Dance Fitness Michigan, LLC v. AKT Franchise, LLC

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES - GENERAL

Case No. 8:23-cv-01643-JVS(JDEx) Date November 13, 2023

Title Dance Fitness Michigan, LLC et al v. AKT Franchise, LLC et al

Present: The James V. Selna, U.S. District Court Judge

Honorable

Elsa Vargas Not Present

Deputy Clerk Court Reporter

Attorneys Present for Plaintiffs: Attorneys Present for Defendants:

Not Present Not Present

Proceedings: [IN CHAMBERS] Order Regarding Motion to Remand [10]

Plaintiffs Dance Fitness Michigan, LLC, Property Maintenance, Inc., Deanna

Alfredo, 6PK Mason LLC, 6PK Liberty LLC, Amanda Davis, Teeny Turner LLC, Nisha

Moeller, S2 Fitness Enterprises, LLC, Samantha Cox, Suzanne Fischer, Soros &

Associates, LLC, Nichole Soros, Michael Soros, Adedge Services, Inc., Paul Dumas, and

Jodi Dumas ( collectively “Plaintiffs”) move to remand this action to the Superior Court

of the State of California. (Mot., Dkt. No. 10.) Defendant AKT Franchise, LLC

(“AKT”) oppose the motion, (Opp’n Dkt. No. 23), and the Plaintiffs replied. (Reply,

Dkt. No. 29.)

On October 17, 2023, after the tentative order was posted and the Court vacated the

October 16, 2023, hearing, Plaintiffs filed a request for oral argument, advancing various

arguments why they believe a hearing is necessary. (See Dkt. No. 39.) AKT filed a

response on October 25, 2023 indicating that they do not believe that oral argument is

necessary. (See Dkt. No. 48.) The Court considered the arguments raised by both parties

and finds that oral argument would not be helpful in this matter. Fed. R. Civ. P. 78; L.R.

7-15.

For the following reasons, the Court DENIES Plaintiffs’ motion to remand. The

Court also ORDERS AKT to file, no later than November 20, 2023, an amended Rule

7.1 Disclosure Statement.

I. BACKGROUND

CENTRAL DISTRICT OF CALIFORNIA

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Case No. 8:23-cv-01643-JVS(JDEx) Date November 13, 2023

Title Dance Fitness Michigan, LLC et al v. AKT Franchise, LLC et al

Fitness, Inc., including AKT Franchise LLC. (Compl. Dkt. No. 1-2.) Plaintiffs brought

claims for (1) declaratory judgment; (2) multiple violations of California’s Franchise

Investment Law §§ 31200 and 32101; (3) fraud in the inducement; (4) breach of contract

and the covenant of good faith and fair dealing; (5) violation of the Michigan Franchise

Investment Law; (6) fraudulent misrepresentation; (7) negligent misrepresentation; (8)

violation of Florida Franchise Act; (9) promissory estoppel; and (10) violation of Florida

Deceptive and Unfair Trade Practices Act. (Id.) The central allegation of the lawsuit is

that AKT allegedly made oral and written misstatements and omissions that caused

Plaintiffs to agree to become AKT franchises. (Id. ¶¶ 1–7.)

On September 1, 2023, AKT removed the action to federal court under 28 U.S.C. §

1332(a), diversity jurisdiction. (Dkt. No. 1.) AKT asserted that there is complete

diversity of citizenship between Plaintiffs and Defendants and the amount in controversy

exceeds $75,000. (Id.) AKT further argued that 28 U.S.C. § 1441(b)(2) — commonly

referred to as the “forum defendant rule” — is inapplicable because of the notice of

removal occurred before any Defendant was “properly joined and served” as required by

the statute. (Id.)

In response, Plaintiffs filed this motion to remand the case back to Superior Court

because there is a lack of diversity and, as a result, this Court lacks subject matter

jurisdiction. (Mot. 3–4.) Specifically, Plaintiffs allege that Defendants Sarah Nolan,

Emily Brown, and Rachel Markovic are domiciled in Ohio. (Id. 11.) Because Plaintiffs’

citizenship also includes Ohio, diversity jurisdiction does not exist and this Court should

remand the case to Superior Court. (Id. 8.) Plaintiffs further argue that because AKT

failed to properly name and identify the citizenship of every individual or entity whose

citizenship is attributed to Defendants. (Id. 4–8.) Therefore, AKT’s removal was

deficient under 28 U.S.C. § 1446 and Fed. R. Civ. P. 7.1 and the case should be

remanded. (Id.) AKT disagrees and argues that it adequately identified the citizenship of

all defendants and that the Ohio Defendants were fraudulently joined. (Opp’n 7–8.)

II. LEGAL STANDARD

Under 28 U.S.C. § 1441(a), a defendant may remove a civil action from state court

to federal court so long as original jurisdiction would lie in the court to which the action

CENTRAL DISTRICT OF CALIFORNIA

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Case No. 8:23-cv-01643-JVS(JDEx) Date November 13, 2023

Title Dance Fitness Michigan, LLC et al v. AKT Franchise, LLC et al

against removal jurisdiction.” Gaus v. Miles, Inc., 980 F.2d 564, 566 (9th Cir. 1992).

