HORNSWAGGLED

Dispatches from the Deep End of Franchise Law

The 1988 File

ACT I

The Investigation

On April 18, 1988, the New York Attorney General's Investor Protection and Securities Bureau sent a formal investigation letter to Joseph J. Frohnhoefer, President, Sea Tow Services International, Inc. The AG's office didn't mince words. They told Captain Frohnhoefer that the offer and sale of franchises had been regulated by New York statute since January 1, 1981, under General Business Law Article 33. The statute required that franchise offerings be made by a prospectus registered with the Department of Law.

And then came the finding that should make every current Sea Tow franchisee pay very close attention:

Document 192-2 · PageID #: 6340. "The offer and sale of franchises in and from the State of New York has been regulated by statute since January 1, 1981, (General Business Law Article 33), the statute requiring that such offers and sales by made by a prospectus registered with this Department. Our records show no registration of a Sea Tow prospectus."

Same letter. The AG ordered Frohnhoefer to appear at 120 Broadway, Room 23-122, on Tuesday, April 26, 1988, at 10:00 a.m.

No registration. No prospectus. No disclosure documents. Just a company selling franchises in the dark — and a state regulator who had finally turned on the lights.

ACT II

The Assurance of Discontinuance

What happened after that April 1988 summons? The public record tells us. By December 1989, the matter had been resolved through what the Attorney General's office calls an "Assurance of Discontinuance" — a formal enforcement settlement. Sea Tow agreed to cease unlawful franchise practices and pay $1,000, "which the AG alleges are costs pursuant to the provisions of the Executive Law §63, subdivision 15, and Section 689(a) of Article 33 of the General Business Law of the State of New York."

But the Assurance contained a loaded gun. If Sea Tow ever violated the agreement, the AG could obtain a permanent injunction on just ten days' notice:

Document 192-3 · PageID #: 6344. "IT IS HEREBY AGREED that in the event of any violation of this agreement by Sea Tow, the Attorney General of the State of New York may upon ten (10) days notice, commence a proceeding to obtain a permanent injunction pursuant to Article 33 of the General Business Law of the State of New York and in such proceeding proof of violation of this agreement shall be prima facie proof sufficient to entitle the Attorney General of the State of New York to a judgment of permanent injunction."

A permanent injunction. On prima facie proof. With ten days' notice. That clause is still out there, loaded and waiting. The question is whether anyone has pulled the trigger.

ACT III

The Architect's Blueprint

Enter Mitchell A. Stein.

While the Assurance of Discontinuance was being finalized, Stein — then an attorney at Lieberman, Rudolph & Nowak, 292 Madison Avenue, New York — was already engineering Sea Tow's escape route. On September 7, 1989, he wrote directly to Sheldon Horowitz at the AG's office. The subject line of his letter: Re: People v. Sea Tow International.

Think about that caption for a moment: People v. Sea Tow International. The People of the State of New York versus Sea Tow. This wasn't a civil dispute between private parties. This was the state's law enforcement apparatus proceeding against Sea Tow for franchise law violations.

Case 2:20-cv-02877-JS-SIL · Document 192-4 · Filed 01/28/22 · PageID #: 6347-6348. "As per our discussions, enclosed please find a proposed License Agreement and Settlement Agreement, for your consideration. As to the former, I respectfully request an informal opinion from your office that the License Agreement, as newly phrased, does not violate the New York General Business Law Sec. 680, et seq. in that Sea Tow, as licensor, does not charge a 'franchise fee', as required under Sec. 681." — Letter from Mitchell A. Stein, Lieberman, Rudolph & Nowak, to Sheldon Horowitz, Principal Attorney, NY State Department of Law, September 7, 1989.

The restructuring replaced the $2,500 franchise fee with a $500 annual payment for "sales materials of an equivalent or greater value than the payment." The fee wasn't eliminated. It was rebranded, reduced, and disguised as a purchase of promotional materials.

Stein also explained that instead of a flat license fee, the franchisee would be paid "a 'portioned percentage' of the membership fees collected by Sea Tow for his area."

