------------------------------------------X

THOMAS CALLEN, COURTNEY CALLEN,

and GOLDEN POLAR BEAR, LLC,

Plaintiffs, MEMORANDUM AND ORDER

- against - 2:20-cv-3345 (DRH) (JMW)

ILKB, LLC, MICHAEL PARRELLA, RYAN

HEALY, and SCOTT FERRARI, each

individually, and ILKB TOO, LLC, DANIEL

CASTELLINI, and SHAUN YORK, each as

successor by merger to ILKB, LLC,

Defendants.

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APPEARANCES

ROSENBERG & ESTIS, P.C.

Attorneys for Plaintiffs

733 Third Avenue

New York, NY 10017

By: John D. Giampolo, Esq.

Justin Scott Weitzman, Esq.

GORDON REES SCULLY MANSUKHANI, LLP

Attorneys for Defendants ILKB, LLC, Michael Parrella, ILKB Too, LLC, Daniel

Castellini, and Shaun York

1 Battery Park Plaza, 28th Floor

New York, NY 10004

By: Peter G. Siachos, Esq.

David Oxamendi, Esq.

Matthew P. Gallo, Esq.

HURLEY, Senior District Judge:

INTRODUCTION

Plaintiffs Thomas Callen, Courtney Callen, and Golden Polar Bear, LLC

(collectively, “Plaintiffs”) bring six causes of action against Defendants ILKB, LLC

(“ILKB”), Michael Parrella, Ryan Healy, and Scott Ferrari (together the “Predecessor

Defendants”): violation of the New York State Franchise Sales Act (“NYSFSA”), N.Y.

Gen. Bus. L. § 680 et seq.; breach of contract; common law fraud; negligent

misrepresentation; violation of the Colorado Consumer Protection Act, Colo. Rev.

Stat. § 6-1-101 et seq. (“CCPA”); and alter ego, veil piercing and agency liability.

Plaintiffs also bring one cause of action—successor liability—against ILKB Too, LLC

(“ILKB Too”), Daniel Castellini, and Shaun York, each as successor by merger to

ILKB (together, the “Successor Defendants,” and with the Predecessor Defendants,

“Defendants”).

Presently before the Court is Defendants ILKB, Parrella, ILKB Too, Castellini,

and York’s (the “Moving Defendants”) motion to dismiss pursuant to Federal Rules

of Civil Procedure 12(b)(1),1 12(b)(2), and 12(b)(6). For the reasons stated below, their

motion is granted in part and denied in part.

BACKGROUND

The following facts from the Complaint, the exhibits attached thereto, and

other materials properly considered on the Moving Defendants’ motion are taken as

true for the purposes of this Order.

Thomas and Courtney Callen allege the Predecessor Defendants

misrepresented and omitted material information about ILKB, inducing the Callens

to purchase and run an ILKB franchise. (Second Am. Compl. ¶ 15 (“SAC”) [DE 18]).

Scott Ferrari, President and Director of Franchise Development at ILKB, for

1 The Court construes the Successor Defendants’ standing argument under Rule

12(b)(1). See infra Discussion Section II.

example, stated in February 2015 that [1] “90% of marketing was and would be

accomplished by ILKB corporate,”2 (id. ¶¶ 16, 20); [2] “55-68% of potential ILKB

studio customers introduced through ILKB’s marketing sign up for long term

membership contracts,” (id. ¶¶ 16, 21(h)); [3] “the average ILKB studio member

stayed with the program for 14 months,” (id. ¶ 16); [4] “no ILKB franchise locations

struggled or went out of business,” (id.); and [5] “all or the average ILKB franchises

broke even with less than 200 members and receive six figure income with less than

300 members,” (id.).

In March 2015, the Callens received an ILKB Financial Disclosure Document

allegedly not registered in New York State that omitted that: [6] “ILKB franchise

owner and founder, [Michael] Parrella, had filed for bankruptcy and had been

discharged in 2008,” (id. ¶ 18(a)); [7] “Parrella or FC Online Marketing, LLC, the

predecessor affiliate of ILKB, had been the charged with fraud, violation of franchise

laws or theft of services,” (id. ¶ 18(b)); [8] “ILKB did not receive rebates from

suppliers to franchisees,” (id. ¶¶ 18(c), 20, 21(f)); and [9] “ten ILKB franchised units

had closed in 2015 and five had closed in 2014,” (id. ¶ 18(d)).

Defendants also allegedly misrepresented and failed to disclose that

[10] “ILKB would retain profits at the expense of franchisees through Defendants’

lead generation program.” (Id. ¶ 19).

2 The Court refers to each numbered misrepresentation and omission as a

“Representation.”

In February 2016, Defendants invited Plaintiffs and other prospective

franchisees to New York for its “Discovery Day.” (Id. ¶ 20). Ryan Healy, who

identified himself as ILKB’s Vice President of Franchise Operations, allegedly

repeated some of the above misrepresentations and added that [11] “the initial

investment for an ILKB franchise studio was $228,000 to $273,000,” (id. ¶¶ 20, 21(a));

[12] “all or the average ILKB franchise breaks even at 200 members, reaches

profitability in four to six months, and experiences approximately 80% profit for each

member beyond 200,” (id. ¶¶ 20, 21(b)); [13] “ILKB corporate would negotiate with

landlords for franchisees and the Callens would not need to sign a personal guarantee

for a commercial lease for space for their ILKB studio,” (id. ¶ 20); and [14] “the

business worked with an absentee owner model,” (id. ¶¶ 20, 21(c)). Around the same

time, Parrella, Ferrari, Healy allegedly reiterated some of the above and further

stated that [15] “the average ILKB franchise generated in excess of $130,000 in

profits for the owners per year,” (id. ¶ 21(d)), and [16] ILKB’s marketing “would result

in at least 100 trials a month on the basis of a $2,500 monthly marketing budget,”

(id. ¶ 21(e), (g)).

