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January 2018

Multi-Office Gordon & Rees Team Obtains Dismissal of Franchise Claims

Gordon Rees Scully Mansukhani New Jersey attorneys Peter G. Siachos and JoAnna Doherty and Virginia attorneys O’Kelly E. McWilliams III and Patrick Burns obtained complete dismissal of a multi-count lawsuit filed against their client, one of the largest tax preparation service franchisors in the country, in the Eastern District of Virginia. In an eight-count complaint the plaintiffs claimed Gordon & Rees's client improperly terminated the plaintiff as a franchisee and area developer following litigation between the federal government and the plaintiff.  

The government accused the plaintiff of improperly filing tax returns to illegally generate a tax refund or a refundable tax credit from the IRS; failing to furnish copies of completed tax returns to customers; and filing income tax returns reporting false filing statuses. The plaintiff agreed to a permanent injunction with the government against its future ownership or operation of any tax preparation/filing business. Furthermore, the plaintiff was given a 153-day window to sell its contractual rights as a franchisee and area developer. Following the entry of the injunction, Gordon & Rees’s client terminated the plaintiff for multiple material breaches of the franchise and area developer agreement, including loss of the right to file tax returns; material, documented violations of law; failure to provide requested documentation; and repeated failure through substantiated unlawful conduct to operate in a manner that protects the client's goodwill, reputation, and marks.
 
The plaintiff filed an eight-count action against Gordon & Rees’s client, claiming that it should have been offered the opportunity to cure its breaches prior to termination and that the firm’s client should have authorized the plaintiff to sell its franchise locations to a third-party. The plaintiff alleged, among other things, claims for breach of contract, breach of the covenant of good faith and fair dealing, tortious interference, and fraud under 28 U.S.C. § 7434.  Gordon & Rees's attorneys filed a motion to dismiss for lack of standing and for failure to state a claim as to each cause of action. The court granted the motion in full, stating in its opinion several times that Gordon & Rees's motion was “well-stated” and warranted the extreme remedy of dismissal with prejudice.  
 
With regard to the plaintiff’s breach of contract counts (Counts I and III), the court held that Gordon & Rees's client properly terminated the agreements based on the government’s complaint. Based on the government’s allegations, ample evidence existed for the firm's client to determine the plaintiff was violating the terms of the agreements through its illegal activity, and, therefore, could not assert a breach of contract claim.  As the plaintiff’s material breach occurred prior to any alleged breach by Gordon & Rees's client, the doctrine of prior material breach prevented the plaintiff from any recovery under those counts.  

As to the plaintiff’s good faith and fair dealing counts (Counts II and IV), the court dismissed both claims on the basis that Virginia does not recognize such a cause of action.  All contracts contain an implied covenant of good faith and fair dealing, but it is not a stand-alone cause of action in Virginia. The plaintiff based its tortious interference counts (Counts V, VI, and VII) on the premise that Gordon & Rees's client interfered with a sale of the franchises with prospective purchasers by advising that it did not possess any developer rights, due to the stipulation for judgment with the government. The court determined that the plaintiff failed to set forth facts to satisfy the “improper methods” element, which required it to allege the specific methods employed by the firm's client in tortuously interfering with it business expectancy.  

Lastly, under Count VIII, the plaintiff alleged, under 28 U.S.C § 7434, that Gordon & Rees's client committed fraud by falsely filing a 1099 form to evade income taxes and to cause the plaintiff to pay taxes on the same. The court found these allegations be insufficient as fraud requires a heightened pleading standard and more specific allegations. The court found that the facts alleged only gave “rise to an inference of an accounting mistake,” which was not sufficient to sustain an action for fraud.  

As none of the counts set forth by the plaintiff were sustainable, the complaint was dismissed in its entirety with prejudice and, importantly, the plaintiff was not provided the opportunity to replead its complaint as such a pleading would be futile. 

Patrick K. Burns
JoAnna M. Doherty
Peter G. Siachos



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