Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_11-cv-01386/USCOURTS-casd-3_11-cv-01386-0/pdf.json

Nature of Suit Code: 196
Nature of Suit: Franchise
Cause of Action: 28:1332 Diversity-Contract Dispute

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UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

AAMCO TRANSMISSIONS, INC.,

Plaintiff,

CASE NO. 11cv1386-WQH-POR

ORDER

vs.

ANTONIO A. TROVATO; RICARDO S.

TROVATO; and DOES 1-10, inclusive,

Defendants.

HAYES, Judge:

The matter before the Court is the Motion to Dismiss Plaintiff’s Complaint and Motion

to Strike Improper Allegations and Motion for More Definite Statement (“Motion to

Dismiss”), filed by Defendants Antonio A. Trovato and Ricardo S. Trovato. (ECF Nos. 6, 7).

I. Background

On June 22, 2011, Plaintiff Aamco Transmissions, Inc. (“Aamco”) initiated this action

by filing a Complaint in this Court. (ECF Nos. 1, 4).

A. Allegations of the Complaint

On July 23, 2004, Plaintiff and Defendant Antonio Trovato “entered into a franchise

agreement, pursuant to which [Antonio] Trovato ... was authorized to use and has been using

the name and mark ‘AAMCO’ in connection with the operation of an automotive transmission

repair center located at 3141 India Street, San Diego, CA 92103 (‘Center’).” (Compl. ¶ 6, ECF

No. 1). “By way of an amendment to the Franchise Agreement, also dated July 23, 2004,

[Defendant Ricardo] Trovato [Defendant Antonio Trovato’s son] ... was added as a coCase 3:11-cv-01386-WQH-POR Document 10 Filed 09/28/11 Page 1 of 8
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franchisee to the Franchise Agreement.” Id. ¶ 7.

“Under the Franchise Agreement, the Defendants are required to pay a weekly franchise

fee to [Aamco] calculated as a percentage of the previous week’s gross business sales from the

Defendants’ Center.” Id. ¶ 8. “Along with their weekly franchise fee, Defendants are required

to submit to [Aamco] an accurate weekly business report documenting the Center’s sales.

Defendants’ weekly business report is used to calculate the weekly franchise fee.” Id. ¶ 9.

“[Aamco] requires its franchisees, including Defendants, to use official Aamco customer repair

order receipts in their transactions with customers. Each repair order form has a control

number assigned from [Aamco]. [Aamco]’s franchisees, including Defendants, are required

to attach copies of each customer repair order receipt they issue during the preceding week to

their weekly business report.” Id. ¶ 11. The Franchise Agreement provides:

Franchisee agrees to keep true and correct books and records according to

directions of Aamco, and to employ such recordkeeping systems as Aamco may

request.... Franchisee agrees to use exclusively numerically certified work or

repair orders provided by Aamco. Franchisee further agrees to furnish to Aamco

bank deposit slips, verification of cash receipts and any other documents or

information requested by Aamco as part of standard auditing procedures....

Aamco’s representative may enter the Franchisee’s center to inspect books and

records to verify the accuracy of Franchisee’s reports. Franchisee agrees to keep

its books and records available in the center at all times, or to make them

available there upon request by Aamco.

Id. ¶¶ 10, 15; see also Compl., Ex. A ¶¶ 11.1, 11.2, ECF No. 4. 

“On February 11, 2011, [Aamco] was contacted by customer Vern Barney concerning

a warranty problem he was having with the Defendants who had fixed his transmission at the

Center.” (Compl. ¶ 12, ECF No. 1). “Mr. Barney produced two ... non-[Aamco] authorized

receipts issued by the Defendants to Mr. Barney which documented that Defendants were paid

$2,400.00 for the repair transaction. Mr. Barney confirmed to [Aamco] that these receipts

were the only paperwork that he was provided by the Defendants in connection with the

repair.” Id. ¶ 13. “Defendants had not reported Mr. Barney’s repair transaction to [Aamco]

and had not paid any franchise fee to [Aamco] in connection with the transaction.” Id. ¶ 14.

“On February 22, 2011, [Aamco] sent two ... of its Field Auditors to the Center to

inspect the books and records of the Defendants’ Center business to verify the accuracy of

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Defendants’ business reports submitted to [Aamco].” Id. ¶ 16. “During the course of the site

audit, [Aamco]’s auditors discovered two ... non [Aamco] approved receipt books in a drawer

in the Center’s office which contained receipts similar to the receipts provided by Mr. Barney.”

