Opinion
No. 98-2511-DJW
March 10, 2000.
MEMORANDUM AND ORDER
In this action, plaintiff Ramada Franchise Systems, Inc. ("RFS" or "Plaintiff") claims defendants Tresprop Ltd. and Donald Boos (collectively "Defendants") breached a franchise license agreement and guaranty and infringed Plaintiff's trademark. Conversely, Defendants claim the franchise license agreement at issue is unenforceable, and Defendants are entitled to damages because Plaintiff fraudulently induced them to enter into it.
A trial to the Court was held in this matter from January 3, 2000 through January 5, 2000. Plaintiff filed a written Motion for Judgment as a Matter of Law on its claims at the close of Plaintiff's evidence (doc. 110) and a written Motion for Judgment as a Matter of Law on Defendants' counterclaim at the close of Defendants' evidence (doc. 111.) The Court thoroughly has considered the evidence and arguments presented at trial. It has relied to a considerable degree on its opportunity to form conclusions about the credibility of the witnesses from close observation of their demeanor while testifying at trial. The Court is now prepared to issue its findings of fact and conclusions of law pursuant to Federal Rule of Civil Procedure 52(a). For the reasons set forth below, Plaintiff's motions are denied and judgment is entered in favor of Defendants on all claims.
I. Findings of Fact
During the time period relevant to this action, Tresprop Ltd. ("Tresprop") owned a guest lodging facility at 3802 South Topeka Boulevard in Topeka, Kansas. Chuck Tantillo ("Tantillo") was the primary investor and shareholder in Tresprop and Donald Boos ("Boos") was a limited partner. Kyle Cloutier ("Cloutier") worked as manager of Tresprop's Topeka facility from May 1994 to May 1996.
Tantillo has not been involved in any aspect of this case as a witness or otherwise due to his death prior to litigation of the dispute.
In February 1995, RFS representatives Leonard Smith ("Smith") and Paul Sanders ("Sanders") first approached Tantillo and Boos about licensing Tresprop's Topeka facility as a Ramada franchise. Smith was Vice-President of Franchise Sales and Development for Hospitality Franchise Systems, Inc. (of which RFS was a division) and Sanders was Director of Franchise Sales for RFS.
When Tresprop first was approached by RFS, there were two existing Ramada franchises in Topeka: one located directly across the highway from Tresprop's facility ("Site 515") and the other located in downtown Topeka ("Site 1040.") These two Ramada franchises were operated through various companies managed by an individual named Cal Cohen ("Cohen".) It is undisputed that both of the properties managed by Cohen (hereinafter "the Cohen properties") had reputations in the Topeka market of inferior physical accommodations and poor customer service.
Smith and Sanders represented to Tantillo and Boos from the outset that the Cohen properties were failing to comply with terms and conditions of their RFS franchise license agreements, and RFS was in the process of terminating both franchises from the RFS system. Expressing concern to Smith and Sanders about becoming a Ramada franchise when the reputation of the "Ramada" name in the Topeka market was so poor, Tantillo and Boos advised Smith and Sanders that Tresprop would not enter into a franchise agreement with RFS until the Cohen properties were permanently terminated from the Ramada franchise system.
RFS and Tresprop representatives met on several occasions during the fifteen-month period of February 1995 through April 1996 to further discuss the licensing agreement. Discussions at these meetings included negotiation of various terms and conditions of the prospective franchise license agreement; negotiation of the specific RFS "System Standards" with which the Tresprop facility would need to comply if it became a facility within the RFS system; and status of the termination process with respect to the Cohen properties. Tantillo and Boos reiterated on numerous occasions in these meetings that Tresprop would not enter into a franchise agreement with RFS until the Cohen properties were permanently terminated from the Ramada franchise system.
The negotiated RFS "System Standards" were documented in what the parties referred to at trial as a "punch list." Although Tresprop's original "punch list" was dated June 19, 1995, numerous revisions subsequently were made to the list as a result of additional negotiations. The final version of Tresprop's "punch list" was February 28, 1996.
Site 515, the Cohen property located directly across the street from the Tresprop facility, permanently was terminated from the RFS system on March 28, 1995. On or about July 1, 1995, Tantillo and Boos began remodeling the Tresprop facility so that, if and when Site 1040 (Cohen's downtown property) was permanently terminated from the RFS system, the Tresprop facility would be on track to comply with RFS "System Standards."
On May 2, 1995, RFS issued to Site 1040 a written notice of continuing default with respect to the RFS franchise license agreement. The notification was based on a failing score in the facility's March 15, 1995 quality assurance inspection. The written correspondence to Cohen advised that failure to cure the continuing default within the following thirty days may result in termination of the Site 1040 franchise license agreement. On October 27, 1995, RFS issued a second notice of continuing default to Site 1040 based on a failing score in the facility's October 26, 1995 quality assurance inspection. A third quality assurance inspection of Site 1040 was conducted by RFS on April 5, 1996. The facility again received a failing score.
In early April 1996, around the time of Site 1040's third quality assurance inspection, RFS and Tresprop representatives again met to discuss the prospective license agreement between the two entities. The meeting was attended by Smith on behalf of RFS and Tantillo, Boos and Cloutier on behalf of Tresprop. Sanders did not attend the meeting due to his promotion and transfer out of the RFS division effective March 1, 1996. At this meeting, Tantillo and Boos again made it clear that Tresprop would not enter into a franchise agreement with RFS until Site 1040 permanently was terminated from the Ramada franchise system. During the meeting, Smith placed a call on his cellular phone to RFS corporate headquarters in New Jersey to inquire into the current status of Site 1040 within the RFS system.