Doubts as to removability should be resolved in favor of remanding the case to the state

court. Id. This “‘strong presumption’ against removal jurisdiction means that the

defendant always has the burden of establishing that removal is proper.” Id. (quoting

Nishimoto v. Federman-Bachrach & Assocs., 903 F.2d 709, 712 n.3 (9th Cir. 1990)).

An exception to removal known as the forum-defendant rule also provides that a

“civil action otherwise removable solely on the basis of [diversity jurisdiction] may not

be removed if any of the parties in interest properly joined and served as defendants is a

citizen of the State in which such action is brought.” 28 U.S.C. § 1441(b)(2).

Under 28 U.S.C. § 1332, federal jurisdiction is proper if (1) there is complete

diversity between the parties and (2) the amount in controversy exceeds $75,000. 28

U.S.C. § 1332(a). There is “complete diversity between the parties” only if “each

defendant is a citizen of a different State from each plaintiff.” Owen Equip. & Erection

Co. v. Kroger, 437 U.S. 365, 373 (1978) (emphasis omitted). But a well-established

exception to the requirement of complete diversity arises “where a non-diverse defendant

has been ‘fraudulently joined’ ” or is otherwise known as a sham defendant. Morris v.

Princess Cruises, Inc., 236 F.3d 1061, 1067 (9th Cir. 2001). Joinder of a non-diverse

defendant is deemed fraudulent “[i]f the plaintiff fails to state a cause of action against a

resident defendant, and the failure is obvious according to the settled rules of the state.”

McCabe v. Gen. Foods Corp., 811 F.2d 1336, 1339 (9th Cir. 1987).

III. DISCUSSION

A. Forum Defendant Rule

As stated above, an exception to removal known as the forum-defendant rule

provides that a “civil action otherwise removable solely on the basis of [diversity

jurisdiction] may not be removed if any of the parties in interest properly joined and

served as defendants is a citizen of the State in which such action is brought.” 28 U.S.C. §

1441(b)(2). The plain language of the statute makes clear that only if a forum defendant

has been “properly joined and served” may an action not be removed. Choi v. Gen.

Motors LLC, No. CV 21-5925, 2021 WL 4133735, at *2 (C.D. Cal. Sep. 9, 2021).

CENTRAL DISTRICT OF CALIFORNIA

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Case No. 8:23-cv-01643-JVS(JDEx) Date November 13, 2023

Title Dance Fitness Michigan, LLC et al v. AKT Franchise, LLC et al

residents, which would typically prohibit removal. (Opp’n 2.) However, AKT correctly

argues that because no Defendants were “properly joined and served,” removal was

permissible. (Id. 2–3.) Plaintiffs, despite heavily criticizing the practice, recognize that

such removal is permitted in this district. (Mot. 1.) Given that AKT’s removal of the

case was permissible under § 1441(b)(2), the forum-defendant rule that might normally

bar removal in these circumstances does not apply.

B. Identification of Citizenship of All Defendants

Plaintiffs first argue that remand is required because AKT’s removal notice and

corporate disclosure statement do not comply with the requirements of 28 U.S.C. § 1446

and Fed. R. Civ. P. 7.1. (Mot. 7.) This failure to “sufficiently allege its own citizenship”

despite multiple opportunities should result in the Court finding that AKT has not met its

burden and remand is proper. (Reply 6.) AKT argues that it disclosed the citizenship of

AKT, its sole member, Xponential Fitness LLC, and the members of that LLC as well.

(Opp’n 7.) And that this disclosure of its “members’ members’ members” satisfies the

requirements for removal. (Id.)

The Federal Rules of Civil Procedure require that when an action is filed or

removed to federal court on the basis of diversity under 28 U.S.C. § 1332(a), each party

must file a disclosure statement that identifies the citizenship of every individual or entity

whose citizenship is attributed to that party. See Fed. R. Civ. P. 7.1(a)(2)(A). “The

statement must name--and identify the citizenship of--every individual or entity whose

citizenship is attributed to that party. . . .” Fed. R. Civ. P. 7.1(a)(2). Indeed, each party

that subsequently appears must file a Rule 7.1 Disclosure Statement with that party’s

“first appearance, pleading, petition, motion, response, or other request addressed to the

court.” Fed. R. Civ. P. 7.1(b)(1). It is well settled that both partnerships and LLCs are

citizens of every state of which its owners and/or members are citizens. See Johnson v.

Columbia Properties Anchorage, LP, 437 F.3d 894, 899 (9th Cir. 2006).

The issue presented is at what level of ownership is a individual or entity no longer

considered attributable to a removing party? See Fed. R. Civ. P. 7.1(a)(2). More specific

to this case, at what point has AKT satisfied Rule 7.1(a)(2)’s requirement to name and

identify the citizenship of every individual or entity attributed to it? AKT asserts that it

CENTRAL DISTRICT OF CALIFORNIA

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Case No. 8:23-cv-01643-JVS(JDEx) Date November 13, 2023

Title Dance Fitness Michigan, LLC et al v. AKT Franchise, LLC et al

members of any LLC or partnership involved in the ownership structure of AKT to

determine whether diversity jurisdiction exists. (Reply 1.)

The Advisory Committee Notes to Rule 7.1 do not address how far an inquiry into

attribution needs to proceed to satisfy its requirements. However, it does provide

examples of when attributed citizenship may apply. Included in these examples are LLCs

and partnerships, which take on the citizenship of each of its owners. Fed. R. Civ. P.

