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PIERRE, S.D. -- Owners of five failed Blimpie restaurants in South Dakota and Iowa were deceived by West Des Moines, Iowa-based Krause Gentle Corp. because it did not keep its promises to get them off to a good start, the South Dakota Supreme Court ruled Thursday.
The unanimous decision upholds nearly $1.7 million awarded earlier to eight people who formed corporations to manage Blimpie restaurants between 1994 and 1997. The awards included $995,000 in punitive damages to five of them, the Associated Press reported. A Minnehaha County jury decided that Krause Gentle was guilty of fraud in its sales of the Blimpie franchises. Several lawsuits were filed against the firm, and a five-week trial was held in 2001.
The unsuccessful restaurants were located in Sioux Falls, Watertown and Mitchell in South Dakota and Storm Lake and Sibley in Iowa.
Krause Gentle argued in its appeal that there was not enough evidence to prove fraud. The firm insisted that it had fulfilled promises made to those who bought Blimpie franchises, but not to their satisfaction, the report said. Rejecting that argument, the South Dakota Supreme Court agreed with jurors that Krause Gentle, which sold the franchises under a subsidiary called Blimpie Midwest, did not provide the promised management assistance and national advertising it touted in sales pitches. Inflated sales projections also were given to those enticed into buying the franchises, the justices said.
Rick Johnson of Gregory, an attorney for the failed restaurant owners, said they managed to keep their Blimpie stores open only until finances and bank credit ran out. Krause Gentle fooled the franchise buyers into thinking they would begin making money the moment they opened their doors, he said.
"There was no cash flow. The gross-sales figures and profit figures Krause Gentle gave to some plaintiffs were far exaggerated," Johnson told the Associated Press. "Fraud permeated the transactions."
Krause Gentle owns more than 300 Kum & Go convenience stores in 12 states. A Krause Gentle lawyer, Steven Sanford, said the jury verdict was suspect and not supported by the evidence. Even if fraud took place, the jury award is excessive, he said, suggesting that punitive damages be no more than 50 percent of actual losses.
But the Supreme Court said the damages were not overblown and the firm has ample finances, noting that Krause Gentle had an $18 million net worth and net income of nearly $3.2 million in 2000. The ratio of punitive damages to actual damages was not excessive, the justices said.
The high court did give the firm a break on the amount of interest it owes four of the plaintiffs from Iowa. Under Iowa law, interest earnings on legal damages begin when a lawsuit is filed and are based on the annual rate paid for treasury bills at the time of verdicts, plus 2 percent, the report said.