In response to Smith's inquiry, the corporate representative assured Smith that RFS finally was in the process of actually terminating Site 1040 from the Ramada franchise system. Smith passed this information on to Tresprop representatives Tantillo, Boos and Cloutier. Tantillo and Boos then specifically asked Smith whether, once terminated, Site 1040 would ever be permitted to reenter the RFS system. Smith stated that, based on the information he had just received from the corporate representative in New Jersey, Site 1040 would not be permitted to reenter the RFS system.
Defendants do not suggest they were assured an exclusive marketing territory (e.g., a promise that no Ramada facility would ever replace Site 1040.)
Based on the assurance that Site 1040 was in the process of being permanently terminated from the system, Boos finally authorized full execution of the RFS franchise License Agreement. Were it not for the representation by RFS that Site 1040 would be terminated and never allowed back into the RFS system, Tresprop and Boos would not have entered into the License Agreement and Guaranty. The written License Agreement reflects an execution date of April 8, 1996.
The Guaranty was signed by Boos, but not by RFS, and states it is effective as of the date of the License Agreement.
In the License Agreement, RFS allowed Tresprop to use Ramada's trade name and service marks for a fifteen-year term. In exchange, Tresprop agreed to renovate the facility to comply with RFS "System Standards" as defined in the License Agreement. Tresprop also agreed to achieve certain scores on periodic quality assurance inspections by RFS, to operate the facility in continued compliance with RFS "System Standards" and to make periodic payments to RFS for franchise and royalty fees.
RFS had the right to terminate the License Agreement, with notice to Tresprop, for various reasons. Grounds for termination included failure to pay RFS the amount due under the License Agreement and failure to remedy any other breach of the License Agreement within thirty days after receipt of written notice from RFS. Tresprop agreed that if RFS terminated the License Agreement for these reasons, Tresprop would pay liquidated damages within thirty days according to a formula specified in the License Agreement.
On April 9, 1996, one day after the License Agreement between RFS and Tresprop was executed, an RFS representative from corporate headquarters in New Jersey issued to Site 1040 a third notice of continuing default based on its failing score in the April 5, 1996 quality assurance inspection. After setting forth the history of default, the written letter goes on to state that RFS would consider terminating Site 1040 from the system sometime in the next few weeks. RFS also explained that it did not want to terminate the Site 1040 franchise and RFS looked forward to assisting the facility in curing the default. Defendants were not aware of this information at the time the letter was sent and seemingly did not become aware of it until they became involved in the instant litigation.
On April 30, 1996, RFS issued a letter to Cohen terminating the license agreement for Site 1040, effective immediately. On May 16, 1996, approximately two weeks after notification of termination, RFS Director of Quality Assurance William Crossett ("Crossett") sent Mr. Cohen a "proposed work out plan to assist in bringing [Site 1040] to a minimum passing score." RFS and Cohen subsequently entered into a Reinstatement Agreement dated June 18, 1996, wherein RFS agreed to reinstate the terms of the License Agreement. The agreement also promised to reinstate Site 1040 to the national reservation system immediately after a reinspection to be conducted on September 8, 1996, if the reinspection established the facility had cured all defaults. RFS subsequently did reinstate Site 1040 to the national reservations system. Tresprop representatives did not become aware that Site 1040 had been reinstated to the reservations system until March 1997.
In November 1997, RFS terminated Tresprop's franchise agreement due to Tresprop's breach and default of the License Agreement. The notice of termination advised Tresprop to immediately discontinue use of all trade names, service marks, signs and other forms of advertising and other indicia of operation as a Ramada facility. RFS also demanded liquidated damages of $278,000.00 as required by the License Agreement, gave Tresprop ten days to de-identify the facility and instructed Tresprop to pay arrearage and additional monies, including franchise and royalty fees through the date of termination in the sum of $53,787.68.
Pursuant to Fed.R.Civ.P. 56(d), the Court previously held this fact to be deemed established for purposes of trial. See Memorandum and Order dated October 28, 1999, at p. 9 (Doc. #89.) The Court further held the termination to be proper pursuant to Section 11.2 of the License Agreement. Id.
Neither Tresprop nor Boos have paid the franchise fees, the royalty fees or liquidated damages as required by the License Agreement and Guaranty, and thus both have breached their respective agreements.
Pursuant to Fed.R.Civ.P. 56(d), the Court previously held this fact to be deemed established for purposes of trial. See Memorandum and Order dated October 28, 1999, at p. 9 (Doc. #89.)
II. Conclusions of Law
RFS seeks damages for breach of the franchise License Agreement, breach of the Guaranty and infringement of RFS's trademark. As an affirmative defense, Tresprop and Boos claim RFS is not entitled to damages because RFS fraudulently induced them to enter into the franchise License Agreement in the first place, and this fact renders the entire License Agreement unenforceable. To that end, Tresprop and Boos bring a counterclaim for the damages they sustained as a result of the alleged fraud. This counterclaim was filed on February 9, 1999. RFS argues the counterclaim is barred by the applicable statute of limitations and the parol evidence rule prohibits the Court from considering evidence presented by Defendants at trial that supports the claim of fraud.A. Statute of Limitations
In ruling upon Plaintiff's Motion to Dismiss Defendants' Counterclaim, the Court previously found the Kansas statute of limitations applicable to Defendants' counterclaim for fraud. See Memorandum and Order dated October 28, 1999, at p. 17 (Doc. #89.) Kansas law imposes a two-year statute of limitations for fraud claims. K.S.A. 60-513(a)(3). A cause of action for fraud accrues when the claimant discovers or reasonably should have discovered the facts necessary to know of the fraud. Id.; Robinson v. Shah, 23 Kan. App. 2d 812, 825, 936 P.2d 784 (1997). Defendants' counterclaim for fraud was filed on February 9, 1999. Therefore, if Defendants discovered or reasonably should have discovered the facts necessary to their claim of fraud prior to February 9, 1997, Defendants' counterclaim falls outside the limitation period and is thus barred.
