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Goddard Systems, Inc. v. Gondal

United States District Court, D. Delaware

March 27, 2018




         Presently before the Court in this case is Plaintiff Goddard Systems, Inc.'s ("Plaintiff or "GSI") motion to dismiss Defendants Hina Gondal, Bilal Gondal, and BHSG & Co.'s ("Defendants") counterclaim for breach of the implied covenant of good faith and fair dealing (the "covenant of good faith and fair dealing" or the "covenant of good faith"), pursuant to Federal Rule of Civil Procedure 12(b)(6) (the "motion"). (D.I. 19) Defendants oppose the motion. (D.I. 38) For the reasons set forth below, the Court GRANTS Plaintiffs motion.

         I. BACKGROUND

         A. Factual Background

         GSI is a Pennsylvania corporation with its principal place of business in King of Prussia, Pennsylvania. (D.I. 1 at 1 at¶ 1) Mrs. Hina Gondal and Mr. Bilal Gondal (collectively, "the Gondals") are residents of Middletown, Delaware. (Id. at 1-2 at ¶¶ 2-3) BHSG & Co. ("BHSG") is a Delaware corporation with its principal place of business in Middletown, Delaware. (Id. at 2 at ¶ 4) BHSG was formed by and was controlled by the Gondals; Mrs. Gondal now owns 100% of the shares of BHSG. (Id.; D.I. 15 at 12 at ¶ 4)

         From 2007 through 2017, the Gondals operated a THE GODDARD SCHOOL® ("Goddard School") preschool franchise in Middletown, Delaware (the "Middletown Goddard School"). (D.I. 1 at ¶¶ 33, 68) The rights and responsibilities relating to the Gondals' relationship with Plaintiff were documented in a franchise agreement (the "FA" or "Franchise Agreement"), which was executed by Mr. Gondal and GSI on July 11, 2007. (D.I. 1 -1, ex. 1 at 1; D.I. 1 at 8 at ¶ 33) In December 2010, by way of an addendum to the FA, Mrs. Gondal "was added to the Franchise Agreement as a franchisee[.]" (D.I. 1 at 8 at ¶ 34; see also D.I. 1-1, ex. 2) In July 2013, the Gondals assigned their rights and obligations under the Franchise Agreement to BHSG, (D.I. 1 at 8 at ¶ 35; D.I. 1-1, ex. 3), but agreed to guarantee BHSG's performance "of its obligations under the Franchise Agreement and to continue to be bound by all of the provisions of the Franchise Agreement." (D.I. 1-1, ex. 3 at 1)

         On October 10, 2016, Plaintiff notified Defendants that it was terminating the FA as the result of Defendants' failure "to comply with GSI's Quality Assurance ('QA') standards, as required under [the] Franchise Agreement." (D.I. 1-2, ex. 7 at 1) The Gondals thereafter signed a "Listing Agreement" with GSI on October 28, 2016, in which they offered to sell the assets of the Middletown Goddard School and the associated franchise for $850, 000. (Id., ex. 8)

         On November 16, 2016, the parties executed a Conditional Reinstatement of the Franchise Agreement (the "Conditional FA"). (Id., ex. 9; see also D.I. 1 at ¶ 58) Defendants allege that "[i]n order to induce [them] to sign the Conditional [FA], GSI led Defendants to believe that the Franchise Agreement would be reinstated if they cured the alleged quality assurance deficiencies, which [Defendants] did." (D.I. 15 at 14 at ¶ 11)

         The Conditional FA documented the history of the Middletown Goddard School franchise, Defendants' prior QA failures, and GSI's termination of the FA. (D.I. 1-2, ex. 9 at ¶¶ A-O) Under the Conditional FA, the FA was reinstated from November 16, 2016 through February 28, 2017 (the "Reinstatement Period"), (id. at ¶ 1), during which time Defendants would seek to "transfer their Goddard School business to an unrelated third party approved by GSI[, ]" (id.). According to the Conditional FA, the parties' "sole purpose" in entering into the agreement was to allow Defendants to "transfer their business to [such a] third party[.]" (Id. at 4)

         In the case that Defendants "fail[ed] to complete the transfer of the business within the Reinstatement Period . . ., then on notice from GSI [Defendants would] agree to cooperate fully with GSI to effect an orderly closure of the School." (Id. at ¶ 3) The Conditional FA gave Plaintiff the ability to extend the Reinstatement Period "on a showing that [Defendants were] working diligently and reasonably toward a sale of the business to an approved buyer." (Id. at ¶ 1) At the same time, the Conditional FA also granted Plaintiff the power to "terminate the Franchise Agreement immediately and without any notice or opportunity to cure if [Defendants] fail[ed] to comply in any respect with any of their obligations under" the FA or the Conditional FA. (Id. at ¶ 6) Notices under the Conditional FA were to "be in writing[.]" (Id. at ¶ 8)

         There are two other notable aspects of the Conditional FA. First, Defendants therein "acknowledge[d] and agree[d] that they have no right to, or expectation in, any reinstatement of the Franchise Agreement after the Franchise Agreement has been terminated[.]" (Id. at ¶ 9) Second, Defendants "release[d], acquit[ted] and forever discharge[d] [Plaintiff] ... from all obligations, claims, counterclaims, debts, demands, liabilities, costs, attorneys' fees, actions, or causes of action .... based in whole or part on events occurring prior to the Effective Date of [the] Conditional [FA, which is November 16, 2016]" (hereinafter, "the release"). (Id. at ¶ 14)

         The Reinstatement Period terminated on February 28, 2017; during that time period, Defendants did not transfer the school to a third party. (D.I. 1 at 16-17 at ¶ 60) Thereafter, through March and April 2017, Plaintiff did not seek to close the school, and Defendants continued to operate the school as a Goddard School (including by paying royalties to Plaintiff). (Id. at ¶¶ 60, 62)

         Defendants allege that at some point in this time frame, "Plaintiffs consultant offered to purchase Defendants' franchise for approximately $120, 000, which was a grossly unfair price." (D.I. 15 at 14 at ¶ 18) "When Defendants refused this offer, the consultant advised Defendants that they would likely receive less from GSI." (Id.) On March 27, 2017, "GSI issued Defendants a 'Certificate of Compliance[, ]'" (id. at 14 at ¶ 12), which Defendants contend "cured the alleged [QA] deficiencies[, ]" (id. at 14 at ¶ 11). "Despite GSI's [prior] assurances and despite GSI issuing the Certificate of Compliance to Defendants confirming that any default had now been cured - GSI [] refused to reinstate the franchise, effectively forcing Defendants to close the school." (Id. at 14 at ¶ 15)

         In early April 2017, Plaintiff provided Defendants with a proposed Second Conditional Reinstatement of the FA and asked Defendants to sign it. (D.I. 1 at 17 at ¶ 61) Defendants did not sign this document, and on April 28, 2017, Defendants' counsel sent Plaintiff a letter, notifying it that ...

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