Tutor Doctor hits attorney, claims he dropped registration ball
Tutor Doctor is suing a franchise attorney who calls himself the affordable alternative, claiming fraud. But others defend Harold Kestenbaum, suggesting his rock-bottom rates attract jealousy from other lawyers.
For over 30 years, Harold Kestenbaum, of East Meadow, New York, has been the low-cost alternative for franchisors seeking legal representation. While major law firms charge franchisors up to $800 an hour, Kestenbaum advertises he charges an “affordable fee” to provide services that include reviewing and modifying existing franchise documents, updating disclosure documents and “registering FDDs in all franchise registration states.”
But a lawsuit filed in U.S. District Court in Maryland now questions those services. In February, Toronto-based Tutor Doctor filed a $20-million lawsuit against Kestenbaum, alleging he allowed Tutor Doctor’s registrations to lapse in nine states, but still wrote agreements for new franchisees within several of those states. The lawsuit also names the law firms that engaged him at the time, Ruskin Moscou Faltischek in Uniondale, New York, and Gordon & Rees in Baltimore, for allegedly failing to supervise his work.
Tutor Doctor CEO Frank Milner said, “When we acquired Tutor Doctor in 2007 from its founder, we inherited Harold, who agreed to take care of registration renewals in the states that require them and to draft agreements for new franchisees. We paid him $1,500 a month and didn’t worry because we never received any notices about delinquent filings.”
In early 2012, Milner said, “I sent Harold a note asking if he was sure everything was up to date with our registrations. He said it was all fine and sent me a spreadsheet showing that all the filings were current. I took it at face value.” A year later, Milner said he felt the franchise needed “more sophisticated legal representation” and contacted Lee Plave of Plave Koch in Washington, D.C. “When Lee started uncovering what was really going on, I was shocked.”
Kestenbaum declined to comment on the lawsuit, saying through a public relations firm the case is in mediation and all parties are forbidden from talking. He also declined an interview but provided written answers to questions. “When I started more than 30 years ago, I realized most entrepreneurial business people, especially those getting into franchising for the first time, do not like to pay high legal fees and, as a result, I strive to keep my rates reasonable and affordable,” he said in the email. His “priority is to provide sound legal and franchise counsel to my clients.”
Gordon & Rees said in a statement that “partner Harold Kestenbaum is a highly regarded franchise lawyer with more than 35 years of experience and numerous contributions to the industry. The firm has been in dialogue with this former client for some time and it is unfortunate that they have now decided to file suit. Having done so, Gordon & Rees intends to vigorously defend itself and Mr. Kestenbaum. Beyond that, the firm’s public relations policies preclude Mr. Kestenbaum or representatives of the firm from commenting substantively on ongoing litigation involving the firm.”
Kestenbaum is a long-time Franchise Times Legal Eagle, the annual ranking recognizing top attorneys in franchising and garnering more nominations than most of the other attorneys honored. He said in the email, “It humbles me that so many of my clients appreciate the work that I do for them and they are happy to place my name in nomination.”
According to the lawsuit, while Tutor Doctor was a Kestenbaum client, their registrations had lapsed for times ranging from a few weeks to almost a year in Maryland, California, Connecticut, Hawaii, Minnesota, New York, Virginia, Washington state and Wisconsin. As Kestenbaum had requested, state examiners had been sending all notifications to his office, including comment letters asking for additional information that were not answered until months later. “They asked for simple things that could have been answered so easily,” Milner said. “All this was so avoidable.”
During those lapses, Kestenbaum wrote agreements for “about a dozen” new franchisees from those states, Milner said. “We had to offer to rescind all those agreements and so far, we’ve lost two franchisees. Even though this was out of our control, it reflects badly on us.”
[Editor’s note: The following paragraph is corrected from the original article published online and in the May print edition.]
In 2011, franchise consultant Shery Christopher of Tucson sought to help franchisors seek exemptions from New York state’s franchise laws for unregistered franchisors who wanted to exhibit in the 2012 International Franchise Expo in the Javits Center. Several of Kestenbaum’s clients were not registered in New York, it was determined by the state, even though he had told them they were.
According to its 2013 franchise disclosure document, former Kestenbaum client Fetch! Pet Care in Berkeley, California, was sued by the states of Maryland, California, New Jersey, Minnesota, Illinois, Rhode Island and Virginia for selling franchises without being registered in time periods stretching from 2008 to 2011. In addition to rescinding franchise agreements, the FDD says, the franchisor had to pay penalties and, in one case, damages of $45,000 to one of the rescinded franchisees.
Fetch! founder and CEO Paul Mann declined to comment and would not say how many franchisees he lost. According to Cal EASI, California’s searchable database of franchise registrations, Fetch! lost 53 franchisees in 2010, the year the lawsuits were filed; the database lists Kestenbaum as the attorney responsible for registrations during that time. The FDD does not list the reasons why so many franchisees left the system in 2010.