Defendants assert their claim of fraud is based on the statement made by RFS in the meeting between the parties that took place in early April 1996. In this statement, RFS representative Leonard Smith told Boos, Tantillo and Cloutier that RFS was in the process of terminating Site 1040 from the Ramada franchise system for good, and that Site 1040 would not be allowed to come back into the system. All witnesses with personal knowledge of this meeting testified that this statement was made and that the source of the information was a representative from RFS corporate headquarters. Boos testified that he did not discover the falsity of RFS's representation — that Site 1040 had been reinstated into the Ramada franchise system — until March 1997.
RFS argues Boos and Tantillo knew long before March 1997 that Site 1040 might remain in, or be reinstated into, the RFS system. In support of this argument, RFS introduced into evidence a July 7, 1995 franchise application submitted to RFS by Boos for a facility located at 635 S.W. Harrison in downtown Topeka, Kansas. The application is signed by Boos and contains a handwritten note on the last page stating that the "$1,000 app[lication] fee will be fully refunded in the event prop[erty] #1040 does not leave the system." RFS asserts this handwritten note establishes Boos knew in July 1995 that Site 1040 might not leave the system. Based on this assertion, RFS argues the statute of limitations for fraud began to run in July 1995 and not in March 1997.
The Court is not persuaded by Plaintiff's argument. The evidence presented at trial conclusively establishes that Boos and Tantillo, on behalf of Tresprop, refused to enter into the License Agreement with RFS until they were assured the Cohen properties were permanently terminated, or in the process of being permanently terminated, from the RFS system. Based on the testimony of Boos, Cloutier, Smith and Sanders, as well as the date the Tresprop License Agreement actually was executed, the Court finds Boos did not receive the assurances he sought from RFS regarding permanent termination of Site 1040 until early April 1996. Because the representation upon which Tresprop and Boos relied in going forward with the License Agreement was not made by RFS until April 1996, Boos' belief nine months prior to the allegedly fraudulent representation is immaterial. The controlling issue is when Boos discovered the April 1996 statement by RFS was fraudulent.
The fact that both Boos and Sanders acknowledged in July 1995 that Boos had a right to a refund if Site 1040 did not leave the system supports the finding that, as of that date, RFS had not yet represented to Tresprop that Site 1040 was in the process of being permanently terminated from the RFS system. In further support of this finding is the fact that, as of July 1995, Site 1040 had received only one of the three default notices that preceded notice of termination.
In further support of its argument that Boos and Tantillo knew before March 1997 that Site 1040 might be reinstated into the RFS system, Plaintiff introduced into evidence a letter dated August 30, 1996 from Tantillo to Wayne Siverson ("Siverson") in RFS's corporate offices. In the letter, Tantillo states (1) his understanding that Site 1040 is under an irrevocable deadline of September 15, 1996 to bring the property into compliance with RFS standards; (2) his understanding that RFS will request a cease and desist order against Site 1040 if the facility is not in compliance with RFS standards on September 16, 1996; and (3) although Tantillo does not have confidence in the ownership of Site 1040, he hopes — for the sake of RFS and the owners of Site 1040 — that RFS standards are met by the deadline. RFS asserts this letter establishes Tantillo and Boos knew on August 30, 1996 that RFS was working with Site 1040 in an attempt to have the facility reinstated to the RFS system. RFS thus argues the statute of limitations for fraud began to run on August 30, 1996 — the date of the letter.
Boos is designated as the recipient of a carbon copy ("cc") of this letter.
Plaintiff's assertion that Tantillo and Boos knew in August 1996 that Site 1040 might be reinstated to the RFS system, even if true, fails to support Plaintiff's conclusion regarding when Defendants' counterclaim for fraud actually accrued. Notably, a cause of action for fraud accrues when the claimant discovers or reasonably should have discovered the facts necessary to know of the fraud. To know of the fraud, a claimant must know the perpetrator made an untrue statement of fact and knew when he made it that the statement was untrue or made it with reckless disregard for its truth. See Tetuan v. A.H. Robins Co., 241 Kan. 441, 465-67, 738 P.2d 1210, 1228-30 (1987) (setting forth elements of fraud); Nordstrom v. Miller, 227 Kan. 59, 65, 605 P.2d 545, 551-52 (1980) (same); Hutchinson Travel Agency, Inc. v. McGregor, 10 Kan. App. 2d 461, 463-64, 701 P.2d 977, 980 (1985) (same). A cause of action for fraud has not accrued at the time the claimant discovers or reasonably should have discovered facts establishing a broken promise or a contract breached. Highland Restaurants, Inc. v. Judy's Foods, Inc., No. 83-4030-RDR, 1990 WL 92484, *11 (D.Kan. June 26, 1990) (citing Garter-Bare Co. v. Munsingwear Inc., 723 F.2d 707, 713 (9th Cir. 1984)). Notice that a contract has been breached is not tantamount to notice that a fraud has been perpetrated. Id.
