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HomeMy WebLinkAbout99-7262 civilSHRI PARAS, INC., a Pennsylvania: IN THE COURT OF COMMON PLEAS OF Corporation, and PRAFUL C. : CUMBERLAND COUNTY, PENNSYLVANIA SANGHANI, an adult individual, Plaintiffs v. : NO. 99-7262 CIVIL S.A.C. ENTERPRISES, INC. A Pennsylvania Corporation, and SHANTILAL N. PATEL, an adult Individual, Defendants : CIVIL ACTION - LAW IN RE: DEFENDANTS' PRELIMINARY OBJECTIONS Before HESS, J. and OLER, J. ORDER OF COURT HOFFER, P.J.: AND NOW, June 28, 2000, after oral argument and careful consideration of the parties' briefs and relevant law, defendants' preliminary objection in the nature of a demurrer to causes of action against Defendant Shantilal N. Patel as an individual is denied. Defendants' preliminary objection in the nature of a demurrer to the claim for breach of contract against Defendant Shantilal N. Patel is granted. Defendants' preliminary objection in the nature of a demurrer to the cause of action against S.A.C. and/or Shantilal N. Patel for fraudulently misrepresenting the amount of renovations required under the Franchise Agreement is denied. By the Court, Kenneth Millman, Esquire Leisawitz Heller Abramowitch Phillips, P.C. 2201 Ridgewood Road Wyomissing, PA 19610 -1193 (Attorney for Defendants) James N. Clymer, Esquire Clymer & Musser, P.C. 23 North Lime Street Lancaster, PA 17602 (Attorney for Plaintiffs) SHRI PARAS, INC., a Pennsylvania: IN THE COURT OF COMMON PLEAS OF Corporation, and PRAFUL C. : CUMBERLAND COUNTY, PENNSYLVANIA SANGHANI, an adult individual, Plaintiffs v. : NO. 99-7262 CIVIL S.A.C. ENTERPRISES, INC. A Pennsylvania Corporation, and SHANTILAL N. PATEL, an adult Individual, Defendants : CIVIL ACTION - LAW IN RE: DEFENDANTS' PRELIMINARY OBJECTIONS Before HESS, J. and OLER, J. OPINION HOFFER, P.J.: Facts Plaintiffs, the PARAS Corporation and Sanghani, filed a complaint on December 2, 1999 alleging defendants' breach of contract and fraudulent misrepresentation. Defendants have preliminarily objected in the nature of a demurrer that plaintiffs have not set forth legally sufficient claims. Defendants request that Shantilal N. Patel be dismissed as a defendant and that the claim of fraudulent misrepresentation as set forth in plaintiffs' count three be dismissed. Plaintiffs' complaint avers that plaintiffs bought a Rodeway Inn Hotel property and business from defendants. The contract provided for the sale of real property and a business at 1239 Harrisburg Pike, Carlisle. The facility needed renovations, but on signing the contract, the defendants informed plaintiffs that the agreement could be voided if the necessary renovations exceeded $20,000. Plaintiffs state the contract specifically set forth that all franchise fees to Choice Hotels International, Inc., had been paid in full at the time of the settlement. Plaintiffs state that defendant Shantilal N. Patel guaranteed the Franchise Agreement and led plaintiffs to believe that the fees had been paid. After property settlement and transfer to the plaintiffs, plaintiffs aver that: (1) franchise fees had not been paid for 2 years; (2) the franchise had been cancelled by the franchisor, Choice Hotels International, Inc., along with participation in the 1-800 number reservation system; and (3) necessary renovations would cost more than $150,000. Defendants agree that a contract was entered into for the sale of real property and business assets at 1239 H.aYrisburg Pike, Carlisle, on April 19, 1999, for consideration of $1.6 million. Defendants state that the property is a Rodeway Inn Hotel operating under franchise with Choice Hotels International, Inc. Shantilal N. Patel, as an individual and as president of S.A.C., entered the franchise agreement with Choice Hotels International, Inc. (hereinafter "Franchisor"). Plaintiffs' complaint is threefold. Plaintiffs are Shri Paras, Inc., a Pennsylvania corporation, and Praful C. Sanghani, an adult individual. Plaintiffs first contend that defendants breached the contract of sale because the franchise fees had not been paid in full at the date of settlement. Plaintiffs state that defendant Shantilal N. Patel is personally liable for the breach of contract because of the assurances Patel gave. Plaintiffs' second contention is that 2 defendants fraudulently misrepresented that the franchise fees were paid and that the cost of necessary renovations would not exceed $20,000, while in fact the necessary renovations would cost $150,000. Plaintiffs' third contention is that the misrepresentations caused them to buy a property that they would not have purchased but for the misrepresentation. Discussion A preliminary objection should be sustained only in cases that clearly and without doubt fail to state a claim for which relief may be granted. Baker v. Cambridge Chase, Inc., 1999 Pa. Super. 