On February 29, 2016, the Callens signed an ILKB franchise agreement,

enabling them to open a kickboxing studio covering three territories in Colorado

Springs, Colorado. (Id. ¶ 22; see Franchise Agreement (“Fr. Agmt.”), Ex. A to SAC).

They invested more than $364,280.81 in building out, equipping and setting up the

studio, and even signed a personal guarantee to lease the space. (SAC ¶ 23). They

also formed Golden Polar Bear, LLC to conduct the business of their franchise. (Id.

¶ 5). After the studio’s June 2017 opening, the Callens learned that it would not be

profitable with absentee ownership and instead “required 50 to 60 unpaid hours a

week by owners.” (Id. ¶¶ 22–23). “Over the years,” as their franchise struggled to

remain viable, they further discovered the alleged falsity of the rest of the

Representations. (Id. ¶¶ 23–25).

Pursuant to their Franchise Agreement, the Callens commenced an arbitration

proceeding against the Predecessor Defendants on February 26, 2019. (Id. ¶ 27; Fr.

Agmt. § 14.2). Defendants, however, have refused to deposit their portion of the

arbitration fees, and the proceeding has been held in abeyance. (SAC ¶ 29).

Plaintiffs allege that, as of June 26, 2020, ILKB Too—through its limited

liability company members Castellini, York, and Parrella—acquired “all assets” and

had taken “full control” of ILKB, thereby becoming its successor. (Id. ¶¶ 10, 31–32).

Castellini is ILKB Too’s Chief Executive Officer and York its Chief Operating Officer.

(Id.).

Plaintiffs brought this suit on July 24, 2020. [DE 1]. In response to the Court’s

Order to Show Cause concerning subject-matter jurisdiction, Plaintiffs amended their

complaint on August 31, 2020. [DE 15]. Then, in response to the Moving Defendants’

letters requesting leave to move to dismiss, Plaintiffs amended their complaint a

second time. [DE 18]. On March 12, 2021, the Moving Defendants filed the instant

motion to dismiss.

On February 17, 2022, the Court again ordered the parties to show cause as to

whether the pending arbitration proceeding precludes further litigation in federal

court and whether the Court should stay this case until its resolution. Order to Show

Cause (“OTSC”) [DE 47]. In responding, both parties expressly contend that the

Court “should hear and decide this case.” Pl. Resp. to OTSC at 1 [DE 49] (“[T]his

Court should and must hear and decide this case rather than . . . .”); Def. Resp. to

OTSC at 1 [DE 48] (“[T]his Court should hear and decide this case rather than staying

it pending arbitration.”).

DISCUSSION

The Court will address the issues in the following order: (I) personal

jurisdiction over the Successor Defendants; (II) Plaintiff Golden Polar Bear, LLC’s

standing; and (III) Plaintiffs’ failure to state a claim.

I. Personal Jurisdiction

The Successor Defendants move the Court pursuant to Rule 12(b)(2) to dismiss

them for lack of personal jurisdiction, both specific and general. Plaintiffs respond

that personal jurisdiction exists pursuant to successor liability.

A. Legal Standard

Plaintiffs bear the burden of establishing the Court’s personal jurisdiction over

the Moving Defendants. Metro. Life Ins. Co. v. Robertson–Ceco Corp., 84 F.3d 560,

566 (2d Cir. 1996). Where the parties have not yet conducted discovery, a plaintiff

may “mak[e her] prima facie showing of [personal] jurisdiction by way of the

complaint’s allegations, affidavits, and other supporting evidence.” Mortg. Funding

Corp. v. Boyer Lake Pointe, L.C., 379 F. Supp. 2d 282, 285 (E.D.N.Y. 2005). As such,

the Court must view the pleadings in the light most favorable to the plaintiff, Sills v.

The Ronald Reagan Presidential Found., Inc.,2009 WL 1490852, *5 (S.D.N.Y. May

27, 2009), “may rely on additional materials outside the pleadings,” Minnie Rose LLC

v. Yu, 169 F. Supp. 3d 504, 510 (S.D.N.Y. 2016), and resolve doubts “in the plaintiff’s

favor, notwithstanding a controverting presentation [of evidence] by the moving

party,” A.I. Trade Fin., Inc. v. Petra Bank, 989 F.2d 76, 80 (2d Cir. 1993).

A court need not, however, “draw argumentative inferences in the plaintiff’s

favor” nor “accept as true a legal conclusion couched as a factual allegation.” In re

Terrorist Attacks on Sept. 11, 2001, 714 F.3d 659, 673 (2d Cir. 2013) (quoting

Robinson v. Overseas Military Sales Corp., 21 F.3d 502, 507 (2d Cir. 1994) and Jazini

v. Nissan Motor Co., 148 F.3d 181, 185 (2d Cir. 1998)). A plaintiff “may not rely on

conclusory statements without any supporting facts, as such allegations would ‘lack

the factual specificity necessary to confer jurisdiction.’” Art Assure Ltd., LLC v.

Artmentum GmbH, 2014 WL 5757545, at *2 (S.D.N.Y. Nov. 4, 2014) (quoting Jazini

148 F.3d at 185); accord Cont’l Indus. Grp. v. Equate Petrochemical Co., 586 Fed.

App’x 768, 769 (2d Cir. 2014) (“[A plaintiff] must make allegations establishing

jurisdiction with some ‘factual specificity’ and cannot establish jurisdiction through

conclusory assertions alone.”).

B. Analysis

In their opening motion papers, the Successor Defendants contest both general

and specific personal jurisdiction. Def. Mem. at 3–12 [DE 28-1]. A court’s exercise of

general jurisdiction—“extend[ing] to ‘any and all claims’ brought against a

defendant”— occurs “only when a defendant is essentially at home in the State”

where the court sits. Ford Motor Co. v. Montana Eighth Jud. Dist. Ct., 141 S.Ct.

