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Hiren Patel v. Sharon K. Smith

July 11, 2011

HIREN PATEL, PLAINTIFF,
v.
SHARON K. SMITH, NICOLE JOHNSON, AND SJ SUBS, LLC, DEFENDANTS.



MEMORANDUM

This is a diversity and federal question action brought by plaintiff Hiren Patel. Patel alleges that defendants Sharon Smith, Nicole Johnson, and SJ Subs, LLC defrauded him of $300,000. Patel further alleges that the defendants induced him to buy Subway franchises and then tortiously interfered with his re-sale of those franchises. In total, Patel brings seven causes of action. Defendants have moved to dismiss Patel's claims for lack of jurisdiction and, alternatively, for failure to state a claim.

I. Background*fn1

Subway sandwich shops are franchised through Development Agents ("Subway Agents"), which act as Subway's regional representatives. This case concerns Hiren Patel's unsuccessful efforts to become a Subway Agent in southern New Jersey.

In January and February 2008, defendants Sharon Smith and Nicole Johnson told Patel that they would be interested in selling him some of their Subway holdings and their position as Subway Agents. Patel, Smith, and Johnson met in Las Vegas on May 19, 2008 to arrange the sale. Patel examined Smith and Johnson's Subway Agent contract, but Smith told Patel that the content of the contract did not matter because Patel would enter into his own contract with Subway if Subway approved the transfer of the position to Patel.*fn2 Smith also encouraged Patel to increase his chances of being approved as a Subway Agent for southern New Jersey by purchasing Subway franchise locations in the area. Patel then verbally agreed to purchase from Smith and Johnson: (1) the position of Subway Agent for southern New Jersey for $1.3 million; (2) two franchise locations in southern New Jersey for a total of $400,000; and (3) a 1/3 interest in SJ Subs, LLC, which owned other franchises in southern New Jersey, for $200,000.

On May 28, 2008, Patel, Smith, and Johnson executed the sales. Patel signed three agreements: first, a purchase agreement for the Subway Agent position that included a $100,000 deposit; second, an amendment to the first agreement making the deposit refundable if Patel were not approved as a Subway Agent for southern New Jersey; and third, a purchase agreement for the interest in SJ Subs.*fn3 After the meeting, Patel wired $700,000 to Smith and Johnson: a $100,000 deposit toward the Subway Agent position; $400,000 for the two Subway franchise locations; and $200,000 for the interest in SJ Subs. Patel took ownership of the two Subway locations soon after, but did not receive any written evidence of, or cash distribution from, his interest in SJ Subs.

In August 2008, Smith, and now Johnson, encouraged Patel to purchase additional Subway franchises in southern New Jersey. Patel "and/or his affiliates" subsequently purchased six locations for a total purchase price of $957,000. Compl. at ¶ 30.

In early September 2008, Smith called Patel to tell him that "it would be desirable to enter into a replacement contract" for the Subway Agent position that increased the purchase price by $200,000. Compl.at ¶ 31. The new contract also called for a $300,000 deposit, but Smith told Patel that he would not have to pay the additional deposit because the "extra $200,000 would correspond to the $200,000 already paid by Patel" for the interest in SJ Subs.*fn4 Compl. at ¶ 33. On September 5, 2008, Patel, Smith, and Johnson executed the replacement contract. Smith assured Patel that the only change in the replacement contract was the increased purchase price and deposit, but in fact there were other differences, including that the $300,000 deposit was now non-refundable.

Later that month, Smith told Patel that Subway had not approved him as a Subway Agent. Patel then attempted to sell the Subway franchises he owned in southern New Jersey, but Smith and Johnson allegedly frustrated his efforts to do so by: (1) imposing conditions that made the transactions difficult to consummate; (2) telling potential buyers that the sale price was too high; and (3) making negative comments to potential buyers about the franchise locations. Patel was only able to sell one location, and he incurred a $25,000 loss on that sale.

On August 18, 2010, Patel filed a civil complaint in this court bringing seven claims: (1) restraint of trade; (2) conversion; (3) fraud; (4) civil conspiracy; (5) civil racketeering; (6) securities fraud; and (7) tortious interference with business relations. Patel argues that the defendants defrauded him of $300,000 and received further financial gains from his purchase and re-sale of Subway locations.

II. Discussion

Patel invokes this court's jurisdiction on two grounds: diversity of citizenship, 28 U.S.C. § 1332(a), and federal question, 28 U.S.C. §1331. Both bases are discussed below.

A. Diversity of Citizenship

The complaint states that two defendants, Smith and Johnson, have "a principal place of business" in New Jersey, but it says nothing about their permanent home. This pleading is insufficient to establish federal diversity jurisdiction, see Chemical Leaman Tank Lines v. Aetna Cas. and Sur. Co., 177 F.3d 210, 222 n.13 (3d Cir. 1999) (noting that "the plaintiff must state all parties' citizenships such that the existence of complete diversity can be confirmed"), and Patel will be given leave to amend his complaint for the purpose of establishing ...


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