Court Opinion

ID: 213116
Source: CourtListenerOpinion
Date Created: 2011-03-23 19:55:32+00
Date Added: 2024-06-11T17:28:14.126336
License: Public Domain

UNPUBLISHED

                  UNITED STATES COURT OF APPEALS
                      FOR THE FOURTH CIRCUIT

                             No. 09-1774

WW, LLC, A Maryland Limited Liability Corporation trading
as The Coffee Beanery Cafe; DEBORAH WILLIAMS; RICHARD
WELSHANS,

               Plaintiffs - Appellants,

          v.

THE COFFEE BEANERY LTD; JOANNE SHAW; JULIUS L. SHAW; KEVIN
SHAW; KURT SHAW; KEN COXEN; WALTER PILON; OWEN STERN,

               Defendants - Appellees.

Appeal from the United States District Court for the District of
Maryland, at Baltimore. Andre M. Davis, District Judge. (1:05-
cv-03360-AMD)

Argued:   December 9, 2010                 Decided:   March 23, 2011

Before NIEMEYER, DUNCAN, and KEENAN, Circuit Judges.

Reversed and remanded by unpublished opinion. Judge Niemeyer
wrote the opinion, in which Judge Duncan and Judge Keenan
joined.

ARGUED:     Harry Martin Rifkin, Lutherville, Maryland, for
Appellants.   Karl V. Fink, PEAR SPERLING EGGAN & DANIELS, PC,
Ann Arbor, Michigan, for Appellees. ON BRIEF: Joshua R. Fink,
PEAR SPERLING EGGAN & DANIELS, PC, Ann Arbor, Michigan, for
Appellees.
Unpublished opinions are not binding precedent in this circuit.

                                2
NIEMEYER, Circuit Judge:

       WW,   LLC,    a    Maryland         limited     liability       company,   Richard

Welshans, and Deborah Williams commenced this action against The

Coffee   Beanery,        Ltd.,       a    Michigan     corporation,      and   individual

officers of The Coffee Beanery, alleging that the defendants

made material misrepresentations that induced the plaintiffs to

enter into a franchise agreement with The Coffee Beanery.                                The

district     court       stayed      this     action    to   allow      the    parties    to

proceed to arbitration in the Eastern District of Michigan, as

required by the franchise agreement.                         After arbitration, the

district     court       in    the       Eastern   District     of     Michigan   entered

judgment on the arbitration award in favor of The Coffee Beanery

and    its   officers.            The      district     court     in   this    case   then

dismissed this action “in accordance with the [Eastern District

of Michigan] judgment.”

       Subsequently, the Sixth Circuit reversed the judgment of

the    Eastern    District        of       Michigan    and   vacated     the    franchise

agreement,       including        its       arbitration      clause,     prompting       the

plaintiffs here to file a motion to reopen this action under

Federal Rule of Civil Procedure 60(b)(5) (authorizing a court to

reopen a judgment that is based on an earlier judgment that has

been   reversed      or       vacated).        The     district      court    declined   to

reopen this action, and the plaintiffs filed this appeal.

                                               3
     For    the     reasons      that       follow,     we    reverse      and    remand       for

further proceedings in the district court.

                                               I

     The     Coffee       Beanery          franchises        specialty       retail         coffee

stores, cafes, kiosks, coffee carts, and coffee bars, and it is

registered in Maryland, allowing it to offer and sell franchises

in   Maryland.           In     May    2003,       Richard        Welshans       and    Deborah

Williams,    a     married       couple,       investigated          the     possibility        of

purchasing    a     franchise         to    operate     a    Coffee    Beanery         store    in

Annapolis, Maryland, and, pursuant to their inquiry, The Coffee

Beanery mailed them a copy of the Uniform Franchise Offering

Circular     for    the       State     of    Maryland,           together    with      a     form

franchise    agreement,         which        Welshans       and    Williams      received       in

early June 2003.              About a week later, Kevin Shaw, the vice-

president of The Coffee Beanery, visited Welshans and Williams

in Annapolis to discuss more particularly the possibility of

entering     into    a    franchise          agreement.             Several      days       later,

