UNITED STATES DISTRICT COURT DISTRICT OF CONNECTICUT

The ALPACA SHOP FRANCHISE COMPANY, Plaintiff Counterclaim Defendant, V. EDYTHE ROXBURGH

Defendant Counterclaim Plaintiff.

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CIVIL ACTION NO. 3:05 CV 1203 (SRU)

NOVEMBER 10, 2005

SUR-REPLY MEMORANDUM OF LAW IN SUPPORT OF OBJECTION TO MOTION TO DISMISS COUNTERCLAIM Counterclaim Plaintiff Edythe Roxburgh (Ms. Roxburgh) hereby respectfully submits her Sur-Reply Memorandum of Law in Support of her Objection to Counterclaim Defendant The Alpaca Shop Franchise Companys (TAS) Motion to Dismiss. A review of the legislative history of the Connecticut Business Opportunity Act (BOIA) demonstrates that TASs Reply Memorandum of Law in Support of its Motion to Dismiss (Reply) fails to properly analyze the effect of a contract made in derogation of BOIA. Furthermore, Ms. Roxburgh is compelled to correct the mistakes of law in TASs Reply. I. TASs Reply Contains Two Mistakes of Law TAS argues that Ms. Roxburghs claim under 36b-74(a) is time barred and that the section heading of 36b-74 is persuasive to the determination of whether contracts made in derogation of BOIA are void or voidable. Both arguments are inaccurate as a matter of law. Conn. Gen. Stat. 36b-74 subsection (a) was amended by Public Act 99-38 that expanded the time limitation contained in that subsection from one year to two years. TAS admits that

sufficient written notice was provided within two years. Reply p. 5, n. 2. Therefore, the remainder of TASs argument is moot. Secondly, TAS argues that the section heading of 36b-74, Contracts Voidable, When. Purchaser-Investors Remedies is evidence that BOIA operates to make contracts made in violation of it voidable not void. However, it is black letter law that section headings may not be used to interpret statutory language unless the headings were part of the act as passed by the legislature. 2A J. Sutherland, Statutory Construction (4th Ed. Sands) 47:14 and 47:03. BOIA was first enacted as Public Act 79-458 (attached hereto as Exhibit A). Sections 15 and 19 of Public Act 79-458 were first codified as Conn. Gen. Stat. 36-517 and then later transferred to Conn. Gen. Stat. 36b-74 in 1995. Neither section 15 nor 19 of Public Act 79-458 contains a title heading. In fact there are no title headings contained anywhere in Public Act 79458. Finally, the word voidable does not appear anywhere in Public Act 79-458. Accordingly, the addition of a section heading including the word voidable may not be used to interpret the meaning of BOIA and TASs argument is misplaced. II. Contracts Made in Derogation of BOIA are Unenforceable and Void. In its Reply TAS argues that BOIA makes contracts voidable and thus contracts containing an arbitration clause made in violation of BOIA are subject to the Federal Arbitration Act (FAA), 9 U.S.C. 1 et seq.. Ms. Roxburgh agrees with TAS that the determination of TASs Motion to Dismiss or Stay the Action Pending Arbitration is dependent on whether contracts made in derogation of BOIA are void or voidable. The Supreme Court of Connecticut answered this very question in Connecticut Natl Bank v. Giacomi, 242 Conn. 17, 66-67 (1997) and found that the language contained in BOIA (and relied upon by Ms. Roxburgh), renders contracts void and illegal on their face. Accordingly, contracts made in derogation of BOIA are void on their face and unenforceable.