Contrary to Plaintiff's assertion, Plaintiff must establish Defendants actually discovered, or reasonably should have discovered, that RFS made an untrue statement of fact and that RFS knew the statement was untrue when it was made in order to establish Defendants' counterclaim for fraud is time-barred. Neither Plaintiff nor Defendants sufficiently established when Defendants became aware of the fact that RFS knew at that time it made its early April 1996 representation that the representation was untrue. Based on evidence presented at trial, however, Defendants seemingly did not become aware until the discovery stage of this litigation that RFS knew at the time it made the statement that the statement was false.
This is not to say that a claim for fraud accrues only upon actual knowledge. "[A] fraud is discovered at the time of actual discovery or when, with reasonable diligence, the fraud could have been discovered." Waite v. Adler, 239 Kan. 1, 6, 716 P.2d 524 (1986). A person must be aware of enough facts indicating fraud that a reasonably prudent person would investigate. Wolf v. Brungardt, 215 Kan. 272, 281, 524 P.2d 726 (1974). Notwithstanding this broad construction, the Court finds no evidence presented to establish that Boos or Tresprop reasonably should have discovered prior to February 9, 1997 that RFS knew it was making an untrue statement at the time the statement was made.
A discovery of fraud, however, does not occur upon mere suspicion. Augusta Bank Trust v. Broomfield, 231 Kan. 52, 63, 643 P.2d 100 (1982).
Based on this discussion, the Court concludes Boos and Tresprop did not discover the facts supporting their claim of fraud until after February 9, 1997. Because Defendants discovered the facts necessary to know of the fraud less than two years prior to filing their February 9, 1999 counterclaim alleging fraud, Defendants' counterclaim falls within the statutory limitation period and is not barred by K.S.A. 60-513(a)(3).
B. The Parol Evidence Rule
Plaintiff next argues the Court should refrain from considering Defendants' evidence of prior or contemporaneous oral statements not reflected in the executed License Agreement. In Kansas, the parole evidence rule prohibits a party from relying on evidence of prior or contemporaneous verbal statements that contradict the terms of a written agreement. Flight Concepts Ltd. Partnership v. Boeing Co., 38 F.3d 1152, 1157 (10th Cir. 1994). Where a contract "directly contradicts the oral promises made during contract negotiations, the oral promise[s] cannot be construed as fraudulent" and "cannot, as a matter of law, establish fraudulent inducement or misrepresentation." Id. ( citing Edwards v. Phillips Petroleum Co., 187 Kan. 656, 660, 360 P.2d 23, 27 (1961); Jack Richards Aircraft Sales, Inc. v. Vaughn, 203 Kan. 967, 973, 457 P.2d 691, 696 (1969)).
A well-recognized exception to the parol evidence rule, however, permits evidence of fraudulent representations made during the course of negotiations in those cases where a contract is induced by fraudulent representations of one party upon which the other party relied. See Inter-Americas Ins. Corp. v. Xycor Sys., Inc., 757 F. Supp. 1213, 1222 (D.Kan. 1991). In order for evidence to be admissible under the fraud exception, the evidence must tend to establish some independent fact or representation, some fraud in the procurement of the instrument, or some breach of confidence concerning its use, and not a promise directly at variance with the promise of the writing. Cf. Terry Bivens Constr. Co. v. Southwestern Bell Tel. Co., No. Civ. A. 89-2305-GTV, 1993 WL 112986 at *5 (D.Kan. Mar. 5, 1993); Edwards v. Phillips Petroleum Co., 187 Kan. at 660-61, 360 P.2d at 26-27; Jack Richards Aircraft Sales, Inc. v. Vaughn, 203 Kan. at 973-74, 457 P.2d at 696.
Based on the evidence presented, the Court finds the fraud exception applicable to Defendants' counterclaim of fraudulent inducement. Defendants allege RFS fraudulently induced them to enter into the License Agreement based on the representation that Site 1040 would be permanently terminated from the RFS franchise system. This statement is not directly contrary to the language of Section 15.3 within the License Agreement, which provides:
[Ramada Franchise Systems] and our affiliates each reserve the right to own, in whole or in part, and manage, operate, use, lease, finance, sublease, franchise, license (as licensor or licensee), provide services to . . . (iii) a Chain Facility at or for any location other than the Location. There are no territorial rights or agreements between the parties.
Section 15.3 reserved to RFS the right to license other facilities in the Topeka area. Defendants do not challenge Plaintiff's right to license other facilities, but claim they relied to their detriment on RFS's oral representation that RFS was in the process of permanently terminating Sites 515 and 1040, and that RFS would not exercise its right to reinstate or relicense these two facilities. The oral representation made by RFS is not directly at variance with the terms of the License Agreement and the fraud exception to the parole evidence rule is applicable.
C. The Merger and Integration Clause
Plaintiff also argues the License Agreement's multiple merger and integration clauses prohibit consideration of prior representations. The Court previously rejected this argument in its Memorandum and Order (Doc. #56) filed August 25, 1999, incorporated herein by reference.
D. Fraudulent Inducement
As a defense to enforcement of the License Agreement, and also as an independent counterclaim, Defendants allege RFS fraudulently induced them to execute the License Agreement by representing shortly before April 8, 1996 that the other two Ramada franchises in Topeka had been, or were being, permanently terminated from the Ramada franchise system. To prevail on a claim of fraudulent inducement, Defendants must establish by clear and convincing evidence that (1) RFS made an untrue statement of fact; (2) RFS knew that the statement was untrue or made it in reckless disregard for the truth; (3) RFS made the statement with the intent to induce Defendants to act on the statement; (4) Defendants justifiably relied on the statement to their detriment; and (5) Defendants sustained injury as a result of their reliance. Tetuan v. A.H. Robins Co., 241 Kan. 441, 465-67, 738 P.2d 1210, 1228-30 (1987); Nordstrom v. Miller, 227 Kan. 59, 65, 605 P.2d 545, 551-52 (1980); Hutchinson Travel Agency, Inc. v. McGregor, 10 Kan. App. 2d 461, 463-64, 701 P.2d 977, 980 (1985). For the following reasons, Defendants have established a claim of fraudulent inducement.