1017, 1024 (2021) (quoting Goodyear Dunlop Tires Operations, S.A. v. Brown, 564

U.S. 915, 919 (2011)). Specific, or “case-linked,” jurisdiction arises from the

“affiliatio[n] between the forum and the underlying controversy.” Goodyear, 564 U.S.

at 919. Plaintiffs make no argument under either of these doctrines. Pl. Opp. at 18–

26 [DE 28-3].

Rather, Plaintiffs contend personal jurisdiction over the Successor Defendants

exists “under the theory of successor liability.” Id. New York recognizes that, “in

certain circumstances[,] a successor corporation ‘may inherit its predecessor’s

jurisdictional status.’” Semenetz v. Sherling & Walden, Inc., 21 A.D.3d 1138, 1140

(N.Y. App. Div., 3d Dep’t 2005), aff’d, 7 N.Y.3d 194 (N.Y. 2006); Time Warner Cable,

Inc. v. Networks Grp., LLC, 2010 WL 3563111, at *5 (S.D.N.Y. Sept. 9, 2010)

(asserting personal jurisdiction over limited liability companies because “[a]n

allegation of successor liability against an entity whose predecessor is subject to

personal jurisdiction can provide personal jurisdiction over the successor entity”

(citing Libutti v. United States, 178 F.3d 114, 124–25 (2d Cir. 1999))). “It is well-

settled” that, should the Successor Defendants be “successor[s] in interest to [an

entity] over whom the Court has personal jurisdiction,” they are thereby subject to

the Court’s jurisdiction “without regard to whether they had any other minimum

contacts with the state.” Leon v. Shmukler, 992 F. Supp. 2d 179, 190 (E.D.N.Y. 2014)

(Bianco, J.) (internal quotation marks omitted); see Transfield ER Cape Ltd. v. Indus.

Carriers, Inc., 571 F.3d 221, 224 (2d Cir. 2009) (citing and quoting Patin v.

Thoroughbred Power Boats Inc., 294 F.3d 640, 653 (5th Cir. 2002)).

Accordingly, whether the Court has personal jurisdiction over the Successor

Defendants turns on whether the Plaintiffs have sufficiently alleged successor

liability against them. Snowbridge Advisors LLC v. ESO Cap. Partners UK LLP,

2022 WL 667606, at *9 (S.D.N.Y. Mar. 7, 2022). Because Plaintiffs have adequately

pleaded successor liability, see infra Discussion Section III.B.5, the Court has

personal jurisdiction over the Successor Defendants given the present state of the

proceedings. The Successor Defendants’ motion on this issue is denied.

II. Standing

The Moving Defendants allege that Plaintiff Golden Polar Bear, LLC lacks

standing in this matter. Accordingly, and even though they moved under Rule

12(b)(6), the Court construes the issue under the Rule 12(b)(1) standard. E.g., Evans

v. Port Auth. of N.Y. & N.J., 2017 WL 3396444, at *1 n.2 (E.D.N.Y. Aug. 8, 2017);

Cortlandt St. Recovery Corp. v. Deutsche Bank AG, London Branch, 2013 WL

3762882, at *1 n.1 (S.D.N.Y. July 18, 2013). The two standards, nevertheless, are

“almost identical,” except for the “significant difference [] that a court may consider

extrinsic evidence when evaluating a motion to dismiss under Rule 12(b)(1) for lack

of standing.” Reyes v. Sofia Fabulous Pizza Corp., 2014 WL 12768922, at *2 (S.D.N.Y.

Apr. 7, 2014) (Francis, Mag. J.), report and recommendation adopted, 2014 WL

1744254 (S.D.N.Y. Apr. 24, 2014).

A. Legal Standard

The standing doctrine concerns a federal court’s jurisdictional power to hear a

plaintiff’s suit. Carver v. City of New York, 621 F.3d 221, 225 (2d Cir. 2010) (quoting

Warth v. Seldin, 422 U.S. 490, 498 (1975)). Plaintiffs must have standing for each of

their claims and forms of relief sought. Id. (quoting Baur v. Veneman, 352 F.3d 625,

642 n.15 (2d Cir. 2003)). For standing, Article III of the Constitution demands (1) the

plaintiff to have “suffered an injury-in-fact, (2) that is fairly traceable to the

challenged conduct of the defendant, and (3) that is likely to be redressed by a

favorable judicial decision.” John v. Whole Foods Mkt. Grp., Inc., 858 F.3d 732, 736

(2d Cir. 2017) (citing Lujan v. Defenders of Wildlife, 504 U.S. 555, 560–61 (1992)). An

“injury-in-fact” is a “concrete and particularized and actual or imminent, not

conjectural or hypothetical” invasion of a legally protected interest. Id. at 736

(quoting Spokeo, Inc. v. Robins, 136 S.Ct. 1540, 1547–48 (2016)). At the pleadings

stage, general factual allegations of injury resulting from the defendant’s conduct

may suffice to show standing. Id. (quoting Lujan, 504 U.S. at 561).

B. Analysis

The SAC alleges that Golden Polar Bear, LLC is the entity through which the

Callens conducted their iLoveKickboxing franchise. SAC ¶ 5. The Moving

Defendants contend “Golden Polar Bear is not a proper plaintiff to any claim but the

CCPA claim.” Def. Mem. at 16–17. Courtney Callen avers that she and Thomas

Callen assigned their rights to Golden Polar Bear pursuant to ILKB’s prior written

authorization. Decl. of Courtney Callen ¶ 8 [DE 28-5]. The Moving Defendants point

out that Plaintiffs do not provide a copy of the written authorization or the

assignment and likewise fail to supply any of their details, e.g., what was authorized

or assigned and when. Def. Reply at 4–5 [DE 28-6].