His conclusion: "By this modification, Sea Tow would no longer charge a license fee."

And then came the tell. At the bottom of his two-page letter, right above his signature, Stein added this line:

Document 192-4 · PageID #: 6348. "Also, please give your comments on the proposed Settlement Agreement. As before, please keep this confidential."

"Keep this confidential." The architect didn't want anyone examining the blueprints. But here we are, thirty-six years later, reading them on a federal court docket — because Stein himself filed them as exhibits in his own defense.

ACT IV

The Settlement Nobody Was Supposed to See

Exhibit C also contains the proposed Settlement Agreement itself — the document Stein asked Horowitz to keep confidential. It's now part of the public record. And its recitals are devastating to Sea Tow's current litigation position:

Document 192-4 · PageID #: 6349. "WHEREAS, the Attorney General for the State of New York, through its special deputies in the New York State Department of Law has charged Sea Tow International, Inc., a New York State Corporation ('Sea Tow'), and Captain Joseph J. Frohnhoefer ('Frohnhoefer'), its president with violation of New York General Business Law, Sec. 680, et seq. WHEREAS, Sea Tow and Frohnhoefer deny the charge, but in an effort to move further away from alleged franchising have changed the licensing program by deleting the collection of a license fee."

Pause on that language: "in an effort to move further away from alleged franchising." Not "we were never a franchise." Not "the allegation was baseless." The language concedes the direction of travel — away from franchising — which necessarily implies they were at franchising to begin with.

The Settlement Agreement then imposed a permanent obligation:

Document 192-4 · PageID #: 6349. "1. Neither Sea Tow nor Frohnhoefer shall, from now until the end of time, violate the franchise law, Sec. 680, et seq. of the New York General Business Law." — Settlement Agreement, Paragraph 1.

"From now until the end of time." That's not a standard legal phrase. That's the language of a regulator who wanted to make absolutely certain there would be no backsliding. Sea Tow and Joseph J. Frohnhoefer personally agreed — forever — not to violate New York's franchise law. The question every current Sea Tow operator should be asking: has that promise been kept?

ACT V

The Opinion That Wasn't an Opinion

Stein's final exhibit is the document he was really after — the response from the AG's office to his September 7, 1989 letter. Dated December 13, 1989, it came from Sheldon Horowitz on official State of New York Department of Law letterhead.

But before we look at what it says, look at what it doesn't say. Count the disclaimers:

Case 2:20-cv-02877-JS-SIL · Document 192-5 · Filed 01/28/22 · PageID #: 6351-6352. "We have your letter of September 7, 1989 with an agreement enclosed asking us whether the enclosed agreement would create a franchise relationship between the parties. This office is authorized to give official opinions to state agencies and unofficial opinions to local governments and special districts. It is not authorized to give opinions to private parties. However it is our informal, non-binding analysis of the enclosed agreement that a franchise relationship would not be created, there being no payment of a franchise fee, as required by law, were a franchise relationship to be created, (General Business Law section 681.3, 681.7). The foregoing analysis should not be considered an opinion either of this office or the undersigned. It is given only for the guidance of attorneys. Neither this office nor the undersigned are bound by this analysis." — Letter from Sheldon Horowitz, Principal Attorney, NY State Department of Law, to Mitchell A. Stein, Lieberman, Rudolph & Nowak, December 13, 1989.

In other words: the one piece of paper Sea Tow waves around to say "we're not a franchise" applies to an agreement that almost certainly no longer exists in its 1989 form. The lock was changed decades ago, but they're still showing everyone the old key. A house built on sand — six disclaimers deep, and thirty-six years out of date.

Every modification, every addendum, every new fee category, every revised payment structure — each one potentially reintroduces the very franchise fee element that Stein so carefully excised in 1989. And each one falls entirely outside the scope of the only analysis Sea Tow has ever obtained from any state regulator.

ACT VI

The Timeline That Tells the Story

When you lay out the documents in order, the narrative writes itself:

1984-1988: Sea Tow offers and sells franchises in New York, collecting $2,500 per franchise. No franchise prospectus is registered.