Welshans and Williams attended a Coffee Beanery “discovery day”

in Flushing, Michigan, during which they were given a tour of a

Coffee Beanery Cafe store and engaged in further discussions

about   entering         into     a    franchise.             At     the     conclusion        of

“discovery day,” Welshans signed a franchise agreement with The

Coffee Beanery for the operation of a franchised Coffee Beanery

                                               4
Cafe     store   in     Annapolis.          Subsequently,            with    The     Coffee

Beanery’s consent, Welshans assigned the franchise agreement to

WW, LLC, a Maryland limited liability company owned by Welshans

and Williams.         WW, LLC, opened its Coffee Beanery Cafe store in

2004.

       The store was unsuccessful and generated a cash loss each

year of its operation.           WW, LLC, attributed the losses to store

layout, the cash register system, the advertising program, and

the nature of required equipment.                 More importantly, they claim

that material facts about Coffee Beanery Cafe store franchises

were misrepresented or omitted during the negotiation process.

        WW, LLC, Welshans, and Williams commenced this action in

December    2005,     alleging    violations           of    the    Maryland      Franchise

Law,    detrimental     reliance,     intentional            misrepresentation,           and

negligent    misrepresentation.                 They    complained,          among    other

things, that the Uniform Franchise Offering Circular provided by

The Coffee Beanery was incomplete and inaccurate, in violation

of   Maryland    law.     They    alleged        that       the    franchise      agreement

contained    untrue     statements     of       fact,       and    that   Kevin    Shaw    (a

Coffee    Beanery      officer)    and      The    Coffee          Beanery    made    false

statements regarding the operation and earnings of franchised

stores and other matters.            WW, LLC, also filed a complaint with

the Maryland Securities Commissioner.

                                            5
       The    Coffee     Beanery     and      the       other    individual      defendants

filed a motion to dismiss this action or to stay it pending

arbitration.           Around the same time, they filed a petition to

compel arbitration in the Eastern District of Michigan, relying

on the franchise agreement’s arbitration clause and its forum

selection         clause,    which   provided           that     any    legal    action    be

brought in the Eastern District of Michigan.

       In response to The Coffee Beanery’s motion to stay pending

arbitration and WW, LLC’s motion to stay pending investigation

by    the    Maryland       Securities     Commissioner,           the    district     court

entered      an    order,    dated   March        23,    2006,    staying       this   action

“pending further order of this court.”

       In the agency action, the Maryland Securities Commissioner

entered an order directing The Coffee Beanery and its officers

to show cause “why a final order should not be entered ordering

that Respondents cease and desist from violating the disclosure

and    antifraud        provisions       of       the     Maryland       Franchise     Law.”

Following         an   agency   investigation,            the    Commissioner        and   The

Coffee Beanery entered into a consent order, in which The Coffee

Beanery neither admitted nor denied the Commissioner’s statement

of    facts   and      conclusions    of      law       but    agreed    to   the    agency’s

jurisdiction and its order.                   The Commissioner found that The

Coffee Beanery violated the Maryland Franchise Law by making

material      misrepresentations         of       fact    or    omissions       of   material

                                              6
fact    about    The    Coffee      Beanery       franchise      and    by    offering         and

selling    franchises         in     Maryland        without         giving        prospective

franchisees       a    copy   of    the     required       offering         prospectus,          in

accordance with Maryland law.                 The consent order directed that

The    Coffee    Beanery      and    its     officers          “permanently         cease      and

desist from offering and selling franchises in Maryland or to

any    prospective        Maryland         franchisees         in     violation          of    the

Maryland Franchise Law.”               The consent order also required The

Coffee Beanery “to make a rescission offer to the Welshans, by

and    through    WW,    LLC”      allowing       them    to    rescind       the    franchise

agreement on the condition that they release all claims against

The Coffee Beanery and its agents.                       Finally, the consent order

provided       that     it    was    “a      disclosable            order     as    described

under . . . the Maryland Franchise Law.”                        WW, LLC, Welshans, and

Williams did not accept the rescission offer provided for in the

consent    order,       electing      to    pursue       their       claims    against         The

Coffee Beanery, as asserted in this action.