TAS concentrates its argument on subsection (a) of section 36b-74 and even makes the statement that [n]owhere in Section 36b-74 does BOIA operate to void a contract on its own. Reply, p. 5. However, BOIA does operate to void a contract on its own. TAS fails to acknowledge the clear statement of the legislature contained in subsection (h) of the same section regarding the enforceability of contracts made in derogation of BOIA. Subsection (h) states: No person who has made or engaged in the performance of any contract in violation of any provision of sections 36b-60 to 36b-80, inclusive, or any regulation or order adopted or issued under said sections, or who has acquired any purported right under such contract, may base any cause of action on the contract. The legislative history of BOIA is replete with evidence that BOIA was modeled after the Connecticut Uniform Securities Act (CUSA), Conn. Gen. Stat. 36b-2 et seq.. ...As you know, the Banking Department or Banking Division, now---the Department of Business Regulation administers the Uniform Securities Act, and protects investors from going into new ventures. However, during the last few years, there have been many attempts to skirt the Uniform Securities Act by going into what are called business opportunities. Testimony of Commissioner of Banking, David Neiditz before the General Law Committee on April 4, 1979, p. 1215. CUSA contains an identical provision to 36b-74(h) in Conn. Gen. Stat. 36b-29(h) which states: No person who has made or engaged in the performance of any contract in violation of any provision of section 36b-2 to 36b-33, inclusive, or any who has acquired any purported right under any such contract with knowledge of the facts by reason of which its making or performance was in violation, may base any cause of action on the contract. The meaning of this CUSA subsection was the source of debate in Couldock & Bohan, Inc. v. Societe General Securities Corporation, 93 F. Supp. 2d 220 (D. Conn. 2000). In Couldock, the plaintiff sought to enforce a clearing house agreement with a broker-dealer after the defendant broker-dealer terminated the contract without the notice required under the contract. The court found that since the plaintiff was not licensed to sell securities in the State of Connecticut and since the purpose of CUSA was clearly regulatory, the contract was void and unenforceable. Couldock at 233. The court stated: 3

the well established rule is that if the purpose of a licensing statute is the regulation of the business licensed and not merely the collection of revenue, a person not licensed cannot enforce a contract for services rendered within the scope of the regulated business. Couldock at 232 citing Solomon v. Gilmore, 248 Conn. 769, 792 (1999) (holding secondary mortgage issued by unlicensed lender unenforceable on public policy grounds). The court went on to note that the regulatory intent of CUSA was not only clear but was far reaching: Moreover, the Connecticut Supreme Court has held that the remedial purpose of CUSA supports the conclusion that the scope of Section 36-498(g) [now Section 36b-29(h)] encompasses not only a contract illegal on its face, but also extends to the basic transaction underlying the contract. Couldock at 232 citing Connecticut Natl Bank v. Giacomi, 242 Conn. 17, 66-67 (1997). In the case at bar, BOIA was violated on the face of the contract and during the basic transactions underlying the contract. The Counterclaim alleges numerous violations of BOIA during the making of the ill-fated Franchise Agreement. Furthermore, Ms. Roxburghs Affidavit, 10, made and filed in support of her Objection to the Application for Preliminary and Permanent Injunctive Relief (Roxburgh Affdavit), specifically states that the principal sales tool promised to her by TAS, the catalogs, were more than 45 days later than promised in violation of Conn. Gen. Stat. 36b-63 (23) and 36b-66 (b)(4). See Memorandum of Law in Support of Objection to Application for Preliminary and Permanent Injunctive Relief, p. 10-11. Accordingly, under either scenario BOIA renders the Franchise Agreement between the parties void. Beyond CUSA, the common law voids contracts in contravention of public policy. If a party is prohibited from doing an act because of his failure to comply with a licensing, registration or similar requirement, a promise in consideration of his doing that act or of his promise to do it is unenforceable on grounds of public policy if (a) the requirement has a regulatory purpose, and (b) the interest in the enforcement of the promise is clearly outweighed 4

