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Supreme Building Technologies Suit

Collusive lawsuits have a long history in the United States going back to Fletcher v. Peck. To that tradition, may we add Supreme Building Technologies v Elite Manufacturing?

Supreme Building Technologies was incorporated by Alvin Handshoe, with Ryan Deetz as registered agent, on January 10, 2007. Five days later, Elite Manufacturing entered into a contract with this venerable entity to "act as general contractor for the construction of all of Elite's franchise buildings..."

Perhaps Morg Morgan had a soft spot for a company which was a mere 120 hours old, and felt that they were just the type of stable organization he could entrust with a million dollars worth of commercial construction. Or perhaps SBT was incorporated for the purpose of conducting business with Morgan's entities. You be the judge.

Within 10 months, SBT was getting grants and tax credits from the taxpayers of Indiana--just as the Cuppy's saga was once again preparing to explode on the internet. Cuppy's was the franchisor under common control with Elite Manufacturing, and in turn Elite Manufacturing was the "primary" (that's an understatement!) customer of SBT.

According to published reports, franchisees of Cuppy's would tender money not to the franchisor but rather to Elite. What happened to all the money remains an open question, but a significant portion of the money appears to have vanished and numerous franchisees got nothing for their money.

So long as Morg Morgan was in control of Cuppy's, Elite, and Medina, all went well. Odd things began to come to light once the convoluted corporate structure began to implode, and Morgan bailed out, leaving the new owner as Fransynergy Inc (a company controlled by Dale Nabors).

The first oddity was an "Exhibit D" to another oddity: the oxymoronically-titled "Agreement for the Sale of Corporate Stock and Membership Interests." Leaving aside that an LLC does not have "corporate stock", the Exhibit D appears to obligate Fransynergy Inc to liability beyond the limited liability of Fla. Stat. 608.4227

More significantly, the Exhibit appears to create an obligation to an intended third-party beneficiary , which is... drumroll please... Supreme Building Technologies!

Normally, the members of an LLC have no liability for the obligations of the LLC--that's why it is called a Limited Liability Company.

As such, while Elite would of course have had continuing obligations to its vendors, the purchaser of the membership interests would have no more lawful obligation than the previous owner. And generally there would be no lawful basis for Supreme to have any right to interfere in the internal member affairs of a company with which it purportedly had a mere arms-length vendor/vendee relationship (exceptions would be where the third-party has a contract containing a "change of control" provision, but that does not appear to be the case here).

One might argue that Exhibit D is mere surplusage. But this is belied not only by the fact that it is an addendum to the agreement for transfer of membership interests--meaning that the parties gave this matter specific thought and deemed it necessary and not otherwise covered by the contract or common law/statutory obligations, and further the SBT Complaint at paragraph 11 obliquely references a "reaffirmation" of contractual obligations--so the SBT lawyer obviously believes Exhibit D is of legal significance to his cause of action.

Given the ongoing contractual obligation between Elite and SBT, why would one need to "reaffirm" anything? Why would it be necessary to discuss a "reaffirmation" at all in the pleadings? Why is there no discussion as to how SBT came to have this critical document in its posession before discovery (but conveniently in time for the lawsuit filing)? If Morg Morgan was running the show when the debts were piling high and the money vanishing, why didn't Morgan have to assume an "obligation" to SBT?

Most inexplicable: why would Dale Nabors sign "Exhibit D" in the first place?

Nabors has legal counsel on the payroll and prior M&A experience. Nobody in his right mind would sign a document like that, and I can't think of any lawyer who would "accidentally" draft such an ambiguous document, let alone create third-party beneficiaries and endanger otherwise-shielded assets of the Purchaser.

Miraculously once Morgan was no longer the owner of Elite, the SBT accounting department suddenly discovered that there were huge unpaid debts (!!!) and filed suit against Elite.

Another question is why SBT has apparently not filed any mechanics/materialmans liens.

This is a bit of an arcane area, governed by state law, but basically: when you perform work such as SBT allegedly has done, if you are not paid you can file a lien against the property. This is a very powerful tool since it can result in the tenant being in default of their lease. Some states follow the rule that the rights of the lienor are derivative of the rights of the general contractor (so if the zee had paid Elite, then SBT would have no recourse) but some states follow the Pennsylvania rule and permit the subcontractor to file notwithstanding full payment to the GC. Caution to Cuppy's franchisees: if you used Elite and/or SBT, talk to your legal counsel about this!

The pleadings state that Elite is a "franchisor...doing business as Cuppy's Coffee" which as anyone would know from the most cursory inquiry is a false statement. Even the "depositors" never claimed that Elite was a "franchisor", and given the existence of state and federal law on the subject, it is not likely that an attorney practicing in federal court would fail to understand who the "franchisor" was, nor accidentally claim that an LLC is "doing business as" an "Inc." The law firm's receptionist would not make that kind of mistake.

Remember--Elite was not one of many SBT customers, it was SBT's raison d'etre and was in constant communication with Elite staff and even got itself superior legal rights by inserting itself into a contract to which it had no business being in the middle of.

Elite has no money, as the disgruntled "depositor-franchisees" have already discovered. And yet SBT obliquely threatens the assets of Fransynergy Inc but does not name it as a party-defendant. So what's the benefit?

Well, if it is true that the state of Indiana is getting tips about the SBT/Elite/Medina/Cuppys entanglement, they may start poking around and see what happened to that "performance-based" money. And a nicely packaged lawsuit and an uncollectable judgment make for a good facade.

It is worth remembering that all these folks were dealing in multi-million dollar commercial transactions. You don't play in that league without having lawyers involved every step of the way.

For the historically-minded, it is worth contemplating the parallels between "Exhibit D" and the Snowden/Morgan "promissory note" of yore.

It strains credulity to believe that lawyering would be so sloppy, but deliberately sloppy lawyering explains a lot in the SBT/Elite lawsuit.

Stay tuned...

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About Paul Steinberg

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Attorney. Former franchisee. Co-author of Beguiling Heresy: Regulating the Franchise Relationship (Penn State Law Review, 2004). Paul primarily represents small business clients and franchisee litigation in the state of New York. Contact the Law Office of Paul Steinberg, NY, NY at 212-529-5400.

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Franchise Operations