       After     the    Coffee      Beanery       filed    the      petition        to    compel

arbitration      in     the   Eastern       District      of     Michigan,         that       court

granted the petition, and the arbitrator subsequently found in

favor of The Coffee Beanery.                The arbitrator found “no intent on

the part of Respondents to mislead Claimants or misrepresent the

franchise system.”            She determined that The Coffee Beanery had

provided WW, LLC, with “adequate, proper and timely disclosure

                                              7
. . . under       Michigan       and    Maryland        franchise         laws,   excellent

training,    competent       assistance         with     store      location,     competent

lay-out     of      the    store        and         business       start-up       resources,

comprehensive        operations,          training          and     equipment       manuals,

excellent        coffee    and        related        products,       available      trouble-

shooting resources, and available financial assistance.”                                   The

arbitrator determined that WW, LLC’s lack of success was not

caused by The Coffee Beanery.                       She determined that The Coffee

Beanery properly provided Welshans with a copy of the Uniform

Franchise Offering Circular, and that WW, LLC, had not proved

the    elements      necessary          to     recover        for     claims      based     on

nondisclosure of gift cards, the DMX music system, and Pepsi

contract requirements.            She found that Welshans did not “rely on

any sales or expense information provided by Respondents.”                                 And

with   respect      to    WW,    LLC’s       claim     that    Kevin       Shaw   failed    to

disclose     a    felony     grand       larceny       conviction,         the    arbitrator

concluded that it was not the kind of conviction subject to

disclosure       because    Michigan         and     Maryland       disclosure     laws    are

limited     to      “felonies          that         involve       fraud,     embezzlement,

fraudulent       conversion,      or     misappropriation            of    property.”       In

addition,     the    arbitrator          found       “the     testimony      of   witnesses

Welshans,     Williams,         and     their       expert     witness      Lombardo      with

regard to the claim for damages, not credible.”                            Ultimately, the

arbitrator concluded that The Coffee Beanery was not liable on

                                                8
any claim and that WW, LLC, Welshans, and Williams should pay

costs and back royalties to The Coffee Beanery.

      The district court for the Eastern District of Michigan

confirmed the arbitration award and entered a judgment ordering

WW,   LLC,   Welshans,     and    Williams     to   pay   The   Coffee       Beanery

$152,766.73.

      Based on the judgment entered in the Eastern District of

Michigan, the district court in this case entered an order on

March 3, 2008, dismissing this action “[i]n accordance with the

judgment . . . of the United States District Court for the

Eastern District of Michigan.”

      The judgment entered in the Eastern District of Michigan

was appealed to the Sixth Circuit, and on November 14, 2008, the

Sixth   Circuit      reversed    the   judgment,    vacated     the    arbitration

award, and held that the arbitration agreement was unenforceable

because of fraud in the inducement.              Without reaching WW, LLC’s

other arguments, the Sixth Circuit held that the arbitrator’s

decision that Kevin Shaw’s grand larceny conviction need not

have been disclosed showed a “manifest disregard for the law”

because a grand larceny conviction involves misappropriation of

property.     The Sixth Circuit held that WW, LLC, was not bound by

the arbitration clause because The Coffee Beanery’s failure to

disclose     Kevin    Shaw’s     conviction     deprived      WW,     LLC,   “of    a

mandatory,    statutorily       required     notice”   prior    to    signing      the

                                         9
agreement and therefore, WW, LLC, was “fraudulently induced into

signing” the franchise agreement.             Finally, the court stated

that WW, LLC, “need not resort to arbitration to vindicate its

statutory rights but may instead seek appropriate relief in a

court of law.”

