The Franchise Owner's most trusted news source


Log In / Register | Dec 18, 2014

Terminated IHOP Franchisee Appeals Order Denying Evidence

Windward Mall IHOP, Kaneohe, HI
Windward Mall IHOP, Kaneohe, HI. photo/bmm

HONOLULU – Attorneys representing a terminated franchisee of International House of Pancakes filed an appeal last month challenging an order denying their request for certain testimony and documents. The information they are seeking pertains to the successor franchisee who IHOP allowed to take over their clients’ location.

Lead attorneys Paul Alston and Eric Ferrer of Alton Hunt Floyd & Ing state that they are asking that the district court reverse that portion of the magistrate’s ruling on IHOP’s Motion for Protective Order because it is “clearly erroneous or contrary to law."

Citing Burlingame v. County of Calaveras in the May 15 notice of appeal, Alton Hunt states, "A decision may be contrary to law if it applies an incorrect legal standard, misapplies the correct legal standard, or fails to consider an element of applicable standard."

As background to the lawsuit, Rennie West and her company JRW Oahu One, Inc., owners and operators of an IHOP franchise in Kahului, Maui since 1999, and previous owners of another in Kihei, pursued opening a new franchise in Oahu at the Windward Mall in late 2003. After entering into negotiations with IHOP for the location, West signed a Single Store Development Agreement (SSDA) in November 2004, and seven months later entered into a franchise agreement with IHOP for the mall location.

The complaint against IHOP states that West immediately started development of the new restaurant and in February 2005 signed a lease agreement for the site. She then applied for a building permit from Honolulu, required by law prior to commencing construction. At that time, West discovered there was a tremendous backlog of building permits in Honolulu, causing extreme delays of a year or more.

The opening date for her new restaurant was set for October 31, 2005. While waiting for the building permit, West obtained a demolition permit in June and broke ground for her IHOP site, expending more than $100,000. IHOP then extend her opening date to December 31, 2005 through a contract agreement. When the delay continued, West allegedly contacted the company’s director of franchise and development Jess Sotomayor. He agreed to a new opening date of March 31, 2006, verbally and in writing, provided she pay a “delayed development fee” at the time of construction. According to West, other IHOP employees including the VP of franchise development Rick Celio, confirmed that date.

At that time, IHOP required West to pay a $16,000 training fee for her restaurant, which she did, even though the franchise was not opened.

But on January 4, 2006, the situation changed. IHOP sent West a letter terminating her development agreement and franchise agreement for the Windward Mall restaurant. The appeal states, “Secretively . . .  IHOP’s franchise review committee met in mid-December and concluded that Plaintiffs [West and her company] were in “full default” because they failed to obtain a building permit prior to December 31, 2005.” 

Ferrer said when his client got the letter she was in complete shock. “They told her she failed to develop the store, even though she had conversations with Sotomayor and Celio telling her they extended her deadline date to March 31, 2006,” he exclaimed. Ferrer said IHOP agreed saying yes, we had those conversations but the contract requires you to open on a certain date and she failed to do that. IHOP told West the only way she could then proceed would be to start all over again and apply for a new franchise. “In other words, all the money she spent for the development of her new restaurant, some $300,000 is gone and she must start from scratch,” Ferrer said.

West then not only sent a new application to IHOP, she also sent a check for $31,000 for the delayed development fee. Ferrer said the company refused it and sent it back, explaining, “They said the only thing she could do was ask for a new franchise and pay the new $50,000 franchise fee.”

In order to mitigate their damages, Rennie West and JRW Oahu One assigned their interest in the Windward Mall lease to franchisees Vince and Sarah Espinos at IHOP’s request. But while West was required to adhere to an impossible opening deadline, not able to obtain a building permit, the Espinos, faced with the same difficulty, were given substantially more time to open the very same franchise using West’s permit application and development plans without her permission.

In their complaint filed September 2009, West’s attorneys assert that while she was required to comply with all applicable laws, the Espinos were allowed to violate the law by building the Windward Mall IHOP before obtaining the permit, all with IHOP's knowledge.  “Even with these advantages, it still took the Espinos until January 17, 2007, over a year after West’s franchise was terminated, to get a building permit,” Ferrer said. In doing so, West alleges that IHOP violated the Hawaii Franchise Investment Law by discriminating against their clients, as revealed by the disparate treatment shown to West’s successors, the Espinos, with respect to the permitting and opening of the Windward Mall IHOP restaurant.

IHOP filed its motion for protective order to prevent the production of documents and limit questioning of the Espinos at their depositions on issues regarding their profits and losses. The magistrate judge filed his order on March 15, granting in part and denying in part the motion. But as IHOP filed its motion, West received documents pursuant to subpoenas served on the Espinos architect and contractor, as well as Windward' Mall’s owner. That discovery showed that IHOP had wrongfully withheld a number of relevant documents from West and her company, including that the Espinos had illegally started construction without a building permit.

In his deposition, the Espinos’ architect testified that he advised his clients to use the plans and permit application originally submitted by West in 2005, that there was a “big benefit” in proceeding under the original documents because it was hard to obtain permits. Espinos’ building contractor testified that while he knew it was illegal to commence construction without a permit, construction began on October 26, 2006, almost three months prior to getting the building permit.

IHOP defendants filed their reply to the complaint on December 9, 2009 through attorneys Goodsill Anderson Quinn & Stifel, LLP, stating they either deny the allegations or assert that “IHOP is without information sufficient to form a belief as to the truth of the allegations.”  Their first defense is that the complaint fails to state a cause of action upon which relief may be granted.

As of this writing, the district court had not responded to the notice of appeal by West and her company.  Yesterday, according to court records, a settlement conference scheduled for today was terminated.

Joel Siegel of SNR Denton, one attorney representing IHOP, declined to make comment on the litigation. Patrick Lenow, spokesman for IHOP said, “Franchisees are the core of our success. It is unfortunate when litigation like this occurs.” He stated that they do not comment on ongoing litigation with the press, saying they  prefer to leave it with an arbitrator or the court.

AttachmentSize
IHOP - West Complaint-sp.pdf104.95 KB
IHOP Appea of Magistrate Decisionl.pdf198.6 KB
No votes yet