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Judge Vacates $8.4M Award, Orders Rehearing

PROVO, Utah — After an arbitrator awarded $8.4 million to franchisees of defunct Bajio Mexican Grill in restitution for being defrauded, a district judge ruled that the arbitrator’s award must be vacated and the issues re-arbitrated.

Judge David N. Mortensen based his decision on two facts. First, the notice given as to when and where the arbitration hearing would take place was lacking for Bajio Mountain West, the company that purchased the assets of Bajio, LLC, a Subway affiliate, when it sold out. When Bajio Mountain West made that purchase in October 2009, it agreed to indemnify Bajio, LLC against any claims brought by the Woodwards.

Secondly, the judge set aside the award because the arbitrator exceeded his authority.

Utah’s fourth judicial district judge expressed that he passes no judgment on the claims brought by the restaurant owners against Bajio, LLC and its other entities. He declared, “…the court does not wish its decision herein to be wrongly construed as an endorsement of the approach taken by Bajio, LLC and Bajio Mountain West.” In light of the Bajio companies not attending the arbitration, the judge said, “Simply ignoring an arbitration proceeding is an approach fraught with danger and rightly susceptible to later assertions of indifference or manipulation.”

Judge Mortensen also found no fault with the arbitration proceeding in the absence of the franchisor parties who chose not to participate. “The courts frequently strike pleadings and enter default in similar circumstances,” he further expounded.

But he asserted that he did find a fundamental issue in the arbitrator’s award that he could not otherwise rectify, and he could not find a way to reasonably salvage it.

Franchisees assert fraud, voiding agreement

Franchisees Brad Woodward and son Sanford, experienced Subway multi-unit store owners, claimed they were fraudulently deceived after buying the Bajio Mexican Grill franchise in 2006. The Woodwards said their decision to purchase the new concept sold under Subway’s sister company Franchise Brands was a regrettable error in that the franchise agreement was illegal, fraudulent and should have been deemed void. 

As required by their franchise agreement, the Woodwards presented their claims against the franchisor through arbitration. The allegations were basically related to the fact that Bajio placed two franchises in one exclusive territory and fraudulently made representations of the likely profits the franchisees would obtain in running their business.

Their franchise agreement dictated that “each party’s liability shall be limited to actual compensatory damages.” And those damages “shall be the greater of $100,000.00 or at your [the franchisee’s] sole option, all amounts paid to us [Bajio, LLC] for franchise fees and royalties for this agreement for up to three years preceding the date of an award herein.” 

That language in their contract was a significant part of the judge’s decision as to whether the franchise agreement should be deemed void.

Bajio’s mystery counsel furthers confusion

After the Woodwards served their arbitration complaint against Bajio, attorney Neil Sabin filed a response on behalf of the franchisor. Judge Mortensen states, “The mystery thus begins as to whom Mr. Sabin represents.”

In reviewing the background of the case, the judge said Sabin responded to the complaint only on behalf of Bajio Mountain West, but adds that Sabin signed the appointment of Mr. Holbrook as the arbitrator for Bajio, LLC. After the parties entered into an agreement for the binding arbitration, Sabin withdrew as counsel on behalf of Bajio, LLC only. But the judge states that Bajio, LLC claimed Sabin was never their counsel.

Judge Mortensen said the record was clear that only Bajio, LLC was named in the arbitration agreement and in designating Holbrook as the arbitrator. In addition, the arbitrator made no mention that the agreement included only punitive damages in excess of $100,000. He also emphasized that when the Woodwards’ counsel sent notice of the hearing in June 2011 to Bajio, LLC, Bajio Mountain West and Sabin, none of the parties objected, and the arbitrator proceeded.  

At the end of the session arbitrator Holbrook announced his award of $8.4 million on September 27, 2011, sending a strong message to the franchisor that it must make restitution for defrauding the franchisees and harming their family. The amount included compensatory damages, prejudgment interest, consequential and punitive damages. Holbrook also stated, “Given the nature of Bajio’s fraud . . . Bajio, LLC and Bajio Mountain West, LLC are jointly and severally liable for all the Arbitrator’s fees . . . and not divided equally between the Woodwards and Bajio.”

Judge Mortensen said after the arbitration award was presented, both Bajio companies filed motions to have the arbitrator reconsider his decision, but they were denied.

Basis for judge’s decision

After significant briefing by the franchisees and Bajio to confirm and deny the award, respectively, Judge Mortensen presented his thorough analysis for his ruling to vacate.

He rejected the Woodwards’ argument that the course of conduct of the Bajio parties simultaneously voided the franchise agreement altogether and provided a basis for the arbitrator to ignore the terms of the arbitration, which could have limited his authority as to the remedies the Woodwards were seeking.

The judge made it clear that all supplemental pleadings by the Woodwards,  unsolicited by the court, would be stricken, and Bajio Mountain West’s request for declaratory judgment would be denied.

The decision presented ways an arbitration award could be vacated, including if it was procured by corruption or fraud, or if there was evident partiality by the arbitrator.  In the end, it concluded that the only way to vacate the award was “where the arbitrator exceeds the arbitrator’s authority, to include circumstances where an arbitrator has manifestly disregarded the law.”

He agreed with Bajio and Bajio Mountain West that Holbrook exceeded his authority by considering the two companies were one in the same for all purposes. His ruling concluded that the arbitrator co-mingled the award against both companies, which resulted in punitive damages being addressed on a joint basis showing a manifest disregard for the law.

Judge Mortensen’s decision also sided with the Bajio companies that the arbitration procedure was not proper because Holbrook did not personally give notice of the hearing, in compliance with Utah law. Both Bajio companies professed that the Woodward’s counsel sent out the notice of hearing himself, stating he was following the arbitrator’s order. That fact was not substantiated.

Franchisees vow to fight on

Brad Woodward said the judge’s November 13, 2012 decision was the most one-sided ruling he had ever seen. He vowed, “We will continue on until we prevail. We will not give up the fight.”

Woodward said they were currently in discussions with counsel to determine if they will re-arbitrate their case or appeal the decision. The former Bajio franchisee said, “The bottom line is the franchisor cheated us. They sold us an invalid franchise. Then they refused to do what they were obligated to do as a franchisor when they made a mistake.” He said the franchisor and its affiliate companies have used the legal system to run them into the ground.  He declared, “We are not going to let that happen.”

Robert L. Purvin, Jr., chair and CEO of the American Association of Franchisees & Dealers, a group that assists franchisee associations negotiate fairer franchise agreements, said he saw this result coming when he previously read the case a year ago. He had previously explained as an outsider that franchise agreements are carefully written to insulate franchisors from liability by limiting remedies. 

Purvin said in this instance the franchisor created several layers of protection to avoid liability: The creation of multiple entities to protect assets; providing for arbitration and limiting remedies; limiting the authority of the franchisor (in this instance the arbitrator’s authority was apparently limited to $100,000), the arbitration can be devastating for the franchisee, but easily afforded by the franchisor.”

After reading the judge’s ruling Purvin said, “An arbitrator doesn’t have any more authority than what’s in the agreement, and that was proven by this decision. Sadly, this is a predictable outcome where the franchise agreement that does not fairly protect the franchisee’s interests, especially one with an arbitration clause, will survive even fraudulent conduct.”

Robert K. Reynard of Pia Anderson Dorius Reynard & Moss in Salt Lake City, representing Bajio Mountain West, said they were very pleased with the judge’s decision to vacate the award. He said, “It fairly reflects what should have happened [with the case].”


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