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DISTRICT COURT, CITY AND COUNTY OF DENVER, STATE OF COLORADO 1437 Bannock Street Denver, CO 80203

Plaintiff: RHC, LLC, a Colorado Limited Liability Company; DAN SERAFIN, individually, SAMIR TAILOR, individually, DANCIN Ventures, Inc., a Colorado Corporation, and DANIEL WALSH, individually v. Defendants: QUIZNO'S FRANCHISING, LLC a Colorado Limited Liability Company; THE QUIZNO'S FRANCHISING COMPANY, LLC a Colorado Limited Liability Company; THE QUIZNO'S OPERATING COMPANY, LLC a Colorado Limited Liability Company AND Plaintiff: L MAR, LLC, a Delaware Limited Liability Company v. Defendants: RHC, LLC, a Colorado Limited Liability Company; Daniel Serafin, Jr., Angela Serafin, Samir Tailor, Sejal Tailor and THE QUIZNO'S OPERATING COMPANY LLC I.  COURT USE ONLY

Case Number(s): 04CV985

Courtroom: 8

FINDINGS OF FACT AND CONCLUSIONS OF LAW AND ORDER

THIS MATTER is before this Court for a trial to the Court. The trial commenced on May 16, 2005. After five days of trial, at the Court's direction, Plaintiffs provided the Court with an offer of proof for the remaining witnesses Plaintiffs intended to call. This decision relates on to the claims of RHC, LLC, Dan Serafin, Samir Tailor, DanCin Ventures, Inc., and

Daniel Walsh's claims against Quizno's Franchising, LLC, The Quizno's Franchising, LLC, and The Quizno's Operating Company. The Court now accepted the offer of proof as true for the purpose of this decision and enters the following findings of fact and conclusion of law and order pursuant to C.R.C.P Rule 50. Some Quizno's franchisees like other small businesses fail. There are a myriad of reasons why a Quizno's franchisee may not achieve profitability. These reasons include factors such as competition, the economy, etc. and some within the franchisee's control such as inadequate management, poor operations or bad site selection. The parties' rights are set forth in the Franchise Agreements, in which the Parties expressly acknowledged and agreed that Quizno's would not be responsible for the Plaintiffs' failures with respect to the sales achieved at their respective restaurants if such were to occur, including if caused by poor site selection. The Quizno's Defendants are Colorado limited liability companies that have developed a submarine sandwich restaurant concept known as Quizno's Sub. They have developed the system and operations for these restaurants and they grant the right and license to qualified persons to use their name, marks and system pursuant to the terms of a Franchise Agreement. Plaintiff RHC is a limited liability company authorized to do business in the State of Colorado. Plaintiffs Serafin and Tailor are members of RHC. RHC is a Franchisee of Quizno's. Plaintiff DanCin is a Colorado corporation of which Plaintiff Walsh is the President. DanCin is a Franchisee of Quizno's. In September 2002, Serafin and Tailor attended a Quizno's meeting for franchise sales. They had no prior franchise experience. Later that month, after other meetings, they signed franchise agreements. As a part of the franchising process, an addendum identifies a "target area." Although the franchise agreement indicates it is for a specific location, no specific location is identified, nor is a specific location part of the franchise agreement. The selection process occurs thereafter. Serafin and Tailor decided to open Store 4399 at a location at the intersection of Highway 287 and South Boulder Road in Lafayette, Colorado. At the time of this selection, the area was still bare ground under development to become a shopping plaza. RHC submitted a site submittal package to Quizno's and Quizno's approved this site for Store #4399. As part of the site selection, Serafin and Tailor asked a Quizno's representative, Jim Merlo, regarding the proximity (1.4 miles) between a proposed site for store #4399 and an existing store owned and operated by Quizno's, which is located at 1387 South Boulder Road, Unit G, Louisville, CO 80227 (Store #30). Serafin and Tailor were concerned that the owner of Store #30 would object to the close proximity of their Store # 4399, since that owner would have a first right to open the store in that area under his Franchise Agreement. They were assured that would not be a problem and was told there was a management problem at that store. In October 2003 it became apparent that another proposed new store location in which they were interested could not go forward. Serafin and Tailor were approached by Quizno's agents suggesting that they purchase Store #30 as a "substitute" for the other store (#4392). Quizno's decided to sell seventeen stores owned and operated by Quizno's. Store #30 was one 2

