Opinion
16-P-529
04-25-2017
MORTON DONUTS, INC. v. FOUR K'S DONUT, INC., & others.
MEMORANDUM AND ORDER PURSUANT TO RULE 1:28
The plaintiff, Morton Donuts, Inc. (Morton), brought this action in the Superior Court seeking, inter alia, enforcement of an asset purchase agreement (APA) by which defendant Four K's Donut, Inc. (Four K's), promised to sell Morton a Dunkin' Donuts franchise located in Weymouth. Four K's argues that Morton breached the APA, either excusing performance by Four K's or entitling Four K's to terminate the deal. After a four-day bench trial, a Superior Court judge determined that any deviation from the APA's terms by Morton was not material, and did not entitle Four K's to walk away. The judge also found that, even if Four K's had a right to terminate, it did not provide an effective termination notice. Holding that Morton was ready, willing, and able to purchase the franchise at all relevant times, the judge found Four K's in breach and issued a judgment ordering that the sale go forward. We affirm.
Background. The following facts are taken from the judge's detailed findings, supplemented by uncontroverted evidence in the record. Morton is a Massachusetts company owned by three sisters, Lynne McLaughlin, Carol Resnick, and Sharon Holdcroft (collectively, the Morton principals), who took over their father's Dunkin' Donuts franchise, located at 755 Main Street in South Weymouth, upon his death in 1998. Four K's is also a Massachusetts company, owned by two brothers, codefendants Kevin and William Donovan. Four K's owns thirty-one Dunkin' Donuts franchises throughout Massachusetts. "[S]ince before 1998," Four K's has owned and operated a Dunkin' Donuts store at 1255 Main Street in South Weymouth, which is located in a shopping plaza also owned by the Donovans as principals of a separate company not involved in this suit.
During the summer of 2015, Four K's was in the process of building a new Dunkin' Donuts store (new store), with a drive-through window, at the opposite end of the shopping plaza. Four K's intended to close its old store in the shopping plaza when the new store opened. The Donovans approached the Morton principals to discuss the possibility of selling the new store franchise to Morton, once the new store was completed. The Morton principals had previously never been involved in buying or opening a Dunkin' Donuts franchise.
On or about September 25, 2015, the parties signed the APA, in which Morton agreed to buy the franchise assets from Four K's for approximately $1.4 million. The deal included the build-out of the new store, all installed equipment, the franchise rights, and an assignment of the lease held by Four K's to Morton. The original draft of the APA, provided by counsel for Four K's to Morton's counsel, included a closing date of September 30, 2015. Following negotiations between the parties' attorneys, the final executed APA omitted a date certain for closing and instead required a closing
"within but not later than thirty (30) days after the Franchisor approval of this Agreement is given or at such other place or earlier or later date or time as may be fixed by mutual written agreement of Buyer and Seller, provided, however, that the same shall be automatically extended to accommodate timing requirements of Buyer's lender or other reasonable requirements (the ‘Closing Date’). The parties shall reasonably accommodate closing date extension requests implemented in this Agreement."
Exhibit "M" to the APA was to be a document entitled "Rider to Contract for Sale" to be supplied to the franchisor of Four K's, Dunkin' Brands. The rider was not attached to the APA or signed at the time that the APA was signed. The purpose of the rider was to prompt Dunkin' Brands to determine whether the proposed sale of the franchise would be approved and to supply information to Dunkin' Brands for the approval process.
Although the franchisor is referred to in the judge's decision as Dunkin' Brands, the APA lists the franchisor as one of three entities: Dunkin' Brands, Inc.; Dunkin' Donuts Franchised Restaurants LLC; and/or Dunkin' Donuts Franchising, LLC. None of these Dunkin' Donuts entities is a party to this case, and the precise corporate nomenclature for the franchisor is immaterial to the outcome of this case.
Soon after the APA was signed, Morton's attorney sent an electronic mail message (e-mail) to the attorney for Four K's with a draft rider that named "Royal Donuts, Inc." as the purchasing entity. Royal Donuts, Inc. (Royal) is a name that the Morton principals had reserved with the Massachusetts Secretary of State for future use, but no entity bearing that name had been formed. The Morton principals intended that Lynne McLaughlin's son, Nicholas McLaughlin (Nick), would become a part owner of the new store. Accordingly, they had planned to form Royal with the three Morton principals and Nick holding four equal shares in the company, once Dunkin' Brands approved Nick as a franchisee. Accordingly, Nick's name appeared on the rider that was originally provided to counsel for Four K's by Morton's counsel. The Morton principals also executed an assignment of their rights under the APA to Royal, even though Royal did not yet exist.