Id. ¶ 17. “Upon discovering the receipt books, [Aamco]’s auditors requested to inspect and

copy the receipt books, which request Defendants refused without any credible explanation.”

Id. ¶ 18.

“In a letter dated March 25, 2011, [Aamco] notified Defendants that they were in breach

if section 11.2 of the Franchise Agreement and required that Defendants cure said breach

within thirty ... days or face termination of the Franchise Agreement without further notice.”

Id. ¶ 19.

“Defendants, through their attorney, ... responded in a ... letter dated April 22, 2011,

which denied that [Aamco] had any contractual or legal right to review Defendants’ so-called

‘private’ records. The letter went on to state that Defendants had, nonetheless, ‘enclosed the

original ledger sheets that were requested in [Aamco’s] March 25, 2011 letter.’” Id. ¶ 20.

“The receipt books enclosed with [Defendants’ attorney’s] letter, referred to as ‘ledger sheets’

... contained receipts which [Aamco] now knows to be bogus. The bogus receipts provided

in [Defendants’ attorney’s] letter have been recreated to appear like real receipts, which real

receipts have not been provided by Defendants to [Aamco].” Id. ¶ 21. “Without the real

receipt books, [Aamco] has been denied its contractual right to inspect the Defendants’ books

and records to verify the accuracy of the Defendants’ weekly business reports.” Id. ¶ 23.

In the first cause of action for breach of the Franchise Agreement, Plaintiff alleges that

Defendants breached the Franchise Agreement (a) “by failing to report sales and pay the

corresponding franchise fees due and owing to [Aamco],” and (b) “when Defendants denied

[Aamco]’s request to inspect their books and records at the Center.” Id. ¶¶ 27, 28. Plaintiff

alleges that, “[a]s a result of Defendants’ material breaches ..., [Aamco] has been damaged ...

in an amount ... believed to be in excess of seventy five thousand dollars....” Id. ¶ 30. In the

first cause of action, Plaintiff seeks compensatory damages and attorney’s fees and costs.

In the second cause of action for fraud and deceit, Plaintiff alleges:

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Defendants knowingly submitted an understated weekly business report to

[Aamco] and knowingly underpaid franchise fees due and owing to [Aamco]

with the hope and intent that [Aamco] would rely on the understated business

report as being accurate and would accept the underpayment of franchise fees

as full payment, which [Aamco] did.

Defendants further knowingly withheld receipts which they were required to

produce under their audit obligations under the Franchise Agreement and,

instead, provided bogus receipts with the hope and intention that [Aamco] would

rely to its detriment on the bogus receipts.

[Aamco], at least initially, did rely on Defendants’ above mentioned fraudulent

actions to their detriment.

Id. ¶¶ 34-36. In the second cause of action, Plaintiff seeks compensatory and punitive

damages.

In the third cause of action for declaratory judgment, Plaintiff seeks a declaration that

the Franchise Agreement is valid, and that “[Aamco] may lawfully terminate Defendants under

the Franchise Agreement and California law for one or more of the breaches described in the

above set forth Counts of this Complaint.” Id. at 8. 

B. Motion to Dismiss

On August 8, 2011, Defendants filed the Motion to Dismiss. See ECF No. 6 (Motion

to Dismiss filed by Defendant Antonio Trovato); see also ECF No. 7 (joinder in Antonio

Trovato’s Motion to Dismiss filed by Defendant Ricardo Trovato). Defendants move for the

dismissal of the cause of action for breach of the Franchise Agreement on the basis that:

The claim for allegedly under-reporting and paying the repair job clearly states

the entire repair cost $2,400, however the breach cause of action alleges that the

damages from this claim somehow exceed $75,000. This jump seems to indicate

that there are other components of this breach of contract claim which were not

specifically plead and against which the Trovatos cannot, at this time, formulate

a defense.

(ECF No. 6-1 at 9). Alternatively, Defendants move for a more definite statement as to the

first cause of action. See id. Defendants move for the dismissal of the first cause of action to

the extent it alleges a breach of the inspection clause of the Franchise Agreement because

“[t]he Complaint never alleges that the ledger sheets [Aamco]’s inspectors demanded were the

sort of books and records contemplated by the inspection and audit clauses [of the Franchise

Agreement].” Id. at 10. Defendants move for the dismissal of the second cause of action for

fraud on the basis that it “does not meet the heightened pleading requirements of Fed. R. Civ.

