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Hoot Winc, L.L.C v. Rsm Mcgladrey Financial Process Outsourcing

September 6, 2011


The opinion of the court was delivered by: Honorable Barry Ted Moskowitz United States District Judge


Defendant RSM McGladrey Financial Process Outsourcing, LLC ("FPO" or "Defendant") has filed a motion for partial summary judgment on Plaintiff's tort claims. For the reasons discussed below, Defendant's motion is GRANTED IN PART and DENIED IN PART.


Plaintiff Hoot Winc, LLC ("Plaintiff" or "Hoot Winc"), is a Kansas limited liability company, with its principal office in Oceanside, California. During the relevant time period, Hoot Winc provided certain management services to approximately 22 Hooters restaurants located in five different states (the exact number of restaurants varied slightly during the contract period). Each restaurant was a separate limited liability company, and each restaurant was under the umbrella of a regional holding company. Hoot Winc refers to the stores and regional holding companies as the "Hoot Winc Franchise Group."

Defendant FPO was a business services outsourcing company organized and existing under the laws of Minnesota. FPO was a wholly owned subsidiary of RSM McGladrey, Inc. (Ofenloch Dep. (Def. Ex. D) 13:17-21.) RSM McGladrey, Inc. was a services firm that provided tax services and consulting services. (Ofenloch Dep. 13:21-24.)

Before Hoot Winc engaged FPO's services, Hoot Winc performed accounting operations for the Hoot Winc Franchise Group. Among other things, Hoot Winc handled payroll, accounts payable, and bank reconciliations. Hoot Winc also prepared profit and loss statements and balance sheets for the individual store locations, roll ups by region, and combined financial statements. (Debisaran Decl. ¶ 3.) According to Plaintiff, the accuracy and timeliness of the financial data contained in these reports were critical to the Hoot Winc Franchise Group's operational success, its ability to achieve internal growth goals, and its ability to make pro rata distributions to those persons holding an ownership interest in the members of the Hoot Winc Franchise Group. (Debisaran Decl. ¶ 14.)

In 2005, Hoot Winc began exploring the possibility of outsourcing its accounting functions. In the fall of 2005, Maureen Debisaran, the CFO of Hoot Winc, attended a National Restaurant and Finance Trade Show in Las Vegas, where Debisaran met Lesley Woodring and Ken Johnson, two of FPO's Directors of Business Development. (Debisaran Decl. ¶ 6.) Debisaran had a discussion with Woodring and Johnson regarding the outsourcing services FPO could provide Hoot Winc. (Id.) Woodring and Johnson also provided Debisaran with marketing materials. (Spitcaufsky Decl. ¶ 5, Exs. 2,3,4.)

According to Debisaran, at the trade show, Woodring and Johnson represented that FPO was a full-service accounting and CPA firm. (Id.) Woodring and Johnson also allegedly told Debisaran that the services provided to Hoot Winc would be performed by staff in Chicago and Wisconsin with restaurant-specific experience. (Id. at ¶ 7.) Woodring and Johnson explained that basic data entry would be provided by persons in India but that the substantive work would be done in Chicago and Wisconsin. (Id.)

In December 2005, FPO traveled to California to meet with Hoot Winc. At the meeting, FPO gave a PowerPoint presentation. The PowerPoint Presentation represented that "RSM McGladrey" had more then 160 offices in the United States, outsourcing operations were performed at 14 accounting centers in the country, RSM McGladrey had a "national accounting firm culture," RSM McGladrey had been in the accounting business for 75 years, and RSM McGladrey hired and staffed professionals with industry experience. (Pl. Ex. 7.) According to Debisaran, nothing was said about accounting services being provided from India. (Debisaran Decl. ¶ 12.) Debisaran and Larry Spitcaufsky, managing member of the Hoot Winc Franchise Group, recall that Woodring and Johnson again explained that their company was a national accounting firm and that CPAs with restaurant specific experience would be the ones providing accounting services from accounting centers in the United States. (Debisaran Decl. ¶ 12; Spitcaufsky Decl. ¶ 6.)

