Secret Partnership to Purchase McDonald’s Franchise Was Deceptive, Illegal

This posting was written by Pete Reap, Editor of CCH Business Franchise Guide.

A partnership formed by two brothers to purchase a McDonald’s franchise and to conceal the existence of the partnership—in order to contravene McDonald’s policy against selling to partnerships—was deceptive conduct in violation of the Washington Franchise Investment Protection Act and a Washington securities statute that rendered the partnership agreement unlawful, a Washington appellate court has held. A ruling by a Washington state court that the partnership was illegal and unenforceable was affirmed.

The brothers decided to purchase a McDonald’s franchise and agreed that one of them would apply for the franchise and the other would supply a portion of money required for the purchase and for other initial operating costs. They were aware that McDonald’s sold franchises only to individuals who owned the entire equity interest in the franchise and not to partnerships. They agreed to conceal the existence of their partnership and the investor brother’s involvement,

More than one year after the franchise purchase, the franchisee brother died and his estate rejected the investor brother’s claim for an interest in the partnership. The investor brother filed suit against the estate, alleging that he was entitled to receive his share of the partnership interest from the estate.

Violation of Securities, Franchise Laws

The partnership violated a Washington securities statute that made it unlawful for any person—in connection with the offer, sale, or purchase of any security—to engage in any act that operated as a fraud on any person, the court determined. The partnership violated the statute because the brothers set out to deceive McDonald’s and did so with knowledge of the franchisor’s policy against selling to partnerships.

A contention that the partnership did not qualify as a security was without merit, the court held. However, even if the partnership did not qualify as a security, the brothers violated the Washington Franchise Investment Protection Act’s provisions making it unlawful for any person—in connection with the purchase of a franchise—to employ any scheme to defraud or engage in any act operating as a fraud upon any person.

Culpability

The investor brother was equally culpable as the franchisee brother in perpetrating the fraud on McDonald’s, the court ruled. Under Washington law, if parties to an illegal contract, such as the partnership, were not equally at fault, the less culpable party could bring an action based on the illegal contract, the court noted. In this case, the investor brother was equally active in pursuing the franchise purchase and provided the franchisee brother with knowledge and information concerning the advisability of purchasing a McDonald’s franchise in general and in various locations.

There was no evidence that the franchisee brother cheated the investor brother out of any profits or otherwise attempted to defraud him, unlike the facts of the case cited by the investor brother. It was the franchisee brother’s estate—not the franchisee brother—that refused to recognize the partnership and share the profits with the investor brother, the court observed.

The decision in Marte v. Hernandez will appear at CCH Business Franchise Guide ¶14,622.

Further information about CCH Business Franchise Guide appears here.