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P. 9(b).” Id. at 8. Defendants move to strike “clearly privileged settlement communications

that are referenced in the Complaint,” i.e., the April 22, 2011 letter from Defendants’ attorney,

pursuant to Federal Rule of Evidence 408.

On August 29, 2011, Plaintiff filed an opposition to the Motion to Dismiss. (ECF No.

8). Plaintiff contends that the allegations of the Complaint “more than meet the pleading

requirements,” and the April 22, 2011 letter from Defendants’ attorney does not meet the

requirements of Rule 408. Id. at 4.

On September 6, 2011, Defendants filed a reply in support of the Motion to Dismiss.

(ECF No. 9).

II. Standard of Review

Federal Rule of Civil Procedure 12(b)(6) permits dismissal for “failure to state a claim

upon which relief can be granted.” Fed. R. Civ. P. 12(b)(6). Dismissal under Rule 12(b)(6)

is appropriate where the complaint lacks a cognizable legal theory or sufficient facts to support

a cognizable legal theory. See Balistreri v. Pacifica Police Dep’t, 901 F.2d 696, 699 (9th Cir.

1990). To sufficiently state a claim to relief and survive a Rule 12(b)(6) motion, a complaint

“does not need detailed factual allegations” but the “[f]actual allegations must be enough to

raise a right to relief above the speculative level.” Bell Atl. Corp. v. Twombly, 550 U.S. 544,

555 (2007). “[A] plaintiff’s obligation to provide the ‘grounds’ of his ‘entitle[ment] to relief’

requires more than labels and conclusions, and a formulaic recitation of the elements of a cause

of action will not do.” Id. (quoting Fed. R. Civ. P. 8(a)(2)). When considering a motion to

dismiss, a court must accept as true all “well-pleaded factual allegations.” Ashcroft v. Iqbal,

--- U.S. ----, 129 S. Ct. 1937, 1950 (2009). However, a court is not “required to accept as true

allegations that are merely conclusory, unwarranted deductions of fact, or unreasonable

inferences.” Sprewell v. Golden State Warriors, 266 F.3d 979, 988 (9th Cir. 2001). “[F]or a

complaint to survive a motion to dismiss, the non-conclusory factual content, and reasonable

inferences from that content, must be plausibly suggestive of a claim entitling the plaintiff to

relief.” Moss v. U.S. Secret Serv., 572 F.3d 962, 969 (9th Cir. 2009) (quotations omitted).

For all allegations of fraud, Federal Rule of Civil Procedure 9(b) requires that “a party

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... state with particularity the circumstances constituting fraud,” while “[m]alice, intent,

knowledge, and other conditions of a person’s mind may be alleged generally.” Fed. R. Civ.

P. 9(b). “Rule 9(b) demands that the circumstances constituting the alleged fraud be specific

enough to give defendants notice of the particular misconduct so that they can defend against

the charge and not just deny that they have done anything wrong. Averments of fraud must

be accompanied by the who, what, when, where, and how of the misconduct charged.” Kearns

v. Ford Motor Co., 567 F.3d 1120, 1124 (9th Cir. 2009) (quotations omitted).

Federal Rule of Civil Procedure 12(e) provides: “A party may move for a more definite

statement of a pleading to which a responsive pleading is allowed but which is so vague or

ambiguous that the party cannot reasonably prepare a response.” Fed. R. Civ. P. 12(e).

Federal Rule of Civil Procedure 12(f) provides that a court “may order stricken from any

pleading ... any redundant, immaterial, impertinent, or scandalous matter.” Fed. R. Civ. P.

12(f).

III. Discussion

In the first cause of action, Plaintiff alleges that Defendants breached the Franchise

Agreement in two ways: (a) “by failing to report sales and pay the corresponding franchise fees

due and owing to [Aamco],” and (b) “when Defendants denied [Aamco]’s request to inspect

their books and records at the Center.” (Compl. ¶¶ 27, 28, ECF No. 1). Plaintiff alleges that,

“[a]s a result of Defendants’ material breaches ..., [Aamco] has been damaged” because

“[Aamco] has been underpaid franchise fees due and owing it under the Franchise Agreement,

and ... [Aamco] has been deprived of its contractual right to police and protect the integrity of

its franchise system.” Id. ¶ 30. The Court finds that the first cause of action adequately alleges

a claim for breach of contract pursuant to the pleading standards of Federal Rule of Civil

Procedure 8(a)(2). See Twombly, 550 U.S. at 555-56. The Complaint adequately alleges

diversity subject matter jurisdiction pursuant to the pleading standards of Federal Rule of Civil

Procedure 8(a)(1). See 28 U.S.C. § 1332(a).