The Donovans refused to sign the rider listing Royal and Nick as buyers. Morton's counsel responded that the APA expressly permitted an assignment of the buyer's rights without the consent of Four K's, and that Nick was being qualified as a franchisee. On October 1, 2015, William Donovan explained to Lynne McLaughlin that because Nick had not yet been approved by Dunkin' Donuts as a franchisee, including him in the sale would cause a delay that was unacceptable to Four K's. Lynne McLaughlin told Donovan that she would instruct Morton's counsel to prepare and submit a rider listing Morton as the buyer. Counsel for Four K's told Morton's counsel by e-mail that he had been informed by his clients that the rider would be revised to name Morton as the buyer. Morton's counsel replied with an email stating, "[W]ill do. I will send you the revised rider." Thereafter, the Donovans and Morton's principals all signed a rider listing Morton as the buyer and omitting Nick's name. The parties agreed that Morton's counsel would submit the rider to Dunkin' Brands.
Without informing Four K's or its attorney, Morton's counsel instructed his paralegal to alter the rider that had been signed by the Donovans and the Morton principals by separating the buyer's and seller's portions of the document and submitting them separately, with the buyer's submission showing Royal as the purchaser and including Nick as a signatory. The paralegal contacted an administrator at Dunkin' Brands and was told that it was fine to submit the seller's and buyer's portions separately, but this advice was provided without disclosure to the administrator that the Donovans had previously refused to proceed with Royal and Nick as buyers. The paralegal then physically created the two separate riders, one for the sellers and one for the buyers, with the buyer's version of the rider listing Royal as the purchasing entity and including Nick's signature. The judge found that "[t]hough Ms. McLaughlin knew that Four K's [had] refused to sign the previous Royal rider for fear that it would slow down the sale and transfer, she relied on the information provided to her by [the paralegal] on behalf of [Morton's counsel]."
The paralegal obtained Nick's signature on the buyer's rider via an e-mail request to Lynne McLaughlin. That e-mail stated: "[P]er Dunkin's instructions we're going to be sending the Rider to Contract of Sale in separate documents but sent in the same email. One will be Seller only submission and the other Buyer only submission. Your buyer submission will show Royal Donuts, Inc. as the proposed buyer. Therefore, I have attached pages 12 and 21 which need to be signed by Nicholas."
On October 8, 2015, the paralegal submitted the package, including the two separate riders, to Dunkin' Brands for approval of the deal. She did not copy Four K's or its counsel on the submission. On October 13, 2015, the parties each received packets of signed originals. The packet received by Four K's included the rider listing Morton and its principals as buyers, but not the rider including Royal as a buyer and Nick as a signatory. The judge found that, "though the Morton principals were hopeful that the sale would go through in the Royal name, which included [Nick] as an approved franchisee, Morton was at all times prepared to close on the agreement as Morton."
On October 21, 2015, Kevin Donovan had a conversation with James Faria, a Dunkin' Brands business development manager, during which Faria advised him that Dunkin' Brands was waiting for Nick's approval as a franchisee. This conversation alerted Kevin to the fact that the Morton principals were still hoping to close in the name of Royal, with Nick included in the purchase. "At this point, Kevin Donovan felt that he had been lied to by Ms. McLaughlin and that he was justified in terminating the deal."
Later that day, Faria spoke with Lynne McLaughlin and told her that Kevin Donovan was upset. Lynne McLaughlin told Faria that he should tell Kevin that the Morton principals were willing to go forward as Morton and would not wait to have Nick approved as a franchisee to close the deal. On October 23, 2015, Kevin Donovan sent an e-mail to the Morton principals stating, "We regret to inform you that due to recent communications with the brand regarding the document processing we cannot proceed with the sale." Lynne McLaughlin attempted to speak with Kevin Donovan and left him voicemail messages seeking to move the deal forward with Morton as the buyer. However, the parties did not speak with one another and Four K's continued to work on the build-out of the new store. On October 29, 2015, Morton's counsel sent a letter to counsel for Four K's demanding that the parties move forward with the transaction and advising that "[s]ince there is trepidation on the Seller's side from this requirement we have resubmitted the original rider.... The Buyers fully intend to proceed with the transaction. Transfer of the agreement is permitted as a matter of right. This is no basis to terminate the agreement." The letter further stated: "Nick's qualification will not delay the closing in any way. If he is not qualified by the closing then he will not have issued shares and this will be handled after the closing. This was the Buyer's intent from day one as communicated to the Seller." That day, Morton's lawyer submitted a revised rider to Dunkin' Brands naming Morton (not Royal) as the buyer.