7.1(a)(2) advisory committee’s note to 2022 amendment. The committee emphasizes that

“disclosure is necessary both to ensure that diversity jurisdiction exists and to protect

against the waste that may occur upon belated discovery of a diversity-destroying

citizenship. Id. “[D]iscovery may be appropriate to test jurisdictional facts by inquiring

into such matters as the completeness of a disclosure’s list of persons or the accuracy of

their described citizenships.” Id. The notes recognize that courts have discretion on

when to limit the disclosure in appropriate circumstances, such as a revealed citizenship

that defeats diversity jurisdiction or “the names of the identified persons [have] . . .

substantial interests in privacy” or “when there is no apparent need to support discovery

by other parties to go behind the disclosure.” Id.

AKT asserts, with support of a graphic, that Defendant AKT has one sole member,

Xponential Fitness LLC (“Fitness LLC”). (Opp’n 4–5.) Fitness LLC has one sole

member, Xponential Intermediate Holdings, LLC (“Holdings”). (Id.) And Holdings

members include Xponential Fitness, Inc. and “five individual members, who are citizens

of New York, Washington, Tennessee, Arizona, and California.” (Id. 4–5, 7.) AKT

further maintains that its amended corporate disclosure statement both named and

identified the citizenship of “every individual or entity whose citizenship is attributed to”

AKT. (Id. 8.)

In its original motion, filed before AKT submitted its amended corporate

disclosure statement, Plaintiffs asserted that AKT’s failure to name the other individual

members of Holdings meant AKT did not comply with Rule 7.1. (Mot. 7.) In their reply,

filed after AKT filed its amended disclosure, Plaintiffs argued that the updated disclosure

still failed the requirements of Rule 7.1 because it lacked context for determining who

were members of the listed LLCs and limited partnerships. (Reply 3.) Furthermore,

Plaintiffs disputed the accuracy of AKT’s amended disclosure and assert that there

CENTRAL DISTRICT OF CALIFORNIA

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Case No. 8:23-cv-01643-JVS(JDEx) Date November 13, 2023

Title Dance Fitness Michigan, LLC et al v. AKT Franchise, LLC et al

n.2) (citing Dkt. No. 29-2, Schedule 13D of Mark Grabowski.)

The Court agrees with Plaintiffs that AKT’s amended corporate disclosure lacks

context for determining whether the listed individuals are members in one of the listed

LLCs or limited partnerships or are attributed to AKT in their individual capacity.

Furthermore, AKT provides no explanation for how it determined the listed parties are

attributed to AKT nor where in the organizational structure they reside. AKT’s original

corporate disclosure only contained four entities. (Dkt. No. 3.) The amended version

lists sixteen individuals and eight entities. (Dkt. No. 22.) This addition of twenty new

parties makes limited discovery appropriate to determine whether the amended corporate

disclosure is a complete list of individuals and entities attributed to AKT and whether the

list accurately describes their citizenships. See Fed. R. Civ. P. 7.1(a)(2) advisory

committee’s note to 2022 amendment. In particular, AKT should identify whether the

individuals listed are members of one of the listed entities or attributed to AKT in their

individual capacity. AKT should also explain where each entity and individual is in the

organizational structure, as it did in the original disclosure statement only listing four

entities. This amended disclosure statement will assist the Court in determining the

completeness of AKT’s disclosure and if AKT must disclose additional individuals or

entities associated with some of the listed entities.

Plaintiffs insist that AKT’s “fail[ure] to disclose its own citizenship” should result

in a remand. (Reply 7.) However, the cases they cite to bolster this argument do not

support this conclusion. See Norton v. SF Markets, LLC, No. 23-cv-00851, 2023 WL

4976183, at *2 (C.D. Cal. Aug. 3, 2023) (remanding action to Superior Court because

defendant failed to comply with court order requiring a complete disclosure of the names

and citizenships of its owners/members); Le v. Gen. Motors LLC, 23-cv-00238, 2023

WL 4681576, at *1 (C.D. Cal. Apr. 3, 2023) (ordering defendant to file a disclosure

statement that identifies the name and citizenship of each owner/member of the LLC

when information was absent from notice to removal). In Norton, the defendant failed to

comply with a court order and the court remanded the case because it did “not have

enough information to determine whether it ha[d] jurisdiction.” 2023 WL 4976183, at

*2. That is not the situation here; rather, this motion is the first time the Court is

addressing whether AKT’s disclosure statement was sufficient. Le more accurately

reflects the current timeline in this case. There, the defendant failed to disclose the

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES - GENERAL

Case No. 8:23-cv-01643-JVS(JDEx) Date November 13, 2023

Title Dance Fitness Michigan, LLC et al v. AKT Franchise, LLC et al

this case where the Court is ordering AKT to submit in amended disclosure statement.

Therefore, the Court finds that remand is an inappropriate remedy at this stage.

In response to the Court’s tentative order, AKT filed an amended Disclosure

Statement. (Dkt. No. 47.) However, its disclosures remain deficient. Specifically, AKT

asserted that for certain members of Holdings are “not otherwise related to AKT

Franchise LLC and [it] respectfully believes that these entities are not attributable to

AKT.” (AKT’s Amended Corporate Disclosure, Dkt. No 47, at 3.) AKT makes this

argument with regard to eleven members of Holdings that are either LLCs or

partnerships. (Id. at 2–3.) This is insufficient. The Court requires a complete disclosure

statement. Where a party is an LLC or partnership, it shall disclose the citizenship of

each partner/owner/member. And where any such LLC or partnership is a

partner/owner/member, it shall disclose its partners/owners/members, and shall do so for

each successive tier. This includes the citizenship of those members of Holdings that

AKT did not disclose in its amended disclosure and any partner/owner/member at a

successive tier. (See id.)

