Cases & Deals

Former managers and executive officers of Quiznos restaurant brand obtain dismissal of federal and state securities fraud actions

Client(s) Consumer Capital Partners

Jones Day defended former owners, members of the Board of Managers, and executive officers of the Quiznos restaurant brand against claims brought by subsequent purchasers and operators of the company who alleged that defendants’ misstatements induced the plaintiffs to enter into a 2012 restructuring transaction. Plaintiffs claimed damages of hundreds of millions of dollars.

The case initially was filed in federal district court in Colorado. The court dismissed the federal securities fraud claim with prejudice in 2015, agreeing with defendants’ argument that the limited liability company interests the plaintiffs purchased as part of the 2012 transaction did not constitute "securities" and thus were not regulated by the federal securities laws. The court declined to exercise supplemental jurisdiction over the remaining state law claims.

After plaintiffs appealed, the Tenth Circuit affirmed the dismissal. It held that federal securities law does not extend to the purchase of LLC interests by "sophisticated and informed" fund investors like the plaintiffs who "control [] the profitability of their investments." Such investors, the court reasoned, have the know-how necessary to protect their interests and participate in the LLC's operations, and thus do not require the protections of federal securities law.

The plaintiffs then turned to Colorado state court to pursue state common law claims and a new claim under Colorado’s state securities act. The state court dismissed the entire case, holding that the release provision that the parties agreed to as part of the 2012 transaction barred all claims.

Avenue Capital Management II, LP v. Schaden, 131 F. Supp. 3d 1118 (D. Colo. 2015); 843 F.3d 876 (10th Cir. 2016); No. 2017CV30165 (Dist. Ct., Denver Cty., Colo.)