“Standing is not dispensed in gross. Rather, a plaintiff must demonstrate

standing for each claim he seeks to press and for each form of relief that is sought.”

Davis v. Fed. Election Comm’n, 554 U.S. 724, 734 (2008) (internal citations and

quotation marks omitted). Golden Polar Bear, LLC has not demonstrated its

standing on any of the challenged claims. In the absence of any details and the

assignment itself, Courtney Callen’s blanket statement that the Callens assigned

their rights to Golden Polar Bear, LLC does not, at this juncture, suffice to confer

standing on Golden Polar Bear, LLC with respect to the claims challenged by the

Moving Defendants.

Accordingly, the Court grants the Moving Defendants’ motion to dismiss

Golden Polar Bear, LLC for lack of standing on all claims except the CCPA claim.

III. Failure to State a Claim

The Moving Defendants contend Plaintiffs have failed to state a claim on their

NYSFSA, breach of contract, common law fraud, negligent misrepresentation, CCPA,

and successor liability claims. They lodge no argument with respect to alter ego

liability claims.

A. Legal Standard

In deciding a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6),

a court should “draw all reasonable inferences in Plaintiff[’s] favor, assume all well-

pleaded factual allegations to be true, and determine whether they plausibly give rise

to an entitlement to relief.” Faber v. Metro. Life Ins. Co., 648 F.3d 98, 104 (2d Cir.

2011) (internal quotation marks omitted). The plausibility standard is guided by two

principles. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing Bell Atl. Corp. v.

Twombly, 550 U.S. 544 (2007)); accord Harris v. Mills, 572 F.3d 66, 71–72 (2d Cir.

2009).

First, the principle that a court must accept all allegations as true is

inapplicable to legal conclusions. Thus, “threadbare recitals of the elements of a

cause of action supported by mere conclusory statements, do not suffice.” Iqbal, 556

U.S. at 678. Although “legal conclusions can provide the framework of a complaint,

they must be supported by factual allegations.” Id. at 679. A plaintiff must provide

facts sufficient to allow each named defendant to have a fair understanding of what

the plaintiff is complaining about and to know whether there is a legal basis for

recovery. See Twombly, 550 U.S. at 555.

Second, only complaints that state a “plausible claim for relief” can survive a

motion to dismiss. Iqbal, 556 U.S. at 679. “A claim has facial plausibility when the

plaintiff pleads factual content that allows the court to draw the reasonable inference

that the defendant is liable for the misconduct alleged. The plausibility standard is

not akin to a ‘probability requirement,’ but asks for more than a sheer possibility that

defendant acted unlawfully. Where a complaint pleads facts that are ‘merely

consistent with’ a defendant's liability, it ‘stops short of the line’ between possibility

and plausibility of ‘entitlement to relief.’” Id. at 678 (quoting Twombly, 550 U.S. at

556-57) (internal citations omitted); see In re Elevator Antitrust Litig., 502 F.3d 47,

50 (2d Cir. 2007). Determining whether a complaint plausibly states a claim for relief

is “a context specific task that requires the reviewing court to draw on its judicial

experience and common sense.” Iqbal, 556 U.S. at 679; accord Harris, 572 F.3d at 72.

B. Analysis

The Court organizes the Moving Defendants’ arguments by claim, addressing

them in the following order: (1) NYSFSA; (2) breach of contract; (3) common law fraud

and negligent misrepresentation (different claims argued jointly in the papers);

(4) CCPA; and (5) successor liability.

As a preliminary matter, the Court declines to consider, on this portion of

Defendants’ motion, any materials Plaintiffs submitted in their opposition which

were not attached to, integral to, or incorporate by reference in the SAC. See Decl. of

Justin Scott Weitzman [DE 28-4]; Decl. of Courtney Callen; see, e.g., Chambers v.

Time Warner, Inc., 282 F.3d 147, 152–55 (2d Cir. 2002).

1. NYSFSA

The Moving Defendants argue the NYSFSA claim (a) is barred by the statute

of limitations and (b) fails to state a claim on which relief can be granted.

a. Statute of Limitations

The Moving Defendants contend Plaintiffs’ NYSFSA claim is untimely. “A

federal court sitting in diversity applies the forum state’s statute of limitations

provisions, as well as any provisions that govern the tolling of the statute of

limitations.” Wang v. Palmisano, 51 F. Supp. 3d 521, 530 (S.D.N.Y. 2014); see

Schermerhorn v. Metro. Transp. Auth., 156 F.3d 351, 354 (2d Cir. 1998) (“In diversity

cases, state statutes of limitations govern the timeliness of state law claims, and state

law determines the related questions of what events serve to commence an action and

to toll the statute of limitations.” (quoting Diffley v. Allied–Signal, Inc., 921 F.2d 421,

423 (2d Cir. 1990))). New York state law subjects Defendants to liability under the

NYSFSA so long as Plaintiffs brought their claim “before the expiration of three years

after the act or transaction constituting the violation.” N.Y. Gen. Bus. Law § 691(4).

The limitations period for such claims “begins when the franchises were purchased.”

W. Valley KB Venture, LLC v. ILKB LLC, 2021 WL 4171918, at *3 (E.D.N.Y. Sept.

13, 2021) (quoting Kroshnyi v. U.S. Pack Courier Servs., 771 F.3d 93, 103–04 (2d Cir.

2014)); Leung v. Lotus Ride, Inc., 198 A.D.2d 155, 156 (N.Y. App. Div., 1st Dep’t 1993);

Tri-City ValleyCats, Inc. v. Houston Astros Inc., 151 N.Y.S.3d 617 (Table), at *4 (N.Y.

