Krause Gentle Case Heard by S.D. Supreme Court

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Krause Gentle Case Heard by S.D. Supreme Court

PIERRE, S.D. -- Owners of five failed Blimpie restaurants in South Dakota and Iowa argued before the South Dakota Supreme Court yesterday that they were tricked by Krause Gentle Corp. when it failed to deliver on promises to help boost the QSR program in its convenience stores.

The Des Moines, Iowa-based company, which operates more than 300 Kum & Go convenience stores in 12 states, denies any wrongdoing.

In 2001, several lawsuits were combined against Krause Gentle Corp. In the five-week trial, a jury decided Krause Gentle was guilty of fraud and ruled the company must pay $1.66 million in damages, according to Associated Press documents. Most of the allegations by 10 plaintiffs in eight corporations that obtained the Blimpie franchises between 1994 and 1997 were unfounded, jurors decided. However, the jury said Krause came up short on management assistance and other promises.

Circuit Judge Kathleen Caldwell of Sioux Falls gave erroneous trial instructions that allowed the jury to provide both actual and punitive damages, even if the elements of fraud were not proved, Steven Sanford, a lawyer for Krause, told the state Supreme Court. He further told the justices that the individuals who won damages had no legal standing to sue.

The case instead should have involved corporations formed by the plaintiffs. "These are economic losses suffered by a corporation," said Sanford, who suggested the reason Krause was being sued is because of the company's attractive finances.

Further, Sanford told the Supreme Court that all of the supposed misrepresentations related to future promises. The plaintiffs admit that Krause Gentle promises were met -- but not to their total satisfaction, he said. Furthermore, the Iowa-based c-store chain did not "earn a nickel profit from the franchises," he said.

All the plaintiffs got their franchises from Blimpie International, which is not named in the litigation. Krause Gentle was an area developer for Blimpie International and distributed that firm's information to prospective restaurant owners, Sanford said. Krause Gentle had sub-franchise agreements with Blimpie and provided significant operational help to franchise owners. Promises that did not live up to the lofty expectations of Blimpie owners do not amount to fraud, he insisted.

But Thomas Nicholson, lawyer for the failed restaurant owners, said Krause Gentle resorted to exaggeration and falsehoods to lure his clients into buying Blimpie franchises, the AP reported. "They were saying things that they knew they couldn't deliver on," Nicholson said of Krause Gentle, adding that a company official "juiced it all up to make a sale."

Rick Johnson, another lawyer for the failed Blimpie owners, informed the Supreme Court in written arguments that Krause Gentle operated its own Blimpies in several Kum & Go stores, doing so under the banner of a company called Blimpie Midwest. The firm misrepresented its success in those endeavors, Johnson argued. "They were experts who knew the ins and outs of the Blimpie business," he said.

The failed franchise owners were not told that the restaurants had average sales of no more than $420 daily in Kum & Go stores, Johnson said. That is a meager amount for franchises that cost $18,000 and also required an average investment of $100,000 in equipment and supplies, he said. The failed restaurants stayed open only as long as their finances lasted and their banks would cover the losses, Johnson said.

Asking that the jury verdict be set aside, Krause Gentle lawyer Sanford said there was no proof that the company did not intend to fulfill its promises to the restaurant owners. "Krause Gentle did provide them support. They just didn't like it or feel it was good enough," he said. "The breach of a promise itself, or the disappointment by a client is simply insufficient to support proof of intent."