August 04, 2025|Publications
August 4, 2025 | U.S. District Court for the Western District of Washington | Unpublished Opinion
Executive Summary
In an unpublished order, Magistrate Judge S. Kate Vaughan denied franchisee Sean Masterson’s motion for appointment of counsel under 28 U.S.C. § 1915(e)(1). Masterson claimed insolvency and requested pro bono representation, arguing that the case’s complexity and financial stakes qualified as “exceptional circumstances.” Signal 88 LLC alleged that Masterson orchestrated a fraudulent shell game of entities, pledged the same assets multiple times, and misappropriated trade secrets and customers to start a competing business. The court rejected his request, concluding he had meaningful income and assets and had been effectively litigating pro se.
Relevant Background
Signal 88 LLC sold Franchise 366 to Sean Masterson, who operated it through three controlled entities: Northern Sky, LLC; Washington Security Services Inc.; and Eyey LLC. Masterson personally guaranteed their obligations. By the time litigation began, each was in dissolution or wind-up, and Signal alleged that this corporate structure was used to mask wrongdoing rather than operate in good faith.
Signal’s complaint details a scheme where Masterson allegedly used the Franchisee Defendants to “mislead lenders, including Signal, into believing Franchise 366 was profitable in order to obtain loans that neither Masterson nor [his entities] could repay.” To secure those loans, he allegedly pledged assets that already served as collateral for obligations owed to Signal. This left lenders and the franchisor exposed when the debts went unpaid.
The alleged misconduct escalated when Signal began scrutinizing Franchise 366. Signal claims Masterson diverted confidential data and trade secrets from the franchisor to Eyey LLC, a competing security company he controlled. Using that misappropriated information, Masterson allegedly solicited and diverted at least 60 customers, including some of Signal’s high-value accounts. According to Signal, this customer poaching directly eroded system goodwill and caused millions of dollars in damages.
Signal also contends that Masterson’s actions were part of a deliberate exit strategy: collapsing existing entities, hiding behind insolvency, and continuing operations under a new brand using appropriated resources. His conduct, Signal argues, combined fraudulent financing practices with brazen misappropriation of brand assets and relationships.
Masterson attempted to push back by filing a related action in King County Superior Court, but it was dismissed in favor of mandatory mediation. Mediation failed, and Signal filed the instant federal action alleging breach of contract, breach of personal guarantees, tortious interference, trade secret misappropriation, and unjust enrichment. The Franchisee Defendants remain unrepresented, and Masterson continues pro se.
Decision
The court denied Masterson’s motion for appointment of counsel. Under 28 U.S.C. § 1915(e)(1), courts may appoint counsel for indigent litigants in “exceptional circumstances,” weighing both financial eligibility and the litigant’s ability to represent themselves.
On the financial side, the court found Masterson had not shown he was unable to afford counsel. His financial disclosure reflected nearly $9,500 in monthly take-home pay, home and vehicle ownership, and a 401(k) valued at $100,000. While Masterson listed over $1.4 million in liabilities and $22,000 in monthly lease obligations, the court concluded most of those debts belonged to his dissolving entities, not him personally. He reported $1,360 in disposable monthly income. Masterson also claimed multiple attorneys told him the litigation would require retainers between $50,000 and $100,000 and might cost as much as $350,000 to $500,000 total, with hourly rates from $600 to $1,200. The court explained, however, that § 1915(e)(1) does not guarantee representation at the defendant’s preferred rates and that Masterson had assets he could leverage or could seek more affordable counsel.
The court also noted that to the extent Masterson sought appointed counsel for his entities—Northern Sky, Washington Security Services, and Eyey—the statute could not apply. Under Supreme Court precedent, corporations and other artificial entities may not appear in federal court without licensed counsel, and § 1915(e)(1) extends only to natural persons. His sole ownership and guarantees did not change this rule.
On the “exceptional circumstances” analysis, the court emphasized that the Ninth Circuit requires consideration of both the likelihood of success on the merits and the litigant’s ability to articulate claims given the case’s complexity. Masterson pointed to the millions at stake, overlapping contract, tort, and corporate issues, and thousands of pages of financial and business records. But the court found the legal issues relatively straightforward and observed that Masterson had already filed dispositive motions, attached exhibits, and articulated defenses competently on his own. Citing Wilborn v. Escalderon and Wood v. Housewright, the court explained that the difficulties Masterson described—navigating discovery, reviewing records, and drafting pleadings—are common to most pro se litigants and do not justify appointment of counsel.
Finally, the court rejected Masterson’s argument that the high financial stakes and imbalance of resources between him and the franchisor warranted counsel. Ninth Circuit law makes clear that whether a litigant might fare better with counsel “is not the test.” The motion was denied without prejudice.
Looking Forward
For franchisors, this case illustrates the importance of rigorous franchisee vetting and active monitoring once a franchise is awarded.
- Financial diligence should extend beyond reviewing net worth. Franchisors should examine whether a prospect has a history of dissolving companies or using layered entities to shift liabilities. Patterns of rolling debt across shells may indicate heightened risk.
- Lenders and franchisors alike must confirm that collateral has not been pledged multiple times. This may require direct verification and ongoing monitoring rather than reliance on representations.
- Customer diversion is particularly damaging because franchisees already have access to sensitive customer lists, pricing, and trade secrets. Franchisors should consider stronger contractual protections, technological safeguards, and audit rights to detect diversion early.
- Insolvency risk should be addressed up front with guarantees, step-in rights, and secured interests structured to withstand an operator’s collapse. Otherwise, as in this case, the franchisee may effectively become judgment proof while the brand absorbs the harm.
Ultimately, Signal 88’s allegations read like a case study in how one bad franchisee can weaponize access, structure, and information against a system. Franchisors who fail to dig deeply enough into prospective operators’ financials and practices risk facing the same nightmare scenario: fraud, misappropriation, and customer loss followed by an insolvent defendant.
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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