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Garrett v. Rothschild

United States District Court, W.D. Washington, Tacoma

May 2, 2019

RUSSELL D. GARRETT, Trustee for the bankruptcy estate of Robert and Stephanie Taylor, Plaintiff,



         This matter comes before the Court on Defendant Morgan Rothschild f/k/a Morgan Henning's (“Rothschild”) motion to dismiss or in the alternative to compel arbitration. Dkt. 7. The Court has considered the pleadings filed in support of and in opposition to the motion and the remainder of the file and hereby denies the motion to dismiss or compel arbitration for the reasons stated herein.


         On September 17, 2018, Robert Sean Taylor (“Sean Taylor”) and Stephanie Taylor (“the Taylors”) filed suit against Rothschild, his ex-spouse Haley Henning (“Henning”), and John Does 1-10 in the Washington Superior Court for Clark County. Dkt. 1-1. On October 25, 2018, Rothschild removed the case to this Court. Dkt. 1.[1] On November 16, 2018, Rothschild moved to dismiss or in the alternative to compel arbitration and stay the case. Dkt. 7. On December 11, 2018, the Court entered a stay pursuant to the parties' stipulation for the parties to pursue settlement discussions and for the Taylors' counsel to seek litigation approval from the Bankruptcy Court. Dkts. 9, 10. On January 7, 2019, the parties stipulated to lift the stay and renote the motion. On January 14, 2019, the Taylors responded. Dkt. 12. On January 25, 2019, Rothschild replied. Dkt. 16. On February 24, 2019, the Court granted a motion to substitute Chapter 7 Trustee Russell Garret into the action as Plaintiff in place of the Taylors. Dkt. 19.


         This case involves a dispute between a franchisor and disenchanted franchisees. Rothschild runs Party Princess International (“Party Princess”). Dkt. 1-1, ¶ 2. Henning, his former spouse, worked with Rothschild on the business and advised on franchises. Id. In October 2015, Party Princess filed paperwork to register in Washington as a franchisor, but the filing was unsuccessful. See Dkt. 8, Declaration of Morgan Rothschild (“Rothschild Decl.”), ¶ 8.

         At some point in 2015, Sean Taylor consulted a franchise broker about investment opportunities who referred him to Rothschild. Dkt. 1-1, ¶ 15. At this time, all parties resided in California. See Dkt. 12 at 2, 3; Dkt. 16 at 6. Taylor and Rothschild spoke by phone, and Rothschild “informed Taylor that a Google advertising campaign alone in Taylor's prospective territory would generate at least $100, 000 per year for Taylor, ” but Rothschild “could not put the projections in writing due to regulatory prohibitions.” Id. ¶ 17. Rothschild also told Sean Taylor that meeting Party Princess's requirement that each franchise host 40 parties per month would be “easily achievable.” Id. ¶ 18. Henning and Stephanie Taylor met during the initial disclosure process and communicated by phone, text, and in-person meetings. Id. ¶ 20. Rothschild and Henning “portrayed themselves as a team to the Taylors.” Id.

         In December 2015, Sean Taylor purchased a Party Princess Franchise “for the Washington territory, ” and “[Rothschild] caused Party Princess to send written documents to Taylor stating that the worst-case-scenario revenue data for Taylor would be $90, 000 in gross revenues based solely on spending $2, 190 per month on the Google advertising campaign.” Id. ¶ 21.[2] In January 2016, according to Rothschild, Party Princess provided supplemental or amended information to the Washington Department of Financial Institutions (“DFI”) and successfully registered as a franchisor. Rothschild Decl. ¶ 8. In February 2016, Rothschild “notified Mr. Taylor that Party Princess's franchisor registration had not been effective in Washington at the time the Taylors originally signed the Franchise Agreement.” Id. On February 27, 2016, Rothschild sent Taylor a new franchise agreement by email to sign. Id. Rothschild declares that the Taylors moved to the Pacific Northwest “sometime during 2016.” Id. ¶ 2. Taylor alleges that despite his continued efforts to operate the franchise, “including fully funding the marketing campaign, [he] never achieved the results promised by [Rothschild].” Dkt. 1-1, ¶ 24.

         In October 2017, Taylor filed a complaint about Party Princess with the DFI's Securities Division. Id. ¶ 25. Party Princess then filed an arbitration claim “seeking to terminate Taylor's franchise, ” and the parties began arbitration in Colorado. Id.[3]As noted, the Taylors filed this lawsuit on September 17, 2018. Dkt. 1-1. The Taylors claim that they have lost “well over $200, 000” in investments in the franchise. Id. ¶ 28.