1. Fraud Elements 1 and 2: Did RFS make an untrue statement of fact and, if so, did RFS know that the statement was untrue or know that the statement was made in reckless disregard for the truth?
Plaintiff asserts Defendants have not demonstrated RFS made an untrue statement of fact. Plaintiff maintains RFS may have represented to Defendants that Site 1040 would be terminated from the system, but the April 30, 1996 letter from RFS to Cohen terminating the license agreement with Site 1040 establishes that this statement was true. Plaintiff also challenges Defendants' assertion that RFS represented to Tresprop and Boos that Site 1040 would be prohibited from reentering the RFS system after termination.
Boos, Smith and Cloutier testified at trial that in early April 1996, the three of them met, along with Tantillo, for what turned out to be the final meeting to discuss the prospective License Agreement between RFS and Tresprop. Given this testimony, and the fact that the Licensing Agreement was executed on April 8, 1996, the Court concludes this meeting occurred sometime during the week of April 1 through April 8, 1996 and occurred within days of Site 1040's April 5, 1996 third failing quality insurance inspection. The undisputed testimony at trial establishes that during the meeting, Smith told Boos, Tantillo and Cloutier that both of the Ramada Inn franchises operated by Cohen were permanently terminated, or were in the process of being permanently terminated, and neither one of the properties would be permitted to come back into the Ramada system.
Undisputed testimony also establishes the following discussion then took place: Tantillo and Boos reiterated to Smith that, because of the inferior quality of Sites 515 and 1040 in the Topeka market, Tresprop would not enter into a franchise agreement with RFS until they were assured by RFS that Site 1040 was not just terminated, but permanently terminated, from the Ramada franchise system. Smith placed a call on his cellular phone to RFS corporate headquarters in New Jersey to inquire into the current status of Site 1040 within the RFS system. In response to his inquiry, the corporate representative assured Smith that RFS was in the process of permanently terminating Site 1040 from the Ramada franchise system. When Smith passed this information on to Tresprop representatives, they then specifically asked Smith whether, once terminated, Site 1040 would ever be permitted to reenter the RFS system. Smith responded that, based on the information he had just received from the corporate representative in New Jersey, the termination was permanent and Site 1040 would not be permitted to reenter the RFS system.
Undisputed documentary evidence presented at trial also establishes that on April 9, 1996, within days of the representation by RFS that Site 1040 would be permanently terminated from the system and only one day after execution of the License Agreement by the parties, RFS sent a letter to Site No. 1040 explaining the facility had failed three consecutive quality assurance inspections and RFS would consider potential termination in the next few weeks. RFS simultaneously explained in this letter that it did not want to terminate the franchise and it looked forward to assisting the franchisee cure the default. RFS issued a letter to Cohen terminating the license agreement for Site 1040 effective April 30, 1996, but subsequently sent Cohen a proposed reinstatement plan on May 16, 1996 — just two weeks after notification of termination. RFS and Cohen entered into the Reinstatement Agreement a month later and RFS ultimately reinstated Site 1040 to the RFS system.
Bill Crossett ("Crossett"), RFS Director of Quality Assurance during the relevant time period, testified at trial that, during the same period of time in which Smith represented to Tresprop that termination of the franchise for Site 1040 was permanent and the facility would not be permitted to reenter the RFS system, RFS considered Site 1040 to be in "retention mode" and RFS was working to keep the facility in the its system.
In an effort to overcome the overwhelming evidence presented at trial supporting Defendants' claim of fraud, Sanders testified he personally was involved in the meetings between RFS and Tresprop that led up to execution of the License Agreement and that at no time during these meetings did RFS advise Tresprop or Boos that Site 1040 would be prohibited from reentering the RFS system.
Sanders' testimony does not invalidate the testimony of Boos, Cloutier and Smith, who all insist that Smith told them in an early April 1996 meeting that RFS was in the process of terminating Site 1040 from the Ramada franchise system for good, and that Site 1040 would not be allowed to come back into the system. First of all, Sanders admits he was promoted and transferred out of the RFS division effective March 1, 1996 and did not attend the early April 1996 meeting. Therefore, he has no personal knowledge regarding representations made at the April 1996 meeting.
It appears reinstatement is not the only issue Sanders forgot was discussed. Although the evidence establishes without dispute between the parties that the issue of whether to exclude "Race Week" from various provisions within the Licensing Agreement was both discussed and negotiated, Sanders testified he does not know what "Race Week" is and thus cannot attest to whether the parties negotiated to exclude it from the Licensing Agreement.
The Court concludes RFS did represent to Defendants in an early April 1996 meeting that Site 1040 was being terminated from the RFS franchise system and would be prohibited from reentering the RFS system after such termination. In light of (1) the statements made by RFS in its April 9, 1996 letter to Cohen, sent only one day after execution of the Tresprop License Agreement; and (2) the subsequent course of conduct by RFS immediately following transmittal of the April 9, 1996 letter, the Court also concludes RFS fraudulently represented on or shortly before April 8, 1996 that the franchise for Site 1040 was currently in the process of being permanently terminated from the RFS system.
