Dream Dinners, lawyers settle legal nightmare with franchisees
An attorney representing franchise owners in the complex legal action against meal assembly franchisor Dream Dinners and its legal counsel made a bold statement last year. “I have high hopes that, at the end of the day, our case will be a ground-breaking case in the areas of franchisor fraud, and liability of franchise attorneys to defrauded franchisees,” he declared. Now with the recent settlement of the litigation, his high hopes have fallen.
One crucial issue the litigation promised to address was on attorney liability in the preparation of franchise disclosure documents. Although franchisees suspect franchisor attorneys are in the precarious position of looking out for their clients’ best interests while providing honest disclosure to investors, they assume basic rules are in place to protect all parties. In light of recent lawsuits, questions have arisen on whether lawyers put the needs of a franchisor client above those of would-be franchisees. The Dream Dinners settlement now casts a dark shadow on the issue of attorney liability.
The two Dream Dinners lawsuits filed in early 2008 by Seattle attorney Howard E. Bundy, representing Ohio franchisees Nicole and Eric Turner, and Minneapolis attorney Michael Garner, representing 15 franchise owners from various states, assert similar allegations. Franchisee plaintiffs alleged that Dream Dinners, with the help of their attorneys, lured prospects into purchasing franchises by falsely showing the company had a well-developed and tested franchise system. They also are accused of presenting illegal earnings projections, oral and written, on how much money investors could make based on different levels of annual revenues they could expect.
Originally, the lawsuits named Dream Dinners and its entities, principals and their spouses, and staff as defendants. Both amended complaints added three outside counsels and the firms they represented. They are John A. Bender, Jr. originally with Holland & Knight and now with Ryan Swanson & Cleveland; Joanie Y. Kim also of Holland & Knight, and Kevin J. Collette of Ryan Swanson & Cleveland.
Bender served as counsel to Dream Dinners since its inception in 2003. He worked closely with founders Stephanie Allen and Tina Kuna on their franchise program and in preparing the required disclosure documents.
Prior to signing franchise agreements, prospects were required to sign binding contracts, a nondisclosure and noncompete agreement, as a precondition to receiving any further information regarding the company’s franchise program. Then as part of the Dream Dinners Discovery Day presentation in Washington, Bender and company officials showed an elaborate PowerPoint presentation for the prospective buyers. By adding pages to the audited financial statements during the slide presentation, they showed revenues and expenses purportedly produced by two company-owned centers. At that time, the franchisor and its attorneys did not provide them with the Uniform Franchise Offering Circular (UFOC), now referred to as the Franchise Disclosure Document (FDD), required by Washington Franchise Investment Protection Act.
Franchisees claim Dream Dinners failed to amend the UFOC prior to selling franchises. Although there were material adverse changes in the financial performance of the company-owned outlets that were used for making earnings claims, they were omitted from the franchisor’s disclosure documents.
Shortly after, franchisees were given the Item 19 earnings claims provision which stated, “Dream Dinners does not furnish or authorize its salespersons to furnish any oral or written information concerning the actual or potential sales, costs, income or profits of a franchise. Actual results vary from unit to unit and Dream Dinners, Inc. cannot estimate the results of any particular franchise.”
Finger pointing begins
On April 28, 2009, a Superior Court judge ruled on Garner’s motion to compel, stating that Dream Dinners must answer further questions as to whether it relied on the “advice of counsel” in giving franchisees financial information regarding what they could make in purchasing a franchise. He also stated that certain documentation between former counsel John Bender and Dream Dinners principals is not “attorney/client privileged.”
The judge also granted the franchisees’ motion in regards to three exhibits pertaining to the earnings claims given by Dream Dinners principals and staff. The motion accuses company officials of giving unlawful projections of earnings in its PowerPoint presentation, frequently asked questions section, and financial statements in the disclosure documents to induce franchisee plaintiffs, and challenges the unlawfulness of the disclosure documents.
Regarding answering interrogatories by plaintiffs, Dream Dinners stated that they relied on their legal counsel for the format of the disclosure documents, as well as for its franchise sales activities. The franchisor took the position that they gave the earnings claims information on the “advice of their counsel,” and that is their defense in the litigation. Yet those defendants were refusing to disclose the substance of that advice in their answers to the franchisees, and asked the court to declare that the attorney/client privilege does not apply to the subject matter of counsel’s advice to Dream Dinners regarding the sale of franchises.
Garner’s motion states, “In order to prosecute their action properly . . . Plaintiffs are entitled to know, specifically, the factual basis and other information for these claims, or they are entitled to a sworn statement that the Defendants do not have this information.”
In his second amended complaint filed June 3, 2010, attorney Bundy stated that another omission by Dream Dinners defendants was the fact that the franchisor was fined $12,000 and ordered by the State of Illinois to rescind a number of “Non-Disclosure and Non-Competition Agreements” because they were in violation of Illinois franchise act. Those violations included distributing sales information before being registered, obtaining signed contracts from “residents prior to providing disclosure documents, hosting a discovery day in Illinois prior to registration, and failing to obtain signed receipts for non-Illinois approved UFOCs delivered to residents. At no time before they invested did franchisee plaintiffs receive that information, although it is required by law to disclose. The amended complaint stated that the omitted disclosures would have been material to franchisees in making their investment decisions.”
In the second amended complaint, Bundy states that Bender reviewed and approved the disclosure documents, the PowerPoint presentation containing illegal earnings claims, disguising them in the audited financial statements. He alleges that Bender was a member of Dream Dinners Inc.’s defacto board of directors, participating in discussions and decisions involving business decisions that were not subject to attorney-client privilege. Bundy said Bender dispensed business and legal advice to Dream Dinners defendants and employees, and at relevant times, neither Dream Dinners nor Bender made any effort to segregate “privileged” from “non-privileged” communications.
Bundy alleged that attorneys Kim and Collette were liable in that they were active partners of Bender in the sale and offer of Dream Dinners franchises to the plaintiffs, constituting negligent misrepresentation. Holland & Knight and Ryan Swanson are also liable, according to the complaint, for the acts and omissions of their employees and attorneys.
The so-called settlement
Numerous phone calls were made to the franchisee plaintiffs and attorneys involved in the settlement, but only one responded on the record. Mark Beard of Lane Powell representing Ryan Swanson as a defendant, said, “I cannot confirm or deny there was a settlement. All I can say is that the litigation was dismissed.” DLA Piper attorneys representing Holland & Knight did not return phone calls. Other sources stated that it was the attorneys and law firms that stepped in to take responsibility for the settlement payments, not the Dream Dinners franchisor.
One undisclosed source said the new language in Dream Dinners’ FDD by its new law firm Ballard Spahr might shed light on the dismissal/settlement:
“Under the terms of the confidential settlement agreement, Dream Dinners Inc., the other Dream Dinners companies and their employees and their respective spouses did not admit any liability and did not pay any consideration, reduce any indebtedness, waive enforcement of any of their rights or take any actions adverse to their interest.”
Janet Sparks is the former publisher of the franchising trade publication Continental Franchise Review before it was acquired by Franchise Times Corporation. Janet can be reached at 303-799-7398 or at email@example.com