9, 725 A,2d 757 (1998) (citations omitted). If the facts as pleaded state a claim for which relief may be granted under any theory of law, then there is sufficient doubt to require the preliminary objection in the nature of a demurrer to be rejected. Id. Defendants' First Preliminary Obiection - Demurrer to Action Against Defendant Patel Defendants' first preliminary objection is that plaintiffs' complaint fails to set forth a legally sufficient cause of action against Patel. Defendants argue that plaintiffs have not alleged the presence of one of the necessary factors to pierce the corporate veil. Specifically, plaintiffs contend that the complaint does not assert that Patel was acting personally o~ as other than within Patel's relationship to S.A.C. Corporation. Plaintiffs argue that paragraph 20 of the complaint states that Patel personally guaranteed the Franchise Agreement to Choice Hotels and personally 3 represented that the franchise fees had been paid in full. Plaintiffs also assert that paragraph 20 indicates that Defendant Shantilal 'N. Patel was acting outside Patel's capacity within S.A.C. when Patel signed the franchise agreement and allegedly misrespresented that the agreement was still valid. Patel's alleged fraudulent misrepresentation is that payments had been made on time when in fact they were delinquent. There is a strong presumption in Pennsylvania against piercing the corporate veil. Lurnax Industries, Inc. v. Aultman, 543 Pa. 38, 41-43, 669 A.2d 893, 895 (1995) (citations omitted). In Lumax Industries, Inc. v. Aultman, the Court set forth factors to be considered in disregarding the corporate form: undercapitalization, failure to adhere to corporate formalities, substantial intermingling of corporate and personal affairs and use of the corporate form to perpetrate a fraud. Id. While it is not necessary to set forth in a pleading the evidence by which facts are to be proved, it is essential that such facts as the pleader depends upon to show the liability sought to be enforced be averred. Id. Here, the only alleged veil-piercing factor contained in plaintiffs' complaint is fraudulent misrepresentation. We cannot say with certainty that this complaint is facially devoid of merit with regard to piercing the corporate veil and, therefore, cannot sustain defendants' demurrer on this ground. We find that the pleading sufficiently states a claim against defendant Shantilal N. Patel individually. Defendants' Second Preliminary Obiection - Demurrer as to Breach of Contract by Defendant Patel 4 Defendants' second preliminary objection is that plaintiffs' complaint fails to set forth a legally sufficient cause of action against Patel for breach of contract, under a third party beneficiary theory. In support of this argument, defendants state that while third party beneficiaries have contract rights, incidental beneficiaries have none. Guy v. Liederbach, 501 Pa. 47, 61,459 A.2d 744, 651-52, (1983). The trial court can give a party claiming third party beneficiary status standing to sue. Id. In Pennsylvania, only intended beneficiaries have such standing. Id Defendants argue that in this case, the Franchise Agreement does not express an intention that third parties may benefit, and does not contain language addressing plaintiffs as third parties. The Franchise Agreement was between Choice Hotels International and Defendant Shantilal N. Patel, who signed the agreement as president of S.A.C. Enterprises, Inc. Defendants next argue that plaintiffs could only assert a claim as to the Franchise Agreement via a theory of third party beneficiary status, which they have not done. Plaintiffs respond that they are third party beneficiaries under the Guy v. Liederbach test. The Pennsylvania Supreme Court's two-part test for third party beneficiary qualification is that 1) the beneficiary's rights must be appropriate to effectuate the intention of the parties, and 2) performance must satisfy an obligation of promisee to pay money to the beneficiary or the circumstances 5 indicate that the promisee intends to give the beneficiary the promised benefit. Plaintiffs argue that have fulfilled the first portion of the test because in Paragraph 9(b) of the Franchise Agreement, Franchisor grants defendants the right to assign the agreement to a third party, with the Franchisor's permission. Paragraph 9(b) also recognizes that the Franchise Agreement binds a third party. Plaintiffs then argue that they have fulfilled the second portion of the test because defendants represented that the Franchise fees had been paid in full. Thus, plaintiffs argue, defendants intended that the plaintiffs receive the benefits of the fully paid franchise fees. Plaintiffs assert that defendants are using privity of contract to shield themselves from fraudulent misrepresentation liability, which is prohibited by Pennsylvania common law. With regard to third party beneficiaries, Pennsylvania has adopted the Restatement (Second) of Contracts § 302, as set forth in Guy v. Liederbach, 501 Pa. 47, 459 A.2d 744 (1983): § 302. Intended and Incidental Beneficiaries (1) Unless otherwise agreed between promisor and promisee, a beneficiary of a promise is an intended beneficiary if recognition of a right to performance in the beneficiary is appropriate to effectuate the intention of the parties and either (a) the performance of the promise will satisfy an obligation of the promisee to pay money to the beneficiary; or (b) the circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance. (2) An incidental beneficiary is a beneficiary who is not an intended beneficiary. Guy v. Liederbach, 501 Pa. 47, 61,459 A.2d 744, 751-52 (1983). 