Notwithstanding the conclusion that RFS made a false representation knowing it was false, Plaintiff goes on to argue the statement is not actionable in fraud because the false statement — that Site 1040 would be permanently terminated from the RFS franchise system and not allowed back in — relates to a future course of conduct. Opposing Plaintiff's position, Defendants argue the fraudulent statement was made solely to induce them to authorize execution of the License Agreement and RFS had no intention of permanently terminating Site 1040 from the RFS system when the statement was made.
Although there is a general rule providing that a claim of fraud predicated upon promises relating to future actions is not actionable, Flight Concepts Ltd. Partnership v. Boeing Co., 38 F.3d 1152 (10th Cir. 1994), the misrepresentation becomes actionable if the promise concerning a future act is coupled with a present intention not to fulfill the promise. See Gerhardt v. Harris, 261 Kan. 1007, 1013, 934 P.2d 976 (Kan. 1997) ("A promise to do something in the future, if the promisor had no intention at the time the promise was made to carry it out, is deceit, and if the promisor obtained anything of value by reason thereof, there is actionable fraud."); see also Bennett v. Coors Brewing Co., 189 F.3d 1221, 1230 (10th Cir. 1999) (citations omitted).
The evidence presented at trial supports the position that when RFS stated to Tresprop in early April 1996 that Site 1040 currently was in the process of being permanently terminated from the RFS system, RFS had no intention of permanently terminating Site 1040 from the RFS system. On April 9, 1996, within days of the representation by RFS that Site 1040 would be permanently terminated from the system and only one day after execution of the License Agreement by the parties, RFS sent a letter to the owner of Site No. 1040 stating it did not want to terminate the franchise and that it looked forward to assisting the franchisee cure the default. Moreover, Crossett testified that RFS considered Site 1040 to be in "retention mode" and RFS was working to keep the facility in the RFS system during the same period of time in which Smith represented to Tresprop that termination of the franchise for Site 1040 was permanent. While the impending termination of Site 1040's license agreement, and the permanency of such termination, could in some circumstances be construed as an issue concerning a future event, the Court finds in this case that RFS knew the statement was false when it was made and never had any intention of permanently terminating the franchise for Site 1040. Given this finding, Defendants' counterclaim for fraud is actionable. See Gerhardt v. Harris, 261 Kan. at 1013; Bennett v. Coors Brewing Co., 189 F.3d at 1230.
2. Fraud Elements 3 and 4: Did RFS make the fraudulent statement with the intent to induce Defendants to act on it and, if so, did Defendants justifiably rely on the untrue statement to their detriment?
The evidence presented overwhelmingly establishes RFS knew the only stumbling block to full execution of the License Agreement by Tresprop was its concern that the Cohen properties were not yet permanently out of the system. The Court finds RFS made the false statement at issue with the intent to induce Defendants to sign the License Agreement.
Plaintiff, however, maintains Defendants failed to establish they justifiably relied on the April 1996 statement to their detriment. In support of this position, Sanders testified at trial that he witnessed Boos sign the License Agreement and Guaranty on July 7, 1995, the date which appears on the facsimile line of various documents within the final document. Plaintiff also presented documentary evidence to establish July 7, 1995 as the date the promissory note and deposit check to RFS were signed by Boos. Plaintiff argues the April 8, 1996 stated date of execution handwritten on the Licensing Agreement reflects the date RFS signed the agreement, not the date Boos signed it. Plaintiff thus concludes Boos and Tresprop could not have relied on the April 1996 representation in entering into the License Agreement because Tresprop entered into the Licensing Agreement nine months before the fraudulent representation was ever made.
The Court rejects Plaintiff's argument. Sanders testified at trial that RFS incorporates a rescission clause in each of its franchise license agreements. The rescission clause provides a prospective franchisee who already has signed a license agreement with a date certain before which it can "back out of" or rescind the license agreement. Until the rescission date passes or is otherwise eliminated, RFS does not consider there to be a bona fide agreement between the parties. Sanders explained it is the practice of RFS to wait until the rescission date passes or is otherwise eliminated before it executes and dates the agreement. Sanders further explained that, because of the prospective franchisee's right to back out of the agreement, the parties often continue to negotiate during the "rescission period."
Sanders testified Tresprop's rescission period lasted from July 7, 1995 (the date Sanders asserts he witnessed Boos sign the License Agreement) to April 8, 1996 (the date RFS executed the License Agreement). Although the initial rescission date set forth in the Tresprop License Agreement was August 1, 1995, Sanders testified it was "extended thereafter from time to time until April 8, 1996," the date RFS ultimately executed the License Agreement. Trial Transcript, Vol. IV, p. 283. Notably, Sanders' testimony is consistent with the fact that the original "punch list" was dated June 19, 1995 and the revision date on the final version appears as February 28, 1996.
Based on the evidence presented, the Court finds, regardless of when Boos signed the License Agreement and Guaranty, Defendants refused to relinquish their right to rescind the signed License Agreement until they received the assurances they sought from RFS regarding permanent termination of Sites 515 and 1040. Relying on assurances by RFS made in early April 1996 that Site 1040 was in the process of being permanently terminated from the system, Tresprop finally relinquished its right to rescind the License Agreement. As a result, RFS executed the agreement as of April 8, 1996. Because Defendants had no way of knowing that the representation made by RFS was false, the Court concludes Defendants justifiably relied on the April 1996 statement to their detriment.
In a final challenge to Defendants' assertion of justifiable reliance, Plaintiff argues the merger and integration clause within the License Agreement, which specifically states Defendants are disclaiming reliance on statements not written within the License Agreement, discredits testimony at trial that Tresprop relied on RFS's fraudulent statement to their detriment. Given the boilerplate merger and integration clause does not "specifically" disclaim reliance on RFS's oral representation, the Court finds Plaintiff's argument unpersuasive.