of those stores. Certainly, Quizno's had a financial interest in promoting the corporate owned stores in lieu of a new store at another location. Serafin and Tailor asked about the proximity of Store #30 to Store #4399. They were informed that the two stores would be appealing to different markets and that the prior problems with Store #30 were based on bad management. Serafin and Tailor requested and received sales and financial data about Store #30. It revealed that sales fell approximately 20% after the closure of Kmart, one of the anchor tenants in the plaza. Serafin and Tailor eventually agreed to take over Store #30 and on April 30, 2003, they signed an Asset Purchase Agreement with Defendant Quizno's Operating Company, on behalf of their company, RHC and personally guaranteed performance. In mid July 2003, Store #4399 opened. Sales in Store #30 fell, and sales in Store #4399 were far below the pro forma projections. The purpose of the pro forma prepared by the franchisees is to assist in obtaining financing. It is suppose to show projections of sale at the particular location. These projections are supposed to be based on estimates of sales at that particular location. However, the pro forma projections made by Serafin and Tailor were not true projections based on anticipated sale. The projections were based on a desired level of profits. Therefore, the pro forma generated by Serafin and Tailor was not useful for comparison with the actual earnings of the franchises. It appears that the Serafin and Tailor in there attempt to properly prepare a pro forma had difficulty in determining the project sales and used a method for determining the rental and CAM cost to profits ratio, which is a method to determine what percentage of the rental and CAM cost were to total profits. The desirable is under 10% and, for malls, 13%. In this case the Serafin and Tailor took the known rental and CAM cost and determined the sale to generate the desirable ratio and used that figure, which is not a projection of sales based on empirical data. When the Quizno's representative reviewed the pro forma they did not disagree with it and felt it was in line with their expectations. With labor costs continuing and sales declining, Serafin and Tailor closed Store #30 on December 2, 2003. On December 8, 2003, Quizno's terminated the Franchise Agreement. After the closure of Store #30 sales at Store #4399 increased and continued to do well through the time Serafin/Tailor sold the store. Walsh investigated opportunities to become a Quizno's franchisee, signed a Franchise Agreement in May, 2002, and began searching for a site. After attempting to establish stores at two different sites, Quizno's contacted him about an opportunity at 1170 Highway 287 in Broomfield (Store #3706). Walsh chose to open Store #3706 at a location in the shopping complex referred to as the Broomfield Marketplace. Walsh submitted a site submittal package to Quizno's for approval of this location. Walsh used a similar method used by Serafin and Tailor to prepare the pro forma for store #3706. While Daniel Walsh was in training and before he opened Store #3706, Quizno's offered Walsh the opportunity to purchase two corporate owned stores referred to as Store #41 and Store #53. Merlo provided demographic information. Davis represented that ownership of the two stores would provide "synergy." "Synergy" is the sharing of resources between multiple stores to reduce cost. After reviewing demographic and historical financial information with respect to

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Store #41 and Store #53, Walsh chose to purchase Store #53. Walsh purchased the assets associated with Store #53 from Quizno's. The transaction closed on May 1, 2003 and DanCin immediately began operating Store 53. Walsh opened Store #3706 on June 23, 2003. Walsh closed Store 3706 in early April 2004. Walsh claims that the location for Store 3706 was not a good location. He claims part of the problem with the location of Store 3706 was the proximity of Store 41. However, Quizno's closed store 41 in late December 2003, four months before Walsh closed store #3706. January 2004, Walsh learned that Quizno's approved a new site selection for a competitor 1.7 miles from Store #53 at 1281 W. 120th Street and Washington, Westminster, Store #2049. Store #2049 and Store #53 are separated by Interstate 25. Further, Quizno's approved another competitor Store #6672 at 120th and Sheridan to replace Store #41. This store is 1.9 miles from Store #53 and approximately 3 miles from Store #3706. Quizno's knew it was going to open these stores before Walsh signed his franchise agreement. This was never disclosed to Walsh. Although sales figures improved above those achieved while Store #53 had been operated by Quizno's, DanCin closed Store #53 in July 2004, approximately one month after the opening of the new stores. DanCin and Walsh claim the location for store #53 was a bad location because Quizno's allowed the two other franchisees to open stores near to store #53 after he bought it. Larry Hay, a terminated Quizno's Vice President on the operations side of the corporation, along with others at Quizno's, believed that the proximity of the stores lead to the failure of the stores. Mr. Hay believed that there was a problem with the number of stores located in the North suburbs. The Franchise Agreements specifically addressed the relative responsibilities with respect to, among other things, the selection of a site. The Franchise Agreement makes clear that the responsibility rested with the franchisee to select a site. 3.1 Franchised Location. Franchisee is granted the right to own and operate a Restaurant at a specific address and location ("Franchised Location"). Franchisee shall choose and acquire a location for its Restaurant within the nonexclusive Target Area set forth in Exhibit 1. Franchise Agreement,

Download RHC, LLC, et al. v. Quizno's Franchising LLC et al. and L MAR, LLC, v. RHC, LLC

Colorado Law