Franchisee Seeks $9.5M, Alleges Roasting Plant Used Fake Representations to Defraud
A franchisee of two Roasting Plant coffee locations in the Detroit area filed a federal lawsuit last week seeking $9.5 million, alleging the franchisor failed to provide him the required-by-law state and federal disclosure documents prior to his purchase, and committed "racketeering activities" throughout its fraudulent scheme in selling franchises.
Michael Shedadi asserts in his complaint that he was first induced by Roasting Plant and its founder/CEO Michael Caswell and chief sales and marketing officer Thomas Hartocollis in November 2015 when he entered discussions regarding the purchase of a franchise or a joint venture opportunity. He alleges that company officials made multiple representations of material fact, including an excel spreadsheet entitled "U.S. Store PL Simulation, showing how successful stores across North America could perform.
The data Shedadi was given showed $1,100,000 in revenue per year; a 25.4% EBITDA; $513,182 in total operating expenses; and $699,406 in build-out costs. Relying on the veracity of the representations made by Roasting Plant, Shedadi signed a "letter of intent" to purchase the location in Detroit and the right to "license" six other stores, four of which came into existence under the names Roasting Plant of Dearborn Heights, LLC, Roasting Plant of Ann Arbor, LLC, Roasting Plant of Dearborn, LLC, and Roasting Plant of Southfield, LLC.
Roasting Plant later made multiple representations, first on a certain location labeled as "Ann Arbor Proforma" showing $1.400,000 per year in revenue; a 28.1% EBITDA; $602,272 in operating expenses; and $849,419 in build-out costs. Again, relying on the veracity of the pre-agreement representation, Shedadi signed entered into a Roasting Plant Coffee Development Agreement with the franchisor.
On August 29, 2016, Roasting Plant executed the "RP Retail Unit License Agreement Addendum to Development Agreement" approving the DH [Dearborn Heights] location, also granting Shedadi's company the exclusive right and license to develop seven retail units, and the license to use Roasting Plant system and trademarks. By way of the agreement, Roasting Plant was given the right to control numerous practices and operations of the franchisee entity, including employee training, and the right to require it to remodel, renovate and modernized its stores.
Roasting Plant was also given the right to require the franchisee on marketing and promotion efforts, and on its site locations, as well as on overseeing "all methods and operations of stores, including . . . supplies, products, menu items, product sources, hours of operation, advertising efforts and content, computer systems and software, and management system," to name a few.
Upon execution of the agreement, Shedadi paid a $90,000 fee to Roasting Plant by wire transfer. And the franchisee was required to pay $150,000 by wire transfer as a down payment on three JavaBots ($50,000 per roasting machine), as required in the agreement. Two other leases were then executed for additional stores, and in October 2016 construction began on the two new locations. Shedadi then paid two license fees for the new locations, $20,000 each, again by wire transfer.
Over the course of 2016, the franchisee entity was required to pay $450,000 by wire transfer to cover the remainder of the costs for the JavaBots machines.
To date, under the agreement, Shedadi asserts that he has been forced to expend at least $3,172,311.55, including other costs, and buildout and construction costs, all to his detriment. At the time Shedadi was presented with all the corporate representations regarding projections on revenue and expenses, he believed the numbers were true. Since that time, he alleges that he and his company have learned that most, if not all, of the forecasts Roasting Plant made were materially false.
Crux of the litigation
Franchisee Michael Shedadi, represented by Jordan S. Bolton and Karl J. Edward Fornell of Birmingham, Michigan, filed his lawsuit against franchisor Roasting Plant and its officers in U.S. District Court, Eastern District of Michigan. They are asking for a principal judgment in the amount of $3,172,311.55, plus all consequential and incidental damages.
The lawsuit alleges seven counts against Roasting Plant defendants. In addition to claiming violations of Michigan's franchise investment law and fraudulent violations against the Federal Trade Commission Act, for failure to make any of the disclosures required by both, and other counts, the franchisee plaintiffs allege fraud against all Roasting Plant defendants asserting they made false representations of material facts prior to entering the license agreement.
The franchisee is also asking for trebled judgment in the principal amount of at least $9,516,934.65, for defendants' violation of the RICO Act (Racketeer Influenced and Corrupt Organizations Act). As an "enterprise", the Roasting Plant defendants "associated together for the common purpose of defrauding plaintiffs by presenting a fraudulent scheme to obtain and retain funds from plaintiffs (franchisee entities)." The perpetrated scheme alleged by the franchisee includes providing false financial forecasts, misrepresent ting the legality of the agreement, misrepresenting the legal form of the franchisees, and attempting to avoid compliance with the Michigan franchise laws and FTC act. And all Roasting Plant defendants have a financial interest in the success of the "enterprise" and share in the profits.
A Detroit Free Press report on the litigation stated that Roasting Plant owners have vowed to "vigorously defend themselves" against the lawsuit by Michael Shehadi, calling the claims "frivolous" and "without merit." It adds that the company founder, Mike Caswell, was also a defendant in a 2015 lawsuit, again filed in U.S. District Court in Michigan. Elizabeth Rose, owner of a downtown Detroit Roasting Plant location, sued the franchisor and Caswell, seeking repayment of nearly $2 million in loans. She alleged that "Michael Caswell oppressed minority stakeholders through a course of conduct that has made Roasting Plant insolvent."
Roasting Plant countered with its lawsuit claiming franchisee Rose had "conspired with members of the company's board of directors to serve her own financial interests and drive international expansion." Detroit Free Press said the lawsuits concluded with a confidential settlement.
As a side note, the article also reported that actor Hill Harper, known for his role in the television show "CSI: NY" "purchased the downtown Detroit Roasting Plant location last May, with intentions to use it to support programming for his youth-focused nonprofit Manifest Your Destiny Foundation. According to a press release issued by Roasting Plant Inc. at the time, Harper also invested in the parent company, where he would also serve as advisor and brand ambassador." It said Harper was not named in Shehadi's lawsuit.