3. Fraud Element 5: Did Defendants sustain injury as a result of their reliance?
The reliance element of misrepresentation serves the function of causation in fact: that the misrepresentation causes someone to act or refrain from acting. Restatement (Second) of Torts § 546, Comment b (1976). Boos and Cloutier both testified Tresprop would not have entered into the Agreement, and thus would not have had the burden of its obligations under the franchise agreement, including operation of the facility in a certain fashion and payment of franchise fees and royalties to RFS, if Tresprop had known Site 1040 would be reinstated back into the RFS system. Given this undisputed testimony, it appears Plaintiff's misrepresentation did, in fact, cause Defendants to suffer injury.
In sum, Defendants have established by clear and convincing evidence all five of the required elements necessary to their counterclaim for fraud. Under general contract principles, it is well established that a contract is unenforceable if procured through fraud. Bennett v. Coors Brewing Co., 189 F.3d 1221, 1229 (10th Cir. 1999) (citing Restatement (Second) Contracts § 164(1) (1981) ("If a party's manifestation of assent is induced by a fraudulent or a material misrepresentation by the other party upon which the recipient is justified in relying, the contract is voidable by the recipient")). Accordingly, the Court hereby determines the written License Agreement and the attached Guaranty of Don Boos executed by the parties as of April 8, 1996 is void and must be rescinded.
E. Damages
Rescission operates to extinguish the contract so that for all intents and purposes it never existed Whiteley v. O'Dell, 219 Kan. 314, 318, 548 P.2d 798, 802 (Kan. 1976) (citing 17 Am.Jur.2d, Contracts, § 516, p. 1002.) Upon rescission of a contract, the parties must be placed in substantially the same condition as when the contract was executed. Id. at 319 (citations omitted.) See, also, Resolution Trust Corp. v. Federal Sav. Loan Ins. Corp., 25 F.3d 1493, 1504 (10th Cir. 1994) (holding purpose of rescission and restitution is to put plaintiff in as good a position as it enjoyed before contract was made by requiring defendant to restore value of plaintiff's part performance or reliance) (citing Restatement (Second) of Contracts § 370); Nordstrom v. Miller, 227 Kan. 59, 68, 605 P.2d 545 (1980) (holding nature of relief from contracts entered into through fraud is to place the parties in their original situation) (citations omitted); Dreiling v. Home State Life Ins. Co., 213 Kan. 137, 147, 515 P.2d 757 (1973) ("Rescission of a contract is the annulling or abrogation or unmaking of the contract and the placing of the parties to it in status quo.")
Defendants argue that, in order to restore them to the position they would have occupied had there been no License Agreement or personal Guaranty, equity requires they be reimbursed by Plaintiff for (1) money spent by Tresprop to remodel its facility to comply with RFS standards; (2) money paid to RFS as franchise and royalty fees; (3) lost profits; (4) increased operating overhead; and (5) diminished property value. Boos testified Tresprop expended a total of $564,694.45 in reliance on the fraudulent misrepresentation made by RFS: $482,571.80 of the total was spent remodeling the Tresprop facility in 1996 and 1997 to meet RFS System Standards and $82,122.65 was paid by Tresprop to RFS in franchise and royalty fees.
With regard to Defendants' request for the Court to confer equity, Kansas law provides that "he who seeks equity must do equity, and he must restore or offer to restore to the other party the benefits received by him under the contract, to be entitled to relief. Dreiling v. Home State Life Insur. Co., 213 Kan. at 147-48, 515 P.2d at 766-67 (citing Bell v. Keepers, 39 Kan. 105, 17 P. 785 (1888); Beneke v. Bankers' Mortgage Co., 119 Kan. 105, 237 P. 932 (1925); Baron v. Lyman, 136 Kan. 842, 18 P.2d 137 (1933)). One who seeks to rescind a contract, or to have equity rescind it, must place the other party in substantially the same condition he was in when the contract was executed. Id.
"The rule that upon the rescission of a contract . . . the parties must be placed in status quo does not require, in all cases, that an absolute and literal restoration of the parties to their former condition shall be had, but it will be sufficient if such restoration be made as is reasonably possible, and such as the merits of the case demand." Dreiling v. Home State Life Insur. Co., 213 Kan. at 148, 515 P.2d at 767 (citing Fairbanks, Morse Co. v. Walker, 76 Kan. 903, 92 P. 1129 (1907)); see also Shields v. Meyer, 183 Kan. 111, 325 P.2d 29 (1958) (recognizing qualified application of status quo rule); State ex rel. Bradford v. Cross, 38 Kan. 696, 17 P. 190 (1888) (finding status quo rule inapplicable for public policy reasons.) As such, it is "within the inherent equitable power of the court to grant relief which [will] achieve justice and equity." Whiteley v. O'Dell, 219 Kan. 314, 318, 548 P.2d 798 (1976) (citing 4 Corbin on Contracts, § 961, p. 864.)
As a preliminary matter, the Court finds insufficient evidence was presented to support Defendants' claim that the fraudulent representation made by RFS in April 1996 caused Defendants to spend $482,571.80 renovating the Tresprop facility. Instead, the evidence establishes Defendants began remodeling the Tresprop facility on or around July 1, 1995 so that, if and when Site 1040 was permanently terminated from the RFS system, the Tresprop facility would comply with RFS "System Standards." Boos testified there were renovations already in progress when RFS made its fraudulent representation in April 1996. Although the Court is not in a position to determine whether Defendants would have gone forward with some, or maybe even all, of the previously initiated renovations in the absence of the April 1996 fraudulent statement, it seems unlikely Defendants would have aborted a renovation project already under way. The Court finds insufficient evidence to establish that Plaintiff's tortious act actually caused Tresprop to spend some or all of the $482,571.80 in renovation costs; therefore, Defendants request to be reimbursed for renovations will be denied.