by the public policy behind the requirement. Restatement (Second) Contracts, 181. Agreements made in violation of public policy are unenforceable and void. Blancato v. Feldspar Corp., 203 Conn. 34, 40 (1987). The general rule of law is that an act done in violation of a statutory prohibition is void and confers no right upon the wrongdoer; but this rule is subject to the qualification that when, upon a survey of the statute, its subject-matter and the mischief sought to be prevented, it appears that the legislature intended otherwise, effect must be given to that intention. Miller v. Ammon, 145 U.S. 421, 426 (1892). In Miller, the Supreme Court held that an individual who sold alcohol without being registered and licensed as required by Illinois law, could not use the court system to collect sums owed by a purchaser of the alcohol. The contract was illegal and void on its face because the seller did not comply with statutory registration and licensing requirements. As in Miller, this Court cannot lend its support to an illegal and void contract. TAS had two opportunities to make its contract lawful and enforceable both before and after the sale to Ms. Roxburgh. Since TAS has chosen to ignore blatantly the requirements of Connecticut law, this Court must deny TAS any relief based on the contract including TASs demand for arbitration. BOIAs legislative history is replete with clear statements of the legislatures regulatory intent. The purpose is to prevent the misrepresentations and fraudulent practices involved in business opportunity investment sales and the resulting financial losses and hardships for Connecticut citizens by requiring sellers who plan to sell business opportunities investments programs to register said programs with the Banking Commissioner, requiring sellers of business opportunity programs to provide perspective purchasers investors with information necessary to make an informed decision before they make payment to the seller. We also require sellers of business opportunity programs to present that the purchaser investors investments are secured in such a way as to provide security in the form of a bond or trust account and prohibiting or otherwise discouraging misrepresentations which tend to mislead perspective purchaser investors

Testimony of Senator Cutillo, 1979 Senate Journal, p. 3225 (May 15, 1979). There can be no doubt that BOIA was enacted with a regulatory purpose and was intended to void contracts made in derogation of BOIA by making them unenforceable. Comment b to the Restatement (Second) of Contracts 8 states: Some contracts are unenforceable because they arise out of illegal bargains which are neither wholly void nor voidable. However, for the purposes of this case the Connecticut Supreme Court determined the wording of subsection (h) of section 36b-74 renders contracts void as a matter of Connecticut law. Connecticut Natl Bank v. Giacomi, 242 Conn. 17, 66-67 (1997); Couldock at 233. Accordingly, the Connecticut Supreme Courts determination of the meaning of this statutory language must control. Therefore, because CUSA and BOIA contain identical language which voids all contracts made in derogation of their strictures and since BOIAs legislative intent is clearly regulatory, all contracts made in derogation of BOIA must be deemed void and unenforceable as against public policy and as a matter of statutory law. In Botany Industries, Inc. v. New York Joint Board, Amalgamated Clothing Workers of America, 375 F. Supp. 485, 491, vacated as moot 506. F.2d 1246 (2nd Cir. 1974)1, the Federal court for the Southern District of New York invalidated an arbitration award because it found that the underlying contract was unenforceable and therefore void. At issue was a labor contract which violated provisions of federal labor law. The court found the arbitration award to be unenforceable and stated: To hold otherwise would undermine the judicial, as well as arbitral process. By failing to ascertain the enforceability of the agreement, the court would not only be disregarding the Supreme Courts mandate prohibiting the enforcement of agreements violative of public policy, but it would also be placing itself in an untenable position of giving

The Second Circuit vacated and remanded the decision without reviewing it so as not to constrict the parties in a related bankruptcy proceeding.

