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WHITE PLAINS, N.Y. – At the heart of a lawsuit brought by bankrupted franchisees against Cold Stone Creamery and their own legal counsel is conflict of interest. Franchisee store owners claim the attorney who represented them in negotiating their lease agreement did not disclose that he also represented franchisor Cold Stone.
New York law states that an attorney must disclose any dual representation or conflict with clients. Lawyers who wish to represent both parties in the same transaction must first determine that there is no reasonable conflict. He or she must disclose any potential conflict with their client. The client must then make the decision whether to use their legal services.
Aaron and Karin Tzamarot first retained attorney Craig Gruber of Salamon, Gruber, Blaymore & Strenger, PC in 2005. Gruber’s name was on a “preferred list” of attorneys who had prior experience in negotiating the terms of leases for “hundreds, or even thousands, of franchisees across the country.” The list was provided by Cold Stone to assure the franchisees that they would receive the best possible terms on their lease for their Cold Stone franchised store.
The Tzamarots signed their 10-year lease on June 6, 2009, and entered into a sublease with Cold Stone. It was finalized by Gruber the next month. The franchisees then opened their Cold Stone ice cream store in January 2007. Eleven months later, the landlord issued a notice of default for non-payment of rent and ordered the Tzamarots to vacate the premises. They then filed for Chapter 13 bankruptcy in December 2009, and the next year converted to Chapter 11 reorganization.
In their complaint, the Tzamarots allege that they were victims of a scheme by Cold Stone and Gruber to induce them into entering a franchise agreement and ultimately enter the lease and sublease for their commercial property. The franchisees state that both Gruber and the franchisor knew the store location they selected was “highly unlikely to generate sufficient revenues and/or profits to support lease payments,” and failed to advise them properly. They also allege that Cold Stone and its affiliates have been known to pay “kickbacks” to certain vendors. The Tzamarots claim fraud, fraudulent and negligent misrepresentation, breach of contract and implied covenant of good faith and fair dealing, and tortuous interference.
But specific to Gruber and his firm, the franchise owners allege the attorney failed to inform them of a potential conflict of interest in dually representing the franchisees and the franchisor firm Cold Stone. They claim the attorney committed fraud and/or fraud in the inducement, and breach of fiduciary duty. The Tzamarots state they have been “damaged in an amount to be determined at trial.”
Legal arguments of attorney
Attorney Gruber filed a petition last January in support of Cold Stone’s motion to dismiss the case. He states that the Tzamarots were obviously aware of the “dual representation” because although it wasn’t specifically mentioned, the franchisees received copies of correspondence addressed to the franchisor. That suggested an attorney-client relationship.
Gruber further asserts that there was never any “active concealment” on his and the franchisor’s part to ‘hide’ the fact that he was representing both the Tzamarots and Coldstone. The attorney also vehemently denies any claim of alleged “conflict” because both sides had a “united interest” with regards to the Tzamarot’s lease for their ice cream shop.
Because the plaintiffs Tzamarots and their companies Mishmash and Simply Moving failed to list any pre-petition cause of action against the attorney and his law firm on their bankruptcy filing for protection, Gruber states they have no standing to assert claims of conflict of interest now. He states, “By operation of the Bankruptcy Code, any causes of action belonging to the Tzamarot plaintiffs became property of the bankruptcy estate when they sought protection under the bankruptcy laws.” Gruber’s court filing states that only the bankruptcy trustee has the power to bring a suit on behalf of a debtor.
As to breach of fiduciary duty and fraudulent inducement, Gruber asserts that it is time-barred by the statutes of limitations. Gruber’s memorandum supporting the motion to dismiss also cites New York law on fraud claims, saying it requires that the defendant “knowingly and with intent to deceive, made false representation upon which plaintiff reasonably relies to his detriment.”
Gruber states that it is very important for the Tzamarots to show what exactly was fraudulent about the statements he allegedly made concealing Cold Stone’s failure rates, “kickbacks to franchisor-mandated vendors,” or the cross revenue and profitability of a Cold Stone franchise. He states that the franchisees do not show he had a duty to provide such information regarding the viability of the lease for Tzamarots’ store.
Gruber repeats that he and the franchisor did not have a fiduciary relationship, rather that he was representing the franchisees in negotiating the terms of the lease agreement.
|Coldstone Gruber Memo of Law.pdf||1011.6 KB|