      In   light   of   the    Sixth   Circuit’s   decision    reversing   the

Eastern District of Michigan judgment, on which the district

court in this case relied to close this case, WW, LLC, requested

that the district court reopen the judgment based on Federal

Rule of Civil Procedure 60(b)(5).            By order dated June 1, 2009,

the district court denied the motion, stating:

      [T]he mere fact that the Sixth Circuit vacated the
      district court judgment enforcing the arbitration
      award resulting from the arbitral proceedings over
      which that court had jurisdiction is no reason for
      this court to vacate its judgment here. In dismissing
      the case, this court presumed that plaintiffs would
      pursue whatever alternative remedies they wished to
      pursue in the court having jurisdiction over the
      parties   and  their  dispute,  namely,  the  Eastern
      District of Michigan.

While the district court relied on the general language of Rule

60(b), which provides that a court may set aside a judgment on

the   basis   of   “mistake,     inadvertence,     surprise,   or   excusable

neglect . . . or . . . any other reason justifying relief from

the   operation    of    the    judgment,”    it   did   not   address     Rule

60(b)(5), which allows relief from a final judgment if “it is

based on an earlier judgment that has been reversed or vacated.”

                                       10
        From the district court’s order denying their motion to

reopen, WW, LLC, Welshans, and Williams filed this appeal.

                                             II

        We   review    the    district       court’s      denial      of   a   Rule     60(b)

motion for abuse of discretion.                   See MLC Automotive, LLC v. Town

of   Southern     Pines,      532 F.3d 269,       277   (4th     Cir.    2008).        “A

district court abuses its discretion when it . . . fails to

consider judicially recognized factors constraining its exercise

of discretion . . . or commits an error of law.”                               Bay Country

Consumer Finance, Inc. v. Fidelity Sec. Life Ins. Co., 311 Fed.

App’x 580, 581 (4th Cir. 2008) (per curiam).

      In this case, the district court dismissed the plaintiffs’

action,      based    on    the    Eastern     District        of    Michigan      judgment,

which upheld and enforced the arbitration award in favor of The

Coffee Beanery.            When, however, the Sixth Circuit reversed the

judgment of the Eastern District of Michigan, the conditions for

application of Rule 60(b)(5) were met.                        That Rule provides, “On

motion and just terms, the court may relieve a party or its

legal    representative           from   a   final      judgment      .    .   .   [if]     the

judgment . . . is based on an earlier judgment that has been

reversed     or   vacated.”          Because      the    district      court       failed    to

apply Rule 60(b)(5), we conclude that it abused its discretion

in      failing       to     consider        judicially             recognized       factors

                                             11
constraining its exercise of discretion and in committing an

error of law.

     Moreover,      the    existence     of    a   forum   selection       clause       as

contained    in   the     franchise     agreement    --    even    if     we    were    to

assume that it survived the vacated franchise agreement -- would

not dictate a different result.               That clause would not strip the

district court of jurisdiction, and it would not even mean that

venue was automatically improper.              See 28 U.S.C. § 1404(a); P.M.

Enterprises v. Color Works, Inc., 946 F. Supp. 435, 440 (S.D.W.

Va. 1996); see also Stewart Organization, Inc. v. Ricoh Corp.,

487 U.S. 22, 28 (1988).

     The Coffee Beanery argues that WW, LLC’s appeal should be

barred because      WW,    LLC,   did    not    appeal     the    district       court’s

original dismissal order of March 3, 2008, which was based on

the Eastern District of Michigan judgment.                      At the time of the

original     dismissal     order,     however,      the    Eastern      District       of

Michigan    judgment      enforcing     the    arbitration        award    was     still

operative,    and   therefore,        there    existed     no    viable    basis       for

appealing the district court’s dismissal of this case.

     The Coffee Beanery also argues that WW, LLC’s motion to set

aside the judgment and reopen this case was untimely.                          We reject

this argument, too, as WW, LLC, filed its motion soon after the

Sixth Circuit’s mandate became final, which was the basis for

its motion to reopen this case.

                                         12
      Accordingly, we reverse the district court’s order denying

the   plaintiffs’   Rule   60(b)(5)    motion   and    remand   for   further

proceedings.

                                                      REVERSED AND REMANDED

                                      13