Accordingly, the Court ORDERS AKT to file, no later than November 20, 2023,

an amended Rule 7.1 Disclosure Statement.

C. Fraudulent Joinder

AKT argues that remand is inappropriate because the Defendants domiciled in

Ohio were fraudulently joined. (Opp’n 8.) It asserts that there is “no possibility of

recovery” against the Ohio defendants because Plaintiffs did not and cannot state a claim

against them and the court lacks personal jurisdiction over them. (Id. 9.) Plaintiffs

contend that the Ohio defendants are proper defendants in this case because they

materially aided in the fraudulent inducement of Plaintiffs and acts or transactions that

constituted a violation of CAL. CORP. CODE §§ 31200 and 31201. (Mot. 13–14.) And

that even if they did not state a claim against the Ohio defendants, the possibility still

exists that they will be able to in an amended complaint. (Id. 15–16.)

In assessing whether the plaintiff fails to state a cause of action where fraudulent

joinder is at issue, “the Court may look beyond the pleadings.” Padilla v. AT & T Corp.,

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Case No. 8:23-cv-01643-JVS(JDEx) Date November 13, 2023

Title Dance Fitness Michigan, LLC et al v. AKT Franchise, LLC et al

removal fails to state a claim against the non-diverse defendant.” Id. The removing party

asserting fraudulent joinder “carries a heavy burden of persuasion” in making this

showing. Nelson v. Diebold Inc., No. CV 15-00846, 2015 WL 4464691, at *1 (C.D. Cal.

July 21, 2015). It must show “that the plaintiff ‘fails to state a cause of action against

[the] resident defendant, and the failure is obvious according to the settled rules of the

state.’” Macey v. Allstate Prop. & Cas. Ins. Co., 220 F. Supp. 2d 1116, 1117 (N.D. Cal.

2002) (alteration in original) (quoting Ritchey v. Upjohn Drug Co., 139 F.3d 1313, 1318

(9th Cir. 1998)).

Therefore, where there is doubt as to whether the plaintiff states a cause of action

against the defendant, “the doubt is ordinarily resolved in favor of the retention of the

case in state court.” Albi v. Street & Smith Publ’ns., Inc., 140 F.2d 310, 312 (9th Cir.

1944). “If there is a non-fanciful possibility that plaintiff can state a claim under

California law against the non-diverse defendants the court must remand.” Macey, 220

F. Supp. 2d at 1117.

1. Personal Jurisdiction

The parties dispute whether the Court can and should reach the question of

personal jurisdiction before it reaches the question of subject-matter jurisdiction

implicated by AKT’s fraudulent joinder claim. (See Mot. 19); (Opp’n 11.) Both parties

rely on the Supreme Court’s decision in Ruhrgas AG v. Marathon Oil Co., 526 U.S. 574

(1999), in arguing whether the Court should reach the question of personal jurisdiction

over Defendants Sarah Nolan, Emily Brown, and Rachel Markovic (collectively “Ohio

Defendants) before it reaches the question of whether Plaintiffs could possibly state a

claim against the Ohio Defendants.

In Marathon Oil, the Supreme Court held that while “[c]ustomarily, a federal court

first resolves doubts about its jurisdiction over the subject matter, . . . there are

circumstances in which a district court appropriately accords priority to a personal

jurisdiction inquiry.” Id. at 578. In so holding, the Court noted that “[i]t is hardly novel

for a federal court to choose among threshold grounds for denying audience to a case on

the merits.” Id. at 584. The Court then set forth the circumstances in which a court may

reach the personal jurisdiction question before it considers questions of subject-matter

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Title Dance Fitness Michigan, LLC et al v. AKT Franchise, LLC et al

will ordinarily conclude that federalism concerns tip the scales in favor of initially ruling

on the motion to remand.” Id. at 586 (citations, internal quotation mark, and alterations

omitted).

There are two types of personal jurisdiction—general and specific. AKT is correct

that there is no general jurisdiction over the Ohio Defendants because they are neither

domiciled nor are their contacts so “continuous and systematic as to render [them]

essentially at home in the forum State.” See LNS Enters. LLC v. Continental Motors,

Inc., 22 F.4th 852, 859 (9th Cir. 2022). A defendant is subject to specific personal

jurisdiction “if the controversy [is] sufficiently related to or arose out of [the defendant’s]

contacts with the forum state.” Omeluk v. Langsten Slip & Batbyggeri A/S, 52 F.3d 267,

270 (9th Cir. 1995). The Ninth Circuit applies a three-part test to analyze specific

jurisdiction.1 LNS Enters., 22 F.4th at 859. Both parties make arguments for and against

finding that the Court has specific personal jurisdiction over the Ohio Defendants. (See

Mot. 20–22); (Opp’n 10.) The need to conduct a full analysis of these arguments

counsels under Marathon Oil toward the Court deciding the subject-matter jurisdiction

question first. Therefore, the Court turns to the subject-matter jurisdiction question

without deciding the personal jurisdiction question.2

2. Fraudulent Joinder

The Defendants at the heart of the fraudulent joinder dispute are Sarah Nolan,

Emily Brown, and Rachel Markovic, whom the Court will continue to call the “Ohio

1“(1) The non-resident defendant must purposefully direct his activities or

consummate some transaction with the forum or resident thereof; or perform some act by

which he purposefully avails himself of the privilege of conducting activities in the

forum, thereby invoking the benefits and protections of its laws; (2) the claim must be

one which arises out of or relates to the defendant’s forum-related activities; and (3) the

exercise of jurisdiction must comport with fair play and substantial justice, i.e. it must be

reasonable.” LNS Enters., 22 F.4th at 859 (citations omitted).