When Franchise Times checked some of the national clients listed on Kestenbaum’s website on Cal EASI, we found registrations for Five Guys Enterprises and 1-800-Flowers were sometimes filed late and comment letters were answered even later. A letter dated June 7, 2007, to Kestenbaum from the California Corporations Commission, for example, states that Five Guys’ 2007 renewal application, due April 20 of that year, “will be abandoned” if not submitted by July 5. It was submitted, and accepted, on July 6. 1-800-Flowers and Five Guys would not comment. Both have new franchise attorneys.
In the email, Kestenbaum said, “I prefer to communicate directly with my clients regarding any issues that may arise during my representation of them.”
Many of Kestenbaum’s clients, which number up to 150 at a time and are typically charged $1,000 to $1,500 a month, are new franchisors referred by their franchise development companies. Clients of David Rutkauskas’ Beautiful Brands in Oklahoma, for example, told Franchise Times that Rutkauskas recommended him; Five Guys was a client of restaurant developer Fransmart, in Alexandria, Virginia, and Frank Fiume, founder and CEO of i9 Sports in Riverview, Florida, is a client of the iFranchise Group in Homewood, Illinois.
iFranchise President Dave Hood said, “We have heard only overwhelming positive remarks about Harold from our clients. A lot of attorneys may not like it that Harold has pushed the bar down on fees.”
Fiume said, “When we started, iFranchise recommended a large firm in Tampa, but their bills were tough to swallow, so I asked about someone less expensive. They recommended Harold and he always did a fine job for me and gave me his personal attention. I did stay in close contact with his office. We are growing quickly and when I left Harold for a larger firm in 2010, I hated making that phone call.”
‘Everything is on time’
David Diferdinando, CEO of Boardwalk Fresh Burgers and Fries in Columbia, Maryland, said he hired Kestenbaum after Boardwalk was sued because another attorney had failed to keep up his registration in Maryland. According to its 2013 FDD, Boardwalk had to offer rescission to four franchisees and pay a penalty to the state. “I make sure Harold gives us a schedule and speaks to my staff at least twice a month,” Diferdinando said. “Everything is filed on time.”
Gaps in franchise registrations do happen. Dale Cantone, a franchise examiner with the Maryland Attorney General’s Securities Division, said, “If franchisors are not actively seeking prospects within a state, they may let their registrations lapse. When I first arrived here, I noticed that Pizza Hut wasn’t registered, but they weren’t selling franchises here either. They registered again before resuming sales a few years later.”
While several franchise attorneys we contacted say they admire Kestenbaum, others said they have been skeptical ever since Kestenbaum himself made a foray into franchise ownership more than 20 years ago.
Kestenbaum’s first purchase, said attorney W. Michael Garner of Minneapolis, was Mr. Sign, a Long Island company that used computer-directed knives to cut adhesive-backed vinyl for stick-on signs. “Two of his first franchisees hired me to sue him for misrepresentation,” Garner said. “They claimed the proprietary software Harold sold them was a stack of notebooks that told them how to program computers themselves.
“We also claimed that Kestenbaum had not disclosed that ‘Mr. Sign’ is a commonly used name for sign companies, that the former Wall Street guy Harold put in as company chairman did not disclose his history as a defendant in securities fraud actions, and that the ‘franchisee’ who told my clients that he was clearing $50,000 a month was the Wall Street guy’s brother.” The case was settled before it went to trial.
Kestenbaum said in his email that Mr. Sign continued to successfully operate and sell franchises prior to it being sold. “The merits of the lawsuit were not in any way related to Mr. Kestenbaum’s knowledge or execution of franchise law,” it said.
According to the lawsuit, Tutor Doctor is asking for $10 million in compensatory damages to cover alleged lost franchisee revenue, $10 million in punitive damages for allegedly fraudulently concealing the registration gaps, and indemnity against any future claims.
The lawsuit further alleges that by emailing the March 8, 2012, chart to Milner showing registrations were current in all 14 registration states when they knew they several of them had lapsed, the law firms involved exposed Tutor Doctor to possible civil and criminal penalties.
A partner with Ruskin Moscou Faltischek said the firm does not comment on litigation. The day after Gordon & Rees sent their statement supporting Kestenbaum, Kestenbaum sent Franchise Times an email saying he was leaving Gordon & Rees on May 31 and would be “restarting” his own law firm.
When we first tried to contact Kestenbaum, he referred us to his PR firm, TopFire Media, of Homewood, Illinois. Vice President Jennifer Furey suggested we “hold off on the story because they are doing mediation and it will be settled before the end of April.”
That was news to Steven Fedder, of Fedder and Janofsky of Baltimore, who is representing Tutor Doctor. Fedder said, “I had hoped we could mediate this months ago, which would have been better for Tutor Doctor in terms of future FDD disclosures, but Harold’s attorneys were dragging their feet. I am surprised he would tell you we are mediating now, because we are still far from doing so.”