Sup. Ct., N.Y. Cnty. 2021)

Here, the Callens entered the Franchise Agreement on which they base their

NYSFSA claims on February 29, 2016. SAC ¶ 22; see Fr. Agmt. They brought this

action on July 24, 2020. Unless a tolling rule applies, then, the NYSFSA claims are

time barred. Plaintiffs argue that, pursuant to the Franchise Agreement, they timely

commenced arbitration in February 26, 2019, and Defendants have short-circuited

the proceeding by failing and refusing to pay or deposit their portion of the required

arbitration fees, as required by the Franchise Agreement. SAC ¶ 29. Plaintiffs

contend they had “no choice but to proceed before this Court.” Id.

The arbitration remains pending, albeit in abeyance. On February 17, 2022,

the Court ordered the parties to show cause on a number of matters related to the

arbitration, including whether its ongoing status precludes further litigation in

federal court and whether the Court should stay this case until resolution of the

arbitration. Order to Show Cause (“OTSC”) [DE 47]. In responding, both parties

expressly contend that the Court “should hear and decide this case.” Pl. Resp. to

OTSC at 1 (“[T]his Court should and must hear and decide this case rather

than . . . .”); Def. Resp. to OTSC at 1 (“[T]his Court should hear and decide this case

rather than staying it pending arbitration.”).

The Court finds that each party has waived any right to force its adversary to

further arbitrate the matter. Nagy v. Arcas Brass & Iron Co., 242 N.Y. 97, 98 (N.Y.

1926). Their waiver of the right to arbitrate triggers New York Civil Procedure Law

and Rules (“CPLR”) 204(b), which reads

Where it shall have been determined that a party is not obligated to

submit a claim to arbitration, the time which elapsed between the

demand for arbitration and the final determination that there is no

obligation to arbitrate is not a part of the time within which an action

upon such claim must be commenced.

CPLR 204(b). Section 204(b) inures to the benefit of plaintiffs who put defendants

“on timely notice of [their] claims as a result of the demand for arbitration” by

exempting them from an overly legalistic application of the statute of limitations.

Joseph Francese, Inc. v. Enlarged City Sch. Dist. of Troy, 95 N.Y.2d 59, 64 (N.Y. 2000).

Section 204(b) tolled the limitations period applicable to Plaintiffs’ claims

during the interval between their commencement of arbitration and the Court’s

finding here that neither party is obligated to arbitrate the matter. Troeller v. Klein,

82 A.D.3d 513, 514 (N.Y. App. Div., 1st Dep’t 2011) (“To toll the statute of limitations,

the arbitration must have been instituted by the parties in order to resolve the

present controversy”). Plaintiffs’ February 26, 2019 arbitration claims included the

NYSFSA claim asserted herein – i.e., Plaintiffs brought their NYSFSA claim less

than three years after they signed the Franchise Agreement. In sum, then, the

limitations period applicable to that claim has not run; the NYSFSA claim is not

time-barred.

Accordingly, Defendants’ motion to dismiss the NYSFSA claim as untimely is

denied.

b. Failure to State a Claim

The NYSFSA applies only to sales or offers to sell franchises in New York

State. N.Y. Gen. Bus. Law § 681(12); JM Vidal, Inc. v. Texdis USA, Inc., 764 F. Supp.

2d 599, 616 (S.D.N.Y. 2011). In the Moving Defendants’ reading, Plaintiffs “do not

allege any offer was made or accepted in New York.” Def. Mem. at 18. This assertion,

however, ignores the allegations concerning the “Discovery Day.” SAC ¶¶ 20–21, 37–

38. In February 2016, at the Predecessor Defendants’ invitation, Plaintiffs and other

prospective franchisees traveled to New York in order to attend a “presentation on

the franchise” and “to learn about the franchise.” Id. Plaintiffs list several alleged

misrepresentations the Predecessor Defendants made at or in connection with that

New York presentation. Id. These factual allegations render plausible Plaintiffs’

assertion that the Predecessor Defendants made an offer to sell a franchise in New

York.

The Moving Defendants’ motion to dismiss the NYSFSA claims is denied.

2. Breach of Contract

The Court disagrees with the Moving Defendants’ contention that Plaintiffs

“fail[ed] to plead they performed their obligations under the franchise agreement.”

Def. Mem. at 18; see Fischer & Mandell, LLP v. Citibank, N.A., 632 F.3d 793, 799 (2d

Cir. 2011) (“Under New York law, a breach of contract claim requires proof

of . . . adequate performance by the plaintiff . . . .”). The SAC reflects that they have.

By way of example, the breach of contract claim is premised partially upon the

Predecessor Defendants’ breach of Section 14.2. SAC ¶ 45. That section requires

“any dispute” to be resolved through binding arbitration. Fr. Agmt. § 14.2(a).

Plaintiffs allege they initially brought the claims asserted in this action in an

arbitration “before the JAMS Resolution Center,” JAMS Case No. 1425029141, on

February 26, 2019 – a proceeding Defendants stonewalled by refusing to pay their

share of the arbitration fees. SAC ¶¶ 27, 29. These facts render Plaintiffs’ compliance

with the Franchise Agreement’s terms claim plausible.

The Moving Defendants’ motion to dismiss the breach of contract claim is

denied.

3. Common Law Fraud and Negligent Misrepresentation

The Moving Defendants contend Plaintiffs’ fraud allegations fail to meet Rule

9(b)’s heightened pleading standard, are premised in part on an unactionable

omission and unactionable predictions, opinions, and puffery. Def. Mem. at 19–20.