6 The first sentence of § 302 undermines the plaintiffs' theory of third party beneficiary, as in High-Tech-Enterprises, Inc. v. General Accident Insurance Co., 430 Pa. Super. 605, 611, 635 A.2d 639, 643 (1993). In High-Tech- Enterprises, Inc. v. General Accident Insurance, an insurer had "otherwise agreed" that no assignment of insurance policy benefits could be effected without the insurer's written consent. Id. The lack of such consent undermined the third party's claim that the third party was a third party beneficiary. Id. Here, the Franchise Agreement between Choice Hotels, International, Inc. (hereinafter "Franchisor") and S.A.C. Enterprises, Inc. (hereinafter "S.A.C.") contains the following provision: 9 b. Your Assiqnment Your rights and duties under this Agreement are personal to you .... You may not sell, assign, transfer, or otherwise encumber any direct or indirect interest that you have in the Hotel, in you, or in any rights or obligations created by this Agreement without giving us a least 15 days prior written notice and obtaining our prior written consent. ... If you assign or transfer the Hotel or this Agreement without our written consent, you breach this Agreement and we may terminate this Agreement. S.A.C.'s Franchise Agreement In order for S.A.C. to sell an interest in the Franchise to Plaintiff Paras, Franchise Agreement section 9(b) requires that S.A.C. first obtain Franchisor's written consent. Plaintiffs' complaint does not state that S.A.C. obtained such consent. Nothing in the complaint indicates that Franchisor gave consent to S.A.C. for S.A.C.'s sale of the Franchise to Plaintiff Paras. Plaintiffs must aver this fact to have a legally sufficient claim under a third party beneficiary theory. · 7 Thus, the plaintiffs' complaint as it now stands fails to state a legally sufficient claim against Defendant Patel. Consequently, we uphold defendants' preliminary objection to the legal sufficiency of plaintiffs' third party beneficiary claim for breach of contract against Defendant Patel. Defendants' Third Preliminary Obiection - Demurrer as to Fraudulent Misrepresentation by both Defendants Defendants' third preliminary objection is that plaintiffs fail to set forth a legally sufficient cause of action against S.A.C. and/or Patel for fraudulently misrepresenting the cost and nature of renovations required under the Franchise Agreement. Defendants contend that to plead fraudulent misrepresentation, plaintiffs must plead with particularity: 1) a misrepresentation, 2) a fraudulent utterance, 3) the maker's intention to induce recipient by the misrepresentation, 4) justifiable reliance by the recipient on the misrepresentation, and 5) that the damages were proximately the result of the misrepresentation. As to element 4, defendants argue that plaintiffs did not justifiably rely upon the alleged $20,000 amount to renovate in light of Paragraph 5(b) of the Franchise Agreement, which provides that the Franchise Agreement itself will be void if renovations exceed $20,000. Defendants also raise the point that Paragraph 6 of the Agreement allows plaintiffs to inspect the property. Plaintiffs respond that they have satisfactorily pleaded each element of fraudulent misrepresentation. Specifically addressing Paragraph 5(b) of the Franchise Agreement, an integration clause does not preclude plaintiffs' claim of 8 fraud. Plaintiffs contend that they reasonably could not discover that the fees were unpaid and renovations would excee~ $20,000, through a simple property inspection. Plaintiffs contend that they had no reason to disbelieve defendants' representations and that time had been of the essence in closing. Only after taking possession did defendants discover the cost of the renovations and the unpaid fees. Plaintiffs state that in an allegation of fraud, parole evidence is admissible and sufficient to deny preliminary objections. The Pennsylvania Rules of Civil ProCedure require that fraud must be averred with "particularity." Pa.R.Civ. P. Rule 1019(b). A cause of action for fraudulent misrepresentation is comprised of the following elements: (1) a misrepresentation, (2) a fraudulent utterance thereof, (3) an intention by the maker that the recipient will thereby be induced to act, (4) justifiable reliance by the recipient upon the misrepresentation and (5) damage to the recipient as the proximate result. Martin v. Lancaster Battery Co., Inc., 530 Pa. 11, 19, 606 A.2d 444, 448 (1992) (citations omitted). Here, the plaintiffs' complaint contains each of the necessary elements for a claim of fraudulent misrepresentation. While plaintiffs' justifiable reliance as to the alleged misrepresentation is in contention, such contention need not be resolved in the pleadings. Thus, we cannot sustain plaintiffs' demurrer as to this claim. "9