August 07, 2025|Franchise Frontlines
August 7, 2025 | Court of Appeals of Texas, Houston (14th Dist.) | Memorandum Opinion
Executive Summary
In an unpublished decision, Justice Tonya McLaughlin of the Fourteenth Court of Appeals in Houston affirmed in part and reversed in part a judgment involving Wellington Yu and Frenchy’s 5588 North Freeway, LLC. The dispute arose out of a $350,000 investment by Hunan Hengzheng Science and Technology Co., Ltd., allegedly tied to an L-1A visa petition for its managing member. Hunan claimed that Yu, described as the “Franchisor of Frenchy’s,” promised to refund most of the investment if the visa was denied. Hunan alleged no refund was provided and pursued fraud and statutory fraud claims. The trial court entered summary judgment in Hunan’s favor, awarding $320,000 in damages and more than $250,000 in attorney’s fees. On appeal, the court determined that the record did not conclusively establish fraudulent intent at the time of contracting, reversed the fraud judgment, and remanded for further proceedings, while affirming dismissal of Yu’s counterclaims.
Relevant Background
According to the pleadings, in 2016 Hunan entered into a stock purchase agreement with Frenchy’s 5588 North Freeway, LLC for $350,000. A supplementary agreement allegedly required Frenchy’s to refund $345,000 if the associated L-1A visa petition was denied. U.S. Citizenship and Immigration Services ultimately denied the petition, and Hunan alleged that no refund followed.
In 2018, Hunan filed suit against Yu, Frenchy’s, and others. After the defendants failed to respond to discovery requests, the trial court granted partial summary judgment on fraud and statutory fraud. Following a bench trial on Yu’s declaratory claims, the trial court entered a final judgment that included:
- $320,000 in actual damages,
- $17,252.75 in attorney’s fees related to the summary judgment, and
- $252,304.07 in additional attorney’s fees for defending against Yu’s declaratory judgment action.
Yu’s counterclaims—including abuse of process, malicious prosecution, negligence, fraud, statutory fraud, and conversion—were denied.
Decision
On appeal, the Fourteenth Court of Appeals reversed the trial court’s summary judgment on fraud and statutory fraud. The court explained that “even if the evidence cited might establish appellants knew [the] visa application would be denied, that evidence does not establish as a matter of law that appellants knew their representation of a refund … was false.” Yu v. Hunan Hengzheng Sci. & Tech. Co., Ltd., No. 14-23-00808-CV, 2025 WL 2253721, at *3 (Tex. App.—Houston [14th Dist.] Aug. 7, 2025) (mem. op.). Citing long-standing Texas precedent, the court reiterated that “the mere failure to perform a contract is not evidence of fraud.” Id. (citing Formosa Plastics Corp. USA v. Presidio Eng’rs & Contractors, Inc., 960 S.W.2d 41, 48 (Tex. 1998)).
The court also considered whether the trial court erred in refusing to withdraw deemed admissions. While noting that admissions should not ordinarily preclude a trial on the merits, the court concluded that the trial court acted within its discretion in this case. Id. at 5–6 (citing Wheeler v. Green, 157 S.W.3d 439, 442–43 (Tex. 2005)).
Finally, the appellate court affirmed dismissal of Yu’s counterclaims, holding that he had not pointed to record evidence sufficient to raise a genuine issue of material fact in response to a no-evidence summary judgment motion. Yu, 2025 WL 2253721, at 6–9 (citing Mack Trucks, Inc. v. Tamez, 206 S.W.3d 572, 581–82 (Tex. 2006)).
Looking Forward
Not all immigration-based franchise investment goes wrong. Indeed, it can be a powerful sales approach for franchisors—particularly those with brands that have international appeal. With that said, like any tool, it can be poorly used. This case demonstrates how allegations of fraud and breach can develop when refund promises and visa outcomes intersect.
While there are innumerable complexities with this process, franchisors should understand several key points at a minimum:
- Immigration-based franchise investment is heavily scrutinized by both franchise regulators and immigration authorities. A franchisor must ensure that its Franchise Disclosure Document (FDD) and Franchise Agreement are fully compliant with federal and state franchise laws, while also recognizing that the investment structure will be reviewed by U.S. Citizenship and Immigration Services (USCIS). If the documents overpromise job creation, profitability, or guaranteed returns, it can not only cause franchise law violations but also derail the visa petition.
- Visa eligibility often depends on job creation, capital at risk, and the legitimacy of the underlying business. A franchisor should not assume that a standard franchise investment automatically satisfies these requirements. The franchise must be structured so that the investment is “substantial” (for E-2) or creates/maintains a sufficient number of full-time U.S. jobs (for EB-5). This requires clear planning around staffing, capital expenditures, and financial projections—without overstating results or straying from realistic operations.
- Immigration approvals are not guaranteed. Even strong L-1A or EB-5 petitions can fail, leaving investors disappointed and looking for remedies. If a franchise arrangement or investment agreement ties repayment obligations to visa outcomes, the franchisor may be drawn into costly litigation.
Franchisors considering immigration-based investment programs should engage both franchise counsel and immigration counsel to evaluate the risks. Agreements should account for regulatory unpredictability, allocate responsibility for visa outcomes, and avoid open-ended refund commitments that could be construed as fraudulent inducement. This case, unfortunately, is one small example of how failure to heed that advice can go wrong.
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.
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