judicial sanction to an unlawful act by ordering the parties to engage in activity proscribed by federal law. In this matter, TASs repeated failures to comply with BOIA render the Franchise Agreement along with the arbitration provision contained therein, void. Ms. Roxburgh must be allowed a trial on the merits to determine the enforceability of the Franchise Agreement between the parties. III. BOIA Consistently Acknowledges Contracts Made in Derogation of it are Void and Unenforceable After a complete review of BOIA, it is clear that TASs voidable interpretation would render many sections of BOIA meaningless. It is a basic tenet of statutory construction that the legislature did not intend to enact meaningless provisions. In construing statutes, we presume that there is a purpose behind every sentence, clause, or phrase used in an act and that no part of a statute is superfluous. Ecchavarria v. Natl Grange Mut. Ins. Co., 275 Conn. 408, 415 (2005) (citations omitted). TASs narrow interpretation of subsection (a) of section 36b-74 fails to read BOIA as a whole or even section 36b-74 as a whole. As the Supreme Court noted in Miller v. Ammon, 145 U.S. 421 (1892) while citing the case of Harris v. Runnels, 53 U.S. 79 (1851): the statute must be examined as a whole, to find out whether or not the makers of it meant that a contract in contravention of it should be void, or that it was not to be so. Miller at 427. TAS argues that the post-sale registration provisions of BOIA lend support to its argument that contracts made in derogation of BOIA are voidable not void. Reply, p. 5. TAS claims that the existence of a postsale registration remedy proves that BOIA renders contracts voidable not void. TAS is wrong. A review of the process for postsale registration proves this point. In order for TAS to have successfully accomplished a postsale registration of its business opportunity, TAS would have had to inform Ms. Roxburgh that TAS had violated BOIA and that she was entitled to 7

remedies under section 36b-74. Then TAS would have to obtain a signed statement of nonprejudice from Ms. Roxburgh. Conn. Gen. Stat. 36b-62(e) (1), (2), and (3). Furthermore, subdivision (4) of subsection (e) leaves the ultimate decision as to whether a postsale registration will be accepted to the Commissioner of Banking. If contracts made in derogation of BOIA were merely voidable, as TAS argues, the effect of a purchaser-investors signature on a statement of nonprejudice would operate as a ratification of the original contract. However, subsection (e) makes it clear that even with a signed statement of nonprejudice from affected purchaser-investors, the decision to allow postsale registration is entirely within the determination of the Department of Banking. Additionally, the other subsections of 36b-74 consistently treat a contract made in violation of BOIA as void and unenforceable. As previously discussed, subsection (h) voids all contracts made in violation of BOIA and prohibits anyone from maintaining a cause of action on the contract. However, in light of the harm that such a provision could cause to an innocent purchaser-investor, the legislature carved out a few specific violations that allow a purchaserinvestor to obtain restitution of all monies paid to the business opportunity seller without having to demonstrate actual losses by using a conventional measures of damages. Conn. Gen. Stat. 36b74(a). Subsection (a) exempts those purchaser-investors who act within two years from having to demonstrate damages and allows for a full refund of all monies paid to a business opportunity seller if the seller violates sections 36b-63 or 36b-66. The legislature further sought to protect unwitting purchaser-investors from the harsh effects of subsection (h) by including subsection (b). Section (b) allows a purchaser-investor injured by any section of BOIA, not just sections 36b-63 and 36b-66, to bring an action for damages. Additionally, subsection (b) allows a purchaser-investor who fails to act within two years for violations of sections 36b-63 and 36b-66, to file suit before the expiration of the six year statute of limitations contained in 36b-74(g). 8