There was no evidence presented at trial on this specific issue.
Defendants have established, however, they would not have entered into the License Agreement, and thus would not have had to expend $82,122.65 in franchise and royalty fees to RFS, if Tresprop had known Site 1040 would be reinstated back into the RFS system. For Defendants to be entitled to this relief, however, equity requires Defendants in turn to restore to Plaintiff the value of the benefits received by them under the License Agreement. Dreiling v. Home State Life Insur. Co., 213 Kan. at 147-48, 515 P.2d at 766-67.
The evidence establishes Defendants received valuable benefits in its capacity as a Ramada franchise during the time period from April 1996 through December 1997. More specifically, the evidence demonstrates Defendants benefitted from the RFS national reservation system, marketing, advertising, publicity and other promotional materials and programs paid for by RFS and confidential and proprietary information owned by RFS, including System Standards Manuals, training programs and materials, quality assurance scoring programs.
Equity requires Defendants to restore to Plaintiff the value of these itemized benefits in return for reimbursement of franchise fees and royalties paid. Dreiling v. Home State Life Insur. Co., 213 Kan. at 147-48, 515 P.2d at 766-67. There was no evidence presented at trial, however, regarding the value of the referenced benefits received by Defendants. The Court finds it inequitable to require Plaintiff to return Defendants to substantially the same financial condition they were in when the contract was executed and, at the same time, to absolve Defendants of their duty to do the same for Plaintiff. Based on this inequitable nature of this remedy, Defendants request to be reimbursed for franchise and royalty fees will be denied.
The Court finds the limited evidence presented at trial regarding Defendants' lost profits, increased overhead and decrease in property value to be unworthy of belief and, even if established, independent of Plaintiff's tortious act. Thus, Defendants' request for these damages also will be denied.
Accordingly, it is hereby ORDERED that
(1) Plaintiff's Motion for Judgment as a Matter of Law at the Close of Plaintiff's Evidence (doc. 110) is denied;
(2) Plaintiff's Motion for Judgment as a Matter of Law on Defendants' Counterclaim at the Close of Defendants' Evidence (doc. 111) is denied;
(3) Judgment shall be entered in favor of Defendants on Plaintiff's claims for breach of the franchise License Agreement and Guaranty and Plaintiff's claim of trademark infringement;
Because the License Agreement and personal Guaranty have been held unenforceable and thus void from their inception, the Court finds it unnecessary to make findings of fact or conclusions of law regarding (1) Plaintiff's request for compensatory and liquidated damages in its cause of action for breach of contract; and (2) Plaintiff's cause of action for trademark infringement.
(4) Judgment shall be entered in favor of Defendants on their counterclaim of fraud;
(5) The License Agreement and attached Guaranty shall be deemed null and void as if never executed; and
(6) Defendants' request to be reimbursed for renovation expenditures, for money paid to RFS as franchise and royalty fees, for lost profits, for increased operating overhead and for diminished property value are denied.
IT IS SO ORDERED.
Dated in Kansas City, Kansas on this 10th day of March 2000.
* Parties * * Attorneys *
RAMADA FRANCHISE SYSTEMS, INC. plaintiff Edward R. Spalty [COR LD NTC] Donald G. Scott [COR LD NTC] Jill Allison Morris [COR LD NTC] Armstrong Teasdale LLP 2345 Grand Blvd.-Ste. 2000 Kansas City, MO 64108 816-221-3420 FTS 221-0786
Paul G. Schepers [term 03/16/99] [COR LD NTC] Seigfreid, Bingham, Levy, Selzer Gee 2800 Commerce Tower 911 Main Street Kansas City, MO 64105 816-421-4460 FTS 474-3447
v. DONALD P BOOS defendant Steven H. Mustoe [COR LD NTC] Eric C. Carter [COR LD NTC] Kurlbaum Stoll Seaman Mustoe, P.C. 1100 Main Street-Ste. 2001 Kansas City, MO 64105 816-221-5444 FTS 474-6822
TRESPROP LTD. defendant Steven H. Mustoe (See above) [COR LD NTC] Eric C. Carter (See above) [COR LD NTC] DONALD P BOOS counter-claimant Steven H. Mustoe [COR LD NTC] Eric C. Carter [COR LD NTC] Kurlbaum Stoll Seaman Mustoe, P.C. 1100 Main Street-Ste. 2001 Kansas City, MO 64105 816-221-5444 FTS 474-6822
TRESPROP LTD. counter-claimant Steven H. Mustoe (See above) [COR LD NTC] Eric C. Carter (See above) [COR LD NTC]
v. RAMADA FRANCHISE SYSTEMS, INC. counter-defendant Edward R. Spalty [COR LD NTC] Jill Allison Morris [COR LD NTC] Armstrong Teasdale LLP 2345 Grand Blvd.-Ste. 2000 Kansas City, MO 64108 816-221-3420 FTS 221-0786
Paul G. Schepers [term 03/16/99] [COR LD NTC] Seigfreid, Bingham, Levy, Selzer Gee 2800 Commerce Tower 911 Main Street Kansas City, MO 64105 816-421-4460 FTS 474-3447