2As discussed below, the Court concludes that the Ohio Defendants were

fraudulently joined and the Court does have subject-matter jurisdiction. Therefore, the

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Title Dance Fitness Michigan, LLC et al v. AKT Franchise, LLC et al

Defendants.” AKT acknowledges that these three named Defendants are domiciled in

Ohio. (Dkt. No. 7, ¶ 20). And refers to them as the “Ohio Employees” throughout its

opposition to this motion. (See generally Opp’n.) Plaintiffs allege that at least three

plaintiffs are domiciled in Ohio. (Compl. ¶¶ 11–12.) And they assert claims of fraud in

the inducement and violations of §§ 31200 and 31201 against all three Ohio Defendants

in their individual capacities. (Compl. ¶¶ 216–241.) Despite the apparent lack of

diversity, AKT argues that Plaintiffs “did not and cannot assert a claim against any of the

Ohio Employees.” (Opp’n 12.) Therefore, the Ohio Defendants were fraudulently

joined. (Id.)

a. Fraudulent Inducement and CAL. CORP. CODE §§ 31200 and

31201.

Fraudulent inducement is a “viable tort claim under California law.” Dhital v.

Nissan N. Am., Inc., 84 Cal. App. 5th 828, 838 (Cal. Ct. App. 2022). “The elements of

fraud are (a) a misrepresentation (false representation, concealment, or nondisclosure);

(b) scienter or knowledge of its falsity; (c) intent to induce reliance; (d) justifiable

reliance; and (e) resulting damage.” Id. (citation omitted). Fraud in the inducement is a

subset of the tort of fraud. Id. at 839. It “occurs when ‘the promisor knows what he is

signing but his consent is induced by fraud, mutual assent is present and a contract is

formed, which, by reason of the fraud, is voidable.’” Id. (quoting Hinesley v. Oakshade

Town Ctr., 135 Cal. App. 4th 289, 294–95 (Cal. Ct. App. 2005).

Plaintiffs contend that “Defendants painted a picture of [Anthony] Geisler as a

squeaky clean, exalted expert in franchising.”3 (Id. ¶ 217.) However, “Defendants knew

that if Geisler’s real past, and in particular if the Fraud Lawsuits and their outcomes, were

disclosed to Plaintiffs, Plaintiffs would not have signed their respective Agreements.”4

(Id. ¶ 218.) Furthermore, “Defendants knowingly concealed the Fraud Lawsuits from

Plaintiffs, intending to induce Plaintiffs to sign their respective Agreements to purchase

3Plaintiffs allege Geisler was “Chief Executive Officer of AKT and President of

Xponential, the parent company of AKT, during the events at issue in this lawsuit.”

(Compl. ¶ 124.)

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Title Dance Fitness Michigan, LLC et al v. AKT Franchise, LLC et al

franchise and area development rights.” (Id. ¶ 219.) And that “Plaintiffs justifiably

relied on Defendants’ false portrayal of Geisler and Defendants’ concealment of the

Fraud Lawsuits, particularly because Defendants had a legal obligation to disclose the

Fraud Lawsuits in AKT Franchisor’s FDDs. Had Defendants disclosed the Fraud

Lawsuits, Plaintiffs would not have signed their respective Agreements.” (Id. ¶ 220.) As

a result, Plaintiffs “signed their respective Agreements and have lost hundreds of

thousands (for certain Plaintiffs, millions) of dollars into a failed franchise system.”

(Id. ¶ 221.)

For the Ohio Defendants, Plaintiffs specifically allege that they occupied a

management role in the sale of the franchises to Plaintiffs.5 (Comp. ¶¶ 148–50).

Plaintiffs contend Brown made several misrepresentations to at least Plaintiff Alfredo,

including the bolstering of Geisler’s credibility. (Declaration of Deanna Alfredo

(“Alfredo Decl.”), Dkt. No. 10-9 ¶¶ 9–10.) And that Anna Kaiser was, and would be,

centrally involved in the franchise brand. (Id. ¶¶ 12–13.) Furthermore, Brown allegedly

told Alfredo the number of members she should expect and how much cash-flow per

month she should expect to receive. (Id. ¶ 15.) Alfredo also alleges Nolan sent her the

AKT Franchise Disclosure Document and the franchise agreement she ultimately signed.

(Id. ¶ 24.) Also, that all three Ohio Defendants were selling franchises in California

during 2020–2022 according to AKT’s reporting to the California Department of

Financial Protection and Innovation. (Id. ¶ 25.)