New York common law fraud and negligent misrepresentation claim must

“satisfy the requirements of the heightened pleading standard under Federal Rule of

Civil Procedure 9(b).” Matana v. Merkin, 957 F. Supp. 2d 473, 484 (S.D.N.Y. 2013)

(citing Eternity Global Master Fund Ltd. v. Morgan Guar. Trust Co. of N.Y., 375 F.3d

168, 187 (2d Cir. 2004)); Woori Bank v. Citigroup Inc., 2013 WL 1235648, at *5

(S.D.N.Y. Mar. 27, 2013). Rule 9(b) requires Plaintiff to “(1) detail the statements (or

omissions) that the plaintiff contends are fraudulent, (2) identify the speaker,

(3) state where and when the statements (or omissions) were made, and (4) explain

why the statements (or omissions) are fraudulent.” Eternity Global Master Fund

Ltd., 375 F.3d at 187. Representation [10] fails to do so; for example, Plaintiffs fail

to plead where and when that statement was made and do not identify its speaker.

SAC ¶ 19. But the rest of the SAC does all the above. To specifically highlight one

example, Paragraph 20 lists at least nine allegedly fraudulent statements and

omissions made by Healy and Parrella, on behalf of ILKB, at the February 2016

Discovery Day event in New York. SAC ¶ 20. The reasons why such statements and

omissions were fraudulent are set out in Paragraphs 23 though 25. These allegations

clear the heightened pleading threshold set by Rule 9(b).

The Moving Defendants next argue that the alleged misrepresentations

concerning Parrella’s bankruptcy filing in 2008 and previous lawsuits charging fraud

against Parrella and ILKB’s predecessor entity are unactionable matters of public

record. See supra Representations [6], [7]. Under New York law, Plaintiffs will have

to show they reasonably or justifiably relied on the Predecessor Defendants’

representations in order to succeed on their negligent misrepresentation and common

law fraud claims. Mandarin Trading Ltd. v. Wildenstein, 16 N.Y.3d 173, 180 (N.Y.

2011) (“[A] claim for negligent misrepresentation requires the plaintiff to

demonstrate . . . reasonable reliance on the information.”); Centro Empresarial

Cempresa S.A. v. Am. Movil, S.A.B. de C.V., 17 N.Y.3d 269, 276 (N.Y. 2011) (“The

elements of common law fraud under New York law are . . . justifiable reliance by the

plaintiff . . . .”). Reliance is neither justifiable nor reasonable where a plaintiff fails

to conduct due diligence into facts not “peculiarly within the [other] party’s

knowledge.” DDJ Mgmt., LLC v. Rhone Grp. L.L.C., 15 N.Y.3d 147, 153–54 (N.Y.

2010) (quoting Schumaker v. Mather, 133 N.Y. 590, 596 (N.Y. 1892)). Due diligence

requires investigation into “matters of public record,” which include “lawsuits and

bankruptcy proceedings.” Crotona 1967 Corp. v. Vidu Bros. Corp., 925 F. Supp. 2d

298, 312 (E.D.N.Y. 2013); see Alpha GmbH & Co. Schiffsbesitz KG v. BIP Indus. Co.,

25 A.D.3d 344, 345 (N.Y. App. Div., 1st Dep’t 2006) (“[T]he allegedly concealed

information, plaintiff’s insolvency and dissolution, were matters of public record that

defendant could have discovered by the exercise of ordinary diligence.”); Nat’l Union

Fire Ins. Co. of Pittsburgh, P.A. v. Red Apple Grp., Inc., 273 A.D.2d 140, 141 (N.Y.

App. Div., 1st Dep’t 2000) (“The existence of the litigation that plaintiff alleges

defendants should have disclosed was a matter of public record that plaintiff could

have been discovered by the exercise of ordinary diligence.”). Plaintiffs allege no facts

to excuse their failure to investigate Parrella’s prior bankruptcy and lawsuits and,

therefore, have no actionable fraud or negligent misrepresentation claims based on

any omissions related to the same. But the omissions concerning lawsuits involving

ILKB’s predecessor entity are actionable. The facts plausibly allege that Plaintiffs

could not, in the exercise of ordinary intelligence, discover a kickboxing studio

franchisor bore any relation to “FC Online Marketing, LLC.”

The Moving Defendants also argue that the representations concerning

“expected profits, start-up costs, memberships and trial memberships” are

unactionable predictions. Def. Mem. at 20; see supra Representations [2], [3], [5],

[10], [11], [12], [15], [16]. Under New York law, actionable representations “relate to

a past or existing fact, or something equivalent thereto, as distinguished from a mere

estimate,” which is “something which is hoped or expected to occur in the future.”

Zanani v. Savad, 217 A.D.2d 696, 697 (N.Y. App. Div., 2d Dep’t 1995); see Dragon

Inv. Co. II LLC v. Shanahan, 49 A.D.3d 403, 403 (N.Y. App. Div. 1st Dep’t 2008). As

pleaded, Representations [2], [3], [5], [11], [12], and [15] are historical facts

concerning ILKB’s business as it then was—many such representations expressly

referring to “all or the average ILKB franchise.” They are not predictions and

therefore are actionable. E.g., W. Valley KB Venture, LLC v. ILKB LLC, 2021 WL

4171918, at *8–9 (E.D.N.Y. Sept. 13, 2021); ILKB, LLC v. Singh, 2021 WL 3565719,

at *7 (E.D.N.Y. Aug. 12, 2021). Representations [10] and [16], however, refer to what

ILKB “would” do in the future – by contrast, they are unactionable prediction

statements.

The Moving Defendants further argue that Representation [14] is unactionable

because a “representations about the suitability of the franchise system for absentee

ownership[,] clearly qualif[ies] as opinion.” Def. Mem. at 20. As with predictions,

fraud and negligent misrepresentation liability does not arise from opinion

statements. Mandarin Trading Ltd., 16 N.Y.3d at 179. But stating that the

“business worked with an absentee owner model” is not an opinion; it “uses past tense

and conveys that current and past franchisees have acted as absentee owners.”

Singh, 2021 WL 3565719, at *7; e.g., W. Valley KB Venture, LLC, 2021 WL 4171918,

at *9. Accordingly, Representation [14] is actionable.

