United States District Court, W.D. Kentucky, Louisville
MEMORANDUM OPINION AND ORDER
JOHN G. HEYBURN, II, Senior District Judge.
Defendant, Zubair Kazi, is the founder, Chairman, and CEO of Kazi Foods, Inc. Prior to a recent bankruptcy, four Kazi franchisee entities operated 142 KFC restaurants in several states. Kazi personally signed guaranty agreements for each restaurant ("the Guaranties"), promising to repay to KFC Corporation ("KFCC") any unpaid debts incurred by his franchisee entities under the various franchise agreements signed between KFCC and the Kazi entities.
In an August 2014 Memorandum Opinion, this Court found that the Guaranties were enforceable. However, questions remained as to (1) whether Kazi could conduct discovery on certain affirmative defenses and (2) the full extent of KFCC's recoverable damages. The most significant issue is whether the bankruptcy proceedings involving the Kazi entities bar Kazi himself from now asserting affirmative defenses to the debt. After careful consideration, the Court determines that Kazi is precluded from raising his affirmative defenses. Therefore, discovery is unnecessary.
The original Memorandum Opinion included a detailed statement of facts; so the Court only includes facts needed to understand the present opinion. The franchisee entities whose obligations Kazi guaranteed operated 142 restaurants in several states. Each franchisee entity filed for Chapter 11 bankruptcy in February and March 2011 in the Eastern District of Michigan. Eventually, the cases were consolidated into one proceeding. While in bankruptcy, the franchisees retained a Chief Restructuring Officer (the "CRO"). Many of the restaurants continued operating under the CRO's direction until February 2012.
KFCC was unwilling to allow the franchisees to assume franchise agreements. Since restructuring was therefore not an option, the franchisees decided to sell substantially all of their assets under section 363 of the Bankruptcy Code. Two buyers, Star Realco Two, LLC and Star Partner Enterprises Two, LLC, purchased most of the restaurants in February 2012. But aside from a payment of $150, 000 to KFCC, which partially paid down royalty amounts owed for the month of February 2012, KFCC received no direct sales proceeds. However, KFCC did receive substantial amounts from the two buyers in the form of new franchise fees.
Ultimately, KFCC filed suit against Kazi to recover under the Guaranties that he signed promising to repay KFCC for certain debts incurred by his entities. KFCC sought to recover on five types of damages. Kazi disputed the validity of the Guaranties under Kentucky law, arguing, in part, that the Guaranties did not satisfy the formalities required under KRS § 371.065(1). The Court disagreed and determined that KFCC was entitled to collect royalty payments, advertising payments, de-imaging costs, and equipment lease payments. The Court stipulated, however, that KFCC's ability to recover on advertising payments and equipment leases would depend on proving that it was an intended beneficiary of the contracts with local advertising co-ops and equipment lessors. The Court invited KFCC to submit a memorandum supporting its damages and Kazi to submit a reply.
For the most part, Kazi does not challenge KFCC's calculations of damages. There are some disputes concerning the calculation of late fees. More generally, Kazi asserts certain affirmative defenses that would block any recovery whatsoever. He wishes to conduct discovery on these defenses. Meanwhile, KFCC has argued that the prior bankruptcy proceedings in the foreground of this case have precluded Kazi's assertion of those defenses.
Kazi seeks to raise four different affirmative defenses. Two of those defenses implicate business judgment and so are dismissed out of hand. Essentially, Kazi has challenged his liabilities under the Guaranties by claiming that KFCC's bad business decisions caused his restaurants to lose money. When officers make business decisions, this Court must presume that those decisions are made on an informed basis, in good faith, and in the belief that those actions are made in the best interests of the company. Allen v. Lawyers Mut. Ins. Co., 216 S.W.3d 657, 660 (Ky. App. 2007)(citing Spiegel v. Buntrock, 571 A.2d 767, 774 (Del. 1990)). Kazi's trifles with KFCC's menu choices and strategic outlook do not negate his liability under the Guaranties.
For his other two defenses, Kazi alleges that (1) KFCC conspired against his franchisee entities and engaged in anti-competitive business practices in violation of antitrust laws and (2) KFCC forced the Kazi Michigan restaurants to undergo unreasonable remodeling as a way of- Kazi seems to argue-financially crippling them. KFCC contends the doctrine of res judicata bars these claims.
The doctrine of res judicata applies where there is: "(1) a final decision on the merits by a court of competent jurisdiction; (2) a subsequent action between the same parties or their privies; (3) an issue in the subsequent action which was litigated or which should have been litigated in the prior action; and (4) an identity of the causes of action." Wignet v. JP Morgan Chase Bank, N.A., 537 F.3d 565, 577-78 (6th Cir. 2008)(citation omitted). The Court will consider each factor in turn and then consider whether precluding the claims in these circumstances is consistent with the overall policy goals of the doctrine.
The first, second and fourth factors seem easily met in the res ...