         The Taylors assert four causes of action. Id. ¶¶ 29-50. The first cause, for intentional misrepresentation, alleges that Rothschild made knowing false representations about likely revenue from the franchise and the amount of effort needed to earn profits and that Taylor relied on these statements in purchasing the franchise and were damaged when their franchise failed to return the expected profit. Id. ¶¶ 29-33. The second cause, for negligent misrepresentation, makes the same allegations, except that it alleges that Rothschild should have known his representations were false. Id. ¶¶ 34-38. The third cause, for violation of the FIPA constituting violation of Washington's Consumer Protection Act, alleges Rothschild and Party Princess either failed to provide a franchise disclosure document or provided one that did not comply with Washington law because Party Princess was not properly registered as Washington franchisor, made false statements and omitted material facts in connection with the sale, and sold the franchise without being registered to do so in Washington. Id. ¶¶ 39-43. The third cause also alleges that “Defendants' wrongful conduct involves a matter of substantial public interest as other Washington citizens have been harmed in a similar manner.” Id. ¶ 44. The fourth cause of action, for unjust enrichment, alleges that “[d]uring the process of selling a franchise to Taylor” Rothschild made false representations about the franchise's earning potential, that the Taylors paid Rothschild for a franchise in reliance on these statements, that despite Taylor's significant additional investments, he never achieved the promised results, and that Rothschild unjustly retained the benefits conferred on him. Id. ¶¶ 46-50.


         Rothschild puts forward six reasons why the Court should dismiss this case: (1) the Court lacks personal jurisdiction over the defendants, (2) all claims are compulsory counterclaims to an ongoing arbitration, (3) all claims were the subject of a final dismissal in the ongoing arbitration and are barred by res judicata, (4) all claims are barred by collateral estoppel, (5) all claims are barred by the parties' contracted statute of limitations, and (6) all claims are barred by warrants and representations in the underlying contract. Dkt. 7 at 1-2.

         In the alternative, Rothschild asks the Court to stay the case and compel the Taylors' claims to arbitration. Id. at 2. Finally, Rothschild claims that whether the Court dismisses the case or compels arbitration, he is entitled to attorneys' fees. Id.

         A. Personal Jurisdiction

         Claims against a defendant may be dismissed when a court lacks personal jurisdiction. Fed.R.Civ.P. 12(b)(2). When a defendant seeks dismissal on these grounds, the plaintiff must prove jurisdiction is appropriate. Picot v. Weston, 780 F.3d 1206, 1211 (9th Cir. 2015). To determine whether it has jurisdiction over a defendant, a federal court applies the law of the state in which it sits, if that law is consistent with federal due process. Daimler AG v. Bauman, 571 U.S. 117, 126 (2014). Washington grants courts the maximum jurisdictional reach permitted by due process. Easter v. Am. W. Fin., 381 F.3d 948, 960 (9th Cir. 2004). Thus, the only question remaining the Court whether its exercise of jurisdiction comports with the limitations imposed by due process. Helicopteros Nacionales de Colombia, S.A. v. Hall, 466 U.S. 408, 413 (1984). A court may not exercise jurisdiction over a defendant if that exercise of jurisdiction “offend[s] traditional notions of fair play and substantial justice.” Int'l Shoe Co. v. Washington, 326 U.S. 310, 316 (1945). Fair play and substantial justice mandate that a defendant has minimum contacts with the forum state before it may be hailed into a court in that forum. Id. The extent of those contacts can result in either general or specific jurisdiction. Goodyear Dunlop Tires Operations, S.A. v. Brown, 564 U.S. 915, 919 (2011). If the requirements for either are met, a court has jurisdiction over the parties. Helicopteros, 466 U.S. at 413-14.

         1. General Jurisdiction

         General jurisdiction permits a court to consider claims against a person or a corporation for any conduct, even that which occurred outside the forum state. Goodyear, 564 U.S. at 924; Daimler, 571 U.S. at 126-27. “For an individual, the paradigm forum for the exercise of general jurisdiction is the individual's domicile; for a corporation, it is an equivalent place, one in which the corporation is fairly regarded as at home.” Goodyear, 564 U.S. at 919. The Taylors do not specify whether they believe the Court has general or specific personal jurisdiction over Rothschild. See Dkt. 12 at 8-10. However, they do not provide evidence contradicting Rothschild's statements in his declaration that he has never had business offices in Washington, owned property in Washington, or been a Washington resident. Compare Dkt. 12 with Rothschild Decl. ¶¶ 1-2. Therefore, the Court concludes it does not have general jurisdiction over Rothschild.

         2. ...

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