The second cause of action alleges a claim for fraud. “To determine if the elements of

fraud have been pleaded to state a cause of action [federal courts] look to state law. The

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elements of a cause of action for fraud in California are: (a) misrepresentation (false

representation, concealment, or nondisclosure ); (b) knowledge of falsity (or ‘scienter’); (c)

intent to defraud, i.e., to induce reliance; (d) justifiable reliance; and (e) resulting damage.”

Kearns, 567 F.3d at 1126 (quotation omitted). The Complaint alleges with particularity the

allegedly unreported customer transactions on January 31, 2011 and February 7, 2011, and

attaches a copy of the customer’s receipts as an exhibit to the Complaint. See Compl. ¶¶ 12-

14, ECF No. 1; see also Compl. Ex. B, ECF No. 4-1. The Complaint alleges that “Defendants

knowingly submitted an understated weekly business report to [Aamco] and knowingly

underpaid franchise fees due and owing to [Aamco] with the hope and intent that [Aamco]

would rely on the understated business report as being accurate and would accept the

underpayment of franchise fees as full payment, which [Aamco] did.” Compl. ¶ 34, ECF No.

1. The Complaint alleges with particularity the Defendants’ alleged refusal to allow Aamco’s

auditors to inspect and copy receipt books on February 22, 2011, and Defendants’ submission

of allegedly “bogus” receipts on April 22, 2011. Id. ¶¶ 16-22. The Complaint alleges:

Defendants ... knowingly withheld receipts which they were required to produce

under their audit obligations under the Franchise Agreement and, instead,

provided bogus receipts with the hope and intention that [Aamco] would rely to

its detriment on the bogus receipts.

[Aamco], at least initially, did rely on Defendants’ above mentioned fraudulent

actions to their detriment.

Id. ¶¶ 35-36. The Court finds that the second cause of action adequately alleges a claim for

fraud pursuant to the pleading standards of Federal Rule of Civil Procedure 9(b). See Kearns,

567 F.3d at 1124.

Federal Rule of Evidence 408 provides that “[e]vidence of the following is not

admissible ...: (1) furnishing or offering or promising to furnish ... a valuable consideration in

compromising or attempting to compromise the claim; and (2) conduct or statements made in

compromise negotiations regarding the claim....” Fed. R. Evid. 408(a). “[C]ourts have held

that Rule 408 is inapplicable when the claim is based upon some wrong that was committed

in the course of the settlement discussions; ... wrongful acts are not shielded because they took

place during compromise negotiations.” Uforma/Shelby Bus. Forms, Inc. v. N.L.R.B., 111 F.3d

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 This Order does not constitute a ruling as to whether the April 22, 2011 letter is

admissible at trial or at any other proceeding in this case.

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1284, 1293 (6th Cir. 1997) (quotation omitted); see also Fed. R. Evid. 408, advisory committee

note, 2006 amendment (citing Uforma/Shelby Bus. Forms). The Complaint alleges that the

receipts submitted with the April 22, 2011 letter from Defendants’ attorney were “bogus,”

Compl. ¶ 22, ECF No. 1, and this allegation forms part of the basis of the fraud cause of action,

see id. ¶¶ 21 (“The bogus receipts provided in [Defendants’ attorney’s] letter have been

recreated to appear like real receipts, which real receipts have not been provided by Defendants

to [Aamco].”), 35 (“Defendants ... knowingly withheld receipts which they were required to

produce under their audit obligations under the Franchise Agreement and, instead, provided

bogus receipts with the hope and intention that [Aamco] would rely to its detriment on the

bogus receipts.”). For the purposes of ruling on the Motion to Dismiss, the Court is required

to accept the allegations of the Complaint as true. See Twombly, 550 U.S. at 555-56.

Accordingly, the Court cannot find at this stage that the allegedly “bogus” receipts submitted

with the April 22, 2011 letter constitute “valuable consideration.” Fed. R. Evid. 408(a)

(emphasis added). The Court finds that the allegations concerning the April 22, 2011 letter,

and Plaintiff’s filing of the letter as an attachment to the Complaint, do not violate Rule 408.

See Uforma/Shelby Bus. Forms, 111 F.3d at 1293. The motion to strike all references in the

Complaint to the April 22, 2011 letter is denied.1

IV. Conclusion

IT IS HEREBY ORDERED that the Motion to Dismiss is DENIED. (ECF No. 6).

DATED: September 28, 2011

WILLIAM Q. HAYES

United States District Judge

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