CAL. CORP. CODE § 31200 makes it “unlawful for any person willfully to make any

untrue statement of a material fact in any application, notice or report filed with the

commissioner under this law.” Section 31201 dictates that “[i]t is unlawful any person to

offer or sell a franchise in [California] by means of any written or oral communication

not enumerated in Section 31200 which includes an untrue statement of a material fact.”

And § 31302 states that

5Plaintiffs allege (and AKT acknowledges) “Sarah Nolan was the Operations

Manager of Xponential Fitness, LLC (“Xponential”), and St. Gregory Development

Group, LLC, and remains the Franchise Development Operations Coordinator for

Xponential. Emily Brown was Vice President of Franchise Development for Xponential.

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[e]very person who directly or indirectly controls a person liable under Section

31300 or 31301, . . . every principal executive officer or director of a

corporation so liable, every person occupying a similar status or performing

similar functions, every employee of a person so liable who materially aids in

the act or transaction constituting the violation, are also liable jointly and

severally with and to the same extent as such person, unless the other person

who is so liable had no knowledge of or reasonable grounds to believe in the

existence of the facts by reason of which the liability is alleged to exist.

Plaintiffs allege that the Defendants represented to Plaintiffs materially false

information orally and in the franchise disclosure documents about the estimated initial

investment required to open and operate an AKT facility. (Compl. ¶¶ 226–28.)

Defendants also purportedly misrepresented the amount of time it would take for an AKT

facility to open after Plaintiffs signed their franchise agreement. (Id. ¶¶ 230–32.)

Defendants allegedly made these misrepresentations knowingly and willfully. (Id. ¶

237.) As a result, Plaintiffs have been seriously damaged, including additional costs to

complete their facilities for opening and upfront investment. (See id. ¶ 228, 234, 238.)

Therefore, they argue each of the Defendants, including the Ohio Defendants, are jointly

and severally liable for the violation of § 31302 because they were either in control of

AKT or materially aided in the sale of the franchises under the defective franchise

disclosure documents. (Id. ¶ 239.)

AKT makes three arguments for why Plaintiffs’ fraudulent inducement and §§

31200 and 31201 claims against the Ohio Defendants fail to state a cause of action.

(Opp’n 13–17.) First, AKT argues that none of the Ohio Defendants qualify as a

“principal executive officer or director” of AKT. (Id. 13.) Second, AKT contends that

Plaintiffs “have not and cannot show” the Ohio Defendants are liable for materially

aiding any alleged violation of § 31302 because they were not responsible for the content

of alleged misstatements made to Plaintiffs. (Id. at 14.) And third, AKT alleges that the

Plaintiffs’ franchise agreements contain language that shifts the liability for any

fraudulent oral statements made by the Ohio Defendants to AKT. (Id. 15.)

Starting with the last argument, the franchise agreements contain a clause that

states

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Title Dance Fitness Michigan, LLC et al v. AKT Franchise, LLC et al

Franchisor’s obligations written in this agreement or based on any oral

communications which may be ruled to be binding in a court of law shall be

Franchisor’s sole responsibility and none of Franchisor’s agents,

representatives, nor any individuals associated with Franchisor’s franchise

company shall be personally liable to Franchisee for any reason.

(Dkt. No. 21-3 § 18.4 at 38.) AKT argues this means Plaintiffs cannot hold the Ohio

Defendants liable for any alleged misrepresentations they made because all liability shifts

to AKT, the “franchisor.” (Opp’n 15.) Plaintiffs disagree and contend that the

contractual language is irrelevant to their fraudulent inducement and §§ 31200 and 31201

claims. (Mot. 18.)

Both sides rely on Farnham v. Superior Court (Sequoia Holdings, Inc.), 60 Cal.

App. 4th 69 (Cal. Ct. App. 1997), in support of their positions. There the plaintiff sued

his former employer and two individuals, both of whom were shareholders, officers, and

directors. Id. at 71. Plaintiff’s employment agreement provided that he “waive[d] any

right he may have for a lawsuit for damages against any shareholder, director, officer, or

employee of [employer] for any claim . . . arising from, in connection with, or in relating

to” his employment agreement. Id. at 72. The plaintiff contended that the contractual

waiver was unenforceable because it was contrary to California’s public policy. Id. at 73.

The court first acknowledged that “exemptions from all liability for intentional wrongs,

gross negligence and violations of the law have been consistently invalidated.” Id. at 74.

But it could not find “any case addressing a limitation on liability for intentional wrongs,

gross negligence or violations of the law.” Id. (emphasis in original). It went on to

conclude that “a contractual limitation on the liability of directors . . . arising out of their

roles as directors is equally valid where, as here, the injured party retains his right to seek

redress from the corporation.”6 Id. at 77 (emphasis in original).

Plaintiffs point to Farnham’s statement that “contractual releases of future liability

for fraud and other intentional wrongs are invariably invalidated” as support for their

argument that the language in the franchise agreement is inapplicable to the charge of

6“In a free market society, we see no public policy reason why a business should

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES - GENERAL

Case No. 8:23-cv-01643-JVS(JDEx) Date November 13, 2023

Title Dance Fitness Michigan, LLC et al v. AKT Franchise, LLC et al

fraudulent inducement. (Mot. 18) (citing id. at 71). But this misses the larger point of

Farnham that contractual limitations on liability for individual agents or directors are

acceptable under California law if the injured party retains a right to seek redress from the

corporation. 60 Cal. App. 4th at 77. AKT interprets Farnham more accurately when it

argues that a liability limitation for its agents and representatives is allowed because

franchise owners can still pursue liability against AKT. (Opp’n 16.)