April 18, 1988: New York Attorney General's Investor Protection Bureau sends formal investigation letter to Joseph J. Frohnhoefer, identifying Sea Tow as a franchisor selling unregistered franchises and ordering Frohnhoefer to appear.

September 7, 1989: Mitchell A. Stein submits a restructured license agreement to the AG's office, replacing the $2,500 franchise fee with a $500 annual payment for "sales materials." He requests an informal opinion and asks for confidentiality.

December 1989: Sea Tow signs the Assurance of Discontinuance, agreeing to cease unlawful franchise practices and pay $1,000. Frohnhoefer personally signs under oath. The agreement gives the AG permanent injunction power on ten days' notice.

December 13, 1989: Sheldon Horowitz issues a non-binding, informal, disclaimed analysis — explicitly not an opinion — that the restructured agreement would not create a franchise relationship.

1989-Present: Sea Tow operates nationwide under agreements that have been updated and modified numerous times since 1989 — including how it assesses and collects fees from operators. The SBA lists Sea Tow in its Franchise Directory. Operators describe themselves as franchisees. Yet the only regulatory analysis Sea Tow possesses applies to a single 1989 agreement that almost certainly no longer exists in its original form.

January 28, 2022: Mitchell A. Stein files all four documents as exhibits on the federal docket — in his own defense.

FOR CURRENT SEA TOW OPERATORS

These are public documents, filed in federal court by Sea Tow's own attorney. They establish that the State of New York investigated Sea Tow for illegal franchise sales, that Sea Tow settled those charges, and that Sea Tow's current legal structure was engineered specifically to avoid franchise classification — not because the relationship isn't a franchise, but because the fee was restructured to fall outside one technical statutory definition in 1989.

The agreement you signed is almost certainly not the same agreement the AG's office looked at thirty-six years ago. The fees you pay are almost certainly assessed and collected differently than the $500 "sales materials" arrangement Stein proposed in 1989. Every modification moves Sea Tow further from the only regulatory analysis it has ever obtained — and potentially back into franchise territory.

If you signed an agreement with Sea Tow without receiving a proper Franchise Disclosure Document, you may want to consult with an attorney who specializes in franchise law — particularly one who is not affiliated with Sea Tow.

FEDERAL COURT DOCUMENTS (PACER)

All four exhibits are publicly available through PACER, filed on the docket of Sea Tow Services International, Inc. v. Tampa Bay Marine Recovery, Inc., et al., Case No. 2:20-cv-02877 (E.D.N.Y.): Document 192 — Motion for Judgment on the Pleadings by Mitchell A. Stein (Filed 01/28/2022). Document 192-1 — Declaration of Mitchell A. Stein. Document 192-2 — Exhibit A: NY AG Investigation Letter (April 18, 1988), PageID #: 6339-6340. Document 192-3 — Exhibit B: Assurance of Discontinuance (December 1989), PageID #: 6341-6345. Document 192-4 — Exhibit C: Stein Letter and Settlement Agreement (September 7, 1989), PageID #: 6346-6350 (Page 5 filed under seal). Document 192-5 — Exhibit D: AG Informal Analysis Letter (December 13, 1989), PageID #: 6351-6352. These documents were originally filed as Document 88 (and attachments 88-2 through 88-5) on February 22, 2021, and were re-filed as Document 192 (and attachments) on January 28, 2022.

The Assurance of Discontinuance and related enforcement records may also be available directly from the New York State Attorney General's office: NY State Office of the Attorney General, Investor Protection Bureau, 28 Liberty Street, New York, NY 10005. Phone: (212) 416-8222. You may submit a FOIL request for the file in the matter of "In the Matter of Sea Tow Services International, Inc.," Bureau of Investor Protection and Securities, approximately 1988-1989. To verify whether Sea Tow has ever registered a Franchise Disclosure Document in New York State: New York Department of State, Division of Licensing Services, One Commerce Plaza, 99 Washington Ave., Albany, NY 12231. Phone: (518) 474-4750.