November 26, 2025|Franchise Frontlines
November 26, 2025 | U.S. District Court for the District of New Mexico | Unpublished Opinion
Executive Summary
In a detailed opinion, Chief Magistrate Judge Wormuth granted in part and denied in part two competing motions in a complex franchise dispute involving the sale and repurchase of a Roll-Em-Up Taquitos location. According to the pleadings, the plaintiffs claimed that the franchisor breached obligations under an Asset Purchase Agreement by failing to pay a secured promissory note and by failing to assume a stockholder loan. The defendants not only denied liability but also asserted counterclaims alleging fraudulent inducement, negligent misrepresentation, breach of multiple agreements, and operational failures at the restaurant. The court concluded that the parties’ later Asset Purchase Agreement superseded the earlier Area Development Agreement with respect to certain disputes, meaning that plaintiffs’ claims would proceed in court, while several counterclaims tied to the development agreement must be arbitrated. Other counterclaims survived, one was dismissed for duplicative pleading, and the court stayed portions of the action pending further briefing on the proper scope of that stay.
Relevant Background
The opinion recounts the parties’ business relationship across multiple agreements, beginning with an Area Development Agreement executed in 2021 that governed the opening and operation of Roll-Em-Up franchise restaurants. According to the complaint, FMP Ventures purchased and operated a Roll-Em-Up location in Las Vegas, Nevada. In 2023, the plaintiffs decided to exit the business and negotiated a sale of the restaurant back to Roll-Em-Up Franchise Group through an Asset Purchase Agreement executed in December 2023. That agreement contemplated a secured promissory note payable to FMP and the franchisor’s assumption of a substantial stockholder loan.
The plaintiffs alleged that the franchisor never delivered the promissory note and never made any payments toward the stockholder loan. The complaint further alleged that, after the repurchase, the franchisor sold the restaurant to a new franchisee but continued to ignore its obligations under the APA. The plaintiffs filed suit for breach of contract and unjust enrichment.
The defendants, however, offered a sharply different narrative. Their counterclaims alleged that the plaintiffs and a principal—Nathaniel Pollock—made material misrepresentations and omissions leading up to the sale. The counterclaims alleged that Pollock did not disclose a substantial Toast Capital loan tied to the business, did not disclose unpaid rent or electrical utilities, and did not disclose alleged operational issues, including accusations of employee drug use, alleged assaults involving employees, and alleged noncompliant construction work. The counterclaims assert that the plaintiffs closed the restaurant shortly after executing the APA, withheld keys from the incoming operator, failed to provide required financial disclosures, and allegedly oversaw a noncompliant buildout that, according to the counterclaims, contributed to a fire in April 2024 that rendered the restaurant inoperable. The court accepted none of these allegations as true and treated them only as counterclaims to be assessed procedurally.
Against this backdrop, the parties disputed whether claims should be litigated or arbitrated. The ADA contained a mandatory arbitration clause with a delegation provision, while the later APA contained a merger clause and a judicial-forum provision requiring that disputes arising from the APA be resolved in New Mexico courts. The interaction between these two agreements became the focal point of the motions.
Decision
The court first addressed whether arbitrability itself should be decided by the arbitrator under the ADA’s delegation clause. The opinion explains that federal courts must decide which agreement governs when two contracts contain conflicting dispute-resolution provisions. Because the APA expressly required litigation in New Mexico courts and included a merger clause superseding prior agreements with respect to its subject matter, the court determined that the delegation clause in the ADA could not control the question of arbitrability. That determination required the court—not an arbitrator—to identify which claims arose from which agreement.
After analyzing the substance of the claims, the court concluded that plaintiffs’ claims clearly arose from the APA, not the ADA. The APA’s subject matter concerned the sale of the franchise back to the franchisor, including the promissory note and assumed liabilities. The plaintiffs’ breach claims therefore fell squarely within the APA and were not subject to arbitration.
The court then parsed the counterclaims one by one. Those tied to the negotiation or performance of the APA—fraudulent inducement, negligent misrepresentation, breach of the APA, and breach of the implied covenant relating to the APA—were permitted to proceed in litigation. A separate claim labeled as a breach of the implied covenant under the ADA contained no ADA-specific factual allegations and simply duplicated another APA-based claim; the court dismissed that claim without prejudice as redundant. Claims that directly implicated the ADA, however, including breach of the ADA and certain allegations relating to construction, maintenance, and operational duties connected to the earlier development relationship, were deemed arbitrable and sent to arbitration.
The court also addressed whether certain parties—including individuals who did not personally sign the ADA—could be compelled to arbitrate claims arising under it. The court noted that the ADA defined “Principal Equity Owners” and “affiliated entities” broadly, and found it likely that those individuals and entities fell within the scope of the arbitration clause for ADA-based counterclaims. The court also recognized that both sides had, through their litigation conduct, waived objections to the court’s authority to compel arbitration despite forum-selection language that might otherwise have raised venue questions.
Finally, the court considered whether the case should be severed or stayed. The court declined to sever any claims but stayed all arbitrable counterclaims and issued a temporary stay of the entire action pending supplemental briefing on whether the non-arbitrable claims should likewise be paused. The opinion emphasizes the need to consider overlapping factual issues, potential preclusive effects of arbitration findings, and judicial efficiency before determining the contours of the stay.
Looking Forward
This decision reinforces several lessons for franchisors, particularly those that manage multi-document relationships across the lifecycle of a franchise unit. Agreements executed at different times can contain conflicting dispute-resolution provisions, choice-of-law clauses, and integration language. When disputes arise, courts may need to determine which agreement governs which claims, and that determination may hinge on how clearly each agreement defines its subject matter. The opinion here illustrates the importance of ensuring that franchise documents, purchase agreements, and ancillary agreements work in harmony, particularly when the parties amend or terminate earlier arrangements.
The ruling also highlights the operational and litigation risks that can emerge when franchisees buy or sell locations, especially if disputes arise concerning disclosures, operational conditions, or the condition of the premises at turnover. Allegations of undisclosed liabilities, employee misconduct, operational deficiencies, or physical damage—while accepted only as allegations—can generate complicated counterclaims requiring courts to separate contractual obligations from tort theories and identify the proper forum for each.
Going forward, franchisors may wish to revisit the consistency of their dispute-resolution frameworks across development agreements, franchise agreements, transfer agreements, and purchase agreements. Courts continue to analyze whether later agreements supersede earlier ones, whether arbitration clauses remain operative, and how merger clauses affect contractual interpretation. As multi-stage franchise transactions become more common, this case underscores the value of clarity, alignment, and careful drafting to reduce ambiguity when disputes arise. It also illustrates the strategic considerations franchisors face when navigating litigation that includes both arbitrable and non-arbitrable claims, ensuring that their operational and contractual structures support efficient and predictable dispute resolution.
This article is based solely on the opinion of the Court in this matter. The author has not conducted any independent investigation into the facts. For the avoidance of doubt, each statement related to the law and facts in this article is drawn from the Court’s opinion in this case.
Thomas O’Connell is a Shareholder at Buchalter APC and Chair of the firm’s Franchise Practice Group. For questions about this article or media inquiries, you can contact Tom at toconnell@buchalter.com.
This communication is not intended to create, and does not create, an attorney-client relationship or any other legal relationship. No statement herein constitutes legal advice, nor should it be relied upon or interpreted as such. This communication is for general informational purposes only and is not a substitute for legal counsel. Readers should not act or refrain from acting based on any information provided without seeking appropriate legal advice specific to their situation. For more information, visit www.buchalter.com.