Plaintiffs also argue that the franchise agreement language is void because

California’s Franchise Investment Law (“CFIL”) makes it clear that any provision

requiring waiver of compliance with the CFIL is not permitted. (Mot. 19.) (quoting

Meadows v. Dickey’s Barbeque Rests., Inc., 144 F. Supp. 3d 1069, 1082 (N.D. Cal.

2015) (citing CAL. CORP. CODE § 31512). AKT counters with a similar shifting liability

argument discussed above. (Opp’n 16.) Once again, AKT’s interpretation is more on

point. Plaintiffs fail to assert which aspect of the CFIL the franchise agreement provision

requires a waiver for. Nor do they identify what part of the provision requires such a

waiver. But see Meadows, 144 F. Supp. 3d at 1082 (noting plaintiffs contend the

arbitration provision in the franchise agreement limits recovery for punitive or exemplary

damages, which are permitted by the CFIL). Without more, the Court cannot conclude

that the franchise agreement provision is void.

Plaintiffs do not dispute the accuracy or existence of the provision in the franchise

agreements limiting liability. Nor whether the Ohio Defendants qualify as “agents,

representatives” or “individuals associated with” AKT. Instead, Plaintiffs argue that the

provision is irrelevant to the fraudulent inducement or §§ 31200 and 31201 claims. (Mot.

18.) And that contractual releases of future fraud, like franchise agreement provision, are

void and invalid. (Id. 18–19.) The Court finds AKT’s shifting liability argument more

persuasive. The plain language of the agreement does not seek to release or avoid

liability. Rather, the language shifts liability to AKT and away from its “agents,

representatives” or “individuals associated with” it. Such contractual limitations on

individual liability are valid under California law when “the injured party retains his right

to seek redress from the” parent entity. See Farnham, 60 Cal. App. 4th at 77. In short,

the provision in the franchise agreements does not conflict with any public interest or

CFIL, but is instead the result of Plaintiffs’ voluntary decision to look to AKT to bear the

risk that might otherwise have fallen on AKT’s agents or representatives. See id. at 78.

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES - GENERAL

Case No. 8:23-cv-01643-JVS(JDEx) Date November 13, 2023

Title Dance Fitness Michigan, LLC et al v. AKT Franchise, LLC et al

Defendants jointly and severally liable for AKT’s violations of the CFIL. (Request for

Hearing at 1.) The premise for this argument is that §§ 31512 and 31512.1 of the CFIL

make the individual liability of the Ohio Defendants “non-waivable.” (Id.) Therefore,

the language in § 18.4 of the franchise agreements, that the Court found shifts liability

from AKT’s agents or representatives to the franchisor, is invalidated. (Id.) In their

response, AKT argues that Plaintiffs “merely rehash” arguments the Court previously

reviewed and rejected. (Response to Request for Hearing at 2.) Specifically, AKT

contends that Plaintiffs simply change their argument in their remand motion that stated

“any provision requiring waiver of compliance with the CFIL is not permitted,” to §§

31512 and 31512.1 “invalidates” the “waiver” language of § 18.4 of the franchise

agreements in its request for a hearing. (Id. at 3.) The Court finds AKT’s argument more

persuasive. In their request, Plaintiffs simply repeat the argument made in their remand

motion that § 18.4 cannot validly waive liability for the Ohio Defendants. Compare

(Motion to Remand (“Mot.”), at 19) with (Request for Hearing at 1–4.) Plaintiffs are

incorrect in their interpretation of the Court’s tentative. (See Request for Hearing at 1, 4.)

As laid out in the preceding paragraphs, the Court did not find that AKT waived

Plaintiffs’ right to sue the Ohio Defendants; rather, it concluded that § 18.4 of the

franchise agreements validly shifted liability from the Ohio Defendants to AKT. See

Farnham, 60 Cal. App. 4th at 77. Plaintiffs’ argument to the contrary is unconvincing.

In the alternative, Plaintiffs assert that § 18.4 of the franchise agreements do not

apply to Counts II–X of its complaint. (Request for Hearing at 5.) Therefore, the claims

against the Ohio Defendants based on these Counts cannot be “waived.” (Id.) This

argument is based on the incorrect premise that the Court concluded § 18.4 validly

waived Plaintiffs’ right to pursue claims against the Ohio Defendants. (See id.) As

discussed above, this is inaccurate. The Court concluded that contractual limitations on

individual liability are valid under California law when “the injured party retains his right

to seek redress from the” parent entity. See Farnham, 60 Cal. App. 4th at 77. The Court

also found that Plaintiffs’ voluntarily decided to look to AKT to bear the risk that might

otherwise have fallen on AKT’s agents or representatives. See id. at 78. At no point did

the Court find that § 18.4 waived Plaintiffs’ rights. Furthermore, as AKT points out in its

response, this argument is a restatement of Plaintiffs’ argument in their remand motion.