The Moving Defendants’ motion to dismiss the fraud and negligent

misrepresentation claims is granted in part and denied in part. Plaintiffs’ fraud and

negligent misrepresentation claims as to Representations [10] and [16] are dismissed.

Such claims are also dismissed as to Representations [6] and [7], but only to the

extent that they concern Parrella and not FC Online Marketing. The motion with

respect to the remainder of the Representations is denied.

4. CCPA

The Moving Defendants also contend Plaintiffs’ CCPA claim both (a) is barred

by the statute of limitations and (b) fails to state a claim on which relief can be

granted.

a. Statute of Limitation

CCPA claims are untimely unless they are “commenced within three years

after the date on which the false, misleading, or deceptive act or practice occurred or

the date on which the last in a series of such acts or practices occurred or within three

years after the consumer discovered or in the exercise of reasonable diligence should

have discovered the occurrence of the false, misleading, or deceptive act or practice.”

Colo. Rev. Stat. § 6-1-115.

A franchisee exercising reasonable diligence would not discover the falsity of

the Predecessor Defendants’ representations until after his franchise opened and

began to suffer a state of affairs much worse than that described in the

representations. A franchise’s “total cost of buildout” and “total cost to open” a studio,

for example, would only become suspect once a franchisee knows how much it will

cost him to open his studio. SAC ¶ 21(a). A purported break-even point “in 4-6

months” engenders doubt in or around that time, viz. after four to six months of

business, at which time a franchisee could tell if he will indeed break even. Id.

¶ 21(b). Similarly, a franchisee can measure his yearly profits and monthly members

against the represented profits-per-year and memberships-per-month figures, at the

earliest, twelve months after opening. Id. ¶ 21(d), (e). Given the nature of the alleged

misrepresentations here, then, the limitations period would begin sometime after the

franchisee purchased a franchise.

The Complaint alleges that was the situation here. SAC ¶ 23. Assuming, for

the sake of argument, that Plaintiffs’ CCPA claim accrued on the date they signed

the Franchise Agreement, February 29, 2016—i.e., the earliest possible date the

limitations period would begin—their CCPA claim is timely because they brought the

claim within three years thereof. Specifically, they brought the claim in arbitration

on February 26, 2019. For the same reasons stated in reference to the NYSFSA

claims, Plaintiffs’ CCPA claim is therefore timely. The time interval between

Plaintiffs’ arbitration demand asserting this claim and this Court’s finding that the

parties have no obligation to arbitrate, pursuant to New York CPLR 204(b), is not

counted for statute of limitations purposes; the limitations period did not run during

that interval.

Accordingly, the Moving Defendants’ motion to dismiss the CCPA claim as

untimely is denied.

b. Failure to State a Claim

Colorado courts give the CCPA “a liberal construction, relying on the Act’s

broad purpose and scope.” Hall v. Walter, 969 P.2d 224, 230 (Colo. 1998). “To prove

a private cause of action under the CCPA, a plaintiff must show: (1) that the

defendant engaged in an unfair or deceptive trade practice; (2) that the challenged

practice occurred in the course of defendant’s business, vocation, or occupation;

(3) that it significantly impacts the public as actual or potential consumers of the

defendant’s goods, services, or property; (4) that the plaintiff suffered injury in fact

to a legally protected interest; and (5) that the challenged practice caused the

plaintiff’s injury.” Rhino Linings USA, Inc. v. Rocky Mountain Rhino Lining, Inc., 62

P.3d 142, 146–47 (Colo. 2003). The Moving Defendants target the third element,

contending that that the alleged practices underlying the dispute do not significantly

impact the public. Def Mem. at 20–21. Courts assess public impact by considering

“at least three factors”: “(1) the number of consumers directly affected by the

challenged practice, (2) the relative sophistication and bargaining power of the

consumers affected by the challenged practice, and (3) evidence that the challenged

practice has previously impacted other consumers or has the significant potential to

do so in the future.” Crowe v. Tull, 126 P.3d 196, 208 (Colo. 2006) (citing Rhino

Linings, 62 P.3d at 149).

Plaintiffs plausibly allege facts sufficient to make out the CCPA’s “public

impact” element. Firstly, through these alleged misrepresentations and omissions,

the Predecessor Defendants “sold dozens of franchises to the public,” at least fifteen

of which failed between 2014 and 2015. SAC ¶¶ 18(d), 59. Secondly, “there is no

allegation that Plaintiffs or other prospective [franchisees] were sophisticated

business people . . . or anything other than people with money to invest.” Ivar v. Elk

River Partners, LLC, 705 F. Supp. 2d 1220, 1242 (D. Colo. 2010) (citing Rhino Linings,

62 P.3d at 150). Thirdly, Defendants allegedly held a public “Discovery Day” event

in New York attended by, among other prospective franchisees, Plaintiffs – who

reside in Colorado. SAC ¶ 20. Additionally, Defendants circulated a “Franchise

Disclosure Document” dated March 26, 2015 to “substantial numbers” of potential

franchisees. The alleged misrepresentations and omissions made at the Discovery

Day and in the Franchise Disclosure Document are not specific to Plaintiffs’

contemplated franchise in Colorado; rather, they are statements about the ILKB

business at large and applicable to “all or the average” franchise. E.g.,

Representation [5]. Plaintiffs are therefore not using the CCPA “to remedy a purely

private wrong.” See Crowe, 126 P.3d at 208.

Taking the allegations as true, which the Court must do on a motion to dismiss,

Plaintiffs have “nudged their [CCPA] claim[] across the line from conceivable to

plausible.” Twombly, 550 U.S. at 570. The Moving Defendants’ motion to dismiss

the CCPA claim is denied.

5. Successor Liability

The Successor Defendants argue that Plaintiffs fail to state a claim of successor

liability against them. “As a general rule,” New York law does not hold an entity

“purchasing the assets of another . . . liable for the debts and liabilities of the seller.”