Representatives from FPO also told Debisaran that she would be able to generate her own customized financial reports through the "FRX writer," which would allow Debisaran to select and organize financial data and generate customized reports. (Debisaran Decl. ¶ 11.) The ability to generate these reports was important to Debisaran because she already had this ability and wished to retain it. (Id.)

On December 28, 2005, Hoot Winc and FPO entered into a services agreement ("Services Agreement") pursuant to which FPO agreed to provide an array of business support services to Hoot Winc and the Hoot Winc Franchise Group including, but not limited to, preparation of financial statements, maintaining and processing payroll, invoice entry, invoice coding, weekly accounts payable and cash requirements, check preparation and mailing, processing of employee expense reports, preparation of 1099 forms, daily cash deposit verification, filing of tax returns, and making tax payments. (Pl. Ex. 6.) In exchange for FPO's business support services, Hoot Winc agreed to pay FPO a fee of $595 per restaurant per period plus an additional $350 per period for accounting services provided to Hoot Winc itself. The total per-period fees amounted to $14,035.

A "go-live" date of February 20, 2006 was selected. As of the "go-live" date, Hoot Winc would depend upon FPO for the contracted services. In anticipation of the transition, the in-house accounting staff at Hoot Winc was reduced. (Debisaran Dep. (Pl. Ex. 9) 149:11-150:16.) On February 23, 2006, FPO granted eight users in India access to Hoot Winc's databases in Great Plains. (Pl. Ex. 46.)

According to Hoot Winc, there were problems with FPO's performance from the time of the "go-live" date until the termination of the contract. Hoot Winc claims that FPO made repeated and numerous mistakes, including: failure to deliver timely and accurate financial statements; failure to grant Debisaran access to the FRX reports; making overpayments, duplicate payments, and underpayments on vendor invoices; failure to pay invoices resulting in the shut-off of some utilities; payroll errors; and failure to properly communicate with Hoot Winc and Hooters general managers. (Debisaran Decl. ¶¶ 19, 23, Ex. 1.)

On May 9, 2006, at the request of Debisaran, FPO and Hoot Winc met at FPO's offices in Chicago. At the meeting, FPO made a PowerPoint presentation. (Pl. Ex. 10.) The presentation revealed that more work was being done in India than Hoot Winc realized. The presentation revealed that FPO had two centers in Mumbai with 400 personnel. The presentation also explained how work was coordinated between the India center and the U.S. offices. According to the presentation, after India entered data and the computer system generated certain reports, India "chartered accountants" accessed the website to review management reports and analysis, make any required adjustments at the Business Unit level, and create customized reports from the website.

Debisaran was shocked to learn about the level of India's involvement in Hoot Winc's account. (Debisaran Dep. (Pl. Ex. 30) 360:7-25.) Prior to the meeting, Hoot Winc believed that India was performing data entry only. (Id.)

Hoot Winc claims that after the May meeting, FPO continued to fail to provide accurate and timely financial statements. Hoot Winc contends that it never received a timely and accurate financial statement from FPO. (Spitcaufsky Decl. ¶ 10; Debisaran Decl. ¶ 19.)

Hoot Winc CEO Fred Glick became increasingly frustrated by the untimely financials. On June 16, 2006, Glick e-mailed FPO, stating, "We do NOT have our store financials (we have 3 out of 23 stores). We do not know where they are or when we will get them. This is fourth period in a row where we are behind on getting financials." (Pl. Ex. 17.) On June 28, 2006, Glick informed FPO: "[O]ur board is unhappy with the results we have seen thus far and is discussing sending a default letter. It is CRITICAL to our company's success that we receive timely accurate information. We have not had that in the 5 months we have been outsourcing." (Pl. Ex. 18.) In an e-mail to FPO dated August 31, 2006, Glick wrote "I asked you twice to get your India team some qualified help as I DO believe that both of you (Mike and Mike) clearly understand what needs to be done and I do NOT have confidence that they do. . . . My next communication will be stating that until I am receiving financials that I can use to run my business, I will not be paying a portion of our bill. It is time for all excuses to end and for you to perform." (Pl. Ex. 37.) In an e-mail dated October 18, 2006, Glick e-mailed Mike Mengarelli, FPO's Relationship Manager and Vijay Bhatt, an India Team employee: "I am absolutely and utterly fed up with the lack of communication and execution on deadlines from your company. I want to have a conference call with the head of India and America restaurant operations tomorrow to discuss whether or not we can continue our business relationship. When deadlines are missed that are personally given to me I expect direct communications on exactly why they were not met and when I WILL receive the requested necessary contracted data. . . . [Y]our company is not performing the necessary contracted data on a timely and accurate basis and has cost OUR company tens and thousands of dollars in lost opportunity and my time." (Pl. Ex. 39.)