Compare (Mot. at 18–19) with (Request for Hearing at 5.) Plaintiffs’ argument in its

request is no more convincing then it was in its original motion. Therefore, the Court

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES - GENERAL

Case No. 8:23-cv-01643-JVS(JDEx) Date November 13, 2023

Title Dance Fitness Michigan, LLC et al v. AKT Franchise, LLC et al

b. Respondeat Superior

Plaintiffs also argue that the theory of respondeat superior “does not invalidate

claims against the Ohio Defendants.” (Mot. 16.) “Under the doctrine of respondeat

superior, an employer is vicariously liable for his employee’s torts committed within the

scope of the employment.” Perez v. Van Groningen & Sons, Inc., 41 Cal. 3d 962, 967

(Cal. 1986). “[A]n employer can be liable for his employee’s unauthorized intentional

torts committed within the scope of employment despite lack of benefit to the employer.”

Id. at 969 (emphasis in original).

Plaintiffs do not dispute the possibility respondeat superior applies to the Ohio

Defendants’ conduct, but argue the theory does not “blanketly absolve employees of

liability for their actions, particularly where employers may avoid liability for punitive

damages.” (Mot. 17) (citing McKinney v. Wal-Mart Stores, Inc., CV 16-02174, 2016

WL 7391511, at *6 (C.D. Cal. Dec. 21, 2016)). They further assert that because of

Defendants’ poor financial viability, respondeat superior should not preclude recovery

against the Ohio Defendants. (Id. at 17–18.)

Plaintiffs accuse the Ohio Defendants of fraudulent inducement and violations of

§§ 31200 and 31201. (Compl. ¶¶ 216–241.) However, Plaintiffs allegations do not

accuse the Ohio Defendants of any improper conduct outside the scope of their

employment or any basis for distinguishing them from Defendant AKT. For example,

Plaintiffs allege Defendant Brown “made several misrepresentations alleged in the

Complaint to at least one Plaintiff, Deanna Alfredo.” (Mot. 14). However, all the alleged

misrepresentations occurred within the scope of Brown’s employment, (see Mot. 14), or

at the very least were “committed in the course of a series of acts of the agent which were

authorized by the principal.” Perez, 41 Cal. 3d at 970 (internal quotations and citations

omitted) (explaining that the proper inquiry for respondeat superior).

Plaintiffs reliance on McKinney is misplaced. (Mot. 17.) In that case, the plaintiff

“presented a non-fanciful possibility of demonstrating that the Individual Defendants’

actions amount to malice” and, as a result, they could be liable for defamation.

McKinney, 2016 WL 7391511, at *6. Unlike McKinney, Plaintiffs have not presented a

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES - GENERAL

Case No. 8:23-cv-01643-JVS(JDEx) Date November 13, 2023

Title Dance Fitness Michigan, LLC et al v. AKT Franchise, LLC et al

does not change this conclusion. CAL. CIV. CODE § 3294 allows an employer to escape

liability for punitive damages based on acts of its employees unless the employer “was

personally guilty of oppression, fraud, or malice.” Plaintiff’s argument that the Ohio

Defendants are essential to the litigation because it may not be able to recover punitive

damages from AKT is unpersuasive for three reasons: (1) the shifting liability clause in

the franchise agreements; (2) the fact that Plaintiffs allege the same causes of action

against AKT as the Ohio Defendants; and (3) the purported improper conduct of the Ohio

Defendants all took place within the scope of their employment.

Having found the provision of the franchise agreements valid and applicable to

Plaintiffs fraudulent inducement and §§ 31200 and 31201 claims, the Court concludes

that the Ohio Defendants cannot be found liable in their individual capacity.

Consequently, AKT has shown “that [Plaintiffs] ‘fail[] to state a cause of action against”

the Ohio Defendants and “the failure is obvious according to the settled rules of the

state.’” See Macey, 220 F. Supp. 2d at 1117 (quoting Ritchey, 139 F.3d at 1318).7

Therefore, AKT has met its “heavy burden of persuasion” in asserting a claim for

fraudulent joinder. See Nelson, 2015 WL 4464691, at *1. And the Court finds that the

Ohio Defendants were fraudulently joined.

IV. CONCLUSION

7Although Plaintiffs raise additional arguments for why there is a “possibility” the

Ohio Defendants could be held liable, the franchise agreement provision nullifies them

because it shifts their liability to AKT. For example, the parties dispute whether the Ohio

Defendants meet the definition of principal or executive officer or director under § 31302

and whether they “materially aid[ed]” the alleged fraudulent misrepresentations under the

same section. (Mot. 11–13), (Opp’n 13–14.) The parties also submitted dueling

declarations about the content and extent of alleged statements that Defendant Brown

made to Plaintiff Alfredo. See generally (Alfredo Decl.); (Declaration of Emily Brown,

Dkt. No. 23-2.) Certainly, these arguments may raise “doubt” as to whether the Plaintiffs

stated a cause of action, which would “ordinarily be resolved in favor” of remand. See

Albi, 140 F.2d at 312. However, because the shifting liability provision precludes any

possibility of Plaintiffs bringing a cause of action against the Ohio Defendants, the Court

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES - GENERAL

Case No. 8:23-cv-01643-JVS(JDEx) Date November 13, 2023

Title Dance Fitness Michigan, LLC et al v. AKT Franchise, LLC et al

For the foregoing reasons, the Court DENIES the motion to remand and ORDERS

AKT to file, no later than November 20, 2023, an amended Rule 7.1 Disclosure

Statement.

IT IS SO ORDERED.