On November 4, 2015, Dunkin' Brands confirmed that Nick was approved as a franchisee. On November 9, 2015, Dunkin' Brands sent a conditional approval letter via e-mail to the parties, stating that it had conditionally approved a transfer of the franchise from the Donovans to the Morton principals and Nick. On November 12, 2015, Morton's litigation counsel sent counsel for Four K's a letter demanding a closing by December 9, 2015.
On November 16, 2015, Eastern Bank offered a loan commitment of up to $1.4 million to Royal and Morton as borrowers. The next day, Four K's opened the new store. On that same day, counsel for Four K's responded to Morton's demand for a closing with a letter stating that the Morton principals were in breach of the APA and that their actions had rendered the contract void ab initio. On November 20, 2015, Dunkin' Brands sent an e-mail to Lynne McLaughlin and Morton's counsel stating that Dunkin Brands had granted conditional approval of a transfer from Four K's to Morton.
Four K's does not now press the claim that the contract was void ab initio, but argues that the Morton principals were in breach of the APA and their breach excused performance by Four K's.
From November 17, 2015, through at least the time of the judge's decision, Four K's operated the new store, retaining any profits from that operation for itself. Morton commenced this action on November 24, 2015. On December 1, 2015, a Superior Court judge entered an injunction preventing the Donovans and Four K's from selling or otherwise transferring the assets that were the subject of the APA. Thereafter, a different judge held a bench trial over four days. On February 26, 2016, that judge issued findings of fact and rulings of law, entered judgment for Morton on seven of Morton's eight counts, and awarded specific performance in Morton's favor. The defendants timely filed a notice of appeal.
In their answer, the Donovans and Four K's asserted four counterclaims/third-party claims for money damages against Morton and the Morton principals, alleging: fraud (Count I); breach of contract (Count II); breach of the implied covenant of good faith and fair dealing (Count III); and violation of G. L. c. 93A (Count IV). The judge ultimately rendered a finding in favor of Morton on all of the counterclaims/third-party claims.
Count VIII, alleging interference with contractual relations, was dismissed; Morton has not appealed from that dismissal.
Discussion. 1. Morton's ability to close. Four K's accepts and adopts the trial judge's findings of fact except the judge's determination that Morton was ready, willing, and able to close in its own name at all relevant times. Four K's contends that the judge's determination was clearly erroneous. We disagree.
"On appeal, we are bound by the trial judge's findings of fact, including all reasonable inferences, that are supported by the evidence." Almeida v. Arruda, 89 Mass. App. Ct. 241, 244 (2016). In finding that Morton was prepared to complete the purchase in its own name, the judge cited testimony from Lynne McLaughlin and correspondence between attorneys for Four K's and Morton, all of which the judge credited. This included findings that on October 1, 2015, Lynne McLaughlin instructed her attorney to submit the paperwork listing Morton as the buyer; that her attorney acted on his own, without direction from Morton principals, when he directed his paralegal to file the rider listing Royal and Nick as franchisees; and that the Morton principals did not intend to defraud Four K's. The judge further relied on a document showing that Morton and/or Royal had received a loan commitment of up to $1.4 million from Eastern Bank on November 16, 2015. The judge's finding that Morton was ready to close with Morton as buyer has ample support in the trial record, and thus was not "clearly erroneous" and cannot be displaced.
2. Materiality of Morton's alleged breach. Four K's concedes that whether a breach of contract is material is normally a question of fact, but it suggests that in this case the evidence was so lopsided in its favor that that this court should displace the judge's determination of nonmateriality as a matter of law. See EventMonitor, Inc. v. Leness, 473 Mass. 540, 546 (2016), citing Teragram Corp. v. Marketwatch.com, Inc., 444 F.3d 1, 11 (1st Cir. 1994). We disagree.
"A breach of a contract is a material breach when it involves ‘an essential and inducing feature of the contract.’ " EventMonitor, supra, quoting from Anthony's Pier Four, Inc. v. HBC Assocs., 411 Mass. 451, 470 (1991). If a judge's ultimate finding of materiality is inconsistent with her subsidiary factual findings, the finding on materiality must be set aside. EventMonitor, supra.