Miller v. Mercuria Energy Trading, Inc., 291 F. Supp. 3d 509, 525 (S.D.N.Y. 2018),

aff’d, 774 Fed. App’x 714 (2d Cir. 2019). The general rule does not apply, however, to

“(1) a buyer who formally assumes a seller’s debts; (2) transactions undertaken to

defraud creditors; (3) a buyer who de facto merged with a seller; and (4) a buyer that

is a mere continuation of a seller.” Aguas Lenders Recovery Grp. v. Suez, S.A., 585

F.3d 696, 702 (2d Cir. 2009); see Schumacher v. Richards Shear Co., 59 N.Y.2d 239,

244–45 (N.Y. 1983). “Thus, for example, ‘when a successor firm acquires

substantially all of the predecessor’s assets and carries on substantially all of the

predecessor’s operations, the successor may be held to have assumed its

predecessor’s . . . liabilities, notwithstanding the traditional rule.’” Aguas Lenders

Recovery Grp., 585 F.3d at 702 (2d Cir. 2009) (ellipses in original) (quoting Nettis v.

Levitt, 241 F.3d 186, 193 (2d Cir. 2001), overruled on other grounds by Slayton v. Am.

Express Co., 460 F.3d 215 (2d Cir. 2006)).

Plaintiffs plausibly allege successor liability under the “de facto merger” and/or

the “mere continuation” exceptions. See Cargo Partner AG v. Albatrans, Inc., 352

F.3d 41, 45 n.3 (2d Cir. 2003) (“Some courts have observed that the mere-continuation

and de-facto-merger doctrines are so similar that they may be considered a single

exception.”); e.g., Snowbridge Advisors LLC, 2022 WL 667606, at *12–13; Time

Warner Cable, Inc. v. Networks Grp., LLC, 2010 WL 3563111, at *6–7 (S.D.N.Y. Sept.

9, 2010).

As an initial matter, Plaintiffs plausibly allege “continuity of ownership,”

which is the “touchstone of the de facto merger concept and thus a necessary

predicate.” Ambac Assurance Corp. v. Countrywide Home Loans, Inc., 150 A.D.3d

490, 490–91 (N.Y. App. Div., 1st Dep’t 2017). “Continuity of ownership ‘exists where

the shareholders of the predecessor corporation become direct or indirect

shareholders of the successor corporation as the result of the successor’s purchase of

the predecessor’s assets.’” Id. (quoting In re New York City Asbestos Litig., 15 A.D.3d

254, 256 (N.Y. App. Div., 1st Dep’t 2005)). “Stated otherwise, continuity of ownership

describes a situation where the parties to the transaction become owners together of

what formerly belonged to each.” Id. Here, ILKB’s founder and owner, Parrella,

allegedly retained an interest in its successor ILKB, Too. SAC ¶¶ 10, 18(a), 23(a), 32,

75.

Other indicia of a de facto merger are present. By way of comparison, the de

facto merger in Burgos v. Pulse Combustion, Inc. resembles the one at bar. 227

A.D.2d 295, 295–96 (N.Y. App. Div., 1st Dep’t 1996). Of note, the Burgos successor

(i) “purchased almost all of the predecessor corporation’s fixed assets and

intangibles,” (ii) “assumed a name nearly identical to that of the predecessor

corporation,” (iii) retained “at least one officer from the predecessor corporation,” and

(iv) manufactured the “same products . . . at the plants transferred under the

purchase agreement.” Id. The Burgos Court held that such facts could establish

successor liability. Here, Plaintiffs allege the Successor Defendants (i) purchased “all

assets” of ILKB, (ii) “us[e] the ILKB or iLoveKickboxing name,” (iii) retained ILKB’s

“officer, director, executive and/or manager” Parrella, and (iv) “continue [ILKB’s]

business.” SAC ¶¶ 6, 10, 31, 32, 75; Ex. B to SAC. Plaintiffs, then, have pleaded

sufficient facts that, if true, would establish successor liability.

To the extent the Successor Defendants argue successor liability pursuant to a

de facto merger requires ILKB’s dissolution, New York law holds otherwise. Holme

v. Global Minerals & Metals Corp., 63 A.D.3d 417, 418 (N.Y. App. Div., 1st Dep’t 2009)

(citing Fitzgerald v. Fahnestock & Co., 286 A.D.2d 573, 575 (N.Y. App. Div., 1st Dep’t

2001)). Moreover arguing ILKB is “still a going concern” disputes the facts alleged.

Compare Def. Reply at 6 (emphasis removed), with SAC ¶ 32. On a motion to dismiss,

however, this Court must assume the truth of all such facts.

Successor liability is a “highly fact-specific” inquiry that, on the “present

record, cannot be resolved with assurance in favor of one party or the other.” Aguas

Lenders Recovery Grp., 585 F.3d at 703. The motion to dismiss the Successor

Defendants is denied.

CONCLUSION

Defendants’ motion to dismiss for lack of personal jurisdiction is denied as the

Complaint plausibly alleges successor liability against the Successor Defendants.

Defendants’ motion to dismiss Plaintiff Golden Polar Bear, LLC for lack of

standing is granted with respect to all clams but the CCPA claim, which the Moving

Defendants do not challenge, because no proof of assignment has been offered.

Defendants’ motion to dismiss for failure to state a claim is granted in part and

denied in part. The fraud and negligent misrepresentation claims survive except as

to those arising from Representations [10], [16], and [6] and [7] to the extent that [6]

and [7] concern Parrella and not FC Online Marketing; the remainder of the causes

of action survive because the SAC’s factual allegations plausibly state a claim.

SO ORDERED.

Dated: Central Islip, New York s/ Denis R. Hurley

June 9, 2022 Denis R. Hurley

United States District Judge