Antitrust Law Daily Liberty Tax Service did not validly extend agreement to sell back franchises
Tuesday, August 14, 2018

Liberty Tax Service did not validly extend agreement to sell back franchises

By Nicole D. Prysby, J.D.

A tax preparation service franchisee who fulfilled the necessary condition to buy back his franchises after the initial agreement deadline but before the end of an extension period was not entitled to damages based on the franchisor’s failure to sell back the franchises, according to the U.S. Court of Appeals in Richmond, Virginia. The franchisor’s promise to extend the period during which the franchisee could buy back the businesses was unsupported by any consideration from the franchisee and was therefore not an enforceable contract. Although the franchisee made certain efforts after the original deadline that he pointed to as consideration, they were all actions he was obligated to do under the terms of the original contract and could not serve as consideration for the extension. And although he relied on the promise of the extension when he continued to act to fulfill the necessary condition (obtaining a new tax identification number) promissory estoppel is not recognized in Virginia. Without any consideration on his part, the extension was merely a gratuitous promise that could not be enforced (JTH Tax, Inc. v. Aime, August 8, 2018, Diaz, A.).

Background. A tax preparation franchisee had its Electronic Filing Identification Number (EFIN) revoked as a consequence of its business practices. The revocation of the EFIN would have allowed the franchisor, Liberty Tax Service and SiempreTax+ (Liberty) to terminate the relationship, but it instead purchased the franchisee’s nine locations on January 21, 2016, through a purchase and sale agreement (PSA). The PSA gave the franchisee until May 8 to obtain a valid EFIN and buy back the business. In the meantime, Liberty kept the locations operating as company stores. In April, the franchisor informed the franchisee by phone that it would extend the deadline for obtaining a new EFIN until the end of the year. The franchisee replied by email, expressing his understanding that the buyback period was continued until December. The franchisee got the EFIN back in September. However, the relationship between the franchisor and franchisee had soured in the meantime because the franchisee failed to assign the franchisor the leases for the properties, as required under the PSA. The parties sued each other, each claiming that the other had breached the agreement.

The district court held that the franchisors were liable to the franchisee in the amount of $2,736,896 for breaches of the PSA. The franchisors had breached the PSA first, by failing to pay rent related to the franchises. And, the court held, the franchisor had extended the deadline for the repurchase and the franchisee was therefore entitled to lost profits for his franchises. Critical to the judgment was the district court’s holding that the franchisee could enforce Liberty’s promise to extend the buyback deadline from May 8 to December 31.

Extension of buyback provision. Liberty argued that the offer to extend did not result in an enforceable contract because there was no consideration. The Fourth Circuit agreed. Although the smallest promise on the part of the franchisee could be deemed consideration, there was none at all. The obligations the franchisee agreed to after May 8 (e.g., transferring leases) were all part of the original PSA. The franchisee asserted that there were several items that were possible forms of consideration, including his payment of utilities and rent for the franchises and his continued efforts to secure a new EIFN after May 8. But the court held that none of those could serve as consideration because they were not bargained for; Liberty never asked the franchisee to do any of them in exchange for the deadline extension.

The franchisee argued that Liberty knew he would spend time and money pursuing a new EIFN after May 8 and therefore, those actions were consideration. The court held that what he was really arguing was for promissory estoppel, but promissory estoppel is not recognized in Virginia, so Liberty’s promise could not be enforced based on the franchisee’s reliance. Without consideration, the extension was merely a gratuitous promise that could not be enforced by the court. Therefore the franchisee was not entitled to damages resulting from the Liberty’s refusal to sell back the franchises.

Other claims. The franchisee also argued that the district court erred in refusing to grant judgment on his fraud claim. He had argued in the lower court that Liberty fraudulently induced him to enter into the PSA while never intending to allow him to buy back his franchises. The district court, however, concluded that the allegations in that claim were not sufficiently distinct from his claims for breach of contract and breach of the implied covenant of good faith and fair dealing. Thus, the court explained, the claim was barred by the independent tort doctrine. The Fourth Circuit found that there was no material misrepresentation made by Liberty before entering into the PSA and on that basis, affirmed the district court’s decision to reject the fraud claim.

Dissent. Judge Richard Gergel of the U.S. District Court of South Carolina sitting by designation, issued a dissent. He concluded that the foreseeable induced reliance on the part of the franchisee was valuable consideration, making the agreement between the parties an enforceable contract. The franchisee continued to support the ongoing expenses of the businesses after May 8, which he would not have done without the promise of the deadline extension. The dissent stated that when the Virginia Supreme Court rejected the doctrine of promissory estoppel, it did not necessarily overrule the principle that where an offer has been made and accepted, consideration may be found where the promisee was induced to act by the promise to his detriment and to the benefit of the promisor. The dissent also would have held that the statute of frauds did not bar enforcement of the PSA, because the franchisee could have performed his obligations within one year and because the franchisor should be equitably estopped from asserting the statute of frauds.

The case is Nos. 17-1859 and 17-1905.

Attorneys: Allison Jones Rushing (Williams & Connolly LLP) for JTH Tax, Inc. d/b/a Liberty Tax Service and SiempreTax+ LLC. William Ryan Snow (Crenshaw, Ware & Martin, PLC) for Gregory Aime, Wolf Ventures, Inc. d/b/a Wolf Enterprises, AIME Consulting, LLC and AIME Consulting, Inc.

Companies: JTH Tax, Inc. d/b/a Liberty Tax Service; SiempreTax+ LLC; Wolf Ventures, Inc.; AIME Consulting, LLC; AIME Consulting Inc.

MainStory: TopStory FranchisingDistribution MarylandNews NorthCarolinaNews SouthCarolinaNews VirginiaNews WestVirginiaNews

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