Moreover, subsection (d) allows suits against the bond or trust fund as provided for in Conn. Gen. Stat. 36b-64 for purchaser-investors aggrieved by BOIA. This subsection clearly recognizes that a contract made in violation of BOIA is void by providing both a statutory remedy for purchaser-investors whose contracts have been rendered unenforceable by BOIA, as well as specifically authorizing a simple breach of contract action to allow a purchaser-investor to bring an action against the bond or trust account when a simple breach of contract occurs. If BOIA did not void contracts made in derogation of it, there would be no need to specifically authorize a suit against the bond or trust account for simple breach of contract because all actions against the bond or trust account would be breach of contract actions. Section (b) also authorizes the recovery of attorney fees for statutory actions and actions for breach of contracts subject to BOIA. Similarly the statute of limitations contained in subsection (g) authorizes suits under this section for six years. This section would not be needed if a contract remained in place; Conn. Gen. Stat. 52-576 governing written contracts would be sufficient. BOIA is consistent. A contract made in derogation of any section of BOIA is void and unenforceable. IV. Ms. Roxburgh Provided Sufficient Evidence in Support of the Counterclaim Ms. Roxburgh filed a lengthy affidavit in support of her Objection to the Application for a Preliminary and Permanent Injunction in which she provided ample factual details supporting her Counterclaim. See Roxburgh Affidavit. Additionally, the Uniform Offering Circular provided by TAS to Ms. Roxburgh and the receipt indicating the date of its delivery are already Exhibits before this Court and are stand alone evidence of a BOIA violation. Roxburgh Affidavit, Ex. C; TASs Memorandum of Law in Support of Application for Preliminary and Permanent Injunctive Relief, Ex. A. Moreover, the Roxburgh Affidavit contains a sworn statement from Ms Roxburgh that Ms. Davis of TAS guaranteed that Ms. Roxburgh would 9

derive income from her investment in TAS. Roxburgh Affidavit, 6. Accordingly, the evidence before this Court is sufficient to determine that Ms. Roxburgh is entitled to a trial on the merits to determine whether TAS sold a business opportunity in violation of BOIA. TAS claims that Ms. Roxburghs Affidavit contains acknowledgements that she believed a contract was in place and that TAS had breached it. Reply, p. 6. This argument completely misunderstands the effect of BOIA. BOIA operates to void a contract whether the purchaserinvestor wants to or not. The parties intentions or understandings are not at issue in determining whether a contract is void and unenforceable under BOIA. V. In the Alternative, Ms. Roxburgh Seeks Permission to Amend her Complaint. Should this Court determine BOIA does not render the Franchise Agreement void and unenforceable, Ms. Roxburgh requests that in lieu of dismissing her Counterclaim, this Court grant Ms. Roxburgh leave to amend her complaint to allege that the arbitration provision is itself voidable due to TASs failure to provide Ms. Roxburgh fair and timely notice of the arbitration provisions by timely providing her a copy of the disclosure statement mandated by BOIA and the Federal Trade Commission.. COUNTERCLAIM PLAINTIFF EDYTHE ROXBURGH By_____/s/ Julie D. Blake________ Julie D. Blake (ct 21990) The Blake Law Firm, LLC P.O. Box 173 East Woodstock, CT 06244 860-928-2617 phone 860-928-2618 fax jblake@blake-law.com

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UNITED STATES DISTRICT COURT DISTRICT OF CONNECTICUT The ALPACA SHOP FRANCHISE COMPANY, Plaintiff Counterclaim Defendant, V. EDYTHE ROXBURGH Defendant Counterclaim Plaintiff. : : : : : : : : : : : CIVIL ACTION NO. 3:05 CV 1203 (SRU)

NOVEMBER 10, 2005

CERTIFICATE OF SERVICE I hereby certify that on November 10, 2005 a copy of the foregoing Sur-Reply Memorandum of Law in Support of Objection to Motion to Dismiss was filed electronically and served by mail on anyone unable to accept electronic filing. Notice of this filing will be sent by email to all parties by operation of the Courts electronic filing system or by mail to anyone unable to accept electronic filing as indicated on the Notice of Electronic Filing. Parties may access this filing through the Courts CM/ECF System. Counsel of record are: Edward Wood Dunham Wiggin and Dana LLP One Century Tower P.O. Box 1832 New Haven, CT 06508-1832 (203) 782-2889 fax Joseph Schumacher Joshua S. Ganz Wiggin and Dana LLP 1001 Hector Street, Suite 240 Conshohocken, PA 19428 (610) 834-3055 fax By_____/s/ Julie D. Blake________ Julie D. Blake (ct 21990) The Blake Law Firm, LLC P.O. Box 173 East Woodstock, CT 06244 860-928-2617 phone 860-928-2618 fax jblake@blake-law.com

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