Here, the judge held that when Morton's counsel altered the rider, "there was a variance of the contract, but ... it did not amount to a material breach." The judge based her determination of immateriality on three facts she found from the record: (i) the APA expressly allowed Morton to assign its rights as buyer; (ii) Morton was acting on the advice of counsel; and (iii) the Morton principals were prepared to close as Morton rather than as Royal. None of these factual determinations by the judge was clearly erroneous. As the judge aptly noted, "[t]here is nothing in the language of the entire APA that reflects the parties' intent that the Seller have any say over the assignment. Indeed, there is no requirement that Seller even be placed on notice." Furthermore, although Four K's presented evidence suggesting that the Donovans were genuinely concerned about avoiding unnecessary delays, the APA did not include a specific closing date. To the contrary, § 1.4 of the APA required that the closing occur not later than thirty days after approval by Dunkin' Brands. Here, Dunkin' Brands approved Morton as the buyer on November 20, 2015, and, as the judge found, "at that time, Morton was prepared to proceed with the sale." These facts, although disputed, were not so tilted in one party's favor that the determination of nonmateriality could be made by an appellate court as a matter of law. The evidence supported the judge's findings, and there was no error in her determination that any contractual breach by Morton was not sufficient to excuse performance by Four K's. See EventMonitor, supra; DiBella v. Fiumara, 63 Mass. App. Ct. 640, 650 (2005).
3. Misrepresentation as a basis for termination. Separate and apart from the theory of Four K's that it had no obligation to perform the contract due to Morton's preexisting material breach, Four K's also claims that it had a right to unilaterally cancel the contract due to Morton's allegedly fraudulent behavior in connection with the submission of the two riders. We agree with the judge, however, that the contract provided no such right.
Section 4 of the APA deals with the buyer's representations and warranties to the seller, and states at § 4.1 as follows:
"As a material inducement to Seller and the Stockholders to enter this Agreement and consummate the transactions contemplated hereby, Buyer and Buyer's Stockholders hereby makes the representations and warranties to Seller and Stockholders contained in this Section 4. If Seller determines at any time that any representation or warranty is untrue or if a covenant is not fulfilled then Seller may terminate this Agreement and all deposits and money, if any, advanced or paid by the Buyer to Seller or to third parties (contractors or architects for example) from this Agreement or related agreements shall be immediately reimbursed to the Buyer."
Four K's argues that § 4.1 of the APA entitled it to terminate the agreement based on any misrepresentation made by Morton, regardless of whether the allegedly false statement was included in the list of representations and warranties set forth in § 4. Accordingly, it claims that Morton's representation that it would submit the rider to Dunkin' Brands listing Morton and the Morton principals as buyers was a misrepresentation that gave rise to a termination right. We agree with the trial judge's rejection of this interpretation for various reasons.
First, an interpretation of the APA that would allow Four K's to terminate the agreement unilaterally based on any misrepresentation by Morton made at any time, regardless of materiality to the deal, belies the presumed common sense and rationality of the parties. Starr v. Fordham, 420 Mass. 178, 192 (1995), quoting from Shane v. Winter Hill Fed. Sav. & Loan Assn., 397 Mass. 479, 483 (1986) (contract should be construed "as a rational business instrument and in a manner which will carry out the intent of the parties").
Second, in order for Lynne McLaughlin's statement regarding the names on the rider to qualify as a "misrepresentation" under basic tort principles, it must have been false at the time it was made. See Cumis Ins. Soc. v. BJ's Wholesale Club, Inc., 455 Mass. 458, 474 (2009). The judge specifically found that the Morton principals did not intend to defraud Four K's and the evidence presented at trial supports this view. Although the evidence in the record also supports the argument by Four K's that the Donovans "felt that [they] had been lied to" and believed that they were "justified in terminating the deal," the Donovans' subjective belief did not authorize them to terminate the APA, and, in this fact-intensive dispute, the judge was entitled to credit the substantial evidence in the record that supported the Morton principals' version of events.
Third and finally, even assuming that Four K's could have properly terminated the APA, the judge found, and we agree, that the October 23, 2015, e-mail sent by Kevin Donovan to the Morton principals failed to comply with the notice requirements under the APA, and thus did not effectively terminate the agreement.
For all of the reasons stated herein, the judgment is affirmed.
To the extent that we have not specifically addressed subsidiary arguments in the parties' briefs, they have not been overlooked. "We find nothing in them that requires discussion." Commonwealth v. Domanski, 332 Mass. 66, 78 (1954).
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So ordered.
Judgment affirmed.