As a result of a conversation between Glick and representatives from FPO on October 18, 2006, FPO came up with a Client Service Action Plan (Pl. Ex. 43) to address issues concerning the Hoot Winc account. Action items included having reports reviewed by the Client Account Manager, replacing the Client Account Manager, getting quality support for the India team, and reducing the attrition rate in India. (Id.)

On October 30, 2006, Tyrone Murray replaced Debisaran as CFO of Hoot Winc. (Murray Dep. (Pl. Ex. 58) 62:16-21.) The first week on his job, Murray received his first set of financial statements. (Id. at 168:8-11.) Murray was concerned about the lack of quality of work reflected in the statements. (Id. at 168:18-20.) In November 2006, Jamie Hogan, FPO's new Relationship Manager, traveled to California to meet with Murray and Glick and discuss the account. (Hogan Dep. (Def. Ex. II) 104:13-105:2.) According to Murray, Hogan admitted to him that the people in India working on the account did not have degrees. (Murray Dep. 175:3-12.) Murray claims that shortly afterwards, he concluded that he did not have confidence in FPO and that the contract should be terminated. (Id. at 175:18-176:11.)

On December 22, 2006, Murray sent a letter to FPO terminating the Services Agreement. (Def. Ex. EEEEE.)


On August 22, 2008, this action was removed from state court. In an order filed on January 21, 2009, the Court granted Plaintiff leave to file a First Amended Complaint ("FAC"). The FAC was filed the same day.

In an order filed on August 10, 2009, the Court granted FPO's motion for partial summary judgment on Plaintiff's professional negligence claim to the extent that it was based on California law. The Court held that pursuant to the choice-of-law provision in the Service Agreement, Minnesota law governed Plaintiff's claims and Plaintiff was therefore precluded from pursuing a professional negligence claim under California law.

In an order filed on November 12, 2009 ("11/12/09 Order"), the Court granted in part and denied in part Defendant's motion for partial summary judgment which was premised on the Services Agreement's limitation-of-liability clause. The Court held that the Services Agreement's limitation-of-liability clause was enforceable with respect to Plaintiff's breach of contract claim, negligent representation claim, and professional negligence claim to the extent that it alleges ordinary negligence. The Court further held that under Minnesota law, the limitation-of-liability clause does not limit the amount of damages recoverable on Plaintiff's claim for willful and wanton professional negligence.

With respect to Plaintiff's claim for willful and wanton professional negligence, the Court explained: "Although the FAC is short on facts supporting Plaintiff's allegations regarding willful and wanton negligence, Defendant did not move to dismiss on this ground. Accordingly, Plaintiff may proceed with its claim for willful and wanton professional negligence, and such claim is not subject to the limitation-of-liability clause." (11/12/09 Order at 6:3-7.) In a footnote, the Court pointed out that it was unclear whether Plaintiff intended to assert a claim for "reckless misrepresentation" a separate cause of action under Minnesota law. (Id. at 6 n. 3.) The Court stated: "The FAC makes no allegations regarding reckless misrepresentation. If Plaintiff wishes to assert a claim for reckless misrepresentation, Plaintiff can bring a motion for leave to amend."

In an order filed on February 19, 2010, the Court granted Plaintiff leave to file a Second Amended Complaint adding a fifth cause of action for reckless misrepresentation and adding factual allegations and punitive damages allegations in ...

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